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Best Practices, Knowledge

What is Assortment Planning?

What is assortment planning?
Published: Reading time: 14 min
o9 Solutions The Digital Brain Platform
o9 SolutionsThe Digital Brain Platform
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Introduction

Regional Variations

Demand Analysis

Seasonal Adaptation

Brand Strategy and Historical Sales Margins

Why is Assortment Planning Important?

Why Use an Assortment Planning Strategy?

When to Use Assortment Planning?

Exploring Efficient Assortment Strategies

Enhancing an Assortment Planning Strategy

Where Does Assortment Planning Fit in the Overall Process?

What Business Rules Constrain the Assortment Plan?

Define Clear Goals for the Assortment Planning Process

What is the Time Period Coverage of the Assortment Plan?

How Detailed Should the Assortment Plan be?

Published:

Assortment planning can be viewed as the strategic process of selecting the most suitable product lineup for the business.

The extent of this procedure varies significantly based on the size of the enterprise. While small, family-run shops might rely on their intuition and local phone service for ordering products, larger retailers implement comprehensive operations to monitor key performance indicators (KPIs). In the present day, there are even AI-powered tools that optimize data-driven product assortments.

In addition to sales data, assortment planners must also take into account a plethora of economic theories and models of customer behavior. For instance, it's important to recognize that customers can become overwhelmed by an extensive product selection in a cluttered store. Furthermore, there are logistical challenges, including maintaining adequate stock levels and managing warehouses with a large number of employees and diverse product stock-keeping units (SKUs).

Important factors to consider for effective assortment planning:

Regional Variations

It's crucial to account for local and regional disparities. Different areas and stores require tailored product selections based on local culture, demographics, and preferences. This might involve stocking specific foods, beverages, or other items that resonate with the local population. It could also mean offering ingredients for regional cuisine or products suited to the age and income levels of the residents. Consideration should be given to products related to the climate or geography, such as offering a wide range of sunscreen in hot regions and a more limited selection in colder areas.

Demand Analysis

Retailers must carefully analyze the sales figures for each product on a monthly basis and make accurate forecasts for future demand. This data helps in optimizing supply chains to meet customer demand effectively and efficiently.

Seasonal Adaptation

Adapting the product assortment to reflect seasonal changes is pivotal. For example, convenience stores may stock more winter-specific items like window scrapers and car de-icer during the winter months, while focusing on barbecues, charcoal, and kindling for the summer season. Similarly, clothing stores regularly update their offerings to align with the changing seasons.

Brand Strategy and Historical Sales Margins

Historical sales data is indispensable for retailers to evaluate product performance and plan for growth. Depending on their business model, target demographics, sales history, and profitability, retailers should align their assortment planning with historical performance and forecasting. This strategic approach enables them to increase profit margins and reduce wastage.

Why is Assortment Planning Important?

Assortment planning holds significant importance as it determines the specific product mix allocated to each store. These assortments must be tailored to the store's physical space, leverage its strengths, cater to the preferences and buying patterns of its customers, and contribute to increased sales. A uniform, one-size-fits-all strategy is usually ineffective for the majority of retailers. Stores come in various sizes, possess differing sales potential, and serve distinct customer demographics. By ensuring that each store offers the appropriate styles in the right quantities, they not only boost sales but also enhance their ability to manage inventory effectively, preventing both overcrowded and understocked shelves. Ultimately, the meticulous execution of assortment planning is vital because it results in elevated sales, improved cash flow, and increased profitability.

Why Use an Assortment Planning Strategy?

When it comes to enhancing profitability, assortment planning assumes a pivotal role in a retailer's in-store business management strategy.

Insufficient planning exposes retailers to the risk of stocking insufficient quantities of highly sought-after items while accumulating excess inventory of underperforming ones. This immediately places them at a disadvantage, with potential losses compared to their competitors.

It's a fact that shoppers who visit physical stores tend to spend more than their online counterparts. In fact, a significant 71 percent of shoppers allocate more of their budget to in-store purchases rather than online transactions.

This preference for in-store shopping is attributed to the diverse array of products available and the opportunity for retailers to cross-promote related items. In physical stores, customers are also more susceptible to getting sidetracked and making impulsive purchases. By employing data-driven stock forecasting, optimizing the utilization of store space, and tailoring the breadth and depth of their product offerings, retailers can intensify this temptation.

The development of a robust assortment plan, which takes into account seasonal fluctuations, budget considerations, and consumer trends, is priceless for achieving the highest possible conversion rate.
Keeping this in mind, here are several advantages that the business can reap by adeptly implementing this strategy:

Boost Profitability

The primary motivation behind embracing assortment planning strategies is to enhance competitiveness. Providing pertinent products not only secures the loyalty of customers but also elevates the brand's prominence within its specific industry. Furthermore, this approach enables us to identify items with the most favorable profit margins, while avoiding those that could 'cannibalize' sales (more on this later).

