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Retail Merchandise Software Retail Merchandise Software — The Panacea and Pitfalls

 
4 stars Average rating: 4 (from 106 votes)
By Chuck Schaeffer

How Retail Merchandise Software Finds the Balance Between Sales and Inventory

The primary sources of retail revenue leakage and diminished profits are lost sales due to stock-outs and inflated inventory carrying costs caused by excessive stock. Getting closer to the equilibrium point which separates these two seemingly opposing objectives directly increases revenues, releases working capital and grows profits.

Merchandise planning is a retail strategy designed to get the correct quantities of the right products at the right places at the right times and at the optimal prices. It's a complex forecast that considers the company's future financial goals, historical purchases, past demand, current trends, supply chain lead time and much more.

Merchandise planning accuracy directly correlates to both top line revenues and bottom line profits. Even small increases in accuracy – such as stocking higher volumes of high demand assortments at optimal prices – will result in significant revenue gains. Or on the flip side, small decreases in merchandise planning accuracy will result in stocking assortments that incur less turnover, more markdowns, higher inventory carrying costs and a significant hit to net income.

Merchandise Planning Process

Merchandise and assortment planning generally begins with a Merchandise Financial Plan that forecasts the retailer's revenue goals along with constraints such as working capital. This plan will advise how much can be invested in product inventories and may tell the buyer how much to spend on each category per period. With the sales target and budget in place, buyers and planners collaborate and create a merchandise and assortment plan.

The Assortment Plan will ultimately forecast what buyers and merchandise planners believe are the right quantities of the right product mix to the right stores at the right times. Assortment planning must calculate several projections, including:

  • Types of goods to be purchased
  • Where goods will be stocked
  • Quantities of goods to be stocked
  • When goods will be ordered, shipped and distributed
  • Procurement and purchase order (PO) creation
  • Reconciliation with merchandise financial plans

If you get the assortment plan right goods flow from shelves to consumers' homes at high velocity and maximum price. Get it wrong and POS registers sit silent, goods sit on shelves and consumers sit in competitor stores.

Fortunately, new technologies aiding merchandise and assortment planning are helping retailers increase forecast accuracy.

Merchandising Planning Software

Merchandising and assortment planning software replaces guesswork with sophisticated data driven models in order to calculate optimal financial, item, assortment, category, space, allocation and replenishment plans. The retail software generally combines three dimensions.

  • Product: item, brand, category, class and style
  • Location: store, chain, region, district, division, department, banner and channel
  • Time: week of year, week of month, month, quarter and season

When retail plans are supported with the quantifiable relationships derived from the intersections of the above dimensions, forecast models can deliver big financial impacts, such as the following:

  • Better decision making. Merchandise planning software can integrate end to end processes and thereby enable buyers or merchandise planners to experiment with different scenarios and dynamically view how changes in assortments, channels, pricing or other factors impact revenue goals, margins and profits.
  • Increased revenue. Merchandise software more easily shows what merchandise quantities should be stocked in which stores. It provides analysis to better understand where and under what conditions merchandise sells best and how consumer demand and precise retailer investments can increase sales of the best-selling or highest margin products while at the same time decrease overstocks of slow moving products.
  • Better margins. Back orders and overstocks are sources of margin erosion that can be reduced with assortment planning software.
  • Reduced inventory. Merchandise planning software aids optimized stock levels, improved turns, more timely visibility of slow moving inventory and better merchandise markdown and exit strategies. These factors have a tremendous effect on margins and working capital.
  • Improved Service Levels. Having the right assortments available in the channels where consumers want to procure them creates a better shopping experience and more satisfied customers.
  • Faster Process Cycles. Merchandise planning software reduces data preparation time, eliminates rekeying of data (which also eliminates transposition errors), lowers risk associated with manual spreadsheets and links end to end processes in a dynamic continuum. This increases collaboration across departments, decreases cycle times for related strategic processes such as Product Lifecycle Management (PLM) and identifies breaks in processes that are otherwise hard to detect.
  • Continuous Planning Improvement. Forecasting is a difficult science that is improved upon with learning. Comparing related plans or multiple versions of plans, such as baseline, original plan, revised plans and prior year plans will disclose which assumptions, variables and parameters are accurate and which should be changed. This learning is particularly valuable when applied to current planning via What-If analysis or predictive modeling – two scenarios that enable buyers and merchandise planners to see the future impact of their decisions in real time.
  • Labor re-allocation. When buyers and planners are not consumed in data preparation, data entry and building spreadsheets of questionable integrity, they can instead allocate their time on process improvements and decision making that will benefit the retailer.

