Retail Management

Unit 3
Merchandise Management
Assortment Planning
What Is Assortment Planning?

• In order to be profitable, you need to stock the right inventory at the right
locations at the right time.
• Through assortment planning, businesses can strategically plan their inventory
and manage their catalog around changes in demand and sales volumes
throughout the year to satisfy customers and maximize profitability
• Assortment planning is the process of choosing which “assortment” of products to
sell during a certain time period, and how to allot those products between different
locations and/or sales channels to maximize profits.
• Assortment planning is about deciding what products to sell and where to sell
them based on seasonality and demand at particular locations.
• For example, a clothing brand may sell bathing suits and breathable fabrics during
summer, but shift to sell fleece jackets and sweaters during the winter.
What does assortment planning include?
Assortment planning typically includes both the variety and variation of products.
Here's how these two elements relate to each other:
• The variety of a product category refers to the span of the collection. For example, a
clothing store with a large variety of products might carry 12 different brands of
shirts and jeans.
• The variation of a product category is the number of different products within each
category. For example, a clothing store might carry a specific type of shirt in 10
colors and six sizes.
When to consider assortment planning?

• Assortment planning is a critical part of inventory management — particularly

when the business faces the following situations:
1. Uncontrolled SKU proliferation
• Jackie operates an online store selling hair care products, including shampoo and
conditioner.
• After seeing more and more hair lovers dying their hair and posting on Instagram,
she decided to offer a new product: DIY hair dying kits in multiple shades.
• The new product line ended up being a huge hit. But at the same time, Jackie’s
business ran into some logistics challenges.
• There wasn’t enough storage space to hold all her SKUs and units needed to meet
demand.
• This is a prime example of SKU proliferation.
• To keep up with the changing market, businesses are always introducing new
items or variations of a similar product.
• But introducing new inventory involves reevaluating your current logistics
operations —whether it’s expanding storage space, making changes to your
restocking process, or optimizing the fulfillment process. 
2. Excessive obsolete inventory

• Assortment planning will help you to plan your inventory investments more
accurately, and avoid investing in products that are slow to sell or for which
demand is low.
3. Regular stockouts

• Deadstock is an issue, but so is stocking out. If you tend to regularly sell out
certain products while demand for them is still high, you should improve your
assortment planning so that you don’t have to replenish products as frequently to
keep up with sales volume.
4. Insufficient storage space

• As your business scales, you may also run out of space to store all the products
that you sell. Assortment planning allows you to strategically plan your inventory
around warehouse capacity and shelf space so that you can get the most value out
of your square footage.
Factors to consider when assortment planning
1. Brand strategy
• When analyzing and building a plan for customer information and interests,
consider reviewing the statistical data and personality base of the customers. This
information can help build the target audience and determine what the audience
requires from a brand. It can also help to analyze the competition and what makes
the brand unique from other brands.
2. Business model and trends
• A business model is the profit plan for the business. Some businesses may have a
business model that focuses on exclusivity, and some may have one that is more
about having a large assortment of products.
3. Sales and margin history
• Keeping high-selling products that have a positive profit margin for the business can
be helpful. For the products that don't sell as well, consider replacing them with
items that are currently trending in the market.
4. Sales channels and finances
• Channels are important to a business because they're how the business sells
products. Some examples of channels include retail stores, online stores and
wholesalers.
• For retail stores, it's important to know how many stores the business has and which
ones are in the same product groups in storefront assortment planning. It also may
help to know the layout of each store. Online stores often rely on content, design
and website navigation.
• For wholesale businesses, consider account types, special orders, order timing and
sales strategy. Financial planning can also affect assortment planning style. If
finances have a positive outlook, then the business can grow its product
assortments.
• In less successful times, a business may lower product assortment numbers to focus
on high-selling staples. Putting a sales hierarchy in place to monitor sales trends and
manage them can also help.
5. Space constraints
• Retail managers might choose a certain assortment planning approach based on
their available space for inventory. At larger stores, the manager might be able to
order more variations of products, so customers can ask for certain products in their
preferred size and color.
• Managers at smaller stores might choose their variations based on past purchase
habits. 
Metrics to track Assortment Planning?
1. Inventory turnover Ratio:

1. Identify cost of goods sold (COGS) over the accounting period

2. Find average inventory value [ beginning inventory + ending inventory / 2 ]
3. Divide the cost of goods sold by your average inventory
• Inventory turnover = COGS / Average inventory value

You can also calculate your inventory turnover ratio by looking at units, rather than costs:
Inventory turnover = Number of units sold / Average number of units on-hand 
• What is an ideal inventory turnover rate?
For most retailers, an inventory turnover ratio of 2 to 4 is ideal; however, this can
vary between industries, so make sure to research your specific industry. A ratio
between 2 and 4 means that your inventory restocking matches your sale cycle;
you receive the new inventory before you need it and are able to move it relatively
quickly.
• Low inventory turnover
A rate of 1 or less means you have excess inventory. For example, if you sell 20 units
over a year, and always have 20 units on-hand (a rate of 1), you invested too much
in inventory since it is way more than what’s needed to meet demand. It’s
important to maintain inventory levels by calculating how much the company sells
and avoid dead stock.
• High inventory turnover
High inventory turnover can indicate that you are selling your product in a timely
manner, which typically means that sales are good in a given period. Ecommerce
retailers should strive for a high inventory turnover rate, which means they sell the
inventory they have on hand quickly and repurchase fresh inventory often. This also
helps save on inventory carrying costs.
• While a high turnover rate is generally considered an indication of success, too
high of an inventory turnover rate can actually be problematic. An influx of sales
can cause you to constantly have to replenish inventory, and if you can’t keep up
with demand, you may experience stockouts.

• This is especially true if it takes weeks to replenish the stock for a specific SKU;
that can mean weeks of lost sales on what is clearly a popular item.
2. Historical Sales Data
3. Lead Times
4. Cost per unit for each SKU & Margin
5. Revenue per unit for each SKU
Purchasing System
• A purchasing system is a set of processes used to acquire goods and services for an organization.
These processes include the acceptance of purchase requisitions, finding and evaluating suppliers,
negotiating prices, placing purchase orders, monitoring procurement cards
What is an inventory report?
• An inventory report is a summary of a retailer’s existing stock. It distills details like how much
stock you have, which products are selling fastest, category performance, and other information
about the status and performance of inventory
Why should you generate an inventory report?
• To monitor the biggest & most expensive asset
• Gives insight into the business
• Better planning
• Transparent tracking
• Organized inventory categorization
How to build an inventory report
• 1. Decide what you want to report on 
• 2. Build a list of items 
• 3. Pick a time frame (and stick to it!)
• 4. Automate your inventory reports
Inventory Report Types

1. Inventory performance report

• Inventory performance reports include specifics on your top sellers, worst sellers,
and year-over-year growth.
• Understanding which products are selling well and which are hanging out on your
shelves can shed light on the volume of units/raw materials you need to reorder or
replenish.
• In addition, paying attention to YOY growth reveals whether your brand’s
financial performance is improving, worsening, or remaining static — which can
then help you make adjustments or improvements to your supply chain (as
needed).
• 2. Inventory profitability report 
• Tracking your inventory profitability happens in three parts: (1) SKU profitability,
(2) listing profitability, and (3) trending profitability. Reports on SKU profitability
are considered the ‘holy grail’ of ecommerce data, because they indicate the true
profit each SKU generates. Listing profitability, on the other hand, looks at your
SKU’s performance data by both gross and unit margins, as well as implied shares
per sales channel. Lastly, trending reports show your profitability over a
designated period of time.
• Using these product analytics can get your brand on the fast track toward cutting
costs, eliminating deadstock, and increasing profits by promoting higher-
performing items.
3. Inventory value report
• A snapshot value report shows you the total value of all your products at
individual warehouses (and even compares the volume of inventory at each
location).

