Product and customer experience are fundamental to any retail business, but they aren’t guarantees of success—retailers who can’t control private–label product development, demand and the supply chain will hurt their profitability.

Managing the Assortment Lifecycle

Once act vertical retailers have designed, developed and sourced the production of a product, they must decide on the quantity and the time period for producing and selling them. This typically isn’t covered under product lifecycle management. Thus, we refer to it as assortment lifecycle management—it’s about proactively planning the assortment lifecycle from initial set to exit and using this to determine how much inventory to have in the queue.

Stellar assortment lifecycle management doesn’t happen by accident, and it begins long before the product is ready to manufacture. Coordination of, and communication between, the different parties involved (design, development, merchandising, planning, marketing, sourcing and the vendor) are key. At defined milestones in the process, design and development managers must confer with merchandisers and planners to review styles and forecast demand. Retailers who have shortened the product design process and pushed key decisions closer to in-store data have greatly increased forecast accuracy, thus substantially reducing their product development risks.

An essential element to increasing speed is to have everyone involved follow the same calendar. A centralized calendar also greatly increases the chances that inventory and promotional materials (store signage, promotional events, direct-mail flyers) arrive when customers are ready to buy. This is critical because a retailer’s unique offerings do not necessarily sell themselves and often lack the large-scale advertising of national brands. Act vertical retailers must make sure their marketing and internal communications are educating employees and customers about the fine points of a new offering. If they don’t, great new products can languish on store shelves.

Retailers can further reduce the risk of overbuying by having strong supplier relationships. The stronger the relationship, the more likely a merchant will be able to commit to only a portion of its buy upfront and not have to place all its bets at one time. Creating such strong relationships comes down to concentrating one’s business on fewer strategic vendors and being good partners. Aéropostale, a hugely successful $1.8 billion apparel chain that has been thriving throughout the 2008–2009 recession with comp-store sales increases, focuses two-thirds of its business on five suppliers.

“We stay committed to our vendors because we recognize that our long-term partnerships will give us a competitive advantage,” Tom Johnson, the company’s chief operating officer, told us.

Having a proactive markdown strategy is also critical. Most markdowns are reactive, that is, a retailer slashes prices when sales don’t meet expectations. A large percentage of those sales can be unprofitable. A proactive markdown strategy is created long before product arrives at stores. It determines in advance, based on projected sales and timeframes, the best times to take markdowns and how much to take so that discounted items can drive revenue and still be profitable. Given a retailer’s significant investment in development and promotion, effective markdowns are critical to maximizing profits.

Planning markdowns carefully is part of the larger issue of creating entry, continuance and exit strategies for proprietary offerings. When is the best time to bring a novel item into a chain, and which regions and stores should get it first, second, third, etc. (or all at once)? And how do managers know what lines to continue or exit?

Once the numbers are in on a new, proprietary product, a retailer should conduct a post-mortem analysis to understand lessons learned for the next new-product initiative. In many chains, a small percentage of their assortment drives the majority of their profitability.

Intimately understanding what product categories, products and product and category attributes (price points, styles, colors, features, etc.) drive profits is critical to designing and developing the next set of winning items.

This is the second part of a two-part series. For the first part, click here.

23 November 2009