Fine-Tuning Your Inventory: Mastering Assortment Planning for Retail Success

Assortment Planning – The Key to Increased Profits

Have you ever found yourself in a situation where you have more than enough inventory on the floor yet seemingly nothing to sell? Perhaps this scenario has happened: you just get another new style but you have no space on the wall or on the selling floor to display it? Better yet you have many different styles and vendors but you seem to quickly run out of the best sizes your customers want. If you have ever experienced any of these situations you most likely have an assortment problem.

Assortment issues can plague a retailer even if they are following the best open-to-buy plan available. How is that possible you ask? Simple an open-to-buy is a dollar control planning methodology designed to keep the amount spent on inventory in line with the planned sales for a given store classification and time period. However an OTB does not dictate how much to spend on any given vendor style or size. That is the function of the assortment plan.

Here’s an assortment planning example:

Let’s say you are opening a brand-new store and have a planned inventory of $50000 @ retail in a given classification. Let’s further assume that the average unit price is $200. Simple math shows us we would be able to buy 250 pairs. If we were to buy a 10 pair run of sizes across all vendors and styles equally we could buy 25 styles right? We also have five brands in this class. You have decided to buy the same number of styles from each vendor and only one pair per size so that you can have a larger presentation of styles. Assuming all inventory has arrived by the opening day you have the perfect assortment.

Now here is where the problems begin. This “perfect assortment” only lasts until the first sale is made.

Narrow and Deep

Sales Opportunities and Inventory Management

By giving equal weighting to all styles and vendors you miss sales opportunities in the best-selling styles because the key sizes are sold out quickly leaving only end sizes. It takes time and money to get these fast sellers back into the system assuming that they are even available to reorder. Other styles you have selected may not sell as quickly if at all. I call this the “shotgun” approach.

The Shotgun Approach

The buyer isn’t experienced enough or doesn’t yet trust their judgment so they overbuy the assortment to make sure “everything is covered.” Experienced buyers don’t buy this way. They know they must have a decent presentation of vendors styles and price points to pique the customer’s interest. They also know that certain styles will most likely be winners. It is these winning styles that should have the key sizes backed up so as not to have broken size runs after the first purchases are made. Their assortment is narrow and deep.

Utilizing SKU History

If you are an established store with SKU history in your POS system you can easily spot the problem. Let’s say your stock turnover goal in a given class is three times annually. In looking over your past performance of style and vendors you find a particular brand turning five times. Initially you might think this is a good thing since faster turns equate to better cash flow and higher sales. Upon further review of the styles however you find stock outs on the best styles that were either never reordered or are not currently available. Conversely there will undoubtedly be other styles with slower sell-throughs that should be stock balanced with the vendor or marked down.

The Impact of Offering More

Studies have shown that offering more does not generate more sales. The most famous being a study published by psychologists Lyengar and Lepper in 2000. What they found was that shoppers were 10 times more likely to purchase jam from a display when the selection was paired from 24 to 6.

Pruning of Assortments

Pruning of assortments started 1-2 years pre-COVID but accelerated during the pandemic. What companies learned supports the Lyengar/Lepper study showing that fewer offerings lead to less customer confusion and fewer markdowns. Eric O’Toole President of Edgewell’s North America Division said that the pandemic presented “a really valuable stimulus” for reassessing assortment. In O’Toole’s words “A tighter more curated portfolio supports healthy profit management.”

Over Assortment Pitfalls

Another pitfall of over assortment is that initially the problem can be disguised within the OTB plan. Sales and inventory levels might appear to be in decent shape on the merchandise plan initially since you are looking at dollars only. This can quickly change as the most desirable styles and sizes are quickly sold through leaving only the slower less requested merchandise. That is why the seasoned merchant constantly monitors his or her SKU assortment using POS data available.

Displaying Over Assortment

Displaying an over assortment also presents problems. In most stores there is only so much room on the wall or the floor or hanging space to display all the styles. If there are too many styles from which to choose the retailer quickly finds him or herself with duplications that lead to increased markdowns and customer confusion as shown in picture #1. Picture #2 on the other hand is a well-curated presentation of carefully assorted SKUs offering:

Assortment creep is a term used to describe a condition of inventory buildup that over time slows turnover ties up cash reduces sales volume contributes to old inventory and causes excessive markdowns.

How to Avoid Assortment Creep

• Remind yourself to buy the best and pass the rest.
• Having a sound sales and inventory forecast and accurate open-to-buy plan is a vital first step.
• Pay closer attention to the assortment plan to fine-tune the process.

Ritchie Sayner

Credit: Is Less Really More? By Anne D’Innocenzio Associated Press 2/17/24

Ritchie Sayner

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