Posts Tagged ‘SKU rationalization’

Hardlines Optimization—Part 2: SKU Rationalization

by Quantum Retail • August 24th, 2011 • Write a comment »

Right now is an extremely important time for retailers to optimize their assortments. This process not only can 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 the breadth of fringe products, and make it easier for them to come to a decision.

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?

Cutting certain types of items can sometimes change the customer’s perception of your brand. For example, the danger of removing an image item, like a high-end flat-screen TV, could make your shoppers see you as having inferior technology than your competitor. Though the customer most likely will not buy the most high-end item, they want to compare the biggest and best options and feel as though they made their purchase at a place that has a respectable assortment of that item.

Another danger is that 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 trendy items, 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 trends, patterns, or colors (i.e. cases for computers or cell phones).

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 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
  5. The ability to take in real-time sales data to make store cluster (grades) changes

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 better able to compete in today’s retail market.

Look out for next week’s blog on understanding long term forecasting and seasonal profiles.

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The Profit Lab: New series – Assortment and Range Planning

by Quantum Retail • August 17th, 2010 • 2 Comments »

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.

Next post in series >>

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

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Grocery Innovation Series: How to target products based on consumer buying behavior

by Vicki Raport • May 27th, 2010 • 1 Comment »

GROCERY INNOVATION // week 4

Precision assortment equals more profit

This series will be published Thursday’s and will review trends, tips and technology to optimize grocery planning. To sign up for series updates – CLICK HERE»

If you precisely target the amount of choices you offer per product, reduce overstocks and markdowns, and ensure that your assortment meets and does not exceed the needs of each of your stores, you will ultimately reduce wastage and increase sales.

“Retailers find they sell a lot more of nearly everything by reducing the number of brands on offer; but figuring out what should stay and what should go can be a tricky business.”

In an intriguing study on the impact of reducing product choices, Wal-Mart found that in many cases less is more. Marina Strauss, Retailing Reporter for The Globe and Mail tells the story of one such product Wal-Mart targeted:

Several months ago Wal-Mart Canada Corp. decided to overhaul one of the staples of its grocery business – the peanut butter aisle.

It dropped two of its five lines of peanut butter to free up scarce shelf space for cinnamon spreads. But the decision didn’t cost the retailer a single jar in sales. With fewer selections to browse, customers wound up purchasing more than before.

“Folks can get overwhelmed with too much variety,” said Duncan Mac Naughton, chief merchandising officer at Wal-Mart in Mississauga. “With too many choices, they actually don’t buy.”

Many retailers are now reducing the amount of choice on their shelves in order to simplify their offerings. The recession has changed consumer behaviors and encouraged retailers to focus on top sellers and private labels.

Strauss reports that by focusing product lines, retailers can trim costs, reduce consumer confusion, and ultimately boost sales. Reducing the number of products can help companies increase sales by as much as 40% while cutting costs by between 10 and 35%, according to a 2007 study by consultant Bain & Co.

Rationalizing an assortment is difficult. Retailers need to have a keen sense of product performance in order to pick the right products. According to this Globe and Mail report, “Evidence suggests that reducing the number of products on the shelf can improve the overall shopping experience. The average shopper takes just 2.5 seconds looking for an item and notices only half the products on a shelf,” according to research by Procter & Gamble Co., the consumer products giant.

Optimizing sizes and rationalizing products:

In order for retailers to target the right range of products on their shelf, they need an acute awareness of product behavior. There are dozens of product behaviors unique to every store. As well, product behaviors can be unique to customer segments. In order to analyze these behaviors, retailers should look at the performance of package size, brand, value, locality, and flavor as well as things like price points, life cycle, overstocks, under-stocks, amount of markdown, etc. What do these metrics tell you about your assortment of products? How do those metrics change across your stores? How do these products support your customer segmentation and brand strategies? Which stores have similar product behavior? What attributes do those products have in common? How often are you discounting those products?

One of the best ways to analyze these behaviors is to look at the profitability of each product at every location. Do not cut your assortment across your chain, but look at the unique selling patterns at each store to determine what products will sell to their unique customer base. This is a complex exercise, but one that needs to be done on a continuous basis. Your customer’s buying patterns will change – and it is necessary to acknowledge they have already drastically changed.