More demanding consumers, more channels, new types of competitors, shorter demand trends, more complex processes and more data require retailers to apply new technologies to manage more complexity.

Ah, but even with the tremendous upside I'd be remiss if I suggested merchandise planning software was either a panacea or without substantive challenges.

Retail Planning Challenges

Before applying retail software to the three primary areas of planning — merchandise financial planning, buying and assortment management, and allocation and replenishment — consider the business process challenges that must first be resolved.

  • Merchandise financial plans are frequently not well integrated with the financial plans of other departments or not in sync with store plans. For example, it's easy for corporate to set financial goals whereby every store should grow revenues by a stated percentage over the prior year. It's much more complex for stores to calculate the mix of consumer demand, assortments, prices, turns and more in order to achieve these goals. When the stores merchandise plans are not linked with the retailers top line revenue forecasts, corporate loses real-time performance visibility and the stores combined performance is less likely to satisfy corporate objectives. When they are linked, data cascades from top to bottom and vice versa, management can perform What-If analysis or other modeling, deviations in one area can be made up in another and performance visibility enables real-time adjustments to plan.
  • Buying and assortment planning remains a manual or partially automated process for many retailers. Decisions are too often the result of a subset of prior year sales, limited data manipulated in spreadsheets, any particular individual's intuition, and forecasts drawn from educated guesswork. Clearly, replacing the subjective process with data driven analytics will result in improved planning.
  • Merchandise and assortment planning is too often a struggle to balance the merchandise needs of stores with the financial goals of the retailer. Increased collaboration and data work well to bring the parties together.
  • Allocation and replenishment planning often suffer from incomplete integration to buying and assortment plans as well as untimely and incomplete data updates from POS and supply chain systems. Evolving from static to dynamic integration with POS and supply chain management systems shows inventory flow, permits real-time adjustments, renders more efficient use of supply chain assets and will significantly improve plan results.
  • In my experience, the single biggest challenge is the cultural inability to evolve from what has always been an artful process to a combination of art and science.
  • Collectively resolving these challenges and applying retail analytics can create an end to end model whereby retail executives, buyers and merchandise planners can experiment or manipulate planning decisions anywhere along the continuum and immediately see the cascading effects.

A Retail Balancing Act

Keeping the right product mix on hand while keeping inventory levels low is perennial challenge with deep financial consequences.

Poor merchandise plans lead too much inventory (and its consequences of slower turns, markdowns and liquidations) or too little inventory (and its ramifications of lost sales and disappointed customers). Deviations in either misdirection lead to corresponding erosion of revenues, margins and profits. For every point closer to the sales and inventory equilibrium, inventory costs are decreased and revenues are increased by a corresponding factor.

Applying more innovative retail strategy supplemented with new retail technology in order to get closer to the point of equilibrium – across brands, assortments, channels and stores – will unquestionably improve financial performance and further separate retail leaders from laggards.

The challenges are daunting but not insurmountable. More so, an increasingly competitive landscape has elevated merchandise and assortment planning software from a nice to have to business essential. End

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 Comments (5) — Comments for this page are closed —

Guest Howard Berns
  I like your article but most retailers do not have merchandise software
  Chuck Chuck Schaeffer
    Merchandise and assortment software has been considered optional forever but that's now forever changed. Market complexities no longer permit viable retailers to operate without this technology. When retailers can automate their merchandise planning and inventory management with technology they can then intervene earlier and control their destinies, so instead of being alerted to shortfalls after the fact and when it's too late, they can identify variances in near real-time and while time still allows them to mitigate or capitalize on exceptions such as changes in demand, stockouts and slow moving items.
  Guest Geoff Martin
    Agree. Its so obvious but I continue to see retailers struggle or make excuses or just limp by with legacy systems. Those that put off new merchandise planning software are kidding themselves.
  Guest Sam Sam
    My company uses function specific systems rather than applications that facilitate end-to-end planning. They are cluegy, unintuitive, have terrible user interfaces and cause our buyers and planners to spend so much time satisfying antiquated systems that they seldom get to the analysis you describe.
  Guest Geoff Martin
    Merchandise and assortment planning is a complex process that can make or break a retailer's seasonal or annual financial performance. It's absolutely amazing how few retailers really give this the attention it deserves.

 

 

 

 

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For every point closer to the point of sales and inventory equilibrium, inventory costs are decreased and revenues are increased by a corresponding factor. Equally important, better merchandise and assortment planning delivers a better consumer shopping experience.

 

 

 

 

 

 

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