4. Stock levels report 

• The benefit to a stock report is really twofold; these calculations can track critical
levels, and establish replenishment alerts, as well.
5. Inventory forecasting report
• The aim of an inventory forecasting report is to calculate the inventory needed to
fulfill future customer orders, based on how much product you expect to sell
within a set time frame.
• These estimates encompass your historic sales data, planned promotions, and
known external forces to develop the most accurate predictions possible. 

6. Sales report 
• With the backing of a sales report, brands can dive into an entire accounting
summary for each individual sales channel — from incomes and discounts to
refunds and taxes.
• A strong report will not only break sales down into different date ranges and
categories of goods, but it’ll also support you in uncovering trends, pinpointing
top customers, and improving your forecasting efforts.
7. Purchase order report
• Just because you have inventory sitting on your shelves or leaving your
warehouse doesn’t mean you can sit back and relax; it’s still necessary to manage
and track inventory that’s incoming, too. 
• Purchase order reports deliver insights into your purchase order activity, which
you can use to monitor transactional details and fluctuating product trends.
• In other words, a PO report gives you the ability to track what inventory stock is
coming in and when it will arrive at your warehouse. From there, you can make
space for new products, plan ahead on your order fulfillment, and prevent
needless overstocking events.
8. Customer analytics report 

• Within customer analytics reporting, companies can gain awareness around the
lifetime value of returning customers, the biggest spenders and/or highest order
value customers, and the most frequent (and most recent) customers to boot. 
• This knowledge will inevitably help in upgrading your marketing, driving more
sales, and giving customers an exceptional experience with every order.
Analyzing Merchandise
Performance
ABC Analysis
By the end of this class, you would have understood:

1.What ABC analysis in inventory control is

2.How to conduct ABC analysis in 5 easy steps

3.Major benefits of ABC analysis

What is ABC analysis?

ABC analysis also referred to as ABC Classification, is a vital part of Inventory Management. It
allows business owners to distinguish the products in their stock and focus on managing them based
on their worth. The main objective of ABC analysis is to make maximum out of minimum
investment without wasting any resources or inventory.

ABC analysis is an inventory classification strategy that categorizes the stocks into three categories,
A, B, and C, based on their revenue.
3 Categories of ABC Analysis
Segment A: 

• Products included in category A are the most essential goods with the highest value.

• Segment A goods consist of approximately 20% of the total products with 80% of revenue
generation for your business.  

• It is considered as a small category with minimal goods, but maximum revenue.

Segment B: 

• Products included in category B have a slightly higher value than segment B.

• It approximately regulates 30% of goods with 15% revenue generation.

• Not to mention, the goods included in this category are more in number but less in utility.
Segment C: 

• Products included in category C are more in numbers but least valuable when it comes to
generating revenue.

• As compared to category A & B, segment C has the maximum share of 50% of the stock,
generating just 5% revenue.
To sum it up, A signifies the most important goods, B indicates moderately necessary goods, and C
indicates the least essential inventory.
Conduct ABC analysis in 5 Steps

Step 1: Use the formula mentioned below to calculate the annual consumption value of each product.

Annual number of units sold (per item) x cost per unit

Step 2: Enlist all the products in descending order based on their annual consumption value

Step 3: Total the number of units sold and the annual consumption value of the products.
Step 4: Calculate the cumulative percentage of the goods sold and the cumulative percentage of the
annual consumption values.

Step 5: Divide the data into three categories. The split of the ABC categories will be unique to your
company but approximately, 80%, 15%, & 5%.
Benefits of ABC analysis
Analyze Customer Demand for a Product

• ABC analysis helps companies identify customer demands. Often companies assume the demand
for the goods and end up stocking up extras.

• ABC analysis makes sure that you know what your customer wants.

• As a result of this,  you will be able to manage your inventory efficiently and effectively. You will
only order the products that your customers want, neither more than the requirement nor less than
demand.
Enables Negotiations with Suppliers

• ABC analysis proves helpful in getting a fair deal on a product from a supplier.

