E-Commerce Assortment Planning and Merchandising 101

I find myself scrolling and scrolling through product after product on many websites. From my perspective, as a retail consultant and a consumer, basic assortment planning and merchandising is often getting lost amid all the wonderful technology and in the e-commerce space.  Many online retailers are forgetting (or never learned) the “art and science” of assortment planning and merchandising. I see opportunities for basic improvement in these areas every day:

Assortment Planning

Merchandise Hierarchy and Navigation

Home Page Presentation

Product Page Presentation

Assortment Planning – Many e-commerce businesses suffer from “over assortment”. In “bricks and mortar” the assortment is naturally limited by space and by inventory investment. In the ole Catalog business the assortment is limited by paper, printing, and postage cost – another form of space. And, inventory investment. These traditional limits on assortments don’t exist in the same way online. In fact, it’s fairly easy to put an image online and begin to sell the product.

For discussion purposes, I’ll break e-commerce into two worlds, “commodity” and “specialty”.  “Commodities” are highly identifiable products or brands. K2 skis are an example.  Shoppers search for their skis on Google. They often pick the best price. They arrive at the selected website via the product page.  “Specialty” exists in multi-channel and in online retailers. “Specialty” has its own brand (even though they may carry other brands) and often its own private label products. I’ll use Nasty Gal, an apparel retailer focused on young women, as an example since it’s in hyper growth mode. More customers enter a “specialty” website via the home page versus product pages.

Assortment planning from a customer selection standpoint is more crucial for the “specialty” e-commerce retailer. But, basic merchandising, where the retailer focuses or limits their assortment on behalf of the customer (and the brand) often isn’t a priority. The poor shopper has to scroll down pages and pages of styles if they choose to spend the time. Inventory investment and cash flow, is another reason to limit the assortment – too much. And, customer satisfaction can be lost by carrying too many styles if one can’t keep the sizes/colors in stock for the customer – too little. “Sku rationalization” or “culling” is the “science” of assortment reduction. The “art” of developing your assortment is crucial also. Brand positioning among other things must be considered. (See my blog, Assortment Planning Part #1 – Six Factors to Consider When Developing Your Assortment Strategy for more.)

This is not “as” true for “commodity” websites. But, “commodity” websites still have some shoppers entering via the home page versus the product pages.  (There is a Google Analytics report which shows this flow and “drop offs” very well.) And, most companies still need to manage inventory investment and cash flow along with stock outs and the customer experience.  

Merchandise Hierarchy and Website NavigationMerchandise hierarchy (the way products are organized and categorized in any retailer) is primarily an internal merchandising tool in traditional retail. From my perspective, a good merchandise hierarchy has never been more important than it is in the growing e-commerce space. It should be the basis for shopping and navigating the website.  I usually suggest that the merchandise hierarchy have no more than four levels (ie division, dept, class, style). An example is Women’s, blouses, long sleeve, and then the specific styles are shown – in three clicks. Most often the merchandise hierarchy runs across the top of the website. “Double merchandising” or “browse taxonomy” is also extremely important. This comes in the form of additional “sorts” or “features” often down the left hand side of the website. Price, brands and colors are great examples of “sorts”. New, best sellers, SALE, and Holiday are all examples of other “features” that may rotate down the left hand side of the website or on the home page. All this is much easier with a well thought out merchandise hierarchy focused on the way the consumer shops. (See my blog, Five Top Tips for Creating a Merchandising or Product Hierarchy for more.)

Home Page Presentation – From my perspective, many websites simply try to do too much on their home page. There are just too many messages. I suggest limiting messages to two or three – in addition to basic navigation. And, the messages need to be prioritized. In general, the first message – especially for “specialty” - is about the brand. What is the brand positioning and what is unique about the brand? This must be presented in a clear manner on the home page. The second priority should be what is going on right now that’s compelling for your customer. Maybe it’s outdoor dining or maybe it’s a new product or technology. It could also be a sale or other promotion. The final but most important feature is “shopping” (ie where and how to quickly get to products – merchandise hierarchy from above). The home page can be treated just like the windows and entrance to a “brick and mortar” store or the cover of a catalog. You want to get shoppers to “come in”!

Product Page Presentation – Ever heard the saying “product is hero”?  That is certainly true on product pages. Photos must clearly show the “product” and its features. So often photos are not compelling or they don’t show the product (and true colors). Descriptions (sizes, colors, fit, and features) must be clear. Remember, that in “commodity” businesses this is where the customer usually enters the website. So, price is probably the most important to them.  Tools that help compare products, show like products, and show customer reviews are great. But, nothing is as important as showing the product, its features, and price very clearly first! On these pages, the customer is “in the store” or “flipping through the catalog”. This is where they need to easily see what they want or need in order to buy!

To summarize, there is a wonderful opportunity in e-commerce to improve:

Assortment Planning

Merchandise Hierarchy and Navigation

Home Page Presentation

Product Page Presentation

I’d love to hear about your needs in these areas. I can be contacted at Janice@JLSearsConsulting.com or 206-369-3726.

Profitabilty and Productivity Improvement - The Cross-Functional Way

I was recently asked to speak at a user’s conference so I selected one of my favorite topics. “Multi-channel retailing today requires a more cross-functional, collaborative approach in order improve productivity and profitability”. - Guess Who.

The Need

 I see the need again and again as a retail consultant and also experienced it as a former retail executive. Retailers and wholesalers experience it every day. The need is greater today with the increasing complexity of distribution channels and competition. Assortment planning, marketing, and forecasting are just three examples of activities that cannot be successful without timely input and collaboration from other departments. To illustrate, these activities are listed below along with a brief description of key input and collaboration needed from other departments for success:·        

 Assortment Planning 

  • Brand positioning and target customer – Marketing
  • Current trends – Product Development/Design
  • Historical analysis - Planning
  • Financial expectations/cash flow – Finance
  • Channel of distribution strategy – Stores, Ecommerce, Catalog
  • Promotions - Marketing

Marketing 

  • Target customer – Brand Marketing
  • Competition – Merchandising/Marketing
  • Assortment plans and direction – Merchandising
  • Historical Analysis/ROI – Marketing/Finance
  • Channel of distribution strategy – Channel leaders
  • Financial expectations/budget – Finance
  • Pricing and supply – Planning
  • Creative presentation - Creative

 Forecasting 

  • Historical Analysis – IT/Systems
  • Assortment, SKUs, pricing – Merchandising
  • Channel(s) of distribution – Merchandising
  • Presentation – Marketing/Creative
  • Promotions – Marketing
  • Financial plans – Finance

Customer satisfaction or unfortunately “dis-satisfaction” is one very damaging way that lack of cross-functional management manifests itself.  A recent personal experience, “The Green Towel Saga”, illustrates this. I was shopping for new green towels for our re-modeled master bath. A specialty home retailer had the color I was looking for in their store. As I tried to purchase the towels, I was told I could only purchase them “on line” even though they were on the towel wall in the store. It was further explained to me that I would have to pay shipping and that I should have the store order them for me so they get credit for the sale. As a customer, why do I care that the store gets credit? As a customer, I don’t understand why I can’t just buy my towels in the store.

 As a retail consultant, I placed the order just to see what would happen next. The order arrived in a timely manner in an oversized box. But, they shipped the wrong green bath rug. There was no return label or directions for returns. So, I went to the Post Office and paid $22 to return the $80 rug. I spent $78 plus $44 in shipping, and a lot of my time on the towels. Merchandising, Inventory Planning, Operations, E-commerce, the Distribution Center and Finance all had a role in “The Green Towel Saga”. They didn’t collaborate cross-functionally and didn’t keep customer satisfaction in mind as a key to increased sales.

