Category Management

(Assortment Planning)
Bhaskar Banerjee
Defining the Basic Profit Factors

 Cost is the amount which the retailer pays purchases

 Retail is the price at which stores offer merchandise
for sale to the consumer.
Basic terms
 Sales volume or operating income
 Cost of goods sold
 Operating expenses
 Gross margin
 Customer returns
 Customer allowances
 Inward freight
 Alteration and workroom cost
 Cash Discount
 Direct Expenses
 Indirect Expenses
Operating Income (sales)
 Gross sales are the total initial dollars received for a
merchandise during a given period
 Gross sales = Total of all the prices charged to
consumers on individual items x Number of Units
actually sold.
Cost of goods sold
 Cost of goods sold refers to the inventory costs of those
goods a business has sold during a particular period.
 Operating expenses:
An operating expense is an ongoing cost for running a
product, business, or system.

 Customer Returns:
When the merchandise is returned to the stock and
customer receives a cash refund or charge credit , these
return of sales are called customer returns.

 Customer allowance:
If a customer receives a price reduction after the sale is
completed, it is known as customer allowance
 Gross margin
Gross margin is the difference between the sales and the
cost of goods sold.
 Net sales
Net sales is the sales total after customer returns and
allowances have been deducted from gross sales.
Departmentalization
 Is an extension of the specialization principle, occurs when tasks and
employees are grouped together into departments to achieve the
operating efficiencies of specialization for a group performing similar
tasks

 Specialization and Departmentalization can be based on:

 Product type (such as apparel, home furnishings, and appliances)
 Activity (such as buying, selling and stocking)
 Activity location (such as main store, branch store and warehouse)
 Customer type (such as household and business customer)

 In order to use these as base for departmentalization of store, a

retailer should select the one providing the management with the best
level of control and producing the highest employee efficiency
PLANNING MERCHANDISE
ASSORTMENTS

 Organizing the Buying Process by Categories

 The Category
 The Category Management
 The Category Captain
 The Buying Organization
 The Category

A category is an assortment of items that

customer sees as reasonable substitutes for
each other
 Each of these items have similar
characteristics
 Merchandise is priced and promoted to
appeal a similar target market
Category Management
 The process of managing a retail business with the
objective of maximizing sales and profit of a
category
 The buyer is responsible for developing the
assortment plan for the entire category, pricing
merchandise, and coordinating promotions with the
advertising department and stores.
 An important reason for adopting category management
is that one person, the category manager, is ultimately
responsible for the success or failure of a category
 It is easier to manage to maximize profit
The category captain

 Some retailers turn to one favored vendor to help them

manage a particular category known as category captain
 CPFR (Collaboration, Planning, Forecasting,
Replenishment)
 Letting the fox into the hen house
THE ASSORTMENT PLANNING
 Variety:
 Variety is the number of different merchandising categories within
a store or department.
 Stores with large variety are said to have good breadth (variety &
breadth are used interchangeably)
 Assortment:
 Assortment is the number of SKU’s within a category.
 Stores with large assortment are said to have good depth
(assortment & depth are used interchangeably)
 Product availability:
 Product availability defines the percentage of demand for a
particular SKU that is satisfied. Also referred to as the level of
support or service level.
Determining product availability
 Cycle Stock / Base Stock:
 Is inventory that results from the replenishment process and
is required to meet demand when the retailer can predict
demand and replenishment times (lead times) perfectly, as
predicted or planned.
 Before the store is out of stock, next order arrives.
 Backup stock / Buffer stock:
 Also known as a safety stock, as a cushion for the cycle
stock so they won’t run out before the next order arrives
How do retailers make trade – off ’s between variety,
assortment & product availability?
Range Width and Assortment
Planning
Putting together a profitable range..
The Assortment Plan
 After setting the financial goals and determining the
relative importance of variety, assortment, and
product availability, the retailer is ready to determine
what merchandise to stock using an assortment plan.
 A good assortment plan requires a good forecast for
sales, GMROI, and inventory turnover along with a
mix of subjective and experienced judgement. A good
inventory management system that combines these
elements.
Without a Range Plan..
 Assortments are put together in an un-structured manner

 Ranges are bought based on availability with supplier rather

than to a specific plan

 Space and volume of merchandise don’t match

 Low margin products occupy more shelf space

 Products bought are either too much or too less to meet the
sales and margin plan
Main objectives
 Get the sales and margin plan right for the planned area