Mitigate Stock Shortages

One of the key merits of assortment planning is gaining insight into which products frequently sell out and are not restocked promptly. While bestsellers are undoubtedly beneficial for the business, empty shelves can deter potential buyers. The psychological barrier of feeling like they might miss out on a great deal can drive customers to seek alternatives. Hence, assortment planning proves invaluable by helping to discern which products need replenishing sooner. Establishing systems to detect sales trends is crucial for counteracting lengthy restocking cycles and maintaining sufficient inventory. 

Reduce Obsolete Inventory

Assortment planning also addresses the opposite challenge: identifying products to stock in smaller quantities. Outdated inventory is detrimental to the business, as it occupies warehouse space until drastic markdowns are needed to clear it. Maintaining open communication channels, such as a cloud-based phone service, between the warehouse and retail store is vital for identifying and mitigating order errors. An agile planning process allows us to recognize slow-selling items and adjust the ordering quantities accordingly. In some cases, discontinuing certain product lines may be a more profitable choice.

Optimize Operational Efficiency

With an effective inventory management system in place, the business will operate seamlessly. Over time, retailers will learn the physical limitations associated with stocking various product ranges and areas where cost-cutting is feasible. For example, by minimizing deadstock and focusing on selling the most relevant products, the warehouse can operate at peak efficiency. Moreover, it will provide precise insights into when it's ideal to order new products based on sales projections and restocking lead times. Identifying reliable suppliers and promoting underrepresented employees will certainly bolster workplace productivity and maintain well-stocked shelves.

When to Use Assortment Planning?

These are the pivotal components of any conclusive plan:

Product Variety

Product variety refers to the breadth of products and styles within an assortment. For instance, a fall assortment plan may include various types of dresses like shifts, maxi dresses, shirtdresses, and more. The significance of variety becomes evident when catering to diverse customer segments, such as bargain hunters, premium brand enthusiasts, or those seeking a wide array of choices.

Product Variation

Product variation relates to the depth of an assortment. In the case of the aforementioned retailer, this could involve incorporating four different brands of shirtdresses, available in seven colors and five sizes. Combining variation with variety enriches the assortment, catering to a broader customer base. Striking the right balance between variety and variation requires a deep understanding of customer preferences in each market, store, and channel.

Assortment Balance

Retailers typically aim to balance assortments across categories, types, colors, sizes, and seasonal trends. For example, a fashion retailer might blend traditional button-down men's summer shirts with trendy beachy prints. Even if traditional styles aren't always the top sellers during hot weather, they maintain their place in a seasonal assortment, alongside the more fashionable choices.

Exploring Efficient Assortment Strategies

Selecting the most appropriate assortment of products for the business can be a challenging endeavor. This section will delve into various theories pertaining to efficient assortment strategies.

Broad versus Deep Product Ranges

Economic theory plays a pivotal role in shaping the assortment strategy that the business should pursue. The primary dichotomy lies in the choice between providing a "wide" or "deep" product range.

A wide product range entails offering a diverse array of unrelated products. For instance, the local convenience store may stock hundreds of different products, including bakery items, produce, healthcare products, and more. However, it's essential to note that a wide range does not necessarily imply depth; for instance, there may be only one premium brand of pasta.

Conversely, a deep product range involves offering numerous variations of products within the same category. Consider a paint store that may carry only a few types of paint but offers them in hundreds of different colors.

Of course, some retailers opt for assortments that are both deep and wide, exemplified by eCommerce behemoth Amazon. So, what assortment strategy should the business be aiming for?

One solution lies in creating "product hierarchies" within the range. This means providing at least two products of the same type to the customers. Frequently, customers make purchasing decisions by comparing products of a similar type.

For instance, they might not have realized the value of the store-brand product if they hadn't seen the price of the premium brand product. This practice is prevalent across various industries, extending beyond retail.

Enhancing an Assortment Planning Strategy

Having established the significance of assortment planning in the realm of consumer behavior and economics, the question arises: What mix of products should someone’s business provide? While there's no one-size-fits-all solution to this question, there are several essential factors to consider.

Geographic Considerations

For retailers catering to diverse geographic areas, it is crucial to factor in local requirements to offer the most pertinent products to local clientele. For example, a car dealership in Canada would understandably feature snow tires and de-icer, while those same products would gather dust on the shelves if offered by the same company in New Mexico.

Many retailers find it advantageous to categorize stores in close geographic proximity and provide a similar product range at each location. This approach addresses local needs without overly complicating inventory management, where each store stocks entirely different items.

Language is another pivotal consideration concerning geographic regions. For online stores, establishing a multilingual content website can effectively attract an international customer base.

Seasonal vs. Evergreen Product Assortments

Certain products are suitable for year-round stocking, known as 'evergreen' items, while others are linked to specific events or times.

Consider the classic example of the holiday season. Retail stores wouldn't think of selling Christmas trees and ornaments in the middle of summer, as it would be entirely incongruent with customer demands.

Retail operations that differentiate between 'seasonal' items and understand when to order them will be more efficient. It's important to note that some seasonal items can evolve into evergreen ones, making it essential to stay attuned to market trends. Establishing an outbound call center to gather customer feedback for seasonal items can be beneficial.

E-commerce Operations

In the realm of digital retail, considerations of seasonal or local demands are less pertinent. The internet serves as a global marketplace where people from all over the world purchase and sell goods. Therefore, it's crucial to make someone’s product range universally appealing.

