Product Variety: Toll on Inventory Investment

“Variety is what our customer demands and that is what we provide”.

More often than not fashion retailers follow this as a guiding principle for their merchandizing strategy. There is no denying the fact that variety is important for fashion business as today’s customer is surrounded by choices, yet the key question is “How much?” While there is no magical answer to this question let’s look at how much does unnecessary variety cost to your business:

• If you look at the cumulative sales data for a period with respect to the number of articles, it is often seen that only 15-20% of articles contribute to 80% of sales and a good 30 – 35% of articles hardly make any sales contribution and have substantial inventory investment.
• Having to manage such a wide range of articles results in lack of focus resulting in under buying hot sellers and overbuying items that do not sell. This essentially ends up in the following:
  • Lost sales due to stock outs of hot sellers
  • Heavier markdowns on items that do not sell hence foregoing margins
  • Left over inventory even after markdowns hence blocking your investment

All this is by no means to oppose the idea of “variety” however is to bring sanity to the concept of “infinite variety”. Product offering can be planned carefully and largely scientifically and is referred to as “Assortment planning.”

Assortment planning refers to balancing the breadth(the number of products)  and depth(stock to be carried for each product)  of the assortment while taking into account the desired service levels, margins, customer profiles and need for variety. Following considerations need to be kept in mind while planning assortments:

• Last year / periods’ cumulative sales performance with respect to the number of articles. This aids you in determining where to draw the line.
• Display capacity of your shops.
• Number of different assortments required as per your store profiles and the overlap between them. Store clustering can be instrumental in this for larger number of stores
• Price brackets spread of assortment

Once breadth of assortment is decided, then one can get into the depth as to how much to buy of what. ABC classification, where you can rank products in your assortment by their sale potential, can be employed for deciding on the depth. Once quantities are decided and gross margin analysis of inventory can be employed to revalidate the assortment and see if desired margins are met. If not either the products being offered or the depth can be tweaked. Hence the assortment being offered to the customer when properly thought through can satisfy both the need for variety and also maximize your return on inventory investment.