Checklist for Evaluating the Current Assortment

Among the many challenges facing retail sellers, one of the most daunting is accurately forecasting demand and determining which products will resonate with customers during a given month or season. The answer to this issue lies in effective assortment planning.

Assortment planning in retail is defined as strategizing the necessary amount of stock for the right customers, during the right month or season. It's crucial for a retailer to select the correct product for each season and then order it in the quantity that avoids both overstocking and understocking.

Experts estimate that globally, over a trillion dollars of retail trade are wasted each year due to surplus or lack of inventory, making proper retail assortment planning a critically important task.

One step of assortment planning involves assessing the company's current assortment. We propose using a checklist to evaluate the current assortment and make informed strategic decisions based on that evaluation.

First, let's establish the principles for the evaluation:

Increasing turnover, reducing write-off costs, increasing customer base, reducing customer dissatisfaction, etc.

For example, you want to reduce stock for specific SKUs, but you can't yet find a supplier who can deliver faster. Or, you want to increase turnover and are willing to reduce the price and gross profit.

Depending on the goals, define the evaluation criteria: decide which indicators you will analyze.

Don't confuse goals with means. ABC analysis is a tool, not a goal. Essentially, it's a ranking of products based on certain indicators. For it to assist in your evaluation, you need to first set a goal, and that goal will dictate which indicator you need to examine using ABC analysis. Your goal may require other analysis tools as well.

The assortment analysis itself is also a tool, typically used to boost business profitability.

For example, if you want to reduce write-off costs, but the shelf-life of a product isn't recorded in the accounting program, an inventory must be done first, and the shelf-life data for each batch of product should be recorded.

For a thorough analysis, you need to consider both revenue and cost data for each product, such as transportation costs, rent, manufacturer bonuses, etc.

If there's no data breakdown available, you can use total costs, but this might distort the picture to some extent. For instance, the costs of refrigerated storage apply only to the products stored there. If these costs are spread across all products, it will distort the profitability of each item.

Group the products depending on their characteristics and the goals of the analysis and adjust the data so that they are comparable.

You can't compare products across different time periods. For example, product A was in stock for 60 days in a quarter, and product B for 90 days. In this case, you need to compare either the indicators for one day of availability or for the quarter, replacing the absence days with forecasted data.

It's also inappropriate to compare a product that has been on sale for a long time with a newly added item. Or compare items undergoing seasonal sales with items during the off-peak season, etc.

A one-time analysis can have varying effects. Regular work with the assortment will enable significant results. The regulation should state who and how often should perform the analysis. Where the recommendations based on it go and how they are implemented.

For example, as a result of the evaluation, you decided it is optimal to purchase products with certain shelf-lives, and the regulation will record this decision and check its execution.

The regulation also specifies how often you need to track the remaining shelf lives for all products and when to lower the price to timely sell products nearing their expiration dates.

An employee should be assigned responsibility for each regulation item.

1. Start analytics with the simplest things - identifying illiquid assets and items with a poor shelf life:

▪ An illiquid asset is a product that hasn't been sold for a certain period. To identify which items fall into this category, it is recommended to take the average frequency of sales for similar items and triple it. That is, if similar items sell on average 1 unit once a month, then an illiquid asset is an item that hasn't been sold for 3 or more months.

▪ An item with a poor shelf life is one that, given the current sales rate, will not be fully sold by the time it expires. This also includes expired items.

2. Calculate an integrated efficiency indicator - profitability of the position - for all items.

To calculate profitability, you need to:
• Identify which items of income and expenses will be included in the analysis.

• Determine the period for the analysis.
• Determine the categories for the analysis.
• Calculate the indicators for the period of analysis for each item in the assortment: profitability per item, profitability per unit of product, gross profit amount, and the number of receipts the product was part of.

• Next, we conduct an ABC/XYZ analysis for each indicator for each item.

ABC analysis allows you to determine the product rating according to the specified criteria and identify the part of the assortment that provides the maximum effect.

● If the goal is to reduce the assortment, then sales volume and profit are chosen as the main parameters.

● If the goal is to identify and reduce the cost of maintaining stocks, then the turnover ratio, volume of illiquid assets, and occupied warehouse space are chosen as the main parameters.

● If you need to investigate profitability, the turnover ratio and profitability level are selected as the main parameter.

ABC analysis data helps optimize the product range. Despite the numerous advantages of this type of analysis, there is one significant downside: this method does not allow for the assessment of seasonal demand fluctuations.

XYZ analysis is a tool that allows products to be divided according to the stability of sales and the level of consumption fluctuations.

The combined ABC/XYZ analysis reveals the undisputed leaders of the assortment matrix (group AX) and its outsiders (CZ). Both methods complement each other well.

If ABC analysis allows you to assess the contribution of each product to the sales structure, XYZ analysis allows you to assess sales jumps and its instability.

● Improving the effectiveness of the assortment management system;
● Identification of key products, increasing the share of high-profit products;
● Redistribution of staff efforts to the most effective product groups.

3. Track Indicators Over Time
To assess the quality of the assortment analysis, it is also recommended to track the dynamics of the following indicators:

- Total profitability of the entire assortment.
- Total profitability of the assortment within the categories of goods that are important to you.
- The share and amount of illiquid assets in the stock.
- The share and amount of goods with poor shelf life in the stock.

4. Consider Seasonality
Taking into account seasonality is also an important factor that needs to be taken into account. A buyer also needs to be ready to order products in time to avoid downtime. Seasonal fluctuations are characteristic of all products - you just need to identify the seasonality characteristic of your particular product.

Optimization and development of the assortment is the basis of the trade business. A product that has exhausted its market opportunities and not timely removed from sales, causes significant losses, requiring disproportionately high resources, efforts and time in relation to the results obtained.

Therefore, it is so important to carry out a regular assessment of the current assortment, which will allow:

● To clearly structure the assortment;

● Evaluate the role of each product category and individual product in the overall assortment of the store;

● Set quantitative requirements for the product: return on investment level, sales volume and/or profit.