Consumers Adopting New Behavior to Save on Food

So what are the consumer behaviors that are affecting your sales? The Food Marketing Institute reported the following changes in grocery shopping trends:

Shoppers are economizing when it comes to food purchases. There are three stages of consumer behavior that have changed:

  1. Stage One: Shoppers save money on eating out by switching from fine dining to fast food. They also seek supermarket meal solutions and prepared foods in place of restaurant fare.
  2. Stage Two: Consumers change their saving measures in the store by buying more private brands, using coupons, buying basic ingredients, focusing on full meal deals, and shopping with a plan.
  3. Stage Three: Shoppers switch store formats and choose venues with focused or limited assortments, including superstores, warehouse clubs, and private label food services.

A majority of consumers (69%) surveyed in the study say they are eating out less. An additional 50% said they are eating out at less expensive places. All point to a significant shift in the expectations that consumers have for service and assortment from their food and grocery retailers.

The survey also showed that when deciding how to save money on their grocery bill, consumers are making plans before heading to the supermarket resulting in fewer impulse purchases. In fact, 53% say they make a shopping list, 40% search newspaper or advertising inserts, and 35% responded that they look for coupons in the mail, newspapers, and magazines.

Private Label Brands Should Become a Priority in Product Assortment Targeting Efforts

The FMI found that the effort to save money continues once shoppers are in the store. The report stated that the popularity of private brands has significantly grown, with 97% of shoppers saying they plan to purchase the same amount of private brands or more over the next year.

The following chart from the FMI report, shows consumer responses on private labels:

The shift of focus to private label brands is a logical choice for retailers. The following diagram from the FMI shows how consumers rank their product choices. Today, price is the most important factor in their buying decision followed by quality. When private labels succeed, it shows that customers are more interested in the product than the brand itself. This has caused retailers to stretch the reach of their private label brands, leveraging the appearance and placement of store-brand products.

FMI reports that some retailers are conducting in-store comparison tests to measure shoppers’ preference for store brands versus national brand alternatives. Words associated with private products in the minds of consumers include “quality,” “value,” “cheaper,” and “inexpensive.”

“Shoppers view private brands as a value-added offering in tough economic times.” - FMI

Technology to assist in product rationalization and give insight into product performance

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
  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

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.

Get back in the game

Are you ready to know exactly what your customers are asking for at every location and to have the ability to react as their wants change? If you are looking for a solution that can drive momentum for your business this year, check out the solutions offered by Quantum Retail.

Our customers see valuable results in 8 to 12 weeks and our customer engagement approach gives your team access to the solution from early on, so you can manage changes to your processes with ease. Quantum Retail continues to help all of its clients rapidly drive measurable and significant business value through our proven merchandising optimization solutions.

Get resources on how to adapt to today’s retail market HERE»

Learn more

Follow this series to learn more innovative practices for grocery.

To download as PDF CLICK HERE»

To sign up CLICK HERE»

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Grocery Innovation Series: Creating a Localized Supply Chain

by Quantum Retail • May 23rd, 2010 • 1 Comment »

GROCERY INNOVATION // week 3

This series will be published Thursday’s and will review trends, tips and technology to optimize grocery planning. To sign up for series updates - CLICK HERE»

Customer Awareness

The movement towards customer awareness is a growing trend in today’s retail market. As grocers seek new business tactics, they will find that one of the most profitable strategies is creating a customer-driven supply chain. For grocery chains, the secret to success lies in the drive towards localized inventory.

Local demand signals

There are a variety of demand signals that need to be monitored on a local level, these signals include: the time of day activity occurs, local events, sports schedules, weather, seasonality, social trends and local buying habits. To add to this already complex problem, this must be done at a SKU/store level, in real-time to optimize profit from perishables. Grocers are one of the only retailers who have a legitimate need to plan inventory by the hour in order to avoid situations of ‘scarcity and abundance’.

Departments like dairy, meat, produce, sea food, bakery, deli, etc. sometimes have a lifecycle that is measured in days (or even hours). The key to optimizing profit with this merchandise is timing. Integrating time-phased planning for fresh products requires a strategy and an execution that aligns store-specific assortments with localized signals of demand. In order for stores to execute on their strategy, they must have the ability to plan in advance for known demand signals, and to execute quickly for signals that change on a day-to-day basis.

Local Suppliers

Utilizing local suppliers in your chain will also help you appease your customer’s needs. According to a report from the Food Marketing Institute on grocery shopper trends, consumers continue to show strong support for locally grown products.