To prevent running out of products at unpredictable times, it’s considerable to contemplate the implementation of one of the various inventory control systems available. Unlike physical stores where tidiness and friendly service are paramount, online customers prioritize prompt delivery times and product availability.

Cross-Merchandising

Once the product range is established, one will naturally discover that certain products complement each other.

Much like a restaurant waiter might suggest a fine wine to pair with a steak, the business should engage in cross-merchandising relevant items for consumers.

For e-commerce stores, this can be as straightforward as introducing a 'customers also bought' section at the bottom of each item's page. This serves to enhance customer satisfaction and encourages higher sales. One may also contemplate advertising the product range elsewhere on the internet, although this aligns more with a performance marketing strategy than assortment planning.

Where Does Assortment Planning Fit in the Overall Process?

Assortment planning does not occur in isolation. It's just one element within the broader pre-season planning process, and there is no unanimous consensus among retailers regarding the sequence of these steps.

To illustrate, some retailers initiate their planning by formulating a financial plan that guides subsequent decisions. They establish targets for sales and margins, often breaking them down by product category. In such organizations, assortment planning is primarily constrained by financial considerations.

Conversely, some retailers start by acknowledging that physical store assortments must align with store layouts. Their plans must accommodate the spatial constraints of individual store planograms and warehouse capacities.

Alternatively, a subset of retailers adopts an assortment-centric approach. They begin by planning the products and their variations, subsequently developing budgets and store-specific plans to implement their assortment strategy.

Effectively executing assortment planning in retail hinges on a clear understanding of the company's priorities. Addressing this question not only illuminates the organization's current focus areas but may also reveal underlying process issues.

Failure to align a plan with the business priorities can lead to potential breakdowns, as it may conflict with the financial, merchandising, or store-related objectives.

What Business Rules Constrain the Assortment Plan?

Some examples of these constraints include

  • Available physical space at distribution centers
  • Shelf space limitations, including variability between stores
  • Budget constraints for initial purchase orders
  • Vendor relationships
  • Contractual obligations

The real challenge lies in effectively accounting for the multitude of variables within the assortment plan. So, how do major retailers manage to navigate these constraints?

  • Some retailers employ numerous Excel spreadsheets in combination with algorithms, macros, and formulas to factor in constraints and flag exceptions. Unfortunately, these methods are still time-consuming and necessitate extensive manual reconciliation across spreadsheets and departments.
  • Others opt for centralized data management software like ERPs. If configured correctly, an ERP can serve as a single source of truth, providing consistent data for different departments. However, this approach still requires manual or algorithmic calculations and reconciliation for exceptions.
  • The most sophisticated retailers employ assortment planning software to calculate genuine demand, leverage AI to determine when to expand or reduce the assortment, and automatically reconcile their plans with all business constraints.

Define Clear Goals for the Assortment Planning Process

To optimize assortment planning, it's essential to set clear goals beyond just meeting or exceeding sales targets. Retailers must define their goals explicitly to construct a practical and actionable plan. Otherwise, there's a risk of creating a plan that doesn't align with the realities of inventory procurement and allocation.
These goals might involve identifying:

  • Specific items to introduce in the next season's assortment.
  • Deciding which product lines to expand and which to shrink.
  • Tailoring the assortment based on store size and type.
  • Adjusting assortment based on location and demographics.

Going into the planning process with well-defined intentions and goals results in clearer constraints and more effective assortment plans.

What is the Time Period Coverage of the Assortment Plan?

Assessing the time period the assortment plan covers is crucial. Depending on the nature of the products, a twelve-month plan could be a necessity to accommodate seasonality, a short-term plan for a specific event, or a rolling assortment plan for continual inventory refreshing. Different selling seasons may necessitate separate assortment plans, which some retailers now handle through advanced analytics and machine learning for real-time demand forecasting and automatic assortment optimization.

How Detailed Should the Assortment Plan be?

The level of detail and specificity in the assortment plan also matters. Retailers vary in size and industry, and this influences whether they need broad, high-level plans or detailed, granular ones. It's important to honestly evaluate:

  • 1.

    A high-level plan is applicable to all locations/channels.
  • 2.

    A medium-granularity plan that optimizes at a store cluster/type level.
  • 3.

    A high-granularity plan that optimizes at an individual store/SKU level, precisely identifying which items to stock in each store and when.

Selecting the appropriate level of granularity is vital to avoid excessive manual adjustments or inventory issues.

Answering these five questions regarding business priorities, constraints, goals, time periods, and specificity will help establish an ideal assortment planning process. However, it's just the beginning.

 A specific business will need to address numerous unique questions during the planning process, such as:

  • How to handle the previous season's stock
  • How will the plan account for both seasonal and evergreen products
  • How will the plan bridge gaps between peak seasons?

Assortment Planning by o9 Solutions

o9’s Assortment Planning enables you to analyze your business trends and convert them to your assortment strategies. Get recommendations by product attribute, location, and carry-forward styles.

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About the author

o9 Solutions The Digital Brain Platform

o9 Solutions

The Digital Brain Platform

o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.

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