Time for Change: When Retailers Need to Automate Assortment Management

Retail can be compared to a living organism: it evolves and constantly requires changes for improvement. These processes are stimulated by external factors such as changing trends, fluctuations in consumer demand, and competitor actions. However, there are issues that can hinder the successful evolution of a company, primarily concerning product management. Let’s analyze the situations indicating that a retailer should consider implementing software for assortment management.

Lack of a Structured Product Lifecycle Business Process

This is a pressing issue for many retailers. Typically, internal ERP systems have limited capabilities for assortment management, offering only two main statuses for products: “active” and “inactive.” This binary choice does not account for the various stages of a product’s lifecycle and the internal processes of the company.

Moreover, even if category managers can make limited adjustments to this set of statuses, it only slightly eases their workload. The regulation of each individual stage of the product lifecycle still rests on their shoulders.

In the ABM Cloud system, this problem has been addressed by creating a customizable list of statuses. This list reflects the entire spectrum of product lifecycle stages and the associated business processes. It can be easily expanded and adapted to the unique needs of each retailer. This approach ensures greater flexibility and efficiency in assortment management, considering the actual processes within the company.

For example, one possible product status in ABM Cloud could be “New Arrival.” This status indicates that the product has recently been launched in the market and has not yet fully met the company’s expectations. The following business processes can be applied to it:

1. Discounts and promotions to increase consumer awareness of the product.
2. Additional quality control to identify and eliminate potential defects.
3. Rapid response to consumer feedback to make necessary adjustments to the product or marketing campaign.

The “New Arrival” status can influence processes in Inventory Optimization and Shelf Efficiency:

• Inventory replenishment may be limited to avoid excess stock.
• Shelf placement may be more advantageous to attract consumer attention.

Scaling the Network

If a retailer aims to increase turnover and reach, it is important to recognize that this will present new challenges for assortment management processes. Specifically:

• As the number of retail locations increases, there will be a need to adapt assortments according to local demand, offers from local suppliers, and seasonal fluctuations.
• Synchronizing the scaling processes with a uniform increase in inventory levels is essential to avoid shortages or excess stock.
• During the growth process, it is crucial not to turn the network into a cumbersome “titan” that responds slowly to trends. A quick response to demand fluctuations and changes in the competitive environment is necessary, which results from high-quality and timely data analysis.
• It is vital to optimize logistics and interactions with suppliers to ensure product availability across all sales points.
• There arises a need to adapt the assortment to boost sales and increase margins. This requires processing performance data across different stores, both overall and for each product individually.

Additional Challenges: Optimal Use of Shelf Space, Enhancing Competitiveness, and Exploring New Product Categories.

Any scaling is more effectively implemented with a system that supports growth without sacrificing customer service quality. The assortment solutions provided by the ABM Cloud platform enable the automation of inventory management processes, optimization of logistics, warehouse management, and staff coordination, as well as improved customer service.

A study conducted by the McKinsey Global Institute revealed that approximately 50% of activities in retail can be automated using modern scalable technologies. The resources freed up as a result can be reinvested into development.

Lack of an Assortment Matrix

If a retailer is still using Excel to manage categories and SKUs or lacks centralized assortment management altogether, it leads to several problems:

• An increase in errors, as the assortment becomes vulnerable to the “human factor,” inaccurate data, or poor decisions.
• Inability to promptly respond to issues such as shortages or excess unsold stock.
• Loss of opportunities for assortment optimization and adaptation to changes in consumer demand.
• Misallocation of the procurement budget, resulting in insufficient product availability or funds being tied up in stock.
• Decreased margins, turnover, and customer satisfaction levels.

A well-structured assortment matrix simplifies the identification of profitable and unprofitable products within the assortment, aligns offerings with current consumer needs, creates pricing strategies, plans inventory, and allows for the removal or addition of products.

Utilizing an assortment management system enhances the accuracy and efficiency of the assortment matrix. Specifically, it enables centralized storage, processing, and updating of data for the entire assortment, trend identification, profitability analysis, and demand forecasting. The system helps determine the optimal number of SKUs in each segment of the assortment matrix, suggests products for removal and introduction, and tracks performance both for individual products and overall category performance.

Lack of a Category Management Strategy*

Category managers operating without a clear plan often make mistakes, leading to a lack of growth drivers for categories and products relevant to the target audience, or to the accumulation of excess stock.

Simultaneously, prolonged storage of unpopular products reduces their profitability. The absence of an assortment strategy forces managers to react to current market challenges rather than actively manage the assortment and forecast demand. Reactive decision-making ultimately results in shortages of popular products, decreased sales, and customer dissatisfaction.

Implementing an assortment management system allows retailers to build their own strategy and monitor its execution. Specifically, ABM Cloud assists in:

• Identifying popular products and consumer needs based on analytical data.
• Formulating the product assortment to meet demand and achieve KPIs.
• Showing volumes and SKU availability.
• Tracking strategy execution and making timely adjustments.
• Evaluating strategy effectiveness in relation to achieving the retailer’s necessary business metrics.

Challenges with Localizing Assortments

If all retail locations in a chain have the same assortment that does not take local demand characteristics into account, it can lead to:

• Decreased sales, as the assortment at certain locations does not meet the expectations of the target audience.
• Accumulation of excess stock in some stores, resulting in loss of margin.
• Shortages of products that are popular in specific locations due to insufficient procurement.

These issues are not relevant for single-store owners, as it takes relatively little time to understand customer preferences in practice. However, even in this case, periodic and proactive rotation of the assortment considering new products and trends is necessary.