Nearly three-quarters (72 percent) of shoppers say they purchase locally grown products on a regular basis.

Some of the reasons they like to buy local:

  • Freshness (82 percent).
  • Support the local economy (75 percent).
  • Taste (58 percent).
  • Environmental impact of transporting foods across great distances (35 percent).

Local demand insight for perishables

When grocers have local demand insight, they can optimize their recipes and manage their yield in order to align their fresh produce to that localized need. They can manage orders based on transit costs and locality of suppliers, as well as understand local factors that drive the demand of specific product types. Grocers will notice immediate increases in margin with their fresh and perishable goods, because they will be minimizing waste while achieving their availability goals.

Local demand insight for non-perishables

Because the majority of non-perishables are shelf stable with long code dates, the time-phased element to the demand, delivery, and sale is related to carrying cost, customer service levels and the cost of money invested. The majority of allocation/distribution projects tend to focus on determining how much inventory to push to a given store. Theoretically these items can remain in the store until someone buys them or until they are marked down as part of a clearance initiative.

Non-perishables are typically divided into two groups, fast moving consumer goods (FMCG) and slow moving consumer goods (SMCG). FMCG are typically intended to be completely consumed by the customer (like paper towels, charcoal, pet food, etc.). SMCG are intended to be replaced someday but on a far less predictable buying curve (like flatware, dishes, light bulbs, decorations, home décor items, etc.).

What is most important for FMCG is the replenishment strategy. FMCG are typically replenished based upon a combination of assortment, demand and time. Having local demand insight on how to most efficiently pack and move those goods during the replenishment cycle will help grocers reduce costs. Grocers usually do not mind carrying some additional inventory for FMCG because demand is usually high and sell through is complete soon after delivery.

Since slow moving goods typically remain in the store for a long period of time, demand is less important. However, these goods can cost a tremendous amount of money in inventory carrying costs and typically end up eroding the overall margins of the store through markdowns and inventory reduction initiatives. The strategy for SMCG relies on having an efficient initial allocation that takes into consideration local transit vs. national transit as well as size and pack optimization.

Assortment and SKU rationalization

Assortment and SKU rationalization ensures that every product serves a purpose at each store. Grocery chains need to align their inventory with regional and cultural product preferences. Grocers will find that in some stores – natural products sell more rapidly, in others – cultural products perform best, while in some – discount items move quickest. To understand this level of SKU/store analysis in real-time with 46,000+ SKUs and over 500 stores would be impossible with spreadsheets. Grocers need the right technology to ensure they are able to get their order right.

Sustainable Practices

The FMI reports, that despite the volatile economy, consumers are still concerned with sustainable practices. More than half (59 percent) of shoppers say retailers’ efforts in the areas of recycling and sustainability are important. The vast majority of retailers (94 percent) sell reusable shopping bags and more consumers (40 percent) are bringing their own bags when they shop for groceries. There is growing evidence that sustainability can make sound business sense, reducing costs and increasing consumer loyalty.

Metrics to drive inventory

In order to adapt to those differing habits, grocers need to have the ability to turn transaction data into an action plan for the store and customer. Grocers must first consider what detail of transaction data is necessary and then compare the factors of demand to the conditions of the transaction.

In an industry where one mistake can wipe out hundreds of good decisions, shopper behavior and local buying habits are the most important metrics for grocers to utilize in their inventory decisions. The quicker a grocer can understand and react to this information, the quicker they will increase sales and service levels while reducing inventory waste.

Learn more

Follow this series to learn more innovative practices for grocery.

To sign up - CLICK HERE»

Download this blog as a PDF»

For resources on allocation, visit: http://quantumretail.com/solutions/allocation-replenishment/resources

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Fashion Innovation Series: Part 2 – Assortment Planning and Range Planning Localization

by Chris Allan • April 25th, 2010 • Write a comment »

This is the part 2 of a 4 part series on Fashion Innovation and Optimization.

KEY TOPICS IN THIS SERIES:

  1. Size & Pack Optimization
  2. Assortment & Range Planning
  3. In-season Replenishment
  4. Allocation Optimization

Look out for part 3 next week, to read part 1 – CLICK HERE. Please engage, start a discussion, or leave a comment if you like this post.

