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generation
April 2007
st yle
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Management briefing
By Stacy Baker
April 2007
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Table of contents
Introduction ..................................................................................................................................... 1
Introduction
The underlying tenet: All of this is best accomplished by knowing thy customer.
Only then can each store’s assortment be effectively and efficiently customised
to local demand.
This doesn’t sound so difficult until you consider that the larger the retailer, the
more stores, the more brands and the more products it must juggle in order to
optimise its offerings by location. Add other variables, like financial constraints,
seasonality, competition, promotions and space layout (not to mention
uncontrollable events like a celebrity wearing your brand’s boots so now
everyone wants them!), and the computations grow.
All of these decisions and possible outcomes become far too complicated to
manage with a pad of paper and a pencil, or even an Excel spreadsheet.
Some retailers even rely on intuition and instinct. In addition, many systems
currently being used to support merchandising are cumbersome, outdated and
lack the ability to effectively execute the mathematical computations necessary
to optimise assortments and manage inventory. Over the years, these
solutions have also been modified to the point where they are impossible to
upgrade and can no longer handle the need for scalability, flexibility and
visibility necessary to forecast and deliver accurately.
Hung LeHong, research vice president with Canada-based Gartner, says that
at present, retailers have three ways to create better product assortments at a
high level:
1. headquarters makes the decision about what to put in each store,
aided by merchandising optimisation tools such as advanced
assortment planning;
To effectively merchandise, LeHong says, retailers must have all three tools in
their tool belt, using each option to various degrees depending on their
operations, technology options, vendor relationships and store managers.
Specifically, the most significant areas of evolution from the first generations
have been in three distinct areas, according to Ijaz Parpia, vice president of
development, i2 Retail Industry Group:
○ customer-centric assortment management;
○ transition to floor-sets-based planning; and
○ integrated planning and execution.
pose additional stress on a retailer’s capabilities. “Retailers who are still trying
to leverage financial or other seasonal calendars to manage assortments are
losing the edge to retailers who are capable of providing a fresh, compelling
assortment each and every week to their customers,” he explains.
And even though the technology has come far in the past few years, there is
much more work to be done in order to streamline and optimise the back-end
in order to heighten consumer experience. “If retailers are going to make the
adjustments to their stores in terms of layout and assortment in order to create
more locally relevant experiences for their customers, merchandising must
continue to change, too,” says Nikki Baird, a principal analyst with Forrester
Research. “This means the next generation of merchandising will be more
granular, real-time, closed-loop and customer-aware than we’ve seen in the
past.”
While the concept of ‘collaboration’, like the term ‘consumer experience’, has
been a buzzword for many years, few apparel manufacturers are truly
embracing the notion, nor executing it. This is because of their current
business practices, as well as their technology means. True
micromerchandising success will come when all partners are working together
for the same end-results. “The next-generation solutions and the
accompanying controls are facilitating real-time information exchange among
merchants, management, and trading partners, allowing all parties to make the
best possible business decisions based on current data,” says Chazen.
Micromerchandising answers
critical apparel industry questions
And if one uses the three tools outlined by LeHong in the previous section, the
chances of assorting successfully are extremely high. “Imagine a retailer who
uses merchandise optimisation to figure out the spread of sizes across a
profile, and you have a store manager to determine specific collections and
items, and then you have other categories that are just vendor-based because
they’re reliable,” says LeHong. “What you’re getting is the combined power of
someone who knows the business better, the number-crunching power of
technology to determine sizes, and the store managers’ local ‘street smarts’
about what needs to be in stores. Those three methods get the right product in
the right place at the right time. The results are fewer markdown dollars,
greater sell-through and better inventory management.”
need for rapid dissemination and interpretation of data – every day counts.
Today’s technology addresses these challenges by enabling true real-time
access and sharing to all necessary information and by providing sophisticated
support engines to effectively leverage this data.”
At the end of the day, retailers need to be able to handle all the potential
issues that can arise. The most relevant and impacting, according to Parpia,
include:
○ variety in assortment;
○ uncertainty in demand;
○ waves in inventory;
○ promotions; and
○ sizing.
match sizes by demographics at the store level, i.e. creating size profiles within
different categories in each location. For instance, a department store’s
intimates department may have a different size profile than its sportswear
area, so optimisation tools will determine the right size and style mix of
products to maximise sales. This requires the ability to access and use large
amounts of consumer data.
