Assortment Management

The sales volume is not always directly correlated with the variety of products that a store is capable of offering to its customers.

The sales volume is not always directly correlated with the variety of products that a store is capable of offering to its customers. It’s crucial to bear in mind that when products on the shelves expire, they result in losses for the company. Assortment management allows you to improve the business efficiency and maximize profits. For example, adding related products can increase the average bill. At least, it's unwise to decline selling insoles and care items in a shop that specializes on shoes. The person who purchased a new pair of shoes will continue to buy polish from another place unless you offer them yours. The article will provide you with insights on effectively managing assortment, including the challenges that may arise and the tools available to assist in organizing this process.

Goals and Objectives of Assortment Management

Assortment is a concept that encompasses a collection of closely related product groups, upon which the company's offerings are formulated. Assortment management is a complex task that aims to create a rational and relevant offering tailored to interests of the target audience. During the process, a company must identify the types and varieties of product groups that are in highest demand within its niche.

The aim of assortment management is to maximize profits from the goods or services being sold. Thus, the primary objective in order to achieve the goal is to satisfy customer demand.

Management processes can be categorized into key steps to make it effective:

Market Analysis.
Customer Demand Research.
Identifying requirements pertaining to the rational use of specific goods.
Selecting an assortment profile based on store specialization.
Developing a framework that includes a comprehensive list of key categories and subcategories, along with the required ratios that must be observed.
Work with nomenclature, organization and formation of assortment.
Calculating and determining the irreducible balance for various types of products.
Procurement planning that includes eliminating low turnover items, replacing them with high turnover ones.
Regular work on optimizing the offer.

The management tasks include ensuring the necessary completeness of the assortment within the product groups, controlling the sustainability and comprehensiveness of the offered products. Based on the formation, assortment management is closely linked to inventory control.

When creating an assortment strategy, it’s important to focus primarily on the target audience. Otherwise, goods or services simply won't be purchased.

Difficulties and Mistakes in Management

Assortment management is a complex analytical task characterized by a high degree of complexity. This is an in-depth analysis of consumer sentiment and the market as a whole. If, for a small pavilion following the "at home" format, you can customize the assortment based on conversations with loyal customers and even adapt products for individuals, then this scheme no longer makes sense in any manner for a larger establishment with a more intricate structure.

Among the main errors are:

Unmet or misaligned, unclear objectives. The main objective is to maximize profits by increasing turnover. The strategy should aim to achieve it.
Weak analytics and insufficiently in-depth monitoring. The company incurs losses when there are no product categories in demand, including those not in demand, within its assortment.
Too much expansion of the profile. Simply having a wider range of products does not ensure that profits will be maximized. Using ineffective products will lead to decreased sales efficiency and, for example, higher rates of expiration.
Consumers perceive the retailer and its products to be less appealing when faced with an assortment that is both unbalanced and sparse.
Incorrect KPIs that cause efforts to be dispersed or misdirected.
Assortment management based on manager's preferences. While it may have a remarkable taste that suits your palate, there is no guarantee that this flavor will resonate with the target audience. You need to focus on a volume sample that takes into account current market data regarding customer preferences.
Vendor-related issues. It’s better to avoid collaborating with companies that enforce strict demands on the goods provision, as well as their assortment. They are sure to start "dumping" the illiquid that will take up shelf space.

Assortment problems can be solved in a number of ways. Including:

Analyze sales data and exclude low-demand products from the inventory, thereby decreasing their quantity available. It’s better to have a narrow selection of popular items than a wide array of expired, expensive pasta on the shelf.
Hire a staff member responsible for range operations. Salespeople most often lack specialized training or at least the necessary analytical background, and on top of that, they are simply overwhelmed by the day-to-day responsibilities in the store. Shifting assortment tasks to them is a lost cause. Hiring an employee with the right competencies will significantly increase profits and, as a result, will pay for itself quickly.
Track "stagnant" items. It's important to keep consumers interested. Updating the assortment and replacing existing products with new ones that have better consumer properties helps to increase sales. Additionally, you should pay close attention to holidays, popular trends. For example, Christmas gifts, WOW items will maximize profits over a period of time.
Move away from seasonality. This method is relevant when the store, for example, sells furs. In this case, it is better to diversify the range of goods from similar groups, which will attract customers even in the “dead” season.
Track the economic environment. Crises lead to a fall in demand for expensive non-food items as well as services and entertainment. It’s worth expanding the range of inexpensive goods, offering special promotions on entertainment and non-food products. Such a measure may not be a way to increase profits, but at least it will allow to survive the crisis.

Product matrix management should be organized using up-to-date information, constant monitoring of market peculiarities and consumer sentiment. The items customers choose today may not capture their interest tomorrow.

Methods of Assortment Management

This process is facilitated by numerous methods. Different ways of analyzing the assortment structure make it possible to determine performance parameters using different criteria. The main methods include: category management, ABC/XYA analysis, BCG matrix, and merchandising systems. Let's talk about each.

Category Management

A fairly recent approach, the implementation of which is based on two principles: the goal is customer satisfaction and the product group — an independent unit. Different combinations may be present within the same catalog. For instance, in a sports store, there is a wide assortment of categories in which the same product can fall. Cleats serve as both "shoes" and "soccer merchandise." When forming combinations, it’s important to consider all factors that influence successful product sales and optimize the entire cycle as much as possible. When implementing category management, you need to:

form categories;
designate a role for each category in the catalog;
develop your own promotion strategy and tactics for each category;
evaluate assortment management and determine its effectiveness;
make adjustments when performance is poor.

