THE PROFIT LAB // Top 10 Ways to Pull Profit from Allocation

We’ve covered 10 different strategies to consider in the process of executing allocations. Most existing environments will find some of these to be easy to adopt while others will be more challenging. But what can you expect as benefit for making the investment? Is allocation really an area worth investing this additional time in?

To answer these questions it’s a good practice to get a high level view of what is impacted. In the introduction to this series, I wrote about the fact that there are many more decisions in the process of allocation than there are in the other merchandising related activities. To put this in perspective, let’s compare the three major components of merchandising. We’ll use a retailer with a range of fashion and basic merchandise offerings having 3 distribution centers (DCs) and 500 stores as an example. Different environments see the following activities in different ways, but for the purpose of this example I’ve broken them into assorting, ordering and allocating as defined below.

The numbers game

Assortment planning (10 decisions) – Defined for purposes of this discussion as determining what products to buy, we generally have one major objective. That is to determine what products to buy or not buy. If we include decisions around ranging (what stores get the products we select) then we also make this choice for stores. In virtually all fashion environments, stores are combined into clusters / volumes or some similar groupings. If we assume 10 of these groups then we’re making 10 ‘include or exclude’ decisions per product.

Ordering (12 decisions) – Defined as determining how many of the items selected in assortment planning should be shipped to a warehouse or DC. Here we’re making the same number of decisions as we have DCs. This is multiplied by the number of receipts we plan. In an environment with 1/3 of product being one shot, 1/3 being 2 shots and 1/3 being ongoing basics we may have an average of say 4 receipts per product. If we have 3 DCs that’s a dozen decisions per product (3 * 4 = 12).

Allocation (2,000 decisions) – Defined as determining how much available inventory goes to each store. Here we also have decisions to make for each receipt. If we use the average of 4 receipts from above we need to make a store specific choice for each store for each of those receipts. In a chain with 500 stores we’re now talking about 2,000 decisions (500 * 4 = 2,000). In the case of direct to store ordering, generally allocation is combining the ordering and allocation steps.

Using the above logic, there are clearly many more decisions in the process of allocation than in ordering and assorting. Obviously there are multiple dimensions of things to consider for each activity, but ultimately allocation has more instances for good decisions to be helpful, or perhaps more importantly, for bad decisions to be detrimental.

Which comes first

So if you’re in an environment where you need help in all three of these areas, what then? Which should you focus on first? Well each situation is unique and these choices are dependent on your current capability and proficiency. Generally there are two reasons why it makes sense in most situations to focus on allocation first.

The first reason is explained in the numbers above. More chances to improve the quality of the decision generally have more bottom line impact. Sure, if you do a better job of choosing the “perfect product” it will result in better performance. It’s rare that those choices with dramatic influence are missed by merchants in the process of assortment planning. It’s much more common that over assortment is an issue.

This leads us to the second reason to consider allocation first. If you make the perfect assortment choices, and even create the ideal orders to DCs, a poor allocation can still irreparably damage the results you get. If, however, you make fairly good decisions on assortment and ordering (which is common since there are fewer choices being made and therefore more thought going into each) an improved allocation can make the best of what you ultimately end up with. These improvements, if done well, can almost always have more impact than changes to ordering and assorting. This frequently generates enough return to fund investment in the other two areas as time permits and as your business can absorb the change.

The retail world is changing

To add to this, complexity is the reality of today’s retail landscape. Customer behavior is changing at paces never before seen in retail. Between economic influences, brand loyalties, fashion preferences and other factors, today’s customer is more unpredictable than ever. This change is happening differently at each individual store so it’s important to have visibility to those changes and have the ability to respond to them immediately. Allocation is the last chance to identify and react to these and therefore is the closest you get to meeting the demand that your customers represent.

The last chance to get it right is logically the first place to invest in doing a better job.

Thank you for following this series. If you have any questions or comments, please feel free to contact me at greg.wilson@quantumretail.com.

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