Assortment and Range Planning Localization

Customer behavior has changed…unfortunately retailer processes and systems have not kept up with the pace of that change. The way that stores are assorted needs to change – to reflect how and where the customer now wants to shop and what they want to spend their money on.

Retailers need to focus on changing the way that they plan their assortment and identify opportunities to align their offering with their customers, to drive profitability of every product in every store. To achieve this, retailers need to identify not only the financial objectives for each product in their assortment, but also the merchandise objectives – as these are key to creating a credible offering in the eye of the consumer.

The most important, but over-looked questions for assortment optimization today:

Why is this product in my assortment?

What strategies do I have in place to decide what products to include?

How am I measuring the performance of my assortment on a continuous basis?

How will this product perform in the future?

How am I aligning my assortment with local demand?

When retailers align both the breadth and depth of their merchandise offering with the localized demand of their customers, it increases full price sales and product availability, and ultimately lowers markdown spend.

There are two main areas in planning that retailers should focus right now:

Sku rationalization //

How well is the breadth of the offering aligned to the customer? It is important to identify where you have too many or too few choices for the customer and have the flexibility to execute on those decisions. If you are not doing this, you are creating both markdowns and lost sales. Retailers need to keep this flexibility and continuously monitor the profitability and contribution of each product. This will allow each store to reveal its own patterns and tell the retailer how to best align their SKUs with local demand.

Localizing inventory //

The customer is the most important element of today’s retail strategies. In order to compete in today’s market – retailers of all verticals need to focus on availability and local consumer behaviors. This kind of granular detail cannot be obtained with traditional, data aggregating systems. Retailers need to remove the simplification from their inventory planning process and focus on real-time local demand. This means creating a dynamic inventory plan that is highly reactive to local demand fluctuations, allowing the retailer to be flexible and respond to how their customers are behaving now. This allows the customer to have product available when and where they want it, in the right size, the right color, and the right style at every store and in every channel.

5 Ways to Innovate Assortment Planning

1. Optimizing inventory:

Retailers need to focus on optimizing their assortments and shaping their offering based on both the merchandise and financial objectives of those products. Many retailers are focused on shrinking their offering, but fewer wrong products will not create more sales, it will only frustrate customers. Investing in the right brands and the right products will ultimately bring new energy to the retail market. Understanding exactly where the offering should be contracted or expanded is they key to achieving those goals.

2. Better placing inventory:

Some of the best retailers have not scaled back on their inventory investments, but focused instead on where to place their inventory. Over the last year, ‘flat’ was the new ‘good’, but by putting inventory where there is demand, retailers can increase their sales and profit, while better serving their customers at the same time. Retailers can also hold back inventory to see where it is performing best – and use precision placement of their remaining inventory to increase profit and create fewer markdowns.

3. Increasing availability:

Focusing on which products need to be made available at what locations and when is a difficult task. But when the right products are available, in the right sizes and colors and in the right amounts, stores increase sales and increase customer service levels.

4. Focusing on the intelligent consumer:

The market has shifted with the intelligence of consumers. The economy has further focused the customer on seeking out the highest value for the lowest cost. The environment has also brought to light new values and new criteria that the customer has begun to judge products on. Retailers need to recognize the needs of their customers and give them products that meet these new expectations – and remember, these expectations will continue to change.

5. Focusing on newness:

If a retailer can continually have something new for the customer to see, it will increase the frequency of customer visits and increase turn rates. This is especially important in fashion and consumer electronics, where customers have become increasingly knowledgeable and demanding. If a retailer can keep up with the pace of fashion, they’ll be able to keep their inventory fresh and unique.

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Learn how to implement better planning practices to manage the breadth of your assortment

Chris Allan, Chief Strategy Officer, Quantum Retail

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You can also follow our 4-part 2010 Retail Outlook series here.

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Get back in the game

Are you ready to know exactly what your customers are asking for at every location and to have the ability to react as their wants change? If you are looking for a solution that can drive momentum for your business this year, check out the solutions offered by Quantum Retail. Our customers see valuable results in 8 to 12 weeks and our implementation approach gives your team access to the system from early on, so you can manage changes to your processes with ease. Quantum Retail continues to help all of its clients drive positive business value more rapidly than anything seen in retail.

For more information, visit: http://quantumretail.com/services/size-pack-optimization

Download this blog as a PDF.