 Each store to get a balanced range with sufficient width for sale all
year round

 To plan full potential of each option and aim to maximize margins

 To plan the display and replenishment qty for each option so that
each option is available for the planned duration without running
out of stock.
The starting point..
 Sales plan –
 Top down and Bottom up approach
 Performance - last year same season and immediate prior season
 Growth % for in like-for-like stores
 Business from new stores

 Estimates from Operations

 Market trends
Sales phasing

 Analyse sales by week for last year same period

 Factor in new launches/ promotions

 Plot sales over the current period

Buy Plan
 Corresponding to the sales plan

 Taking into account lead times

 Manufacturing
 Transit to warehouse
 Allocation to stores

 Stock Covers to be maintained within control

Stock turn
 Buyers aim is to convert stock into cash, the no. of times
this can be done in a specific period is the Stockturn
 Stock turn = Sales/ Avg Stock
 High weeks cover = lower stock turn, vice versa

 Plan the closing stock in no. of weeks cover at any given

time
 Eg. 8 weeks (4 on floor, 2 in warehouse and 2 in transit)
Planned Margins
 Intake margins – at the time of purchasing product
 (Difference between MRP and Cost) / MRP
 Balance the high margin and low margin product to
achieve overall planned margins
 Helps to work backwards from MRP
OTB
 Simply,
 OTB = Planned Closing Stock – (Opening stock –
(Sales+Markdowns)) **

Jan Feb Mar Apr May Jun

Opg Stk 450 370 350 340 350 410
Planned Sales 200 170 180 160 190 220
Markdowns 0 10 10 0 15 30
Closing Stock 250 190 160 180 145 160
Planned Clsg Stk 370 350 340 350 410 220
OTB 120 160 180 170 265 60
Weeks Cover 7.4 8.2 7.6 8.8 8.6
Building the range
 Good assortment is a balance of:
 price
 color
 styles
 Fabrics

 Price:
 Determine the lead-in price, mid price and highest price.
 Limited number of prices = less confusion for the customer
 Overall margin should be achieved with lesser price points
Building the range
 Color:
 Balance the proportion of core colors and highlight colors

 Prevent overkill of any specific color

 Control your own preference consciously

 Involve designers in this process

 All colors only from the seasons color palette

Building the range
 Styles:
 Are the styles complimenting each other?
 Are there too many styles?
 Or too few?
 Are key styles available in key colors?
 Are we taking too much risk by introducing a new style in a new
color?
 Fabrics –
 Are all key fabrics represented?
 Are all key styles presented in key fabrics (and key colors)
Planning the assortment
 Decide the Average Selling Price:
 On basis of last year same season ASP + Inflation
 If there’s a conscious shift to have more expensive products
then it should be factored here.
 Sales Density:
 Determine the sales per square foot required
 Check whether the SPF is feasible from the given area
Planning the assortment

 Determine the total qty required per option on an avg.

 Find out the total qty sold per option in the last year same
season
 Find out avg qty sold per outlet, extrapolate it to total
outlets in the current planning period
Final outcome..
 Inputs:  Output:

 Sales plan  OTB / Avg selling price = Total

qty to be bought
 Avg stock holding value
 Total qty / Avg qty per option =
Total no. of options
 OTB for the entire period required

 Avg selling price

 Avg no of pcs that we can sell

per option
Range Width Planning
 The challenge is to present the best offering in the space available

 Step 1 - Grade the stores

 A, B or C based on size
 A – largest, B – Medium sized, C – Smallest

 Step 2 - Grade the categories in each store

 Category Grade– 1, 2 or 3 based on business potential

Product Ladies
Priority Western Ladies Ethnic Winterwear Home Denims

Store Type A 1 2 3 2 1
Range Width Planning
 Combination of store grade and category grade will determine the
Assortment Grade i.e. number of options planned for each category at
each location.

 Since the characteristics will be the same, each store with the same
assortment grade will get exactly the same width and depth.

 For Eg. From Nov to Jan, winterwear will get more space in all Northern
stores than in Western region stores, irrespective of store size. So it will be
treated as Grade 1 category even in a C grade store in Delhi and therefore
get more space and therefore an appropriate number of options for a C1
Assortment Grade!
Combining the Range Width and
Assortment plan
 Look at planned footage at each store grade.

 For eg.
 For store Grade A,
 Number of pcs that can be displayed using optimum fixturing

 Combination of face-outs and side-outs

 Find out Average depth per option sold last year, arrive at total number of
options that can be displayed this year.

