Management of product assortment and formation of the assortment matrix
Customer needs and desires, as well as economic conditions, are constantly changing. To be successful in managing product assortment, modern tools and approaches must be used.
How can we improve product assortment management? What should we pay attention to? What factors influence assortment management at the retail point? How do we choose products for sale? What tools help manage product assortment and merchandising, and how can we optimize the assortment? These topics will be discussed in the article.
Product assortment, or trade assortment, is the total collection of all goods offered by a retail enterprise to its customers.
Product assortment has seven dimensions:
- Width – the number of different product lines offered by the company.
- Depth – the number of varieties of products within a product line.
- Height – the average price of the product line.
- Novelty – the ability of selected product lines to meet changing market needs through new products. The novelty coefficient is characterized by the emergence of new varieties of goods over a specific time period.
The concept of novelty is related to notions such as relevance (demand) and mobility (flexibility and adaptability of the product assortment).
- Compatibility refers to the level of complementarity and compatibility between different assortment groups.
- Completeness is the correspondence between the actual availability of all types of goods and the developed assortment list, supplier agreements, or industry standards.
- Stability is the property of maintaining an assortment matrix composed of the most demanded and profitable assortment items.
ВBased on this, product assortment management is the activity of forming a rational assortment for a retail enterprise from competitive goods, aimed at identifying and maintaining an optimal assortment.
Let’s consider the specifics of managing a wide assortment and the problems associated with it. A vast number of questions and numerous related issues arise when launching new products into the market: how to introduce a new product, where to find financial resources, and whether to remove old products from the assortment.
It is always difficult to forecast the profitability of new products—whether the product will be in demand or will remain on the shelf as dead weight.
Another feature, and at the same time a limiting factor for stores, is shelf space and the proper placement of products on store shelves. The main task is to allocate retail space as effectively and rationally as possible among all presented product categories. An automated shelf space management system like ABM Shelf can assist you in this.
One of the most pressing and long-term issues, due to its consequences, is the lack of analytics. Companies often lack practical tools that would help conduct accurate analysis and make informed decisions regarding the introduction and removal of products, as well as the expansion and deepening of the assortment, leading to a lack of accountability in assortment decisions.
Retailers often compromise by highlighting certain product categories for which they increase stock while cutting back on others. The solution lies in a rational approach to analyzing product categories and types of retail points according to market needs.
Actions that can help prevent the saturation of retail points:
- Organization of a Central Warehouse (CW): This serves as a point for averaging demand fluctuations, gathering remaining stock, and redistributing unsold SKUs.
The loading and unloading functions of the CW take a back seat. The main role of the CW is to regulate the replenishment system. At this level of demand aggregation, it is possible to accurately determine the needs of the network, trends, and changes in demand. The CW is also tasked with collecting remaining stock across the network and distributing inefficient SKUs among stores to accelerate inventory turnover.
- More Frequent and Reliable Replenishment: This occurs at storage locations as consumption takes place. Dynamic buffer management is essential. The buffer, or target stock calculated for each SKU at the storage location designated for sale, also includes the concept of safety stock, which ensures the visual appeal of the display. Therefore, the storage point should be replenished based on the combined total of these two parameters.
- Analysis of Assortment Structure and Development of Replenishment Rules.
- Adjustment of Processes for Removing Underperforming Items and Introducing New SKUs.
To identify such negative trends, specialized software like ABM Assortment is available.
You can explore all levels of categories to make data-driven decisions. Identify unmet sales goals, the success of new products, the absence of goods in specific stores, and other parameters that will help you be more effective in running your business.
Product Assortment Management is a Cyclical Process
Product assortment management is a cyclical process and includes the following blocks: formation, analysis, adjustment, change analysis, market analysis, and then back to the beginning.
Let’s Explore the Process of Forming Product Assortment
This process lies at the intersection of market and economic analysis. On one hand, marketing criteria must be taken into account (such as purchasing power analysis, market conditions, consumer segmentation, competitive analysis, etc.), while on the other hand, economic criteria must also be considered (a comprehensive set of indicators that demonstrates the priority and relevance of products in the assortment matrix).
For distribution, an effective economic criterion for forming a priority assortment is “dollars per day.” This metric compares the revenue generated from a product with the volume and duration of investment in it. In other words, dollars per day is the ratio of margin to purchase cost, multiplied by the financial cycle. The higher this figure, the more desirable the product is for inclusion in the assortment.
The result of the product assortment process is the creation of a successful assortment matrix—a structurally and quantitatively planned list of products that should be available during a specified time period.
Steps Necessary for Properly Forming an Assortment Matrix:
- Define the Store Format, its core concept, and positioning strategy.
- Research Consumer Demand and segment consumers.
- Conduct a Comparative Analysis of Competitors’ Assortment Policies.Determine the Price Range.
- Analyze the Balance of the Product Assortment.
Once the assortment matrix has been formed, it is necessary to evaluate how effectively your company manages its product assortment. This involves using a range of quantitative and qualitative indicators.
Quantitative Indicators, Both Absolute and Relative:
- Growth rate of market share
- Sales volume (in physical and monetary terms)
- Gross/net profit
- Turnover rate
- Return on investment (profit from invested funds)
- Average check, product penetration in the check
- Sales volume (net profit) per 1 m² of retail space, etc.
In addition to quantitative criteria, it is essential to consider several factors that can qualitatively impact the success of the market performance of a particular set of products. For example, among the negative factors affecting the development of a specific assortment matrix are demand seasonality, the presence of larger or equal competitors, and the availability of substitute products. Favorable conditions for maintaining the assortment matrix of a retail enterprise include the presence of distribution channels, intense competition among suppliers, customer loyalty, and the existence and magnitude of payment deferral from the supplier.
Among the classical methods for analyzing the assortment matrix, ABC analysis is considered the most effective. ABC analysis is a method for classifying a firm’s resources by their importance, ranking the product assortment based on the contribution of each category, product group, and item to the formation of the overall revenue of the enterprise.
It is essential to conduct ABC analysis in two dimensions: business interest (for example, based on the margin indicator) and consumer interest (evaluating the volume and frequency of sales, penetration in the check).
ABC analysis is typically conducted in several dimensions: business interest (for example, based on the margin indicator) and consumer interest (assessing the products in the assortment matrix based on volume and frequency of sales, penetration in the check).
ABC analysis is often complemented by XYZ analysis, which evaluates the stability and resilience of demand for products, along with other analytical methods.
Automation of Assortment Management – An Effective Solution for Retail
The traditional approach to assortment management, based on experience and intuition, is not always effective. Modern technologies and software can help companies automate assortment management, reducing risks and increasing efficiency.
Let’s consider the example of ABM Assortment. Using algorithms, the system continuously analyzes changes in product categories and offers effective solutions to improve performance. The software also helps build strategies for your categories, performs intelligent automatic clustering, and provides deep analytics, which is crucial for further optimization of business processes. Within the system, reports have been implemented: “Plan-Fact,” SKU sales dynamics, supplier and customer analysis, write-offs, inventory, new products, and lost sales.
An automated solution is an effective tool for optimizing assortment management. Want to learn more? Leave a request, and we will send you the ABM Assortment presentation.