“Store clustering becomes the basis for size optimisation – helping to decide
what the optimal number of pre-packs are, balancing projected increases in
sales against the cost of creating more pre-packs,” says Baird. “But there’s a
consequence to this in execution, because replenishment gets more
complicated. Most retailers do some kind of holdback when they distribute
inventory to stores if they’re doing one-time buys. But at what point does it
become more important to break pack, or even move inventory from store to
store in order to fill holes that demand has created?”
To put this in real terms, consider that a retailer runs out of a certain size in its
London store. Does the store know it? Also, should the store fix the problem by
moving the size it needs from a nearby store or should it get a case of mixed
sizes replenished from the warehouse? Which is more efficient and cost-
effective? Not only that, but how does the retailer’s central technology solution
facilitate the decision, as well as notify each location about what’s transpiring?
Look, too, for a nod to the capabilities of the local store managers who
undeniably know more about their consumer than headquarters. They
understand the geographic region, the buying behaviours of that consumer,
the local events, seasons, etc – basically everything that is unique and
particular to that store location.
“In grocery and convenience stores, the pendulum of store control is starting to
swing back to the store manager, where some retailers are allowing store
managers control over, say, 20-30% of the SKUs in the store so that they can
decide what to order,” says Baird. “But I haven’t seen that yet in apparel.”
Better promotions and markdowns are another result. For instance, the i2
solution shows planners the impact of their decisions on the merchandising
process. “Planners can make store level decisions that allow them to mark
product down in those stores that are not selling well, while retaining the mark
up in those stores that are selling the same product per plan or better,” says
Parpia. “Furthermore, the i2 tool recommends markdowns over time, rather
than forcing the retailer to take huge markdowns at the end of life or the end of
the season.”
Many retailers and vendors have already seen many quantifiable benefits from
implementing 7thOnline’s assortment planning applications, according to a
recent survey by Kurt Salmon Associates, including:
○ realised additional sales opportunities of up to 25%;
○ reduced end-of-season excess inventory by up to 50%;
○ reduced time spent on administrative work by 40-95%;
○ shortened cycle times by up to four weeks;
○ reduced error rates by 50-80%; and
○ enabled efficient buyer/seller collaboration and better management
decision-making.
As a result, Follett streamlined its operations for more efficiencies and higher
productivity. For instance, item plans are exported from the system, which
automatically creates a purchase order. According to the company, this small
change has taken an entire month out of the process, which frees up time for
analysing and improving plans, i.e. efficiencies have created more time in their
schedules which they can now use to continuously monitor, analyse and
improve their assortment plans.
The hurdles in implementing any new solution typically revolve around issues
like change management, executive buy-in, the learning curve, etc. While
those also exist with micromerchandising, most experts agree that the greatest
challenges stem from supply chain and retailer capabilities – what can the
operation handle?
For instance, in the case of a large retailer, it is clear that selecting styles and
breaking out sizes at every location is impossible to do manually and a
company can not micromerchandise every store if it has a thousand locations.
In these situations, retailers come up a level to the store cluster level. The
focus, according to White, then becomes how to best map those clusters to
their customer characteristics. The common options are to group by
demographics, climate, store format or regional factors, for example. “Every
retailer will have a different set of attributes and characteristics that help them
determine the best cluster,” White says. “When designing the
micromerchandising solution, this is where retailers sometimes need help and
they have to think through these issues to be better able to take best
advantage of the tools. The software isn’t going to come up with this solution
magically. Retailers need to know their consumer, channels and locations, as
well as how to tailor the solution to meet end-needs.” In January 2007,
Manhattan Associates launched its store clustering software. While providing
the ability to cluster using different levels and attributes, or combinations of
both, the new module has more flexibility.
When retailers think of assortment planning, they need include the most
important attributes for their business. The challenge is to determine which
characteristics drive the business. “Many retailers haven’t been able to do this
before,” says White. “With the right tools, you open up possibilities to better
reach consumers. Our role is to help retailers understand whether [or not] it’s
price-point, colour, fashionability, quality, etc, that drives their business.
Implementing software is relatively straightforward, but harnessing the
flexibility of the software to solve the most important business problems of the
retailer is the key.” That being said, the solution a retailer chooses should be
customisable and configurable so that its particular set of critical attributes are
the ones that get implemented.