The Solutions

The need is clear! Solutions are crucial. As a retail consultant and former retail executive, I have found the following five solutions to be most effective in promoting cross-functional collaboration in order to improve profitability and productivity of teams:

Development of strategic business plans

Utilization of key metrics

Solid organizational structure

Cross-functional “business teams”

Cross-functional planning process and calendar

Strategic Business Planning

Whether one is developing a business plan for a specific category, channel of distribution, or the total organization it is crucial to have strategy (qualitative) support the financials (qualitative). The timing of this plan must be driven by the longest lead time activity such as product lead times or advertising lead times. An example of an outline for a product category is below:  

  • Financial Plans
  • Business Strategy
  • Assortment Strategy
  • Marketing plan
  • Inventory and margin management
  • Risks and contingencies

One example of success is multi-channel retailer in the home business. I worked with the CEO and Leadership Team to develop and implement a Strategic Business Plan which facilitated increased profitability the following year.

Development of Key Metrics

These metrics must be developed in conjunction with business plans. They must be shared across functions but weighted appropriately to the job. An obvious example is sales. Merchandising, Product Development and Marketing all are reviewed on sales but weighted differently based on their function’s impact and other appropriate metrics. Education about the math and the impact of the metric is crucial along with communication across the organization. Key metrics must then be included in performance plans and job descriptions. They must be monitored with a dashboard. Incentives must be clear and paid.  I helped a severely polarized wholesale company implement this and it began the process of better collaboration and team satisfaction.

Development a Solid Organization

I always say develop “the boxes” first. This means develop jobs based on tasks versus current people. Establish clear roles and responsibilities along with cross functional dependencies in the organizational structure. Always build in room for growth – people and organization. Once the “the boxes” are developed, place the people in “the boxes “matching their skills, talents, experience and desire – easier said than done. Insure each team member has an updated job description. I have worked with many clients on “re-orgs” and have found this crucial. Nothing else works until this is in place.  

Establish Cross Functional “Business Teams”

These teams are set up by category, channel or for total organization (senior team). They are responsible for profitability and have shared metrics. Each function must participate. As an example, the e-commerce team in a multi-channel retail would include: Merchandising, Finance, Operations, Creative/Site Merchandising, Marketing, and Logistics. Every team needs a leader so a leader must be assigned. I worked with a multi-brand catalog company to set up “Business Teams” by brand. It dramatically helped their decision making and productivity of the team members. Expectations and timing are crucial which leads us to number five below.

Utilize a Cross Functional Business Process and Calendar

The process and calendar must be driven by the longest lead time activity – product development or advertising. It should include steps for pre-season development, in season execution, and post season analysis. Key milestones must have one owner, input partners, and completion dates. Each milestone must have expectations or “sub steps”. Departmental processes and calendars must support the cross-functional calendar and dates must match. The cross-functional process and calendar must have an “owner”. It serves as guidance for the cross-functional “Business Teams”. I worked with a retailer in the “fast fashion” space to develop and implement this type of calendar. It brought the teams together and kept them on track in their fast world.

In summary

There is an increasing need for cross-functional collaboration in Multi-Channel retailing today in order to improve profitability and productivity of teams. I see it again and again with current clients and experienced it as a retail executive. Retailers experience it every day. The top five solutions that I have found to be most effective are:

Development of strategic business plans

Utilization of key metrics

Solid organizational structure

Cross-functional “business teams”

Cross-functional planning process and calendar

I’d love to hear about your cross-functional collaboration needs. I can be reached at Janice@JLSearsConsulting.com or at 206-369-3726.

 

Combining the “Art and Science” of Demand Planning - Five Top Tips to Improve Forecast Accuracy

 “We need a new system”, that’s what I hear when the topic of Demand Planning and forecast accuracy comes up. Whether it’s a wholesale, catalog, bricks and mortar, or Ecommerce business, the first answer is often the same.  People, processes, and systems, are needed to execute a business plan. I find that in the case of Demand Planning, business process is the area that needs to be addressed first rather than a “new system”. And, if a new system is selected, implementation will require strong business processes, so it’s a perfect place to start for many reasons. Now that you have a well laid out “assortment plan”, it’s time to forecast.

  1. Oddly enough, the first place I’d suggest to begin is to acknowledge that your forecasts will always be inaccurate. Benchmark your industries’ accuracy (or inaccuracy) metrics. How do you compare? Is there realistic room for improvement? Now, make plans (or contingencies) to manage the inaccuracy as well as improve the accuracy. In inventory management this means out of stocks caused by forecasts being too low and “excess inventory” caused by forecasts that are too high as an example.
  2. If you have an idea about what is causing the inaccuracy you’ll be able to address it more effectively. Do you have a way to track inaccuracy? What is causing it? Is it really math/analytics or is it a promotion that the team did not know about? This does not need to be extremely detailed to give you a directional idea where to start. Based on my experience, there is plenty of room for improvement in business processes prior to implementing a new system.
  3. The ‘ole “tops down and bottoms up” really helps. Forecast inaccuracy is larger the further down the merchandise hierarchy that you go (ie sku). At higher levels (ie department), inaccuracy is less. In addition, when you sum “bottoms up” your number usually is too high. “Tops down” along with “bottoms up” is a great way to fine tune your forecast. Often, meeting somewhere is the middle is good. In addition, I always suggest arriving at a number three different ways – perhaps “bottoms up”, “tops down”, and current trend over last year as an example.
  4.  The longest lead time activity should drive a forecasting calendar, whether that’s product placement or marketing development. A calendar should be developed and shared cross-functionally to insure that input is received, forecasting is done, and forecasts are approved in time to meet business deadlines. Often inaccuracy can be improved by simply focusing on timeliness.
  5. Subjective, cross-functional input is crucial.  In my experience this is the biggest area of opportunity in improving forecast accuracy. The team doing the forecast not only needs to know the products, they must know pricing (promotions), space, presentation, marketing activities (advertising, circulation), like items (cannibalization), discontinued items, and trends in the marketplace. Whether you call this an S & OP (wholesale) or the assortment “hand off” meeting (retail), a regular process for obtaining this information is crucial.

Once you have implemented #1-5, you are well on your way to combining the “art and science” of demand planning and will see improvement in your forecast accuracy. You have also put in place items that will be needed if you implement a “new system”. Demand planning systems have nice analytics to help forecast “promotional lifts”, take cannibalization into account, and better forecast seasonality curves. One of the best features of a “new system” is usually the feature to manage by exception which is especially nice if you are dealing with massive amounts of data. Of course, another key element in improving forecast accuracy is to insure the right people are doing the right jobs.

I’d love to hear about your Demand Planning needs and can be contacted at Janice@jlsearsconsulting.com or 206-369-3726.

 

Time For a New or Evolved Organizational Structure? Five Success Factors To Consider

People, processes, and systems – that’s what is needed to execute your business plan. I always like to start with people, the most important. Whether you are at the $10 Million stage or the $1 Billion stage, a well thought out organizational structure is crucial.  And, whether you are developing your senior team or a functional area, such as merchandising, the following five factors will help insure your success:

  1. Do the “boxes” first – that’s what I always say (and do). Meaning, start with the jobs “not” the people you currently have in place. All too often we have seen organizational structures developed around “John’s skills”, as an example. This type of planning leads to inefficient organizations, not to mention the crisis when John gets promoted or leaves. This does “not” mean that you don’t need your current team. But, by beginning with the “boxes”, jobs, you will ultimately set your team up for success.
  2. Before you can develop effective “boxes”, jobs, you’ll need:
    •  A solid list of key metrics to affect.
    •  Tasks or functions that need to be done.
    •  Business processes needed to complete tasks and affect metrics.
    • Cross-functional interactions needed to complete tasks and affect metrics.
  3. Once you have the “boxes” initially developed based on metrics, tasks, business processes, and cross-functional interaction the fun begins.
    •  You don’t want an organization that has too many levels.  It takes too long to get things done and it can limit “ownership” by the employees. Positions can be staggered so that there are not too many levels but there is room to grow in positions and responsibilities.  This means there may be a director position in one area but a manager in another. No need for every area to have both. "Hand offs" in work flow, or business processes, should be as limited as possible.
    • On the flip side, you don’t want an organization that is too “flat”, meaning too few “levels” and too many direct reports. A rough guideline is about six to eight direct reports for each manager.  Less than this can create too many layers and doesn’t add much value. Generally, it’s hard for managers to effectively manage many more than this.
    • Make sure there is room to grow in the organizational structure – for your organization and for each employee. It’s a good idea to lay out your current organization, proposed new organization, and a future organization - one or two years from now. This helps manage your organization to the next level.
  4. Now that you have the “boxes” it is crucial to complete job descriptions for each “box”. These need to include: metrics, tasks, business processes, key interfaces (or cross-functional interactions) along with the qualities and qualifications of the ideal candidate.
  5. Now you are ready. With a realistic assessment of each of your current team members, you can place them in the most appropriate “box” . During this exercise, you will also see where you may need to hire new talent and/or transition a team member to another area.

