by Dwight D. Hill, McMillan Doolittle LLP
It's every retail executive's dreaded scenario. Your marketing or promotion has worked. You have drawn in your target customer either to your store or e-commerce channel with the right item, at hopefully the right price, and they are ready to buy. Sounds great, right? You're about to make a sale as soon as the customer clicks to add the item to their cart or physically select the item in the store. But the story unravels when the dreaded "out of stock" message appears or the customer is greeted by an empty shelf in the store.
Another example that can be just as bad – a dreaded "glut" of merchandise that is left at the end of the season, resulting in margins lost due to excessive markdowns, or worse, write-downs to clear the inventory.
While the sources of these problems can be both elusive and complex, one thing is certain – the existence of a comprehensive cross-channel merchandise planning process is a must when it comes to managing your assortment from initial concept to final disposition. Below is a checklist of merchandise planning fundamentals that should guide every merchant executive's priorities for 2015:
1. Establish a Cross-Channel Merchandise Planning Process. This may sound elementary, but some retailers still lack a formal process. It should begin "pre-season" with top-level financial goals coming from the finance organization. These goals are usually at the highest levels of the organization – at the multi-group or category level, and usually consist of top level sales and margin goals. A merchant should then take these goals and develop a high level plan – usually incorporating metrics such as sales, markdowns, receipt flow, inventory levels, margin dollars and percent, and gross margin/return on investment or GMROI. These plans should be developed through a combination of analytics including like item historical performance, macro trends for the category, and targeted customer data.
Once an initial plan is developed, a working session should take place that includes the merchant, demand planner, merchandise/financial planner and merchandise planning leadership. In this session, the plan and each metric should be reviewed in detail, adjustments made on the spot, if necessary, to arrive at the desired margin and GMROI. This step must be iterative, as it can take several iterations of the plan with each category to arrive at the overall company goal and a finalized plan for a specific season. The result: a signed off and agreed upon plan by all levels of the merchant and planning organizations.
The process should not stop there, however. An "in-season" control checkpoint must be established between the merchants and the planning organization to ensure business trends are capitalized upon or problems avoided. Depending on the turns and speed of the business, this checkpoint should occur at least monthly and include a review of the key vital signs of the business: sales, markdowns, receipt flow, and inventory levels. Only through this type of "in-season" control step can opportunities be pursued or potential inventory problems minimized. The point: increase your chances of meeting and beating the sales and margin plans by establishing a consistent pre- and in-season planning process that is followed by the entire merchandising and planning organization.
2. Establish a Cross-Channel Merchandise Planning Organization. The importance of a dedicated merchandise planning organization cannot be emphasized enough. This group provides the necessary checks and balances between the art of merchandise selection and the science of merchandising analytics. Regardless of the structure of this organization, members of this team should be assigned to and physically positioned with their merchant counterparts, to encourage daily dialogue and healthy interaction. From a reporting perspective, this group should ideally sit outside the merchant ranks and report up through the finance organization, emphasizing the ability to provide an independent, objective point of view for both pre- and in-season planning. The point: create an objective organization that can lead the planning process and ensure consistency in the development and execution of the merchandising process.
3. Define Exit Strategies for All Merchandise. Every item has a useful life and one of earliest lessons for any merchant is to think of their inventory as a truckload of seafood – after a certain amount of time it will start to stink! Thus, each and every item should have a shelf life and exit strategy. The exit strategy is simply a function of either sell-through goals or planogram timing. The exit strategy process should ensure that each and every item will be subject to a category-specific markdown cadence once the merchandise has reached a certain point in its lifecycle – either defined by a specific sell-through goal or planogram exit date. The point: every item has a lifecycle; make sure your merchants are planning for a pricing cadence to work through remaining inventory as profitably as possible, while making room for fresh merchandise.
4. Assign Logical Store Clusters. Macy's has done a phenomenal job recently of creating a localized assortment for its stores, which has driven their positive results over the past several years. While developing a fully localized assortment is tremendously challenging and expensive due to the supply chain tools required, it is reasonable for retailers to identify logical store clusters by category or item classification. These clusters should be assigned based on store volume, customer attributes, and store geography as a start. As the tools and abilities become more sophisticated, more in-depth shopper demographics and competitive clusters should be designed. The point: inventory is a valuable and expensive asset – sending the right merchandise to specific clusters will increase your chances of preserving margin and GMROI.
5. Acquire the Proper Tools. The most important asset a merchant has is data – preferably data from a trusted source. Retailers should consider at least a core set of basic tools to improve their ability to plan and manage their assortment. These include:
Enterprise Planning: the tool which enables the development of top down and bottoms up category plans at the GMROI level
- Enterprise Data Warehouse: the source of foundational data from which to plan and manage the business
- Allocation/Assortment Planning: more advanced tools that enable the development of store and customer specific assortments.
The point: work toward one common set of reports and create one version of the truth. Merchandising is hard enough; don't complicate it by forcing merchant teams to "guess" as to which number is correct!
Will these steps solve all of the possible out of stock or overstock situations that our retail executive faced? Not likely, but you will certainly decrease their frequency by creating a consistent pre- and in-season merchandise planning process enabled by a dedicated team using the right tools – and that will keep your customer coming back.
Dwight D. Hill, whose background includes leadership roles with Neiman Marcus and Deloitte LLP, is Partner, McMillan Doolittle LLP. Dwight can be reached at email@example.com.
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