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Holiday 2013 Lessons Learned: Re-evaluate Your Merchandise Planning Process
Dwight D. Hill, The Retail Advisory LLC

There couldn't be a stronger case for re-evaluating inventory management and merchandise planning functions than the case of Holiday 2013. Traffic slumped. Many retailers struggled, especially in the teen segment. Mother Nature brought two major winter storms. The calendar also didn't cooperate - the period between Thanksgiving and Christmas was the shortest since 2002. As a result, Holiday 2013 turned out to be one of the most dismal on record. Worse yet - many apparel retailers were overstocked, resulting in a frenzy of promotions. 50% off become the new 25% off as chains from H&M to Banana Republic to The Gap offered huge discounts off entire purchases. All the sales, however, didn't motivate the customer as hoped, resulting in heaps of merchandise at 75% off after Christmas. Clearly, there will be some profit hangovers during the January/February earnings season.

The problem? Buyers were pretty optimistic when they made their plans and purchases for the fall season. Consumers on the other hand, already cautious but spooked by a still recovering economy and a government shutdown, proved to be fickle during the all-important 4th quarter, shopping on their own terms.

While retailers can't control the weather or consumer behavior, they can and should instill discipline within their planning processes to provide greater nimbleness in the planning and management of inventory. A defined inventory and merchandise planning process is a must when it comes to managing assortments from initial concept to final disposition - and especially in preparation for the all-important holiday period.

Below is a checklist of merchandise planning fundamentals that should guide every merchant executive's priorities for 2014:


1. Establish a Merchandise Planning Process. This process 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, typically 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 and adjustments should be 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. This step is contingent upon good inventory visibility and the ability to make order quantity adjustments. 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 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 fish - 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 - including positive results (+3.6%) for Holiday 2013. 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:

a. Enterprise Planning: The tool which enables the development of top down and bottom up category plans at the GMROI level.

b. Enterprise Data Warehouse: The source of foundational data from which to plan and manage the business.

c. 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 inventory issues faced by many retailers over the course of Holiday 2013? Not likely, but a consistent pre- and in-season merchandise planning process enabled by a dedicated team using the right tools will certainly increase the chances of the right inventory in the right place - and that will keep your customer coming back.

One last thing, retailers be warned: The holiday shopping period for 2014 will include only one more day than 2013, providing yet another compressed shopping season. Hopefully the "lessons learned" discussions are well underway.

Dwight Hill is the Founder and Managing Director of The Retail Advisory LLC, a management consultancy serving the retail industry. Dwight is a recognized industry expert with over 20 years of executive level experience with Deloitte, Neiman Marcus, Michaels, and Zales. Dwight serves retailers of all types including luxury, department stores, food/drug/mass, specialty and convenience. He has led the implementation of continuous improvements for dozens of retailers that streamline operations, improve customer experience, and drive profitable results.