Having utilized the five success factors, you have set up each employee and your organization for success. Each team member is in a job with clear roles and accountabilities – a job they are suited for. And, you have developed room for the organization to grow along with promotional opportunities for your team members - a wonderful incentive. Next steps include a clear communication plan, transition plan and a 90 day follow up.

Good luck. I’d love to hear about your organizational needs. I can be reached at Janice@JLSearsConsulting.com or 206-369-3726

 

 

Inventory Management – 10 Guidelines To Insure That “Cash is King”

“Too much” or “not enough”, that's the balancing act required to effectively manage inventory. If you end up with “too much” it can mean discounting. This not only hurts your margins for the season, it can also hurt your brand image for seasons to come. If you “don’t have enough” you will lose sales and possibly “goodwill” with customers for future purchases. The art and science of good inventory management balances the two. “Cash is king”, especially lately. Strong sales produce cash and tight inventory management preserves cash.  The following guidelines help with both:

  1. Inventory levels are dependent on forecast accuracy. Forecasts will never be 100% correct. So, work to improve forecast accuracy. But, at the same time work to manage the “inaccuracies” or the “too much” or “not enough” caused by over forecasting or under forecasting. A wholesale client of mine was so intensely “sales driven” that they focused solely on “not” losing a sale despite inventory management or margin implications. I worked with them to better understand and balance all aspects of inventory management.
  2. Good inventory management cannot be done in a silo. Assortment planning and channels of distribution plans – store floorsets, catalog lay outs, e-commerce promotions, and wholesale customers – are all part of the equation and must be key input. I worked with a catalog client who had the inventory management function off by itself in a procurement department. They had tremendous excess inventory. The first thing I did was set up cross – functional processes and responsibilities. This helped to reduce inventory immediately.
  3. When buying inventory or forecasting, it’s good to remember that sales people and product people are optimistic. Clients and products are their “babies”. Each time I work on a reorganization with a client I always build in “check and balances” to address this.
  4. Strong cross-functional processes are crucial to solid inventory management. Skilled people are even better. A “new system” rarely solves your problems but is often required.  A straightforward calendar driven by lead times, with key milestones, owners, and dates has helped many of my retail and wholesale clients. An “Open to Buy” (MRP – wholesale/mgf equivalent) must be put in place and/or actively managed. Twice I have seen clients severely over inventory themselves by mixing up their cost basis inventory with retail basis sales – beware.
  5. “Tops down” and “bottoms up” - stores, catalogs, or customers - is the way to go. This is especially true for bricks and mortar retail stores at the sku level. Stores must have the proper skus to sell and they must have some sort of minimum presentation. One retail client of mine bought at the “total level”. When the goods came in they did not have enough skus to allocate to all stores. I worked with them on doing “bottoms up” buying and forecasting along with “tops down” giving stores better coverage for better sales.
  6. Always have contingencies. Things will never turn out the way you plan so have contingencies and “trigger dates”. These contingencies need to include the “upside” – dual sourcing and raw materials etc – as well as the “downside” - sales events, cancellations etc.
  7. Inventory does not get “better” with time. If a product or certain category is not performing deal with it now. It is not going to get better with time – unless it’s wine. A retail client of mine in the fashion business had kept so many styles around without discounting that their website had way too many skus. Customers never found the old product. I worked with them to clear out these styles and put a process in place to keep the assortment current.
  8.  “Inventory aging” is ok in fashionable, seasonal or perishable categories. My all time favorite example of mis-used aging is automatic markdowns taken on “men’s basic white shirts” simply because of an aging code. This makes no sense. As long as you have the cash to carry excess in basics – do it – you won’t miss a sale.
  9. Inventory metrics must be included in performance plans. Annual inventory turn is the primary measure at a category or company level. Sell through, sales stock (or stock to sales), weeks of supply (or days) works well to insure good management at the sku level. These metrics need to be included in product and sales people’s performance plans as well as the inventory management group.
  10. The shorter the lead time the better. But, don’t mistake this. It does not solve inventory management issues. It simply helps with reaction time. Many of my clients have implemented initiatives to shorten lead times – a good thing – but I also work with them to improve inventory management 1-9 above.

I’d suggest enrolling your entire team in the guidelines above to insure success. Good luck. I can be contacted at Janice@jlsearsconsulting.com.  I’d be happy to hear about your inventory management needs.

Is It Time to Re-Assess your Business? If so, here are the Top 10 Questions to Answer

Do you find your organization in one of the situations below?

  • Your business has stabilized and you need to increase efficiency.
  • It’s time for growth and you need to make sure you have the structure in place to execute.
  • Your organization is feeling “out of control” in the midst of growth.
  • Acquiring or adding another business or category, you want to understand how it will fit into your existing organization.
  • Your business is struggling so you need to identify the issues in order to explore options and map out next steps. 

Just in the last few months I have seen all of these scenarios. Wouldn’t it be great to “take a step back” and assess your business so that you can move it forward in the most productive way? Sometimes it seems like there isn’t enough time in the day. Having worked with many organizations to re-assess their business, I have seen it pay back big dividends – sales, profit, and productivity.

In any multi-channel retail or wholesale business objective answers to the ten questions below are crucial. With answers – along with detailed descriptions of “pain points” - where things are falling short – you can begin to map out your options for improvement. I know we’d all agree the “shot gun approach” or “crisis de-jour” has limited effectiveness. Everything is just too connected. Now for the ten questions:

  1. What are your current goals? How is your performance against these goals?
  2. How is your profitability? What are the challenges or opportunities – sales, margin, and expenses?
  3. Do you have enough cash or financing to grow or continue operations?
  4. Is your brand positioning clear – internally and externally?
  5. How do you stack up against your competition – new and existing?
  6. Are you able to develop and/or deliver a saleable and profitable product assortment – or service - that is “brand right” season after season?
  7. Are you able to manage and control inventory – “cash is king”?
  8. Do you have a good understanding of your current customers – demographics, psychographics, and their behavior?
  9.  Are you able to effectively market – get new customers and retain current customers?
  10. Do you have a strategy in place for your channels of distributions? Are you executing it?

In answering these questions - and developing improvement solutions – an assessment of people processes, and systems must be included. “People” includes the “boxes” or organizational structure along with the “talent” or people holding the positions. Both are critical to any assessment. Business processes must map to the organization. “Pain points” should be identified in order to begin to simplify processes. Computer systems are often “pain points” and also must be included in an assessment. Most often “buying a new system” is “not” the best answer though.

Obviously, any organization cannot solve everything all at once. Priority setting comes next. We have all seen many organizations fail by trying to do too much at once. With objective answers – to the ten questions - and priorities in hand, your organization can begin to map out a realistic game plan for improvement. Wouldn’t that feel good!

I can be contacted at Janice@JLSearsConsulting.com or at 206-369-3726. I’d love to hear about your assessment or business needs.

 

 

You Have Survived, Grown, or are Launching – Time to Dust off and Update Your Business Plan

Many organizations – large and small have been in survival mode for a while. I have seen many that have stabilized and are looking ahead to grow and/or re-position. Other organizations – especially in the E-Commerce space – are on a fast paced growth curve. Many have new ownership. Some entrepreneurs are finally ready to launch their new business. All these stages can benefit from a well thought out “Strategic Business Plan”, incorporating the qualitative and quantitative aspects, in order to move your organization forward.

