Retail Merchandising Software to Grow Revenue, Profit and Cash Flow

Retail Merchandising Software — The Panacea and Pitfalls

The primary sources of retail revenue leakage and diminished profits are lost sales due to stock-outs and inflated inventory carrying costs caused by excessive stock. Getting closer to the equilibrium point which separates these two seemingly opposing objectives directly increases revenues, releases working capital and grows profits.

Merchandise planning is a strategy designed to get the correct quantities of the right products at the right places at the right times and at the optimal prices. It's a complex forecast that considers the company's future financial goals, historical purchases, past demand, current trends, supply chain lead time and much more.

Merchandise planning accuracy directly correlates to both top line revenues and bottom line profits. Even small increases in accuracy – such as stocking higher volumes of high demand assortments at optimal prices – will result in significant revenue gains.

Or on the flip side, small decreases in planning accuracy will result in stocking assortments that incur less turnover, more markdowns, higher inventory carrying costs and a significant hit to the bottom line.

Retail Merchandising Software

Merchandise Planning Process

Merchandise and assortment planning generally begins with a Merchandise Financial Plan. It forecasts the company's revenue goals along with constraints such as working capital. This plan will advise how much can be invested in product inventories and may tell the buyer how much to spend on each category per period. With the sales target and budget in place, buyers and planners collaborate and apply retail merchandising software to create a merchandise and assortment plan.

The Assortment Plan will ultimately forecast what buyers and planners believe are the right quantities of the right product mix to the right stores at the right times. Assortment planning must calculate several projections, including:

  • Types of goods to be purchased
  • Where goods will be stocked
  • Quantities of goods to be stocked
  • When goods will be ordered, shipped and distributed
  • Procurement and purchase order (PO) creation
  • Reconciliation with merchandise financial plans

If you get the assortment plan right the goods flow from shelves to consumers' homes at high velocity and maximum price. Get it wrong and POS registers sit silent, goods sit on shelves and consumers sit in competitor stores.

Fortunately, automated retail technologies are aiding merchandise and assortment planning and helping companies increase forecast accuracy.

Retail Merchandising Software

Merchandising and assortment planning software replaces guesswork with sophisticated data driven models in order to calculate optimal financial, item, assortment, category, space, allocation and replenishment plans. The retail merchandising software generally combines three dimensions.

  • Product: item, brand, category, class and style
  • Location: store, chain, region, district, division, department, banner and channel
  • Time: week of year, week of month, month, quarter and season

When retail plans are supported with the quantifiable relationships derived from the intersections of the above dimensions, forecast models can deliver big financial impacts, such as the following:

  • Better decision making. Retail merchandising software can integrate end to end processes and thereby enable buyers or planners to experiment with different scenarios and dynamically view how changes in assortments, channels, pricing or other factors impact revenue goals, margins and profits.
  • Increased revenue. Merchandise software more easily shows what item quantities should be stocked in which stores. It provides analysis to better understand where and under what conditions items sell best. It shows how consumer demand and precise company investments can increase sales of the best-selling or highest margin products while at the same time decrease overstocks of slow moving products.
  • Better margins. Back orders and overstocks are sources of margin erosion that can be reduced with assortment planning software.
  • Reduced inventory. Merchandise planning software aids optimized stock levels and improved turns. It delivers more timely visibility of slow moving inventory and better item markdown and exit strategies. These factors have a tremendous effect on margins and working capital.
  • Improved Service Levels. Having the right assortments available in the channels where consumers want to procure them creates a better shopping experience and more satisfied customers.
  • Faster Process Cycles. Merchandise planning software reduces data preparation time, eliminates rekeying of data (which also eliminates transposition errors), lowers risk associated with manual spreadsheets and links end to end processes in a dynamic continuum. This increases collaboration across departments, decreases cycle times for related strategic processes such as Product Lifecycle Management (PLM) and identifies breaks in processes that are otherwise hard to detect.
  • Continuous Planning Improvement. Forecasting is a difficult science that is improved upon with learning. Comparing related plans or multiple versions of plans, such as baseline, original plan, revised plans and prior year plans will disclose which assumptions, variables and parameters are accurate and which should be changed. This learning is particularly valuable when applied to current planning via What-If analysis or predictive modeling. These are two powerful scenarios that enable buyers and planners to see the future impact of their decisions in real time.
  • Labor re-allocation. When buyers and planners are not consumed in data preparation, data entry and building spreadsheets of questionable integrity, they can instead allocate their time on process improvements and decision making that will benefit the company.

More demanding consumers, increased channels, new types of competitors, shorter demand trends, more complex processes and more data require retailers to apply new technologies to manage more complexity.

Ah, but even with the tremendous upside I'd be remiss if I suggested retail merchandising software was either a panacea or without substantive challenges.

The Challenges

Before applying retail software to the three primary areas of planning — merchandise financial planning, buying and assortment management, and allocation and replenishment — consider the business process challenges that must first be resolved.

  • Merchandise financial plans are frequently not well integrated with the financial plans of other departments or not in sync with store plans. For example, it's easy for corporate to set financial goals whereby every store should grow revenues by a stated percentage over the prior year. It's much more complex for stores to calculate the mix of consumer demand, assortments, prices, turns and more in order to achieve these goals. When the stores merchandise plans are not linked with the company's top line revenue forecasts, corporate loses real-time performance visibility and the stores combined performance is less likely to satisfy company objectives. When they are linked, data cascades from top to bottom and vice versa. Management can perform What-If analysis or other modeling and deviations in one area can be made up in another. Performance visibility enables real-time adjustments to plan.
  • Buying and assortment planning remains a manual or partially automated process for many companies. Decisions are too often the result of a subset of prior year sales, limited data manipulated in spreadsheets, any particular individual's intuition, and forecasts drawn from educated guesswork. Clearly, replacing the subjective process with data driven analytics will result in improved planning.
  • Merchandise and assortment planning is too often a struggle to balance the inventory needs of stores with the financial goals of the company. Increased collaboration and data work well to bring the parties together.
  • Allocation and replenishment planning often suffer from incomplete integration to buying and assortment plans. Untimely and incomplete data updates from POS and supply chain systems magnify the challenge. Evolving from static to dynamic integration with POS and supply chain management systems shows inventory flow, permits real-time adjustments, renders more efficient use of supply chain assets and will significantly improve plan results.
  • In my experience, the single biggest challenge is the cultural inability to evolve from what has always been an artful process to a combination of art and science.
  • Collectively resolving these challenges and applying data-driven analytics will create an end to end model whereby executives, buyers and planners can experiment or manipulate planning decisions anywhere along the continuum and immediately see the cascading effects.

A Balancing Act

Keeping the right product mix on hand while keeping inventory levels low is perennial challenge with deep financial consequences.

Poor merchandise plans that lead to excessive inventory create consequences of slower turns, markdowns and liquidations. Plans that lead to too little inventory incur ramifications of lost sales and disappointed customers. Deviations in either misdirection lead to corresponding erosion of revenues, margins and profits. For every point closer to the sales and inventory equilibrium, inventory costs are decreased and revenues are increased by a corresponding factor.

Applying a combination of retail strategy and technology will get closer to the point of equilibrium – across brands, assortments, channels and stores. And that will unquestionably improve financial performance and further separate leaders from laggards.

The challenges are daunting but not insurmountable. More so, an increasingly competitive landscape has elevated retail merchandising software from a nice to have to business essential.