 Compare that with the planned number of options as per the Assortment Grade

 Adjust the buy assortment and footage till the offering looks complete - with the
aim of maximising sales
Merchandise and Assortment
Planning
Merchandise and Assortment
Planning (MAP) - COMPONENTS

Strategic Assortment
Planning Planning

Location
Planning

Merchandise
Planning
Slow –seller
Management
Merchandise and Assortment Planning
(MAP) is composed of the following
components:

Strategic Planning
 In a strategic plan - also referred to as a business plan - a retail company defines
strategic retailing targets.
 The business plan is created on the highest level for the whole company but also
for individual distribution channels or higher levels in the merchandise
hierarchy.
 Some of the stock and sales data planned on the higher levels may sometimes be
transferred to the store and merchandise plans.
 As the store plan and the merchandise plan are often created more or less
independently of one another, it must be possible to compare both plans to
ensure that the most important key figures are contained within a particular
tolerance range.
Merchandise and Assortment Planning
(MAP) is composed of the following
components:

Merchandise Planning

 Like location planning, merchandise planning is used to create a more

detailed structure for higher-level strategic guidelines.
 Operative processes such as reporting or allocation are hardly used in
merchandise planning.
 The merchandise category hierarchy is used in the planning process but
the merchandise itself is not looked at in detail.
 Therefore merchandise planning does not extend to product level.
 Other important planning levels are the distribution chain, the season,
the purchasing group and, to some extent, the price margins.
 Merchandise and Assortment Planning
(MAP) is composed of the following

components:
Assortment Planning
The aim of assortment planning is to create assortments and define which
products are listed for which stores and the quantity of these that should be
allotted to individual stores.
Within an article hierarchy , the buyer can plan several levels, for example,
product (style), color (variant) or the price band.
 Merchandise and Assortment Planning
(MAP) is composed of the following
components:
Slow Seller Management
The aim of slow seller management is to ensure that at the end of the selling
period for merchandise - particularly for fashion and high fashion merchandise - only a small
amount of stock remains.

This means that markdowns can be reduced to a minimum.

Slow seller management is composed of markdown planning and controlling.

In markdown planning the markdown budget is defined on different levels.

For markdown planning one must define scaled price reductions in the form of a set of rules
(markdown profile).

This markdown profile provides products with a target sales curve. It is then possible to
perform markdown simulation (when will the product be sold, what quantity of it and at what
price?).

In markdown controlling, slow seller analysis is performed to monitor merchandise sales and
ensure that planned sales rates and gross margins are actually met.
·
Merchandise and Assortment Planning
(MAP) is composed of the following
components:

• Location Planning

The location plan (store plan) is the concrete structure of the strategic plan
that takes into account different factors within the store hierarchy:
•regional marketing,
•competition,
•demographic changes and preferences, as well as particular events.

Planning costs and income for retail is performed in line with the strategic
plan. These key figures are planned to store level or to store/division or
store/department level (for example, ladies' wear or men's wear), but not to
any further level of detail.
Factors affecting a well-planned
Assortment

•Quality of merchandise offered for sale.

•Price Range
•Choice of National Brands or Private Brands
•Good Taste
•Proper Timing
•Product Life Cycle
•Variety of Product Lines, and
•Assortment Strategies
Key Concepts in Merchandise
Assortment Plans

•Product Line : is a broad category of products

having similar characteristics and similar uses.

•Breadth : the number of product lines carried or the

number of brands carried within a product
classification.

•Depth : the number of choices offered to customers

within each brand or product classification.
Assortment Strategies

Limited Number of + A Number of

Assortment Depth = Popular Styles
Categories (Narrow)
(Deep)

A Number of Limited Number

Assortment Breadth = +
of Styles
Categories (Broad)
(Shallow)

A Number of + A Number of
Balanced Assortment = Popular Styles
Categories (Broad)
(Deep)
•Faster Turnover
•Ease of Stocking
•Using less room & display area
•Ease of re-ordering, checking &
receiving
•Simplified counting, and
•Avoidance of Markdowns
Customers are not offered
a wide selection of
products
•Presentation of a wide variety of
goods
•A high degree of stopping & pulling
power
•A slant to those customers of
discriminating taste
Frequent re-ordering is
required which makes it a
costly method of inventory
Managing Assortments

•In order to satisfy customers and remain ahead of

competition, new products must be continuously added
while others must be deleted.

•Stock Breadth can be increased by adding other product

lines or additional items in an existing product line but
new products may divert sales from present assortments.