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Fashion Innovation Series: Part 1 – Size Optimization & Pack Optimization

by Ziad Nejmeldeen • April 20th, 2010 • Write a comment »

This is the part 1 of a 4 part series on Fashion Innovation and Optimization.

KEY TOPICS IN THIS SERIES:

  1. Size & Pack Optimization
  2. Assortment & Range Planning
  3. In-season Replenishment
  4. Allocation Optimization

You can also follow our 4-part 2010 Retail Outlook series here.

If you’d like to be emailed PDF’s of this series as they come out, make sure to sign up for the email series updates! (we will only send you email for our retail series reports)

In fashion retail, Size and Pack Optimization are key

Local demand changes at every store on a daily basis. Clustering stores together by store size and geography might simplify the process, but is inefficient and does not take into consideration individual store patterns for size, color, style and quantity of local demand and product preference.  Retailers need to monitor the changing demand at every store to align their assortment in the way that is most profitable and aligned to their strategic objectives.

It sounds like a no-brainer, but when supply chains become complex, retailers cannot keep up with store level demand and will send the same amounts of every product to similar store types. However, localization of store level assortments and order plans is proven to increase availability, full price sales and customer satisfaction. It is also proven to reduce overall inventory, wastage and markdowns which all erode margin.

Understanding how a product will sell through its entire life on a location by location basis – is essential for:

  1. Meeting sku/store demand: i.e. avoiding missed sales opportunities
  2. Reducing sku/store over-allocations: which would otherwise be dealt with through markdowns
  3. Minimizing handling costs: as the inventory makes its way from vendor to warehouse (where applicable) to store
  4. Reducing Markdowns: by having the appropriate level of inventory and the best assortment possible

The initial assumption of the product assortment is an important part of the process. Retailers need to know what is selling where and why, they need a strategy and goal for why that product is in their assortment and they need to make sure they can  continuously re-evaluate how they expect the product to sell – in real time. This enables retailers to understand which stores will offer the greatest potential for full price sales – and appropriately decide what inventory is best and where.

When they can pinpoint the demand at their stores – they will cut distribution costs and decrease lost sales. With the ability to assign specific pack sizes will also help retailers get the exact amount of inventory to every store and reduce markdowns.

Get the right product in the right place and fulfill based on product performance //

The objective is clear: get the right product in the right place to start with – then fulfill based on how products are really performing at each store – giving the product the best chance to sell at full price and identify when and where markdowns are truly necessary.

Size, pack and prepack innovation for progressive retailers

Size Optimization uses historical sales and inventory data at the size/store level to infer historical demand, and then aggregates demand across groups of items and/or locations. Items are grouped according to the size run, attributes of interest, or merchandise classification that they share. This aggregated demand, when normalized across the sizes that compose a size-run, yields a Size Profile. These size profiles can be used pre-season to impact the size buy for the chain, or in-season to impact store-specific size allocations.

Prepack Optimization refers to the pre-determination of  prepacks that contain fixed quantities of each size in the size run. Like size profiles, prepacks can be defined for groups of products where the grouping is defined by size run, specific attributes, or a common merchandise classification. Unlike size profiles, prepacks are not store-specific – a given pre-pack can be allocated to several stores, if not the entire chain.

In the most trivial cases, Prepack Optimization can be considered a by-product of Size Optimization. Suppose that we want an n-pack solution, have designated that each store should only receive one type of pack, and have pre-determined the approximate number of units in a pack. Then, we can cluster store-level size profiles into n clusters, and use each cluster size profile to determine the optimal cluster pack by multiplying the size profile by the pre-determined number of units and rounding the resulting size units to the nearest whole number.

However, pack optimization becomes more interesting when each pack in a solution can go to all stores, or when the pack quantity range is broad, thereby requiring optimization of the units in the pack. In these cases, you need more sophisticated approaches to obtaining the optimized packs – approaches that utilize historical store/size demand, allocation quantities, and pack handling costs.

Localizing sizes and packs and rationalizing SKUs:

In order to optimize sizes and rationalize SKUs at a local store level you need an acute awareness of product behavior. There are dozens of product behaviors unique to every store. In order to analyze these behaviors, retailers should optimize by style, color, brand, promotion, price, and seasonality at each store.