Many vendors have already made exciting gains in their offerings and
functionalities to retail partners. The upside is that the technology can do just
about anything when it comes to drilling down into size, SKU, lifestyle profiling,
etc, but these decisions need to be balanced against the type of apparel
company, its size, its needs and the resources available to invest. “Assortment
planning needs to be balanced against supply chain cost,” explains Baird. “The
technology can certainly be as granular as you want. Do you want unique size
profiles by item by store? You can get it. But how would you execute it? It
would be too costly – pre-packs are an efficiency that the resulting sales
improvements gained from being specific would not offset.” Most of i2’s clients,
for example, go to the following granular planning levels:
○ financially (by store, store-cluster, class, sub-class and week);
○ assortment (store, store-cluster, style, style-colour, style-colour-size
and week); and
○ allocation and replenishment (store, style-colour-size and day).
ProfitLogic and Coldwater Creek partnered up last year with success on size
optimisation, as the retailer drove its business to the more granular level in its
apparel assortments. i2 recently implemented its Merchandise Planner solution
at WE, a Netherlands-based clothing retailer. And 7thOnline just released Size
Optimization and Assortment Optimization modules in September 2006.
i2’s newest offering, the Advanced Planning Suite, contains three modules –
Merchandise Financial Planning, Buying and Assortment Management, and
Allocation and Replenishment – that fuel a closed-loop, top-down, middle-out
and bottom-up planning process. This offers the flexibility and visibility
necessary to allow retailers to give consumers a fulfilling shopping experience,
while increasing inventory productivity.
“This suite allows retailers to plan at the right level of detail, achieve profitable
market-specific assortments, and synchronise their planning process with their
supply chain for greater efficiencies,” says Parpia. “i2’s Advanced Planning
Suite also incorporates demand intelligence capabilities, allowing retailers to
bring science to the art of planning by informing every step of the planning
process with critical insights about demand.”
collaborated – which will allow them to collaborate with each other. Each
option offers users the ability to translate financial and strategic objectives into
optimised assortments at the door and size level, using historical performance
data as a driver.
While specific features and functionalities will also continue to evolve in the
micromerchandising category, look for evolutions in functionalities and benefits
surrounding consumer-centricity. As retailers and brands strive to become
more efficient, boost profitability and cut costs, their main focus is on the
customer. All systems must be driven by the consumer experience.
“Retailers will plan less in terms of merchandising against categories, but more
against specific customer types,” says Parpia. ”Also, micromerchandising
solutions will improve the collaboration between a retailer and its suppliers so
that the supplier knows exactly what the buyer wants during production. For
example, Campbell’s Soup knows what its consumers want and produces
merchandise accordingly, prior to the soup hitting retail stores.”
Also look for advances in areas like promotion planning and space layout
planning. As retailers and brands try to improve consumer experience,
merchandising solutions will take greater strides in ensuring not only that an
item of apparel is at the right place at the right time, but that it will also be at
the right price and set in the right environment.
“Vendors are thinking about ways to automate promotions into the planning
process – at least to give merchants visibility into the activities the marketing
team is planning,” says Baird. “Promotions is a challenge – it really needs to
Space layout is finally making its way into the apparel arena and its impact is
being seen much more than it has in the past. According to Baird, the largest
gains have been seen in high-traffic areas, for example if a retailer has key
items or traffic areas in the store, it can use space planning and space
optimisation solutions to determine how to maximise the value and impact of
layout and product placement for the greatest sales.
The next generation of this technology will likely also address some of the
holes or problems that still exist, as well as the evolving nature of retail. For
instance, as retailers become more multi-channel, solutions will need to be
“Most apparel retailers are not very cross-channel today, but that will have
important implications on inventory accuracy and being able to hold or reserve
inventory in stores for online customers,” says Baird. “Doing that will require
assortment planning to be done with both online and stores in mind –
something that’s pretty separate today.”
There will also be a significant movement toward the use of optimisation and
simulation tools to create demand forecasts, says White. She predicts that
retailers will start to use systems in a more automatic manner so they will
come up with forecasts, assortment plans, and recommended plans in
advance. While most of the industry isn’t there, a few are moving in that
direction.
When looking into the future of assortment planning, one can not help but
wonder just how close we are getting to technology helping merchandisers
make initial core assortment decisions. This is especially critical without sales
or trend history. Many experts argue that human intervention and decision-
making will always play a role, no matter how progressive and ingenious the
technology.
“History will always play a role – it’s such an important input,” says Baird.
“Even if you’re introducing a new item, it’s extremely helpful to base it on the
history of a like item. The question is: how well will technology help
merchandisers make these decisions, taking into account the impact it will
have on the retailer’s most valuable or most strategic customer segments?”