Creating Efficient and Effective Inventory Assortment
In 2009, Walmart surveyed customers in an effort to improve the customer shopping experience. The survey data was used to create the company’s Project Impact, a plan that overhauled Walmart’s approach to displaying inventory on the sales floor. Implementation included the removal of 15 percent of the store’s inventory from the floor. As a result, the retail giant eliminated the use of pallets that blocked the aisles, decreased the merchandise stocked on the aisle end caps, and shortened shelf height. The Outcome? Customer satisfaction rose while sales plummeted to the sound of $1.85 billion. Walmart quickly reintroduced 300 SKUs that had been removed; however, executives held firm to their initial strategy of giving the customer a cleaner store. Somewhere in the middle between clean and clutter was Walmart’s answer. Given this example, which key areas make the most impact to optimizing your store’s inventory assortment?
In a 1998 BusinessWeek article, Steve Jobs said, “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” Walmart learned that this also holds true for inventory assortment when their customers’ opinions left them with lower sales. When looking for the right inventory assortment for your store, the three most important areas for optimization include (1) planograms, (2) feature displays and (3) customer segmentation.
A planogram is a “planning diagram” or visual representation of retail products in a store layout. Retail stores may use a variety of planogram versions and often utilize a separate planogram for each category merchandised in the store. Softline retailers, such as apparel stores, use a more graphic representation of how the inventory should be displayed, i.e. folded or hung from a hanger. Mass merchants often use box-based planograms that optimize available shelf space and inventory turns. The basic goal for planograms is to provide consistent layouts across multiple stores and to utilize most efficiently the available space, thereby getting the most products on the floor and driving sales volume.
To optimize in this area, retailers need extensive expertise on sales volume and gross margin by product. Even though a typical retail store may have upwards of 1,000 SKUs, this information will be integral in determining the location of specific products within a category. Furthermore, retailers need to know the dimensions of each product to understand the space required per item on the shelf. This information can be captured by the retailer’s inventory planners and interfaced with store planning software programs. These solutions can take the product size, along with the available shelf space, and provide a variety of planograms to maximize the inventory on the shelf.
Something that many software programs may not be able to ascertain, but that is crucial to shelf-planning, is “stackability” of the product. For example, one product may have weak wall structure and cannot be stacked on itself, because stacking it could lead to spills and hazards on the aisle floor. It will behoove the retailer to analyze the stackability, along with sales volume and product dimension, in order to ensure that the best-selling products have sufficient shelf space.
Unfortunately, using a planogram does not ensure that every store will have the exact same layout. While most retailers establish a set of standard store configurations that can be applied to the bulk of their locations, there are still some barriers to consistency that will require local personnel to adjust the layout apart from the planogram’s direction. For example, if the sales floor dimensions are smaller or vastly different from the depicted planogram, then inventory may need to be adjusted to preserve retail visibility.
Inventory shrinkage and sales floor disorder are two consequences that may result when merchandise is moved independently from the planogram’s direction. For example, if a salesperson misreads the planogram or places an item in a different area, inventory may find its way to a less optimal location making it much more susceptible to shrinkage and/or lost sales. Further, many stores are constructed to have maximum sales floor space and limited backroom storage. When inventory does not fit according to the planogram, the leftover merchandise has to be placed somewhere. When there is not backroom storage available, the inventory risks taking up part of an aisle or another item’s space in the store.
Case in point: Promotional items often threaten the product’s intended layout as well as storage and inventory shrinkage. For instance, a product may come from the manufacturer packaged with another product, as a time-limited promotion, while maintaining the original product’s SKU. This new package increases the footprint per item and limits the number of units that will fit on the shelf according to the planogram. For stores with limited backroom storage space, the leftover inventory can present problems with finding adequate sales floor space and can fall victim to inventory shrinkage as a result. In this example, the local store will again have to modify the layout. In consideration of these potential obstacles, the retailer should understand that the planogram may need to be adjusted slightly across multiple locations.
Due to location within customer traffic patterns and attention-grabbing ability, end caps and front-end displays have the potential to sell much more product than the internal aisle. These locations often attract impulse purchases and, in the case of mass merchants, lure perimeter shoppers to the center aisles. Retailers should optimize feature displays by focusing on the product and merchandising.