There are several reasons to develop a “Strategic Business Plan” and prior to beginning it’s important to understand the purpose and the audience for the plan.  These include:

  • Funding is needed either for a start up or growth. Potential investors are the audience.
  • Alignment is needed to manage internally. The internal management team is the audience.
  • Buy off is needed for direction and/or financials. Boards of Directors or new owners are the audience

Whatever the reason and whoever the audience the time horizon for planning has shortened. The traditional “five year long range plan” does not seem relevant any longer. But it does seem prudent to use the current year – with a realistic forecast – as a basis. Next year can be added on that and then the following year can be based on that. So business plans become a three year plan which seems very realistic. Many of us have experienced years 4 and 5 being “pipe dreams” which were never achieved. Focusing on the current year and the next two is much more manageable and achievable.

From my perspective insuring that the quantitative is supported by the qualitative is crucial. Too many of us have been involved with business plans that are driven solely by financial goals with no plans as to how to achieve them. All the different functions – merchandising (product dev, design, sourcing), marketing and branding, channels of distribution – must develop solid qualitative plans. The “puzzle pieces” need to fit together. The “Strategic Business Plan” must also include the “people, processes, and systems” which are needed to execute the plan. Finally the financials need to be a summary of all the plans and what is needed to execute them.   

The following outline is a useful tool when developing a “Strategic Business Plan” for any Retail or Wholesale business. (Sections are usually edited or re-arranged depending on purpose, audience, and stage of growth):

 

  • THE  VISION
    • What is the future “ideal” state of the organization?
  • THE MISSION
    • What wants/needs will/do you fill for your customers that are unique?
  • The Competitive Advantage
    • What does your Brand represent?
    • Who is the customer? Demographics and Psychographics
    • Who is the competition? What do they provide and how?
    • What are the past, present and expected future industry trends?
    • What makes your business different than your competitors?
  • The Strategic Business Plan
    • The Plan addresses how you will fulfill the Mission from above.
  • What products or services will you offer at what price? How will they be assorted?
  • What channels of distribution will you use and how?
    • Bricks and Mortar
    • Web
    • Catalog
    • Wholesale
    • Big box, chains, specialty
  • How will you market? How will you get and retain customers?
  • Operational and Financial Execution Plan
    • People
      • What are the current organizational issues? How will they be addressed?
    • Processes
      • What processes need to be implemented or evolved?
    • Systems
      • What systems need to be implemented or evolved?
    • Facilities
      • What facilities are needed or need to be improved or expanded?
    • Financials and Financing
      • Financial Statements - P&L, Cash Flow, Balance Sheet
      • What financing is needed?
  • Potential risks and contingencies
    • Risks must be included and realistically addressed –often they are not!
    • Solid contingency plans with dates need to be included.

Timing is also a critical factor when developing a “Strategic Business Plan”. There needs to be ample time given to develop the plan so that next year’s budgets are supported and thought through via this plan. The timing on the plan and annual budget must also take into account lead times on things such as product development, marketing activities, and real estate plans. The “Strategic Business Plan” and annual budgets should be in place prior to any major commitments being made.

Developing a solid business plan driven by good strategies is only the beginning. Communicating the plan, getting buy in and developing a successful way to implement and achieve the plan is critical. Please see "Six Steps to Achieving your Business Plan" and "Key Metrics" blogs and/or contact me at Janice@JLSearsConsulting.com. I'd love to hear about your business needs.

                                                             

 

 

Key Metrics (KPI’s) for Retail, Catalog, E-commerce, and Wholesale Organizations-Part #2

Key metrics are a crucial element in the management of any bricks & mortar, catalog, E-commerce or wholesale organization from my perspective. The metrics and their values or goals must be developed during the business planning process and then utilized in individual performance plans in order to achieve the plan (Please see blog titled “Six Steps to Achieving Your Business Plan”).  In my practice, I often see a lack of connection and understanding between the business plan, the metrics, and individual performance plans. This creates an opportunity to increase success stories for organizations and individuals.

Key metrics fall into the following categories and should be shared across functional teams with different weighting depending on the impact on the metric by function:

                Sales and Demand

                Productivity

                Margin and Profit

                Inventory

(The list below looks long but really encompasses most metrics utilized to plan and manage a business.  I usually suggest no more than 4 key metrics for performance reviews though.) 

In Part #1 we talked about key metrics for traditional bricks and mortar and we began our discussion of the direct to consumer business with Catalog. Now let’s talk about additional nuances for the Direct to Consumer E-commerce world. Overall this business operates similar to Bricks & Mortar retail on the front end (aka a virtual store)although customer data is more readily available but operates like the Catalog business on the back end (aka Direct to Consumer logistics model):

Demand and Sales

  1. Demand- Demand measures all potential customer sales regardless of stock outs. I believe there is an opportunity in E-Commerce to capture more true Demand without risking customer dissatisfaction. Most organizations I have seen capture Gross Sales (sometimes only Net Sales) per the above. If more of true Demand was captured future sales could be more easily maximized.
  2. Gross Sales @ Retail-Generally means total sales dollars prior to returns and markdowns.
  3. Returns-Dollar amount of goods returned-often stated as a % of Gross Sales. A benchmark might be a 10% rate.
  4. Markdowns-Dollar amount of the discount a customer receives @ retail-often stated as a % of Gross Sales. A benchmark might be 20% markdowns (which is different than 20% off depending  whether it’s stated as a % of gross or net sales).Sometimes markdowns are taken when sold (POS)and sometimes inventory is de-valued with a markdown prior to being sold.         
  5. Net Sales @ Retail -Gross Sales after returns and markdowns are subtracted

Productivity

  1. Traffic (visits or sessions) –This is just like the traffic or customers entering a bricks and mortar store except that it’s on line traffic. It’s similar to circulation in the Catalog world. It really measures how many “eyeballs” are viewing or shopping your merchandise or services. Traffic in the E-Commerce world is generally generated from SEO (Search Engine Optimization), PPC (Pay Per Click), Affiliate Marketing, Organic Search and Catalogs. These traffic generation methods should be measured for their productivity in an E-Commerce organization in order to maximize traffic profitably
  2. Conversion-As in bricks and mortar or catalog this measures how many people are actually buying out of those visiting your site. In the E-Commerce world this generally is a % of visits or sessions. Some are now measuring this as a % of page views per session.
  3. The Following productivity metrics are the same for traditional bricks and mortar, catalog and E-Commerce.
    1. Sales per Style-Gross sales divided by the number of styles. This gives a benchmark of what the average style produces and is a good metric to review in comparing departments and or when growing or shrinking a category.
    2. Average Order Size and Average Units per order- This is net sales(after markdowns) divided by the number of orders. The larger the order size usually the more profitable since logistics costs then become a smaller %. Average Units per order tells you that the average order size of $150 is made up of 2.5 items per order.
    3. Average Unit Retail – Net Sales (after markdowns) divided by number of units sold. It’s a good metric to compare categories (ie average sale of a top versus a outerwear piece or a fishing rod with a piece of tackle). This really tells you what your customer is willing to pay for an item versus where it is priced. They might be willing to pay $100 for a jacket and $50 for a top. Note: Sometimes organizations calculate the Average Unit Retail of on hand inventory which is not apples to apples with this figure because of markdowns.  In the above example a jacket might be $120 and the top inventory may be $60.
  4. Customer productivity-This is a key element and warrants it’s own discussion. Similar to the Catalog world, E-commerce easily captures customer data. Generally, this data is segmented by frequency (new vs repeat customers) and total purchases. This data can be utilized to better market to existing customers (especially when it goes down to the product category level) or to get new customers (see traffic above).
  5. Merchandising productivity-The productivity of space or placement of product (home page, banner etc) has not been a standard metric in the E-commerce world like in the Catalog world. From my perspective there is an opportunity to better understand this type of productivity.

                 

Margin and Profit-These metrics are the same for traditional bricks and mortar, catalog, and E-Commerce.

