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

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.