Financial planning was made prevalent first by early spreadsheets and then by merchandise financial planning applications that have been around since the 1980s. Assortment planning began around the same time, but is both less mature and has more scattered, inconsistent processes throughout the retail world. It seems that no two retailers do assortment planning the same; however, on the financial side there is more commonality in areas such as: the plan, open to buy (OTB), and weekly stock, sales and inventory (WSSI) reports.
So how can assortment planning and financial plans work together in order for retailers to get the most out of each? The main enabler to having a better financial plan is to have an assortment plan that can truly identify opportunities to improve the financial goals of the organization that are outlined in the financial plan.
The financial planning process
The financial planning process typically starts off by planning sales. This is often done at the chain level, sometimes incorporating comp and non-comp or store changes such as openings and closings. Usually, this chain plan is then broken down by merchandise hierarchy, so that each department’s planning process begins with building a sales plan. This sales plans, if you’ve followed my previous posts on similar subjects, can be enhanced by a sales forecast. This forecast can pick up more recent trends in a category, class, or department level that a simple comparison over the last year cannot.
Once a sales plan has been developed, the next piece of the planning process is to build an inventory plan. The question to ask is this: “How much inventory do I need to meet the sales plan that I just laid out, which has been confirmed by a forecast as the most likely sales activity?” Once the inventory plan is established the inventory receipt plan is established. The planned inventory receipts are the planned ending inventory, plus the planned sales, markdowns and inventory adjustments, less the end of month inventory from the prior month. The receipt plan exists in order to provide an inventory purchasing plan for future periods.
The main issue is that you have no idea what to buy nor do you know where to put the inventory in order to maximize the sales potential to your business. That’s where the assortment plan becomes such a powerful vehicle to performing well. By coordinating a constantly updated forecast enabled financial plan with a sophisticated assortment planning tool, you can ensure that you’re buying goods and putting them in the stores that will perform the best.
Open to Buy
This also works when you have an Open to Buy. OTB is essentially the difference between how much inventory you now have and how much you actually need in order to meet your sales plan. It includes in-stock inventory in stores, in the warehouse, in transit to the stores, and on order. OTB dollars (or units) are often kept positive in order to take advantage of special buys or to react to items that are performing well above expectations.
While Open to Buy is a great way to manage the balance between sales and inventory, the OTB that is typically utilized is simply not at a low enough level to give the buyer or planner any insight into what merchandise will actually help you meet the sales goals that have been laid out in the financial plan. For example, OTB is most often completed down to the level that the buyer is responsible for. That could be a category or a department. But, the buyer, in coordination with the planner, has to make selections at the item level and determine which stores to put more stock in and which stores already have enough. OTB, therefore, is simply not granular enough to accomplish the goal of maximizing the sales plan.
Getting the most out of financial planning and assortment planning
In order to get the most use out of financial planning, the process must consist of a robust assortment planning tool that can tell a buyer and planner at a very granular level which products are performing well at each store or cluster of stores. To meet financial objectives, there are three important capabilities that assortment planning tools should utilize.
First, assortment planning tools should be able to quickly and constantly suggest changes to the plan that can help meet financial goals. Examples of this are suggestions of stores or clusters that are under assorted, where adding items to those stores can increase sales.
Secondly, assortment planning tools should have robust ‘what if’ capabilities. One of the better ways to accomplish this is to incorporate an interactive item/location forecast into the assortment plans. This way, if a user wants to see the effect of adding or removing an item from a cluster, she can immediately see the impact of that change in the assortment. The ability to see into the future with a forecast that is performed at different levels (e.g. department in the OTB plan and item/store in the assortment plan) can significantly enhance that marriage of the plans.
Lastly, a good assortment planning tool needs to be able to compare the financial plan and the potential ‘what if’ assortment plan to identify what is ideal for each store. If all three of these are put together in an assortment planning tool, you have the ability to fully realize the potential of the OTB or in-season plan.
New Products
Today, the typical retailer constantly introduces new products into the assortment for a variety of reasons. The one reason that permeates every type of business is to keep the assortment fresh and give the customer something new to see each time they walk into the store. New products obviously have the ability to add value to the assortment and help meet the goals of the financial plan, but knowing which new products will perform well in which stores involves some sophistication.
When looking at a new product and attempting to determine its demand, one can choose a like product or a combination of like products given attributes, price points, merchandise type, and so on. But it is critical that an assortment plan has a good way of determining how an item will perform in a given store. The total demand can be aggregated to the cluster to determine how much of that item to purchase and which stores should get the item. This quantity should then be balanced with the financial plan to manage the remaining OTB dollars.
In Summary
A financial plan is not complete without an assortment plan. The assortment plan needs to be a key tool that can help a retailer meet the goals that are determined during the financial planning process. A good assortment plan takes the guidance of the merchandise financial plan and carefully analyzes the merchandise on a detailed level recommending changes to the range breadth at a store or cluster level, and has the ability to perform ‘what if’ scenarios to find the best mix of merchandise, including new items in order to fully maximize the potential of the merchandise.
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For resources on assortment planning, visit: http://quantumretail.com/solutions/assortment-range-planning/resources/