  1. Initial Markup Percentage (IMU%)-(Retail of an item-cost of an item divided by the retail of an item-($10-$4/$10=60%)). This is the mark up that buyers are most focused on when buying product and building an assortment. 60% might be a rough benchmark.
  2. Gross Margin Percentage (GM%)-This is the margin after discounts (merchandise markdowns + marketing discounts) ie the margin when something is sold. Sometimes referenced as maintain margin or final margin.
  3. Cost of Goods Sold (CGS)-This is exactly what is says which is nice. It is the inverse of Gross Margin. So in the example above $6 is the Gross Margin or Gross Profit then $4 is the inverse or cost of the goods.
  4. Operating Margin $/%-This generally refers to margin after all direct expenses of buying and selling the product have been taken into account. This would be GM% less any direct expenses such as advertising expenses.
  5. Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA %)-This is the “bottom line” profitability of a business that many managers are rated on.  A Profit & Loss statement begins with Sales, subtracts cost of goods sold to get to Gross Margin and then subtracts S,G & A expenses such as staffing, warehouse etc  to get to EBITDA. I think many businesses would be happy with a 10% EBITDA as a very rough benchmark.

Inventory-These metrics are the same for traditional bricks and mortar, catalog, and E-Commerce.

  1. BOM and EOM-Beginning of month inventory usually stated in units if you are working with styles and stated in dollars if working at the product category level. End of month inventory is the same.
  2. Average Inventory-This is usually stated in dollars for a product category or a total company and is an annual metric. Add together the first month’s BOM plus 12 months of EOM’s and divide by 13.
  3. Turn-This is the rate you “turn” the inventory (like tables in a restaurant). Sales divided by average inventory. This should be apples to apples whether you are on a cost basis or retail basis. Ideally gross sales (net sales + markdowns) would be used but if you don’t have gross you can use net. This is also an annual metric and often compared across companies as a key metric. A benchmark for an apparel company might be a 4 turn.
  4.  WOS and DOS-Weeks of Supply and Days of Supply measures how much inventory is on hand at a given time, usually month end. Inventory divided average sales by day (usually the forecast going forward for internal mgmt purposes).
  5. Sales/Stock Ratio or Stock/Sales Ratio- This is simply as stated. I tend to utilize turn annually and then WOS and/or DOS by month at the category level.
  6. Sell Through Percentage-This metric is often used more at the item level than at total category level and is key in reacting to business. It is the sales divided by the original on hand. As an example we initially had 100 rice cookers and at the end of the first week we sold 15 which is a 15% sell through-not too bad. The second week we started with 85 and sold 10 which is a 12% sell through. At the end of the first month we sold 40 which is a 40% sell through and now we have 60 left. If something isn’t selling at 10% per week perhaps a markdown is needed or conversely if it’s selling 25% per week then maybe we should get a re-order assuming it’s not seasonal or no longer the fashion.
  7. Gross Margin Return on Investment (GMROI)- This is gross margin dollars (often for a year) divided by average inventory. This measure the marginal profit as a return of the inventory invested. A number like 350% or 3.5 is GMROI.

Now let’s shift gears a bit and talk about wholesale organizations:

Demand and Sales

  1. Demand-Demand measures the sales and potential sales for an item even if it’s out of stock and the customer did not get it. “Lost demand or true demand” is sometimes captured in the wholesale world but not consistently. My position is that this is crucial to know in planning for the future, maximizing sales and also for understanding customer satisfaction.
  2. Forecast Error (as opposed to forecast accuracy)-The most common metric is called MAPE (mean absolute percent error). It is the sum of the absolute errors (over forecast plus under forecast) divided by the sum of the actual and is stated as a %. This calculation is usually based on COGS (cost of goods sold). Depending on the business a 40% MAPE may be a good benchmark. While all organizations can continue to improve forecast error (or accuracy) what’s important is that an organization acknowledges that there will always be a fair amount of error (or inaccuracy) and that processes and contingencies are put in place to manage the results of the error (or inaccuracy) such as inventory excess and/or stock outs.  
  3. Fill Rate-This measures how much of the demand (or many cases customer orders) the organization is able to fill for the customer and is a key metric for management, sales, and customer satisfaction.  Depending on the business a 95% fill rate may be a good benchmark. Backorders are orders that may not be filled initially but filled somewhat late so it’s a good idea to state fill rate as initial (prior to backorders) and final (after backorders are filled) sales.
  4. Gross Sales-Generally means total sales dollars prior to returns and discounts.
  5. Returns-Dollar amount of goods returned-often stated as a % of Gross Sales. A benchmark might be a 10% rate.
  6. Discounts-Dollar amount of the discount a customer receives often stated as a % of Gross Sales. A benchmark might be 10% discount (which is different than 10% off depending  whether it’s stated as a % of gross or net sales)
  7. Net Sales -Gross Sales after returns and discounts. 

Productivity 

  1. Sales per Style-Gross sales divided by the number of styles. This gives a benchmark of what the average style produces and is a good metric to review in comparing departments and or when growing or shrinking a category. Often start up costs of an item are utilized to determine the breakeven point on sales of an item to determine when/if to develop new items.
  2. Average Order Size and Average Units per order- This is net sales(after discounts) divided by the number of orders. The larger the order size usually the more profitable since logistics costs then become a smaller %. Average Units per order tells you that the average order size of $150 is made up of 2.5 items per order. Often wholesale companies have minimum order size/units to insure profitability. 

Margin and Profit

  1. Initial Markup Percentage (IMU%)-(Sales of an item-cost of an item divided by the sales of an item-($10-$4/$10=60%)). This is the mark up that produce managers are most focused on when developing product and building an assortment. 60% might be a rough benchmark.
  2. Gross Margin Percentage (GM%)-This is the margin after discounts ie the margin when something is sold. Sometimes referenced as maintain margin or final margin.
  3. Cost of Goods Sold (COGS)-This is exactly what is says which is nice. It is the inverse of Gross Margin. So in the example above $6 is the Gross Margin or Gross Profit then $4 is the inverse or cost of the goods.
  4. Operating Margin $/%-This generally refers to margin after all direct expenses of buying and selling the product have been taken into account. This would be GM% less any direct expenses such as advertising expenses.
  5. Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA %)-This is the “bottom line” profitability of a business that many managers are rated on.  A Profit & Loss statement begins with Sales, subtracts cost of goods sold to get to Gross Margin and then subtracts S,G & A expenses such as staffing, warehouse etc  to get to EBITDA. I think many businesses would be happy with a 10% EBITDA as a very rough benchmark.

Inventory

  1. WOS and DOS-Weeks of Supply and Days of Supply measures how much inventory is on hand at a given time, usually month end. This seems to be the most common metric in the wholesale world. Inventory (COGS) is divided by average sales by day (COGS). Finance and auditors most often refer to WOS/DOS looking backward because it has actually happened. Internal management must look forward and base WOS/DOS on a forecast since that is what they are managing inventory to. In a highly seasonal business this number fluctuates. Depending on the type of business 60 days of supply can be a good benchmark.  I like to always talk about the Yin and Yang of inventory management. If DOS are too low fill rate will be too low. If DOS is too high fill rate will probably be good (depends what the inventory is in) but excess DOS will be too high creating excess inventory-see below.
  2. Excess Inventory-Excess inventory is defined as the difference between the forecast for some determined number of days in the future (ie 90) and the amount of supply or inventory on hand (or in the pipeline).
  3. BOM and EOM-Beginning of month inventory usually stated in units if you are working with styles and stated in dollars if working at the product category level. End of month inventory is the same.
  4. Average Inventory-This is usually stated in dollars for a product category or a total company and is an annual metric. Add together the first month’s BOM plus 12 months of EOM’s and divide by 13.
  5.  Turn-This is the rate you “turn” the inventory (like tables in a restaurant). Sales (COGS) divided by average inventory (COGS). This is also an annual metric and often compared across companies as a key metric. Depending on the type of business a 5 time turn would be a good benchmark.

               

 

 

Strategic Business Planning Simplified

Many differing terms, definitions, and expectations can limit the success of a Strategic Business Planning exercise. I always like to begin by clarifying terms and expectations with my clients and suggest any organization to do the same.  I utilize the following definitions for clarity:

Strategic Planning-Development of the strategic positioning of an organization or division focused on  what needs/wants the business plans to meet along with the financial requirements of the stakeholders.  Branding, customers, products, and channels of distribution strategies are all included and are informed by current business trends and market data.  This a crucial step for any organization to take and it pays big benefits. The risk is that without good follow through and implementation plans it may simply sit on the shelf.