The use of category management implies the division of goods according to their roles into main groups:

profitable - fast sales, large profits;
demand-creating - consistently high popularity;
turnover-maintaining - consistently high sales, relatively low profits;
defenders - goods that are used to attract consumers by pricing them lower than competitors. An example of such items can be socially important goods, for example, the low cost of bread or milk attract customers who will buy related products and thus bring profit;
image - high cost, status. Used to attract buyers focused on expensive, high-end products;
test items - introduced in order to test the market. They should have the smallest proportion, can be easily and painlessly excluded from the assortment.

Category management involves the concepts of strategy and tactics. The strategy should aim to increase the number of satisfied target customers and increase the profit margin. Tactics represents the day-to-day process followed to achieve the strategy. It takes into account specific points: pricing policies, presentation methods, scheduled deliveries, and other issues that arise in a particular time frame (currently). Assortment and quality management in this system is a complex endeavor. In the end, a low-quality product, even with a wide selection, will not benefit the company.

ABC/XYZ analysis

Organization of assortment management using ABC-analysis is a method that allows to classify the company's resources according to their importance. It can streamline almost any area. The method is based on the universally recognized Pareto principle, which asserts that 80% of the turnover is generated by 20% of the goods. According to ABC classification, goods are divided into 3 groups:

A — leaders. These are exactly the ones Pareto is talking about. 20% in assortment, 80% in revenue;
B — the average degree of importance. They can take up to 30% and their share of revenue will be around 15%.
C — the least important items, which make up 50% and generate only 5% of revenue.

Assortment is formed on these indicators.

XYZ analysis uses other principles to categorize products. Criteria for division are stability of sales, dependence of demand on different fluctuations, e.g. seasonal. The product range is also divided into 3 groups, but considering the sales stability:

X — provides a stable consumer volume with 0-10% deviation from average values.
Y — has average demand forecasting capabilities, performance can deviate from the average by 11-25%;
Z — characterized by volatile consumption and high difficulty in forecasting. The deviation exceeds 26%.

Combining these methods allows for more correct and efficient assortment management. The product profile is analyzed using 2 of these methods and the result is a matrix containing 9 product groups:

AX/BX - has consistently high demand and is characterized by easy forecasting of sales levels. Regular supply contracts are concluded for products hereof.
AY/BY - characterized by high turnover with pronounced seasonal fluctuations in demand. The level of demand for a category of goods in this category cannot always be predicted and an increase in insurance stock in the warehouse is required.
AZ/BZ - goods are characterized by high turnover but unstable demand. The optimal option for such products is to sell to order or to fine-tune control of existing inventory with the ability to quickly rebuild based on forecast results.
CX - goods that are extremely difficult to forecast demand for and have little impact on profits. They can be left in the assortment and sales dynamics can be monitored.
CY/CZ - hard-to-realize, profit-decreasing items. It's worth reconsidering their presence in the range.

BCG Matrix

Used to identify product categories that bring maximum profit, as well as to highlight products that have lost popularity in order to further exclude them from the assortment. Matrix evaluates the assortment based on two criteria: growth rate and market share. According to the analysis, 4 categories of items are distinguished:

"Cash cows" are commodities that do not have high growth rates but generate consistently high profits for the organization. The demand for them is stable and they do not require additional investment, they sell themselves. For such goods, it is necessary to hold demand for a long period of time.
"Stars" are high-demand products that provide high market share. These are the sales leaders that are generating excitement but require additional investment. The most striking example of "Stars" are new models of smartphones, which are "stamped" almost every season. Their share needs to be increased in the company's overall assortment.
"Question Marks" are products that have a high growth rate but a small market share. Their promotion requires additional investment and there is no certainty that they will become Cash Cows or Stars. It is required to analyze the potential of such products, on the basis of which to change the share in the assortment.
"Losers" - items from any category above can go into this one. These are products that have a low growth rate, occupying a small market share. More often than not, it's something outdated, whether it's smartphones, clothing. Demand is gradually falling, and so is profitability. They are unlikely to be resuscitated, so it is worth either minimizing such categories or removing them from the market altogether.

Expand the assortment to include "Cash Cows" and "Stars" while minimizing or eliminating "Question Marks" and "Losers".

Commodity Accounting

Facilitating assortment and quality management processes is better moved to the "rails" of automated accounting. Their implementation eliminates errors that are caused by human factor. At their expense, it is possible to maintain the assortment in a state that will meet the needs of the target audience. Thanks to automation, a whole range of problems related to the creation of an assortment that will bring maximum profit with minimum labor costs is solved.

GoodsForecast offers in-store solutions that will:

Forecast demand and plan sales.
Coordinate inventory management in outlets, warehouses, auto-order expiring products.
Plan and forecast the effects of promotions.
Analyze lost sales and product representation.

GoodsForecast's solutions help you build an effective sales planning system that will consider a wide variety of influencing factors, as well as accommodate custom adjustments. By implementing automated processes, companies can achieve a higher level of accuracy in forecasting results, create an optimal product matrix aligned with goals, effectively meet customer demand, and ultimately maximize profits. If you need a system to manage your assortment, contact a GoodsForecast manager to discuss your needs and receive a quote.

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