•Cannibalization occurs when potential sales of existing

products are lost to new items.
Factors affecting Assortment Planning
Decisions
Merchandise Classifications

A merchandise classification system is needed to provide the means

for better planning and control of inventory.

Classification & Sub-Classification:

Classification: refers to the particular kinds of goods in a store or

department. E.g. Men’s Shoe Department

Each of these broad product categories could be further divided into

Sub-Classification. E.g. Men’s Dress Shoes, Casual Shoes etc.

The type/size of the store/dept. , the image , the target market and
financial resources available will affect the number of classifications
and sub-classifications needed.
 Merchandise Classifications

Examples of Merchandise Classifications:

Men’s Shoes Women’s Shoes

Dress Shoes Dress Shoes

Oxfords High Heels
Slip-Ons Medium Heels
Low Heels
Casual Shoes Evening Shoes
Oxfords High Heels
Slip-Ons Medium Heels
Low Heels
Athletic Shoes Casual Shoes
Running Shoes Medium Heels
Court Shoes Low Heels
Cleated Shoes Wedge Heels
Merchandise Classifications

Selection Factors:

Each sub-classification of merchandise can also be broken down by

various selection factors, which are product characteristics most
important for the customers as they make their purchasing decisions.

Key selection factors include:

•Brand
•Price
•Size
•Color
•Material
Preparing an Assortment Plan: The
Concept of Model Stock

•The unit assortment plans are not randomly selected collection of

merchandise.

•Assortments of merchandise are balanced to customer needs while being

bound by the financial constraints of the merchandise buying plan.

•It results in establishing a Model Stock, the desired assortment of stock

broken down according to factors important to the target market .

•While developing model stocks, cues should be taken from Current

Trends as well as Previous Sales .

•The Objective of establishing a Model Stock is to maximize the Sales

and Profits from the Inventory Investment.
Preparing an Assortment
Plan
•A Model Stock does not have to be followed rigidly during selling
season.

•It should serve only as a guide because demand in regard to various

selection factors will vary during the season.

•Adjustments have to be made once the selling season is underway.

•Re-orders also change the nature of Model Stock.

•Fashion Buyers cannot be as specific as other buyers when developing

model stocks.
 Preparing an Assortment Plan

• Decide on Classifications & Sub-classifications.

• By doing this, the breadth of the product assortment is determined.
STEP 1

• Determine the brands and price lines that will be carried for each sub-classification.
• Knowing the characteristics of the target market is crucial here.
STEP 2

• Identify the general characteristics of an item that customers may consider while purchasing it.
• It is not possible to plan for all the characteristics but it should allow the buyer to make purchases according
STEP 3 to the most important of these characteristics in relation to the majority of customers.

• Decide on the proportion of one classification to another and the proportion in which each factor will be
represented in the stock.
• For some selection factors like Size, past sales data can be used for calculation. For others like Colors, the
STEP 4 buyer must know how readily the customers accept new fashion colors as they are introduced.

• Calculate the specific number of units to be purchased.

STEP 5
Preparing an Assortment Plan - An Example

•Department - Wristbands.

•Past Sales show Maxi has been the most popular brand with
customers.

•Buying plan indicates – Rs 3000/- for buying the category.

•The Buyer decides he only wants to keep Maxi.

•Each Maxi wristband costs Rs 10/-

•The total number of pieces that can be purchased is 300.

Preparing an Assortment Plan
- An Example

•The wristbands are available in sizes from XS to XL in

20 colors.

•Also available in 100% cotton or a polyester/cotton blend.

•Embroidered and Non-embroidered options are also available.

Preparing an Assortment Plan
- An Example

According to past sales records:

1. The size distribution is as under-
S = 15%
M = 20%
L = 45%
XL = 20%

2. The higher selling colors are:

White = 20%
Gray = 35%
Black = 15%

The buyer decides to supplement these 3 colors with 2 new colors that are
predicted to be very fashionable for the Fall season.

Each of these will represent 15% of the assortment plan.