Vision-Usually before or in combination with the Mission Statement. The Vision describes the desired future state. Often the Vision is stated in a couple of succinct sentences and informs the Mission.

Mission-This is usually in the form of a Mission Statement which succinctly states why an organization exists, what it is doing and how, along with it’s competitive advantage. This is a wonderul decision making tool that can be utilized daily in any organization as along as it doesn't simply become a word smithing exercise!

Strategic Initiatives-These come out of Strategic Planning and are a list of key initiatives the organization needs/wants to focus on in order to achieve it's Strategic Plan or positioning.  It's important to not have too many, to make sure they are not too tactical in nature, and of course that they are communicated well within the organization.

Business Planning-A comprehensive business plan that addresses the plan for sales, margin, expenses, and infrastructure usually out for 3-5 years. I usually suggest 3 only.  This plan is qualitative as well as quantitative and includes what the organization wants/needs to accomplish along with how they are going to achieve it. It's important that the qualitative has as much or more focus than the quantitative and that they are both connected well within the organization.

Operations Planning-This is the plan for areas such as facilities and logistics that support the overall strategic business plan.

Annual Budgets-The annual budgets developed to support the business plan for a one year cycle. This includes sales, margin, expenses, and inventory. 

In my practice, I focus on Strategic Business Planning which really combines Strategic Planning and Business Planning from above. It includes:

  • Strategic Planning or positioning.
  • Quantitative-Financial Plans (P&L , Balance Sheet, & Cash Flow) out 3 years only.
  • Qualitative-How will the plans will be achieved?

There are several reasons to develop a Strategic Business Plan and prior to beginning it’s important to understand the purpose and the audience for the Plan.  These include:

  • Funding is needed either for a start up or growth. Potential investors are the audience.
  • Alignment is needed to manage internally. Internal management team is the audience.
  • Buy off is needed for direction and/or financials. Board of Directors is the audience.

The following outline is a useful tool when developing a Strategic Business Plan for any Retail or Wholesale business. (Sections are usually edited or re-arranged depending on purpose, audience, and stage of growth):

  • THE  VISION

    • Desired future state.

  • THE MISSION
    • What wants/needs will/do you fill for your customers that are unique?
    • What does your Brand represent?
    • Who is the customer? Demographics and Psychographics
    • Who is the competition? What do they provide and how?
    • What are the past, present and expected future industry trends?
    • What makes your business different than your competitors?
  • What products will you offer at what price? How will they be assorted?
  • What channels of distribution will you use and how?
    • Bricks and Mortar
    • Web
    • Catalog
    • Wholesale
  • How will you market? How will you get and retain customers?
  • Operational and Financial Execution Plan
    • People
      • What are the current organizational issues and how will they be addressed?
    • Processes
      • What processes need to be implemented or evolved?
    • Systems
      • What systems need to be implemented or evolved?
    • Facilities
      • What facilities are needed or need to be improved or expanded?
    • Financials and Financing
      • P&L,Cash Flow,Balance Sheet
  • Potential risks and contingencies

Developing a solid business plan driven by good strategies is only the beginning. Communicating the plan, getting buy in and developing a successful way to implement and achieve the plan is critical. Please see "Six Steps to Achieving your Business Plan" and "Key Metrics" blogs and/or contact me @ Janice@JLSearsConsulting.com. I'd love to hear about your business needs.

                                                             

Key Metrics for Retail, Catalog, Ecommerce, and Wholesale Organizations-Part #1

Key metrics are a crucial element in the management of any bricks & mortar, catalog, Ecom or wholesale organization from my perspective. The metrics and their values or goals must be developed during the business planning process and then utilized in individual performance plans in order to achieve the plan (Please see blog titled “Six Steps to Achieving Your Business Plan”).  In my practice, I often see a lack of connection and understanding between the business plan, the metrics, and individual performance plans. This creates an opportunity to increase success stories for organizations and individuals.

Key metrics fall into the following categories and should be shared across functional teams with different weighting depending on the impact on the metric by function. The list below includes looks long but really encompasses most metrics utilized to plan and manage a business. Generally, I suggest no more than 4 key metrics for performance reviews:

                Sales and Demand

                Productivity

                Margin and Profit

                Inventory

Let’s begin the discussion with Bricks & Mortar Retail since it’s the most traditional:

Sales

  1. Gross Sales @ Retail-Generally means total sales dollars prior to returns and markdowns.
  2. Returns-Dollar amount of goods returned-often stated as a % of Gross Sales. A benchmark might be a 10% rate.
  3. Markdowns-Dollar amount of the discount a customer receives @ retail-often stated as a % of Gross Sales. A benchmark might be 20% markdowns (which is different than 20% off depending  whether it’s stated as a % of gross or net sales). Sometimes markdowns are taken at the register (POS)and sometimes inventory is de-valued with a markdown prior to being sold.  
  4. Net Sales @ Retail -Gross Sales after of returns and markdowns are subtracted

Productivity

  1. Sales per Square Foot-Gross Sales divided by the selling space (dressing rooms and shoe stockrooms count but other non-selling space does not). This of course varies widely by type of merchandise and store but a rough benchmark like $500-$800 per sq ft gives you an idea. This simply measures the sales productivity of your space and it’s a good way to compare departments within a store or compares stores to each other. You can also figure out what you need the Sales per Square Foot to be based on the amount you pay for rent to insure a good profit.
  2. Sales per Style-Gross sales divided by the number of styles. This gives a benchmark of what the average style produces and is a good metric to review in comparing departments and or when growing or shrinking a category.
  3. Traffic and Conversion- The only way for bricks & mortar organizations to get a true traffic measure that I know of is to use a traffic counter and to record these numbers by day and sometimes by hour over time. This mechanism literally counts the people as they come in the door (hopefully not the employees etc).  If this data is accumulated then one can really compare sales being down 10% to traffic being down 20% as an example. Conversion is the number of transactions divided by the number of customers coming in the door.  In the example above it means that conversion is actually up which is a good thing and may be attributable to better product or better service! These numbers are much easier get in the Direct to Consumer world.
  4. Customer Productivity-Understanding one's customer is key and warrants it's own discussion. In the bricks & mortar world I generally see an opportunity to better capture, understand, and maximize sales through understanding the customer better. 
  5. Average Order Size and Average Units per order- This is net sales(after markdowns) divided by the number of orders. The larger the order size usually the more profitable since logistics costs then become a smaller %. Average Units per order tells you that the average order size of $150 is made up of 2.5 items per order.
  6. Average Unit Retail – Net Sales (after markdowns) divided by number of units sold. It’s a good metric to compare categories (ie average sale of a top versus a outerwear piece or a fishing rod with a piece of tackle). This really tells you what your customer is willing to pay for an item. They might be willing to pay $100 for a jacket and $50 for a top. Note: Sometimes organizations calculate the Average Unit Retail of on hand inventory which is not apples to apples with this figure because of markdowns.  In the above example a jacket might be $120 and the top inventory may be $60.

Margin and Profit

  1. Initial Markup Percentage (IMU%)-(Retail of an item-cost of an item divided by the retail of an item-($10-$4/$10=60%)). This is the mark up that buyers are most focused on when buying product and building an assortment. 60% might be a rough benchmark.
  2. Gross Margin Percentage (GM%)-This is the margin after discounts (merchandise markdowns + marketing discounts) ie the margin when something is sold. Sometimes referenced as maintain margin or final margin.
  3. Cost of Goods Sold (CGS)-This is exactly what is says which is nice. It is the inverse of Gross Margin. So in the example above $6 is the Gross Margin or Gross Profit then $4 is the inverse or cost of the goods.
  4. Operating Margin $/%-This generally refers to margin after all direct expenses of buying and selling the product have been taken into account. This would be GM% less any direct expenses such as advertising expenses.
  5. Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA %)-This is the “bottom line” profitability of a business that many managers are rated on.  A Profit & Loss statement begins with Sales, subtracts cost of goods sold to get to Gross Margin and then subtracts S,G & A expenses such as staffing, warehouse etc  to get to EBITDA. I think many businesses would be happy with a 10% EBITDA as a very rough benchmark.

