What Has Changed In Merchandise And Assortment Planning Recently - Part 2?


Introduction

The first article in this series of 4 covered the various aspects of sales planning and channel planning. This week we address inventory, which is an especially tough challenge due to all the supply chain problems being experienced now.


The Impact of Covid-19 on Stock Planning

As best you can, you need to buy enough stock to meet your net sales and any terminal stock targets you may have defined. You need sales at retail and depending on which inventory accounting method you use you may need to calculate net sales at cost as well.  (You can learn more about retail verses cost accounting in our white paper on the subject.

Once upon a time, as a store based seasonal goods retailer, you would have planned 1 to 3 stock injections according to your planned phasing of sales. However, your gross sales will be higher than your net sales and your warehouse despatches will be determined by your gross sales. Hence, your early stock injection phasing will be governed by gross sales. Compared to a retailer with no or negligible online sales, this will mean bigger early intakes, which may adversely impact cash flow.

A tricky question is what happens when a sale you record in period 1 is returned in period 3? Do you post the return as a debit against the total sales number in period 1 or period 3? If you post it against period 1, you must protect the integrity of your gross sales number so that you plan enough stock to achieve period 1 despatches. So, you can debit net sales but not gross sales. Prior to any returns, net sales and gross sales are the same thing.

By the time you get to the second half of the season in clothing, it is not uncommon to find that your e-commerce returns warehouse (or warehouse section) is the biggest single supplier of stock to the business.

In these difficult times, too high a stock of fashion or seasonal lines makes managing profitability and long-term survival more difficult than many retailers are used to. Consumers are more focused on essential items and these are often referred to as basics internally. Essentials are where the stock availability needs to be maintained as best as possible, as good availability is the one thing that will encourage shoppers back into the stores and they are used to availability being less good for fashion or seasonal items.

The chart below shows a typical ABC analysis of cumulative sales percent verses cumulative number of SKUs. The A items are those that are the highest sellers and typically 10% of your SKUs accounts for 30% or so of total sales. The B items account for another 40% of SKUs and 55% of sales. C items are often referred to as the long tail. They are typically 50% of SKUs and only 15% of sales. Basics or essentials are generally A or B items and must have a high in-stock service level.

When cash is constrained and consumers are concerned about their finances, a lot of the C items can be cut as their sales will be even lower in a tough environment.



When planning sales in these times, it is important to remember that store sales are down depending on segment and where you live but can be as much as 40% down compared to the year before Covid (2019). However, conversion rates in store are generally significantly higher. If the consumer makes the effort to go to the store, they aim to buy everything they need in one place. Price was not as critical during the Covid pandemic, but it is again now due to rapdly rising inflation, high energy costs and wages not keeping up. When prices need to be sharp, efficient processes and thoughtful planning really matter.

Clearly, if you can source your stock in smaller purchases and more frequent orders, that’s a good thing to achieve in this market. The initial margin may not be as good, but the risk of excessive markdowns is much smaller. More “nearer to home” purchasing may be a net benefit.

Inventory has a carrying cost, normally between 10% and 15% a year of the cost price of the stock. Stock can be divided into cycle time stock and safety stock. Cycle time is the time between an item being sold in the store to it being back on the shelf to be sold again. On average in retail, safety stock is 60% of the entire stock investment and its main purpose is to protect against out of stock situations due to demand forecasting errors. The more locations that hold safety stock, the more safety stock you need. Centralising safety stock reduces the quantity you need (and therefore the associated risk and carrying cost) significantly. You can contribute to this reduction through improvements in the physical replenishment process to stores and by changes in your approach to assortment planning. We will address assortment planning later in this series.

Given the surges and falls in demand, driven by recent events, concepts such as just in time and fast fashion are effectively dead, at least until we get back to more normal times.

 

Conclusion

Merchandise planning is becoming more complex because of the impact of the Covid virus and recent events. Inventory planning and management is especially challenging. This might be a good time to refresh the skills of your merchandise planners and to train those who will be joining the ranks of the planners in future. Martec provides a comprehensive merchandise and assortment planning e-learning class, and a comprehensive sales and inventory management class, which could help merchandisers and stock managers in these trying times.

 

Finally, remember to re-visit this blog next week to read article 3 in the series.

 


Posted by Brian Hume
12th October 2022

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