Evaluating the role of Assortment planning in retail
Inventory is the largest single ongoing capital investment for most retailers. Therefore, it is vital to mimise the risk from inventory excess, while ensuring sufficient supply for items that sell well. This is no easy task. It requires an active process that regularly reviews stock velocity and dynamically adjusts budgets to ensure spending occurs in the right areas.
It seems like the same narrow choice of SKUs always sells out, a problem that has only been compounded by the pandemic. Is the pursuit of higher conversion rates through wider assortments worth it? Can assortment planning still maximise sales in a modern tech-driven retail landscape?
What is Assortment Planning?
Assortment planning is a process that maximises cash flow and rationalises budgets, while leveraging visual merchandising, and modulating the purchase and flow of stock mid-season. It is not the same thing as purchasing, although this is also a key feature of assortment planning.
Assortment planning takes the view that every assortment is an ‘event’ that blends seamlessly from one season into the next. This means that complementary products are stocked together, and a logical flow runs through the assortment in a way that mirrors and accompanies the customer’s own journey. Assortment planning is a complex process that considers the effects of promotions, alternative products, price points, seasonality, reorder points, and lead times, (to name just a few) to maximise conversion rate and cash flow.
Looking at past sales data and current trend insights, retailers organise complete assortments during the assortment process. This is to ensure that products that sell are in stock when a customer comes to buy.
A higher Average Transaction Value (ATV) can result from intelligent assortment planning. You can group products together in a complementary way that drives sales. This is one of the ways brick-and-mortar retailers can leverage their physical environment.
Visual merchandising also plays a part in this. With a proper visual display, you can make sure that products are easy to find and that impulse purchases find their way into the shopping basket. Assortment planning will also differentiate strategies based on the store type, location, and store demographics – all key drivers of distinct buyer behaviours.
For omnichannel sales, assortment planning can be slightly different to physical stores. But only as much as one physical store or store cluster might also have particular shopper habits and preferences compared to another. The intelligent use of store clustering is sufficient to manage many aspects of assortment planning for omnichannel sales.
Assortment planning best practices and process
The best practices in assortment planning are data-led and match consumer demand as closely as possible. A good assortment planning process will incorporate data about product hierarchy, clustering together of similar stores or channels. Pricing is another area that needs consideration to ensure that anchor prices can deliver the optimum return by placing products at the optimum point on the pricing/sales curve.
We typically see that there are standard replenishment items that have a regular rhythm – like a heartbeat, and where demand changes little from year to year. Seasonal and trendy items are much harder to manage, due to the incredibly unpredictable demand paired with long lead times.
The most valuable process to manage seasonal or trend-based items is Open To Buy (OTB). This helps merchants to reduce inventory risk and retain some flexibility to meet demand and avoid stockouts. As discussed in more detail in another article, OTB has been defined as a financial tool when it is actually a more complex concept that ensures stock availability.
While we can ensure sufficient stock for ‘replenishment’ items (like NOOS, Evergreen, and Basic products) by placing stock buffers at supply-chain nodes, this is not possible with seasonal items that have a short production run, limited demand visibility, and long lead-times.
Instead, this risk is managed with OTB. In this case retailers create “budget buffers” that can release budgets for re-ordering fresh inventory based on early demand signals. In theory, this ensures a steady flow of fast-moving items while minimising losses on the slower-moving stock.
There is a distinct financial advantage (because it limits inventory risk) – however the primary function of OTB is to assist the assortment planning outcome by ensuring enough flexibility to meet the real demand better.
The three phases of assortment planning
There are three distinct phases of activity across the sales season, during which assortment planning focuses on different areas.
Pre-season – In the planning phase, retailers and brands examine data about the previous period to make strategic decisions regarding the upcoming season. They make purchasing decisions and determine the OTB based on expected demand scenarios for each store, channel, or cluster.
In-season – This is a management phase, during which current sales are compared with expectations. Tactical and operational decisions are made to boost sales, such as promotions, clearance offers or reallocation of stock. OTB is utilised in-season to ensure profitable flow of stock. Hot items that are selling better than expected are re-ordered (based on early demand signals) and store layout and visual merchandising is used to refine conversion results.
Post-season – This is an analysis phase. It is a forensic examination of the end-of-season data to understand buyer behaviours and sales patterns. The end result of this, is a detailed data-based report on what worked and what needs improvement. This data helps to inform the pre-season phase in the next assortment planning cycle.
How to plan your assortment to achieve a higher profitability
Achieving the right mix of products helps to drive sales by ensuring that margin-boosting ‘companion’ products are never out of stock and that the customers are inspired and motivated to buy. Having a wide assortment does not always drive more sales – indeed it is often the case that merchants can increase sales by eliminating some SKUs altogether.
With the right combination of products, the retailer can generate sales synergies and gain efficiencies by reducing inventory movement and markdowns. The key to success is to respond accurately to the customer demand – but this is not easily achieved when planning assortments many months in advance. Data can help to build insights about customer demand, and this in turn informs the product mix. With the right technological tools it is much easier to handle complex data to inform better decisions.
The assortment planning process is an essential tactic for optimising sales, but it needs to be done differently when using digital tools – because you are able to achieve more precision using data that is updated in real-time.
The role of automation and technology in optimising assortment planning processes
Analytics plays a key role in ensuring your assortment planning process is informed by data-backed insights. It is a data-heavy task that can consume many person-hours when using basic tools, and can only be conducted periodically (monthly) this way. However, by using technological solutions the data can be handled more nimbly and continuously – avoiding the need for periodically adding and evaluating data manually.
Open-To-Buy (OTB) is a key area that can be optimally managed using technological solutions that help to automate the decisions and provide real-time insight at any time. Merchandisers have managed OTB on a monthly basis using reports already out-of-date. By using a smart algorithm instead, this can be achieved continuously with the most current data about real-time demand. When a machine is making these essentially mechanical decisions, more time is freed up for activities that actually require a human touch.
Re-ordering, reallocation and replenishment
In-season management is also a task that has the best ROI when achieved with a machine to help it along. Many of the in-season management tasks would be fully automated, including re-ordering, replenishment and re-allocation. This has positive effects by reducing the cost of human labour, as well as with more effective decision-making that eliminates overstock and stockouts.
KPIs and insights
With technology, you can perform detailed and granular data analysis that enables you to make better clustering decisions. Thanks to new software tools, you can always stay up-to-date. This analysis can be used even after the ‘in-season management phase’ to make strategic decisions about the next cycles.
Looking beyond the present, as the retailing system becomes more capable of handling things ‘as they are’ (and responding to demand in real-time), the traditional season starts to lose meaning.
Instead, technology is moving us towards a ‘continuous flow’ approach to merchandise and assortment planning. This doesn’t mean that assortment planning has no future – quite the contrary. Rather, assortment planning will become an integral part of the technologically enabled retail model of the near future, with machines making the most critical and data-heavy decisions and humans using their creativity and experience to guide the whole process.