The concept of localization works on two levels:

  1. Retailers can look at the unique behaviors of every product – to determine each stores’ selling patterns for size, color, style, quantity, brand, season, etc. With this understanding, a retailer can plan orders on a store-by-store basis to deliver the right amount of the products that customers are buying at each location, allowing the retailer to achieve the highest turn rates, reduce inventory to the appropriate levels, reduce over stocking and stock outs and ultimately increase margin.
  2. The second concept of localization comes from localizing distribution, optimizing routes, re-locating product in the most optimal way, or utilizing vendors that are in a short vicinity of each store.

Size Optimization Overview:

Size Optimization refers to finding the optimal ratio of sizes to carry for given product in a given store. After segmenting products by Size Run (e.g. XS – XL vs. 2-16) and attributes of interest (e.g. Shape, Color, Fabric), the optimal ratio is found by looking at historic demand, which incorporates actual and lost sales. Size profiles for each group of products are computed at the store level, where enough data exists. A number of Quality Assurance steps are applied to the final output to capture and correct for any exceptions. The client can use the size profiles to both impact the size buy pre-season and the store-level allocation in-season.

Pack Optimization Overview:

Pre-Pack Configuration Optimization refers to finding the optimal configurations and sizes for a combination of packs. Optimality is defined in terms of maximizing an objective function that includes handling costs, lost sales, and markdowns (or wastage).  Pack Optimization involves choosing packs such that the increased profit from sales increase and waste reduction more than offsets any increase to handling costs.

Implications of changing pack size:

As the pack size decreases:

  • Handling Costs Increase: we are ordering roughly the same quantity as before, but doing so with more packs. Assuming a given cost per pack (typically 30p), we can compute the increased cost.
  • Sales Increase: greater sales are achieved by allocating more units to a store where the pack size restriction was previously a barrier.

Ultimately, you can arrive at combinations of packs that work well together to meet store/size demand and minimize handling costs without excessive over-allocation of sizes.

Get back in the game

Are you ready this year to know exactly what your customers are asking for at every location and to have the ability to react as their wants change? If you are looking for a solution that can drive momentum for your business this year, check out the solutions offered by Quantum Retail. Our customers see valuable results in 8 to 12 weeks, and our implementation approach gives your team access to the system from the beginning, so you can manage changes to your processes with ease. Quantum Retail continues to help all of its clients drive positive business value more rapidly than anything seen in retail.

For more information, visit: http://quantumretail.com/services/size-pack-optimization

Download this blog as a PDF.

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The truth about size optimization, SKU rationalization and localization

by Quantum Retail • February 4th, 2010 • Write a comment »

Getting the right sizes, colors, styles and quantities to the right location

Local demand changes at every store on a daily basis. Clustering stores together by store size and geography might simplify the process, but is inefficient and does not take into consideration individual store patterns for size, color, style and quantity of local demand and product preference.  Retailers need to monitor the changing demand at every store to align their assortment in the way that is most profitable and aligned to their strategic objectives.

It sounds like a no-brainer, but when supply chains become complex, retailers cannot keep up with store level demand and will send the same amounts of every product to similar store types. However, localization of store level assortments and order plans is proven to increase availability, full price sales and customer satisfaction. It is also proven to reduce overall inventory, wastage and markdowns which all erode margin.

Optimizing sizes and rationalizing SKUs

In order to optimize sizes and rationalize SKUs at a store level you need an acute awareness of product behavior. It does not make sense to only optimize on size – if a retailer is going to take the time to assess sales and demand at a store-by-store level, they should rationalize SKUs at a local level by using store data.

There are dozens of product behaviors unique to every store. In order to analyze these behaviors and make the most of their efforts, retailers should optimize by style, color, brand, promotion, price, and seasonality at each store. But the complexity of this exercise can become time consuming when a supply chain is vast.

There are however, technologies available that can simplify this process and make it ongoing, creating a strategy for these attributes and applying it to all levels of inventory management, from order planning, allocation, replenishment, forecasting and distribution.

The concept of localization works on two levels:

  1. Retailers can look at the unique behaviors of every product – to determine each stores’ selling patterns for size, color, style, quantity, brand, season, etc. With this understanding, a retailer can plan orders on a store by store basis to deliver the right amount of the products that customers are buying at each location, allowing the retailer to achieve the highest turn rates, reduce inventory to the appropriate levels, reduce over stocking and stock outs and ultimately increase margin. The second concept of localization comes from localizing distribution and utilizing vendors that produce products in the vicinity of each store. This type of localization is most easily applied to fresh foods and markets – where customers prefer to support their local farmers and local brands.
  2. When retailers realize that they cannot optimize sizes and packs unless they have an awareness of store demand, stock outs, and customer behavior at the local level, they quickly become more profitable and able to compete in today’s retail market.