Inventory

  1. BOM and EOM-Beginning of month inventory usually stated in units if you are working with styles and stated in dollars if working at the product category level. End of month inventory is the same.
  2. Average Inventory-This is usually stated in dollars for a product category or a total company and is an annual metric. Add together the first month’s BOM plus 12 months of EOM’s and divide by 13.
  3. Turn-This is the rate you “turn” the inventory (like tables in a restaurant). Sales divided by average inventory. This should be apples to apples whether you are on a cost basis or retail basis. Ideally gross sales (net sales + markdowns) would be used but if you don’t have gross you can use net. This is also an annual metric and often compared across companies as a key metric. A benchmark for an apparel company might be a 4 turn.
  4. WOS and DOS-Weeks of Supply and Days of Supply measures how much inventory is on hand at a given time, usually month end. Inventory divided average sales by day (usually the forecast going forward for internal mgmt purposes).
  5. Sales/Stock Ratio or Stock/Sales Ratio- This is simply as stated. I tend to utilize turn annually and then WOS and/or DOS by month at the category level becaise I think it means more.
  6. Sell Through Percentage-This metric is often used more at the item level than at total category level and is key in reacting to business. It is the sales divided by the original on hand. As an example we initially had 100 rice cookers and at the end of the first week we sold 15 which is a 15% sell through-not too bad. The second week we started with 85 and sold 10 which is a 12% sell through. At the end of the first month we sold 40 which is a 40% sell through and now we have 60 left. If something isn’t selling at 10% per week perhaps a markdown is needed or conversely if it’s selling 25% per week then maybe we should get a re-order assuming it’s not seasonal or no longer the fashion.
  7. Gross Margin Return on Investment (GMROI)- This is gross margin dollars (often for a year) divided by average inventory. This measures the marginal profit as a return of the inventory $ invested. A number like 350% or 3.5 is GMROI.

Now let’s talk about the nuances of the Direct to Consumer Catalog Business:

Sales

  1. Demand-Catalog begins with Demand vs Sales. Demand measure the demand for an item even if it’s out of stock and the customer did not get it. This is easy to do in the Catalog world, not really done in the bricks and mortar world. ECom and wholesale often try to capture.  This is crucial to know in planning for the future and also for understanding customer satisfaction.
  2. Forecast Accuracy-First of all we all know that it’s always wrong to a certain degree! This is often a key metric for those who forecast but also for those who mange the inaccuracy. Hopefully, the “overs” and “unders” are added together instead of being netted against each other.
  3. Percentage Complete-In the Catalog world everyone needs to know if a book is 90% complete in demand or only 20% or 50% because the final number can change.
  4. Fulfillment-This measures how much of the demand the organization is able to fulfill for the customer and is a key metric of customer satisfaction as well as converts demand to sales. fill rate is another term for the same thing. Often two metrics are measured. Initial fulfillment and final fulfillment which measures the fulfillment after a customer waits for a period of time to get their merchandise. Anything that can’t be fulfilled is a sold out. As always, benchmarks depend on the business but 90-95% often seems to be the target for fulfillment.
  5. Now apply the same metrics above for sales to Catalog.

Productivity

  1. Circulation and Conversion-Circulation usually refers to how many customers are sent a catalog. Perhaps a good examples is that 3,000,000 people were sent the fall catalog (the aging or quality of those customers is another discussion). Let’s say that 150,000 actually responded or bought something, equaling a conversion rate of 5% (3,000,000/150,000) which is pretty good in the direct to consumer world.
  2. Customer productivity-Customer productivity is a key element in the Catalog world which again warrants  it's own discussion. This data is easily captured in the Direct To Consumer world. Generally Catalogers segment their customer "file" into categories by frequency of purchases and net sales. This is used for circulation planning and when it goes down to the category level utilized specifically for merchandising directly to the customer.
  3. Factor-Factor measures the productivity of the items on each page in that particular catalog. In the same example above let’s say that of the 150,000 people who actually bought something on average they each spent $100 so the total catalog generated $15,000,000 in demand. Let’s also say that each catalog was 120 pages so on average one page generated $125,000 in demand. If a popular outfit on a page generated $250,000 then the factor of that page or outfit equals 2 ($250,000/$150,000).
  4. Demand Per Thousand Pages Circulated (DMPC)-This is my favorite productivity measure. This measures the demand divided by (# of pages in a book (or portion of a page) times the total circulation of the book then divided by 1000). This is a wonderful productivity measure because it enables you to compare productivity book to book and also item or category to each other in one book or across books. (Factor does not).  In the example above a jacket is pictured in ½ of a page. It generated $75,000 in demand. $750,000/ ((.50 x 3,000,000)/1000)=$50 DMPC which compares to the total book @ $41.67. It also compares to a t-shirt that generated $60,000 in demand on a ¼ page @ $80 DMPC.
  5. PMPC-This metric is exactly the same as above but profit/margin is utilized instead of demand which enables you to directly measure the variable profit of an item, page or book.

Margin

  1. All margin metrics are the same for Catalog as the Bricks & Mortar section

Inventory

  1. All inventory metrics are the same for Catalog as the Bricks & Mortar section but certain metrics such as sell through don’t mean as much in this business.          

Part #2 will talk about Ecommerce and Wholesale

Assortment Planning Part #1-Six Factors to Consider When Developing Your Assortment Strategy

Whether you are a bricks and mortar retailer, cataloger, selling on the internet, or a wholesaler, your assortment is key to your success, the “heart and soul” of your business as I call it! Therefore, assortment planning is a crucial activity. I have seen many companies do this well but there is often a real opportunity to take more factors into account to produce the most profitable and sustainable assortment for your brand.

Six factors must be taken into account in planning the size and content of your assortment:

1. Your brand strategy
2. Your business model
3. Current market trends
4. Sales and margin history
5. Channel (s)of distribution requirements
6. The organization’s financial plans (sales, margin, and inventory)

(I would term these “top down” factors. Part #2 will discuss the “how to” and “bottoms up” execution of the strategy.)

Brand Strategy-Prior to assortment planning, whether in preparation to shop the market or to develop your own product line, developing your brand strategy is crucial. Merchandising/product development must buy into the brand strategy. What does the brand represent? Who are the current customers (demographics and psychographics)? What are they currently buying? Who is the target customer ( often different than the current one)? What do they want and need from you? Who is the competition? What makes you different?

We can all name brands that have faltered because they did not have a clear strategy, it was diluted and/or execution was poor. From my perspective my Alma Mater, Eddie Bauer has been an example of this over the years.

Business Model-If you have a “scarcity” business model (Gilth, Clymb, or Zulily), a “fast fashion” business model, or even a “close-out” business model the content and price of your assortment are much more important than controlling the size of it. Your business model is designed to turn fast and fulfillment is not as important. In fact, running out of merchandise is part of the model and creates future demand! If your model is more traditional and fulfillment is important then the size and flow of your assortment may be as important as the content. If you disappoint your customers by being out of stock in a key denim size, as an example, it really hurts your current and future business!

Market Trends-No one has a perfect crystal ball but current market trends and potential future market trends must be taken into account. This is very qualitative versus the next factor which is fairly quantitative. Some brands must event create their own market trends because they are the leader in their category. This still must be done based on current and potential future consumer trends, wants, & needs.

Sales and Margin History- It is crucial to see what has sold well both last season and the same season last year for your organization. In addition to sales, final margin must also be considered including all discounting! As always, if something sold well but the margins were very low it’s not worth repeating in the same way. Taking a look at the categories and styles that have sold well in the past is often the starting point for assortment planning but I have certainly seen too much weight given to this activity. Even in a traditional business model newness is important! When looking at this history it is good to begin selecting items that can be “carryover” items prior to developing or buying “new styles”.