For a chain of stores located in different city districts or regions of the same country, demand for various products tends to differ. Therefore, the assortment will vary in terms of content, pricing, depth, and other criteria. Some retailers attempt to address this challenge by dividing stores into groups, such as budget, mid-range, luxury, etc. However, this distribution is not always effective due to the high variability in performance across individual categories. For example, the same store might belong to one cluster for the “alcoholic beverages” category and to a completely different one for the “confectionery” category. Effectively managing assortments manually under such conditions is nearly impossible.

The clustering function in the ABM Cloud assortment management system allows for the division of stores into clusters based on various factors, including geographic location, demand for specific product categories, store capacity, and more. This enables:

• Development of localized assortments tailored to the specific needs of the audience for each cluster.
• Simplified management, as managers only need to analyze and optimize the assortment for a limited number of clusters rather than for each store individually.
• Increased sales, as localized assortments better meet the needs of local customers. It also allows for effective procurement planning, leading to satisfied customers who remain loyal to their favorite stores.

Limited Assortment and Issues with Data-Driven Decision Making

If the assortment does not account for the variety of consumer preferences and market trends, it becomes a problem for the retailer, leading to increasing customer dissatisfaction and lost sales.

Retailers who make decisions solely based on intuition, established supplier relationships, or historical data may also face issues of imbalanced assortments and declining sales. The lack of an analytical approach to assortment management will ultimately lead to misalignment with market needs and business strategy.

A solution to this problem is to use software with analytical capabilities for category management, which provides the following advantages:

• The ability to analyze large volumes of data and identify trends that may be unnoticed by humans. This helps to understand which products or categories are popular and identify potential areas for improvement.
• Generation of detailed reports on the state of the assortment, including sales metrics, data on popular products, profitability analysis, and more. This forms the basis for making informed decisions.
• Real-time operation that allows for quick responses to changes in demand under market conditions.
• Assistance in optimizing the assortment, including the removal of products that have lost demand and the addition of promising products.
• Increased sales through precise and balanced assortments.

Customers Are Switching to Competitors Due to More Attractive Assortments

The problem is evidenced by a noticeable outflow of customers toward competitors who offer a more diverse and appealing assortment. The solution lies in fundamental changes in approaches, particularly in building a category management strategy that takes into account the business’s competitive advantages and market demand. To enhance customer loyalty, it’s essential to reassess the following factors:

1. Your Assortment StrategyEvaluate whether it still effectively meets your business needs. Even if the assortment strategy seems to be functioning correctly and aligns with business requirements, it should be reviewed regularly, keeping in mind new segments within the category. These segments must be included to stay on trend.
2. AssortmentAdd or remove categories and products as needed. It cannot be overstated that the products on the shelves must meet the needs of the target audience. Experimenting with and introducing new products is crucial. This will help keep up with trends and attract a new audience that will know they can find something new in this store.
3. Analyze Supplier RelationshipsThere are various scenarios where a supplier cannot provide the necessary price or meet your needs. In such cases, consider seeking alternative options, such as new brands or private label products.
4. Establish PersonalizationUsing analytical data about purchases and behavior, identify which products are of interest to each customer group and create personalized recommendations for them.
5. Analyze CompetitorsStudy the strategies and assortments of other retailers in the niche to understand what attracts customers to them. Create your own competitive advantages.
6. Monitor ResultsContinuously track customer reactions to changes in the assortment. Use tools to collect feedback and respond promptly to audience needs.

Identify Problems as Quickly as Possible

If assortment management processes are not automated, category managers often spend a significant amount of work time addressing issues, such as investigating the reasons behind declining sales of products in a category. This means specialists must analyze the situation, identify causes, and correlate them with outcomes. While this “investigation” is underway, precious time for making changes is lost.

This is why implementing automation tools—such as ABM Cloud—allows for timely data acquisition about issues and immediate responses.

Assortment Management Only Through BI Systems

Relying solely on Business Intelligence (BI) systems for assortment management can lead to certain limitations and disadvantages. These should be considered when making decisions about changes in product categories. Specifically, these include:

• Limited data and variables, making it challenging to see the “big picture.”
• Dependency on data quality, which carries risks of inaccurate or outdated results.
• The need to train category managers to fully utilize BI systems, as the outcomes depend on user competency.
• The requirement to integrate BI with other systems (e.g., inventory or production management), which can pose challenges in some cases.

To overcome these shortcomings, it’s advisable to adopt a comprehensive approach to assortment management rather than just analyzing the assortment as done with BI systems. For example, ABM Cloud can generate more accurate and informative reports and analyses.

Problems Arise Regardless of Network Size

There’s a common perception that automating assortment management is relevant only for large retailers. In reality, even networks with five outlets can encounter problems in assortment formulation—problems similar to those faced by retailers with a hundred stores. Therefore, implementing tools for managing assortment processes is relevant for any company where category managers are forced to spend precious hours on routine tasks.

Both large and small networks face the same issue: margin pressure from competition and other external factors. Most retailers have already exhausted traditional means of cost reduction. Research has shown that grocery retail chains experience margin pressure of 100-150 basis points, while general stores face pressure ranging from 350 to 500 basis points. Implementing a comprehensive automation program can generate an additional 500 basis points of margin, which can be reinvested for scaling up.

Implementing software for assortment management is a crucial step for retailers in addressing current problems. It helps specialists obtain information based on objective data, automates processes, and facilitates strategic planning and assortment optimization. However, it’s important to choose software that aligns with the specific needs and goals of the company. Investments in proper staff training and change management are also significant.