At daVinci, we make assortment planning software to help retailers solve a few problems. Among other things – like automating manual tasks and providing a central hub for all the information the merchandise team uses and creates – one of the problems we love to solve is a financial one. Namely, costly mistakes made during the buying process that eat away at margins and adversely affect your chances of being profitable. But the trouble is, you might not even be aware of how much these mistakes are costing your business.
When we talk about assortment planning, what we’re referring to is the process of buying inventory and matching it to customer demand. In the process, teams of managers, planners, buyers and allocators work together to create the most compelling and profitable assortments possible. Countless decisions need to be made quickly and accurately to get it right, and there are usually tight deadlines to contend with, too.
With so many moving parts, small mistakes can easily go unnoticed. And that is what makes them so dangerous. Being wrong by a few percentage points is a small mistake when you’re only looking at a single line item. But if every line on your buy plan is miscalculated by 1%, and your annual receipts are $1-billion, all those small mistakes add up to $10-million in misallocated buy dollars. Yikes!
In fact, our experience shows it’s often much worse than that. Chances are your company is misallocating as much as 5% of its buy dollars. For businesses struggling to compete, that could make the difference between profitability and insolvency.
So what are the problems that are chewing up your margins? We’re glad you asked.
If you’re still using Excel to track your buys, this is the single biggest change you need to make right now to get things under control.
A major problem with spreadsheets is they trap information. Anything going in has to be entered manually, and anything being exported has to be massaged to work with its destination (or just entered manually). Not only is it time consuming to move data in and out of spreadsheets, but it creates a huge opportunity for mistakes to be made. When buyers are manually entering purchase orders,
And that’s if the information in the spreadsheet is complete and accurate. It’s easy for formulas to be overridden or massaged so the results suit the merchant’s gut rather than the math.
Excel presents all sorts of problems. Typos are rampant. Formulas get overridden. Templates get tweaked to suit the user. Spreadsheets invite chaos. A proper assortment planning tool can help you get control over your buy plans and connect the data with your other systems to eliminate these kinds of errors.
Clustering is a regular problem spot, and it often has to do with the way clusters are calculated and applied.
See also: What is Clustering
Too many retailers choose to assign every store to a single cluster. E.g. the New York flagship is an A store, and Boise is a D. But it’s more nuanced than that. We prefer to cluster at a product class level, and use that information to calculate buy quantities before assortments are bought. This strategy helps bring buying and allocation closer together, and ensures problems are caught before it’s too late. You can read more about this in our detailed guide on how to buy based on customer demand.
Ignoring the math
What’s more, we’ve seen cases where teams ignore the math on their clusters. Certain locations get promoted to a top store for emotional reasons, like the location in the CEO’s home down. Or, they get demoted because people get nervous to allocate the quantity of inventory the math calls for.
If you fail to consider customer demand until after purchase orders are committed, you risk missing out on potential profits (if you buy too little), or having to use markdowns to clear unwanted inventory (if you buy too much). Minimizing the variance between your buy quantity and customer demand is the best way to ensure your assortment will be as profitable as possible.
These types of problems can easily add up to millions of dollars in misallocated funds. We recently published a case study in which our business consultants did an analysis for a leading retailer of women’s fashion apparel and found errors amount to $40-million per year.
The fact is, a large number of small miscalculations can quickly add up. That’s why it’s so important to get control over your assortment planning. By replacing spreadsheets with purpose-built software, and refining your clusters, you can drastically reduce the number of mistakes that could be draining your margins.