THE PROFIT LAB // 4 Strategies to Optimize Assortment Planning

Assortment planning is one of the first areas retailers should assess in order to increase profit and margin. I will be taking you through the top four strategies to optimize assortment planning including: SKU rationalization, clustering, forecasting and financial plans.

- Matt Garvis
Director of Company Strategy, Quantum Retail

WEEK 1

SKU Rationalization: Determining the proper depth & breadth of an assortment //

Right now is an extremely important time for retailers to optimize their assortments. This process can not only dramatically increase margin and sales, but can also help localize store-level assortments and increase the efficiency of your customer’s shopping experience. When retailers offer too many choices, it can cause headaches for shoppers and supply chains alike, force unnecessary markdowns, and ultimately will take a toll on margin.

However, going through this process can be a bit daunting and takes careful consideration on your part. Determining the proper breadth and depth of your assortment is not rocket science, but it is not something to take lightly. If you cut the wrong products, you could potentially lose some of your loyal customers if you are not careful.

But all retailers can benefit from going through the process to evaluate the performance of their products and stores. SKU reduction will help you create assortments that are easier to manage, more efficient and more profitable – this means less stock-outs of the products that are kept in the assortment (depth instead of breadth), tighter focus on product performance, and more flexibility in vendor-level considerations like tray size or pack size choices. Additionally, it can offer a better shopping experience for the customer who may otherwise be distracted by fringe products and the additional breadth allotted in the same space and make her more likely to find her preferred color in her size.

How is this process typically done?

Most retailers have some concept of store grade by merchandise category based on store sales performance or similar criteria. If grades are ranked from highest to lowest (e.g. A through G where A is the highest volume stores), then a product will be ranged to all grades between A and x. The choice of grade x is based on whether the product is core or is just meant to fill out the assortment – in which case it may only go to the top grades. When assessing overall product performance, a product should be removed from the assortment of grades where it is not meeting business expectations. Absent of a store grade concept, the same principal can apply to individual stores where the rate-of-sale of the product in the store can be used to determine whether it should still be assorted to that store.

What are the dangers of SKU Rationalization?

If the decision to remove a product is made solely on that product’s performance, you may be losing a product that helps drive the sales of associated products. Worse, you risk losing a key customer to competition and never regaining their business. It is important to know who is buying the products being removed, and what else they buy.

How do I avoid cutting items that top shoppers really want?

Looking at transactional data (what items sold in the same transaction) or loyalty card information (which customers are associated with the sales of those items and what those customers have spent over the last year) are two means of addressing that question.

Retailers may also make choices about which products they plan to cut from their assortments by briefly discontinuing the product’s replenishment. A good assessment of the choice can be made when a planner looks at how quickly the product stocked out, and if any associated product sales slumped in the process. After this analysis, it should be fairly obvious whether or not the item should stay or be removed. Similar tests can be performed in a grouping of stores. Item performance can be analyzed in those stores and similar decisions can be made for like stores, especially those with similar item level performance and demographics.

When is a good time to rationalize SKUs?

For retailer’s that have a concept of season and have items brought in for each season, SKU rationalization should be done as part of pre-season planning. For long-living items, assortment decisions would be made at the start of the item’s life that would then be tweaked after the item starts selling (but the bulk of the decision would have been made upfront).

Which inventory should retailers focus on reducing?

SKU rationalization in many cases is more effective with longer-living merchandise because you can track an item’s progress and make reasonable adjustments. With fast fashion, for example, it is more difficult (but not impossible) to base next season’s SKU rationalization on the previous season when the previous season may have been impacted by the performance of particular styles.

When determining whether to add or remove SKUs to an assortment, retailers should look at three major factors:

1. The relative value of each SKU in the assortment
2. The GMROI of the store itself (or cluster)
3. The local demand of each store – what shoppers are buying

The reductions or additions should be made in periodic intervals, perhaps weekly. This decision will look at these three factors and assess whether a planner should add one item to this cluster, remove two from another. It’s not a once a year, twice a year process, it’s constant. This is a big deal. Going through this process on a continuous basis will give visibility to product performance and the success of a reduced assortment.

Where to begin

Your main question: What to send to which store for what reason?

The Top 3 things to consider when beginning the rationalization process:

1. The direct impact the SKU will have on the store’s performance through its sales contribution
2. The indirect impact the SKU will have (through halo/cannibalization, i.e. cross-item effects)
3. The hard-to-measure “image impact” – beyond actual dollars generated by the item or associated items, does the existence of the item in the store impact your customer’s perception of your store

What you should consider when looking for new capabilities

It is important to look for tools that will help you assess the profitability and success of each item at all of your stores. When retailers have a tool that can constantly and automatically monitor the success of their products and make recommendations on the breadth and depth of the assortment at each location, they will make the most of their time and quickly increase margin.

There are new technologies available today that can simplify this process and make it ongoing by creating a strategy for these attributes and applying it to all categories and stores.

In the complex task of SKU rationalization, planners and buyers need the assistance of smart technology that can give visibility to the performance of every product at every store. This kind of technology can quickly pay for itself as it optimizes your offering, reduces inventory, and increases sales.

What to look for in assortment planning and SKU rationalization technology:

1. A system that continuously monitors business strategies, customer strategies, profitability, service levels, and stock levels
2. Technology that utilizes the data it takes in to recommend the most profitable assortment for each store, across time while constantly taking customer demand into account
3. The ability to optimize SKU rationalization by recommending like-product attributes for new products
4. The ability to take in real-time data and automatically recommend inventory need based on local consumer behavior and store performance

Most software products focused on assortment give retailers the tools to assess item performance and to make removing or adding decisions. Quantum is going a step further by suggesting, by category/store, where ranges should be increased or decreased. The software will then quantify the specific assortment change recommended by suggesting how many items should be dropped or added to determine the final cluster assignment. The planner can then see the impact (a what-if) to sales/profitability/etc when the SKU rationalization is changed. This gives retailers the tools to make intelligent decisions regarding the rationalization – while still leaving the choice in the retailer’s hands.

When retailers optimize their product range based on local store demand, stock outs, and customer behavior, they will quickly become more profitable and able to compete in today’s retail market.

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For resources on assortment planning, visit: http://quantumretail.com/solutions/assortment-range-planning/resources/

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