The Unit Plan looks like:

SIZE

Total number of Units to

be bought S M L XL Total
300 15% 20% 45% 20% 100%
45 60 135 60 300

COLORS
White 20% 9 12 27 12 60
Gray 35% 16 21 47 21 105
Black 15% 7 9 20 9 45
Green 15% 7 9 20 9 45
Garnet 15% 7 9 20 9 45
TOTAL 100% 45 60 135 60 300
MERCHANDISE CALANDAR PLAN- AW
Activity No. STARTING POINT Days Date Deptt
1 BUSINESS PLAN (July to Dec) 0 1th Sept Merchandise

2 OTB FINALIZATION 2 3rd Sept Merchandise

3 BRIEF TO DESIGNERS CONTAINING OPTION PLAN & COST BRIEF 2 6th Sept Merchandise
MILL WEEK:FABRIC,TRIMS,FACTORY(STYLES) PRESENTATION (all
4 categories) BEGINS 12th Sept Sourcing
MILL WEEK:FABRIC,TRIMS,FACTORY(STYLES) PRESENTATION (all
5 categories) ENDS 5 16th Sept Sourcing
6 CONCEPT/THEME/MOOD PRESENTATION 5 21st Sept Design
7 Styleing & CAD Presentation (On Paper) 20 11th Oct Design
8 Presentation to Key Dealers 5 16th Oct Design
9 Final Styleing & CAD Presentation (On Paper) 10 26th Oct Design
10 Final Indent Handover + Knits Dockets 4 1st Nov Design
11 Order For Sampling Ydgs + Knits Sampling 10 10th Nov Sourcing
12 Proto Samples Ready 30 10th Dec Design
13 Sampling Fab In-house 60 10th Jan Sourcing
14 Knits Sample I/house 60 10th Jan Sourcing
15 Final Samples I/House 20 30th Jan Designers + Merchant
16 Costing + Code Creation 5 5th Feb Merchandise
17 Final Boards for Booking 5 10th Feb Design + Merchandise
18 Road show Begins 11th Feb VM + Merchandise
19 Road show Ends 10 20th Feb VM + Merchandise
20 Order Consolidation 6 26th Feb Supply Chain
21 Bulk Fab Order 3 1st March Sourcing
22 Bulk Fab In-House (Aftert all approvals/Testing ect) 75 15th May Sourcing + Merchandise
23 Bulk Garments In-House (1st Drop) 45 1st July PPC
MERCHANDISE PLAN
AUG SEP OCT NOV DEC JAN TOTAL
LY 10,000 12,000 23,000 18,000 12,000 12,000 87,000
% Contr. 11.5% 13.8% 26.4% 20.7% 13.8% 13.8% 100.0%
Sales TY 11,000 13,200 25,300 19,800 13,200 13,200 95,700
Actual
Revised
Stock-to-Sale ratio 3.1 2.8 2 1.8 1.8 1.8
Planned BOM Inventory (Rs.) 34,100 36,960 50,600 35,640 23,760 23,760
Stock BOM
Actual
Revised
Planned EOM Inventory (Rs.) 36,960 50,600 35,640 23,760 23,760 21,000
Actual
Stock EOM
Revised

Planned 1,100 670 1436 1770 2115 2479 9,570

Actual
Reductions
Revised

Planned 14,960 27,510 11,776 9,690 15,315 12,919 92,170

Purchase at Retail Actual
Price Revised

Planned 8,228 15,131 6,477 5,330 8,423 7,105 50,694

Purchase at Cost @ Actual
45% markup Revised
Planogram
 A planogram is often received before a product
reaches a store, and is useful when a retailer wants
multiple store displays to have the same look and feel.
Often a consumer packaged goods manufacturer will
release a new suggested planogram with their new
product, to show how it relates to existing products
in said category. Today, planograms are used in a
variety of retail areas. A planogram defines which
product is placed in which area of a shelving unit and
with which quantity. The rules and theories for the
creation of a planogram are set under the term of
merchandising.
Planogram
 Primary targets which should be achieved with
planograms:
 Creation of an optimal visual product placement
 Creation of an optimal commercial product placement
 The visual product placement is supported from different
theories:
 Horizontal product placement: To increase the concentration of
a customer for a certain article, a multiple horizontal placement
side by side of one product is applied. Different researches
found that a minimum placement range between 15–30 cm of
one single product is necessary to achieve an increase in
customer advertence (depending on the customer distance
from the unit).
 Vertical product placement: A different stream with its follower
is the vertical product placement. Here one product is placed
on more than one shelf level to achieve 15–30 cm placement
space.
 Block placement: products which have something in common
are placed in a block (brands). This can be done side by side, on
top of each other, centered, magnetized.
Derivative targets:
 To communicate how to set the merchandise .
 To ensure sufficient inventory levels on the shelf or
display.
 To use space effectively whether floor, page or virtual.
 To facilitate communication of retailer’s brand identity.
 To assist in the process of mapping a store Store mapping
Planogram