Channels of Distribution-Whatever your distribution strategy, the elements listed below must be incorporated into planning your assortment:

Bricks and Mortar-You will need to know how many stores, how stores may be grouped and assorted differently, what the floorset and/or visual merchandising strategy, flow, and timing are. We do NOT recommend planning the assortment or style count based on space in the store. Plan your assortment first based on the factors above and adjust in Part #2 if needed.

Catalog-You will need to know when catalogs are being mailed, and how many pages you need to fill along with a productive density plan (# of styles per spread or page). This is generally more of a space and productivity (DMPC) exercise than retail.

E-Commerce-You will need to know the strategy for pages, layout, and navagation here along with search and promotions. In general the assortment is not limited by space here either. Presentation is key!

Wholesale-You will need to know the sales strategy, types of accounts and timing along with and any special order needs of your customers.

Financial Plans-If your organization is planning a +20% increase in sales you may have room to increase the size of your assortment. If they are planning a -10% decrease you probably need to tighten up the assortment. Likewise if cash, which means inventory for you, are tight you may need to decrease the size of your assortment and get higher unit sales out of each item. If your organization needs to improve profitability, which means increased margin for you, then you will have to either limit discounting or increase your initial margins. These factors all have an impact on the size and content of your assortment and must also be considered.

Category financial plans-Based on the brand strategy, business model, history, and financial plans, initial “tops down” category and or brand financial plans can be developed at this point. An example might be helpful! If you know your new brand positioning is an active brand targeting women in their 30’s, you can probably plan the performance tops category up. If your financial plans are +5% perhaps this category is up 10-15%.

Please see “5 Top Tips for Creating Your Merchandising or Product Hierarchy” @ jlsearsconsulting.blogspot.com

Once again to summarize, six factors must be taken into account when developing both the size and content of your assortment strategy:

1. Your brand strategy
2. Your business model
3. Current market trends
4. Sales and margin history
5. Channel (s)of distribution requirements
6. The organization’s financial plans (Sales, Margin, & Inventory)

Part #2 will talk about the “bottoms up” or “how to” execution of the strategy.

If you would like to discuss assortment planning further we can be contacted @ info@jlsearsconsulting.com or @ 206-369-3726

5 Top Tips for Creating a Merchandising or Product Hierarchy

The first place to start in developing a merchandising strategy is to develop a solid merchandise hierarchy. Often a merchandise hierarchy has five levels such as division, department, and classification in addition to style and sku level. Some systems give the ability to do six levels but most of the time five is plenty.

In developing a merchandise hierarchy it’s important to remember that this hierarchy will be in place for several years and that it will be a key way to organize, plan, & analyze the merchandise strategy and results. Changing a merchandise hierarchy is difficult and often gives “apples to oranges” data for one year following the change. Therefore, it’s a good idea to view this as a very universal hierarchy that accommodates annual style changes.

Maybe an example would help at this point!

Divisions may be defined as: Men’s Apparel, Women’s Apparel, Kids Apparel, & Hardgoods

Departments may be defined as: Jackets, Woven Tops, Knit Tops, Pants, Skirts, Shorts

Classifications may be defined as: Sleeveless tops, short sleeve tops, long sleeve tops

Let’s say that next fall short wool plaid skirts are a trend and this on line retailer is planning on going after that trend. Many retailers make the mistake of developing a classification for short wool plaid skirts. The problem with that is that next year the new trend is going to be floral long skirts and that classification won’t be available. So in the merchandise hierarchy a good way to approach it is to have short patterned skirts, long patterned skirts, short solid skirts, long solid skirts. The universal classifications should be able to accommodate trend changes.

While developing the merchandise hierarchy is a merchandise function it’s important to involve cross functional partners because they will also be working things such as search and marketing spend by departments given growth plans etc. It’s also important to organize cross functional business teams to manage the sales, margin, and profit of a business unit (perhaps the Men’s division) so they need to be involved in the final decision. Some areas such as sourcing are usually organized by fabric so it’s hard to do this across all divisions. Some Merchandise systems allow “super groups” and alternate way to sub-total merchandise so if classifications are set up under each department by fabric then it’s easy to sub-total another way.

Now that you have a workable merchandise hierarchy, a good cross functional team (Merchandising, Sales, Marketing, Finance) to plan and manage the business you will develop sales, margin, inventory, and even the number of skus by department so that a buyer can go shopping for these styles with a number in mind and/or you can give the sku count to your product development team!

In Summary:

1. Develop a universal and timeless merchandise hierarchy ( Division, Department, Classification, and sku) that will work to accommodate seasonal trend changes.

2. Include your cross functional partners in the final decision.

3. Plan your cross functional teams around these divisions.

4. Plan and manage your key metrics (Sales, Margin, Inventory, skus) by these departments

5. Utilize the style/sku plans by department in the marketplace to shop or with product development to design and develop your line

If you would like to discuss your merchandising strategy further please contact us @ info@jlsearsconsulting.com or 206-369-3726

Six Steps to Achieve Your Business Plan

Of course the first step to achieve your business plan is to build a well thought out, realistic business plan out three years. The financials (P & L, Balance Sheet, & Cash Flow) must tie to operational plans for all functional areas such as sales, product/merchandising and marketing. Just this week I had three conversations with organizations where this has not been the case! A good support plan including what is required structurally to achieve this plan such as organizational, system, and real estate requirements must also tie into the financials. Key metrics to measure the executions of this plan must be defined and developed during this process by functional area. This process often begins in the third quarter and is completed at year end. When the year is complete the “basis” which originally was a forecast must be adjusted with actual results and then plans must be tweaked to keep the plans realistic.

If not already established, a strong cross functional business team(s) must be formalized. Key metrics need to be included in each team member’s performance plan. The team(s) must have their version (whether bricks & mortar, catalog, e-commerce, or wholesale) of sales, product/merchandising, marketing, finance/planning, HR, and IT on the team and be organized by channel and/or product category. The team must have a leader along with clear roles & responsibilities and regular meeting times.

The next step is to set up a cross functional calendar and process in order to deliver on this plan and adjust as necessary. Each department such as sales, marketing, and product development usually has their own calendar but this is where major milestones come together. This process is managed by a cross functional business team who is responsible for the key metrics identified during the plan development. A senior level ultimate owner of the process helps insure execution. The timing of this calendar must be driven by the longest lead time dates which are often the product development dates, especially if it’s a private label or wholesale company otherwise it might be the marketing dates.

Key milestones include:

Pre-Season milestones such as: Final assortment, purchasing merchandise, finalizing marketing plans, finalizing floorset catalog layout plans, or sales meetings

In Season milestones such as: Executing a floorset in store or getting product on line and taking markdowns on slow sellers

Post Season milestones such as: Cross functional “hits & misses” analysis prior to the next pre-season plan

Each milestone includes:

Sub steps to achieve the key milestone
Owner of each milestone with key input contributor
Completion dates of each key milestone (quarterly or seasonal dates)

Always include a “contingency calendar” to your business plan and process. Things rarely go exactly as planned and the team must be ready to flex and adjust as needed to respond to a rapidly changing business! The contingency calendar should include key dates to read metrics and the business results. These dates should be driven by the ability to affect business dates in the future for things such as product, marketing, and/or infrastructure things such as the org and real estate.

Good luck with your plan. These six steps will help insure your success!

In Summary:

1. Take the time to build a realistic business plan out 3 years and insure that operational plans by function tie into the overall business plan
2. Identify key metrics that are needed to drive the business plan and tie individual performance plans to these metrics.
3. Assign a Senior Level leader/owner to the business team(s) and to the cross functional calendar & process.
4. Establish cross functional business team(s) who are responsible for the execution of the plan. Every team needs a leader!
5. Develop a cross functional business management calendar & process that includes key milestones for:
a. Pre-Season
b. In-Season Execution
c. Post Season Analysis
6. Insure that a contingency calendar with trigger dates is included in the business management process. Things are rarely exactly as planned!

I can be contacted at Janice@JLSearsConsulting.com or 206-369-3726. I'd love to hear about your business needs.