Product The best products for the front-end area will include those that are high-frequency and high-impulse, such as magazines, candy and beverages. When deciding among products to emphasize on an end cap, retailers should consider margin, season, complements and geographic area. Since the end cap has the ability to increase sales for any given product, retailers can realize an immediate sales spike by choosing a product with higher gross margin. Another effective approach is to review products that match the current season. For example, batteries and light bulbs are in high demand during the daylight savings times, and chips and soft drinks sales surge during the weeks leading up to the Super Bowl. Placing complementary products nearby or on a clip-strip down the edge or center of the end cap will help to cross-promote both products. For instance, adding a clip-strip of batteries in the appropriate size for battery-operated items. Retailers can also base product selection on the geographic area. Since Seattle is known for selling more sunglasses per capita than any other major U.S. city, a local retailer may do well by creating a sunglasses end cap in March and April.
Merchandising Whichever strategy is used to elect the product for promotion on a feature display, retailers must attend to the merchandising of the area, including signage, layout and turn-frequency. For end caps and front-end displays, the signage must be adequately sized and highly visible. The passing customer is not likely to spend the time to search for the price on an end cap display. It must be immediately immediately to catch the customer’s attention, or the retailer loses the opportunity for the sale. On an end cap, retailers should minimize customer confusion by only offering one brand and limiting the assortment to one SKU per shelf or one SKU per vertical ribbon at the most. Having many items with the same labels facing outward creates a dramatic blocked effect that grabs the shopper’s attention.
To ensure ongoing success for the duration of the product’s promotion, retailers should place extra attention on keeping end caps and front-end displays fully stocked with labels facing outward at all times while also maintaining adequate inventory for the product’s side counter, or the original location for the inventory. Some retailers may find it beneficial to employ someone who is tasked to keep the feature displays stocked and organized.
Another aesthetic not to be overlooked is the size of the product. Where the planogram will help to understand the number of items to best fit the shelf, the overall size should be considered again when determining which shelf to house the merchandise. The larger items should be located at the bottom; they are normally heavier, more difficult to pick up and have larger print. Labels on the smaller items cannot be read from far away on the bottom shelf, so they need to be closer to the eye on a higher shelf.
Lastly, in order to establish a sense of urgency and to avoid product monotony, mass merchants should plan to rotate end caps as frequently as every one to two weeks. The average supermarket customer visits up to three times in one week – a good reason for a grocery retailer to change end caps weekly. Conversely, softline retailers may see fewer repeat customers throughout one week than a supermarket; therefore, softline end caps can be changed less frequently, such as every two weeks and seasonally. Total available inventory is another indicator of an end cap in need of turnover. If sell-through becomes significant at the feature area and there is not enough inventory to replenish it, then it may be an appropriate time to change the end cap to another product.
The third key area in optimizing inventory assortment exists in customer segmentation. Retailers should employ a strategy of customer centricity in order to align procurement and merchandising decisions with the wants and needs of its most valuable customers. An effective customer-centric strategy can lead to higher revenues, repeat visits and customer satisfaction. To determine who its customers are, a retailer should segment customers into groups based on similar geographic, demographic, psychographic and behavioral parameters.
Geographic location, including region, climate, population size and density, impacts the store’s layout and product offering. An urban store will likely have smaller square footage and more foot traffic as opposed to car-based shoppers. As a result, the retailer will offer fewer SKUs resulting in a limited selection and more compact products than a suburban location. Demographic statistics include age, gender, family, income, occupation and education. In neighborhoods of higher affluence, retailers may have more ability to experiment with new products or brands as well as offer more expensive brands or organic offerings.
Psychographic statistics include lifestyle, interests, opinions and activities. A grocery store in downtown Los Angeles, Calif., is more likely to sell out of sushi spring roll wrappers than Lubbock, Texas. So, it would not make sense for this retailer to base the inventory order on average sales and use the same planogram and product mix for both locations. Behavioral statistics relate to actual buying behavior such as brand loyalty. Retailers can use customer transaction analytics to understand purchasing habits based on product brand, size and common product complements. The retailer using this information can then position certain products together in the store or bring in more of a popular brand.
It is imperative that a retailer understands its customers’ wants and needs. A customer-centric approach utilizing this knowledge can help the retailer make educated decisions with regard to store layout, product merchandising and inventory procurement. When the retailer is supplying the customer with the products he or she demands, then that customer will be more satisfied and will purchase more and return more frequently.
Retailers can and should optimize inventory assortments by implementing effective and efficient strategies for planograms and feature displays – strategies that are both customer-centric and location-based. Planograms should take into account the item’s sales volume, dimensions and “stackability.” Furthermore, front-end displays should feature high-frequency, high-impulse merchandise while end caps should be occupied by higher margin items appropriate for the season and changed every one to two weeks. A retailer who uses these tactics and incorporates a customer-centric approach to inventory assortment will see greater sale volume, higher satisfaction and minimized inventory shrinkage.