• For instance, if you are negotiating with a supplier for an A category product, you know you have
to invest maximum since it generates the most revenue for your company. If the supplier is
reluctant to make you the right offer or accept your offer, you can interest them with any extra
benefits from your end. Maybe, a contract of sorts that you will take the next batch of goods from
the same supplier.

• As a result, you will not only crack a good deal as per your needs, you will additionally save
more on A category products, procuring more benefits.
Improvement in Customer Service

• When you don’t know the accurate level of inventory that you should order, you end up stocking
up on goods that might not even be beneficial to you. You stock up on unnecessary goods instead
of stocking up on goods that your customers may want.

• With the use of ABC analysis, you will know exactly what your customers are looking for or
what they want. This as a result will help you satisfy your customer demands and extend your
business. Not to mention, this will also cut down on the unnecessary from your budget and you
will focus, invest only on the goods that earn you profit.

• Along with that, you will also reduce inventory costs that you could be wasting on goods that do
not interest your customer.
Manufacturing of Goods

• ABC analysis enables manufacturers to improve their cycle of renewal of stocks. It allows them
to manufacture goods based on their annual cost and not produce goods randomly. What often
happens, as we have also discussed before, we often assume demand.

• This assumption leads to production of goods that are not required, and then stocking them up in
the warehouse where they sit for the longest.  As a result of this you find yourself facing your
worst nightmares as a business owner, your goods are damaged towards sitting in the warehouse.

• With ABC analysis, manufacturer will be able to understand the worth of their products and only
produce those goods high in demand and for those with low in demand, the quantity will be more
controlled.
Supply Chain Management & Warehouse
Management
• The inventory control technique of ABC analysis is used to improve the stock count cycle in a
company. For example, the goods belonging to Category A of the ABC analysis are counted
quarterly, goods in category B are counted bi-annually, category C products are calculated only
once a year. In this way, you don't waste too much on checking your inventory or no longer
completely ignore your inventory status.

• When you have A category products that earn you the most profit you want to make sure that
they are always in stock if not in abundance, by doing frequent checks.

• Often when you don't know what your products worth or assume their worth you refuse to focus
on the state/status of your warehouse in terms of stocks. This may lead to going out of stock or
wastage of stocks.
Multi-attribute Method
Multi attribute method for analysing merchandise
performance
• This method of analyzing merchandise performance is used to analyse the various alternatives
available with regard to vendors & select one that best satisfies store needs. This method is based
on the concept that customers look a retailer or a product as a collection of features & attributes

• The model is framed to forecast customers evaluation/ judgement of a product or retailer based
on:

1. Product’s performance on customers’ parameter

2. The significance of those parameters to the customer

Sell through Analysis
Sell through method for analyzing merchandise
performance

• Sell through is a metric that indicates how fast your inventory is selling. It represents the
percentage of units sold versus the number of units that were available to be sold.
• So, if you stocked 100 units of a product and sell 40 units, your sell-through rate is 40%. 
• A high sell through rate means you’re selling a product quickly, while a low percentage indicates
that SKUs aren’t moving quickly off the shelves. 
Merchandise Purchasing
What Is Inventory Carrying Cost?

• Inventory carrying cost, or holding costs, is an accounting term that identifies all business
expenses related to holding and storing unsold goods. The total carrying costs include the
related costs of warehousing, salaries, transportation and handling, taxes, and insurance as
well as depreciation, shrinkage, and opportunity costs. (Opportunity cost is the potential
forgone profit from a missed opportunity)

• A business' inventory carrying costs will generally total about 20% to 30% of its total inventory
value.
• Inventory carrying costs / holding costs can be expressed as percentage.

• It is calculated by adding up the total carrying costs & dividing it by the total value of inventory,
then multiplying by 100.

Total Carrying Costs / Total Inventory Value * 100 = Inventory Carrying Cost %

• The resulting figure can be used to determine if the holding cost are optimum or they can be
reduced. Carrying cost generally run between 20-30% of total cost of inventory, although it varies
depending on the industry & the business size
Any Questions?
Thank You!