Q – the quickest and most profitable solution for size optimization, SKU rationalization and localization

The Q system continuously monitors business strategies, profitability, service levels, stock levels and 35 different aspects of behavior for every product in every store. Q is so intelligent that it learns from data like stock outs, lost sales, slow movers, lumpy sellers, packs, sizes, colors and styles. It takes the most recent data for each item and automatically recommends inventory movement decisions driving toward your corporate objectives. Plus, it optimizes the way you phase in a new product and phase out another – ensuring that you are always reaching your optimal performance, sales and service levels, giving you the highest return on the inventory you are buying.

CLICK HERE for more information on Q

Get resources on how to adapt to the challenges of today’s retail market HERE »

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Quantum Looks to Reach Broader Dealer Base

by Dealer Scope • February 4th, 2010 • Write a comment »

By, Nancy Klosek | DEALER SCOPE

Quantum Retail Technology has aimed high with the initial version of its Q retail business management software, which targets tier-one dealers with a billion dollars in revenue.

The company is also working on a scaled-down version, scheduled for release in about 18 months. Because the solution is not within reach of most independent dealers, Quantum is talking with buying groups, whose small-to-medium sized members have the aggregate buying power that makes acquiring the software more cost effective.

“There are some obvious names that pop out of a hat, both in CE and in the fast-moving consumer goods space,” said Chris Allan , Quantum’s co-founder and chief strategy officer. “Those are areas we’re looking at, because these members all have the same problems. When you look at how they scale across the small businesses they support, it’s a proposition that could work for everybody.”

Quantum, founded six years ago by personnel from retailers and existing software companies, devised Q after studying 200 of the top retailers in the world “so we could understand the constraints and problems that weren’t being solved by technologies already in the market,” said Allan.

The need to help retailers of all sizes with inventory optimization, replenishment, allocation, forecasting, ordering, and assortment and range planning have become all the more acute in the last year.

“What we’re now seeing is that the market is asking questions that retailers aren’t in a great position to answer. The rate of change in consumer behavior is significantly high—it’s almost a consumer revolution,” Allan said. “People are changing their habits overnight and retailers, with their heavily embedded, long-standing processes, are having to struggle to keep up with that rate of change. That’s what we’re trying to address.”

Quantum has molded a management solution, Allan said, that is flexible enough to work for businesses as diverse as the 210-store Guitar Center chain—the company Quantum serves that is closest in nature to the CE space—and Marks & Spencer, a hybrid retailer in the U.K. that sells both perishable goods and clothing. “What that speaks to is that the engine we built, and the capabilities we have to support retailers in this problem of inventory management, are broad,” Allan said.

Why is Q so pricey now? “A lot of the things we do require a lot of data, and that doesn’t come free,” said Allan. “Even if we gave the software away, there would be a cost to the business for pulling that data together. What we’re working on at the moment is how we can make that cheaper. As we experiment, and address more of those roadblocks, it will enable us to scale down further.”

For Guitar Center, the goal set for Q was to take a big chunk of inventory out of the stores while increasing overall customer service. “We were able to increase service levels across the board and take 10 percent out of their inventories—obviously, a significant cost savings, which added to their revenue,” Allan said. The company’s three-and-a-half-year partnership with Quantum also coincided with a 50-store expansion.

Before Guitar Center used Q, in-house forecasting was a major challenge since management had to keep track of more than 7,000 SKUs. Those products ranged from keyboards and amplifiers to iPods and Apple laptops, representing a mix of high- and low-ticket items with varied and volatile lifecycles.

“Those are all factors our system takes into account and helps to automate,” Allan said. “With it, we can understand the way every product is behaving at every location, and use that information to help dealers make good decisions. You tell it what you want it to do and to achieve, from a merchandising or a financial perspective, and it will pull those levers of inventory, placement and timing on your behalf.”

Q’s pricing structure does not include a large, up-front licensing fee, but rather a smaller annual fee. “We tried to lower the barrier of entry there, but it also keeps us on the hook to deliver on our results,” Allan said. “If it’s not working for them, retailers can turn it off.”

View the article on Dealer Scope HERE

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