Knowledge management system in action
Presenting at the KMWorld'99 Conference and Expo in Dallas, Randy Erdahl, group manager for corporate research at Fingerhut Cos., demonstrated how its mail stream optimization system has turned knowledge into dollars-saved dollars.
Fingerhut, a distributor of nearly 500 million catalogs per year to 31 million customers, felt they could do a better job of knowing "who to mail which catalog to and at what time," said Erdahl. That was the challenge. A computer system wasn't going to solve that, but they found out it could help.
That system, called mail stream optimization or MSO and installed about a year ago, needed to deal with saturation. For Fingerhut, saturation represents the point at which the cost of mailing one additional catalog equals little or no return. While the company had systems in place for measuring returns on a case-by-case basis, it lacked the ability to do so for multiple catalogs over a long period of time.
Fingerhut worked in conjunction with IBM Consulting to develop a solution, one that would tap the existing and effective database and be able to analyze and make decisions as simple as: send him this catalog, but not that one. The reason for sending "that one" is because a catalog sent a month ago was similar. Using optimization techniques, and a hardware and software implementation from IBM and Torrent System's Orchestrate product, the system needed to be able to fit in with the existing process and be able to make that decision within a 72-hour time frame.
During the pilot phase, the first attempt yielded the result in 22 days, but Fingerhut stuck with it. Now, MSO has managed it down to 12 hours.
Essentially, what the system does is stop mailings from going out-a conflict with management's judgment, which has lead to some cultural resistance, according to Erdahl.
"The only thing MSO does is reduce catalog mailings," he said, "so it is a threat to managers a bit."
However, resistance to the system is being quelled by the results. The clearest and most pleasing result financially comes from reduced advertising and mailing costs. Two groups where the results have shown the most are "active" Fingerhut customers, those who are making a lot of purchases resulting from the system; and "inactive" customers, those who result in little business despite repeated mailings.
For the active customers, MSO has lead to 7.1% less advertising cost and 3.1% less revenue, for a 4% increase in profits. For the inactives, the results are better. Fingerhut now spends 8.3% less on advertising, loses less than 1% of revenue for a 10% profit increase.
While that represents the hard number gain, Fingerhut is not overlooking the customer.
"There is some point where they (the customers) will get upset with us if we keep sending them stuff," said Erdahl. The tool helps to determine where to make the cuts to prevent that, he added.