Presentation is loading. Please wait.

Presentation is loading. Please wait.

Driving Profitability Through Merchandise Optimization Scott C. Friend Vice-Chairman & President ProfitLogic.

Similar presentations


Presentation on theme: "Driving Profitability Through Merchandise Optimization Scott C. Friend Vice-Chairman & President ProfitLogic."— Presentation transcript:

1 Driving Profitability Through Merchandise Optimization Scott C. Friend Vice-Chairman & President ProfitLogic

2 ProfitLogic Confidential 2 ProfitLogic’s Mission To help retailers transform their merchandising operations and practices with the help of Merchandise Optimization solutions, resulting in dramatically improved financial results and enhanced customer loyalty. 2

3 ProfitLogic Confidential 3 Selected Customers bloomingdales TARGET Marshall Field’s

4 ProfitLogic Confidential 4 Current Retail Environment is Demanding and Complex Demanding customers who have multiple choices for the same item Proliferation of stores and the geographies, demographics, and lifestyles of the customers they are serving Acceleration of fashion trends leading to shorter product lifecycles, more floorsets, more seasons, and more risk Increased competitive pressure as retail formats continue to merge and compete for the same customer, same dollar Retailers must provide a differentiated experience in terms of selection, presentation, availability, price, and service to retain customers and stay competitive Merchandising is Getting Harder How do you manage merchandising centrally while fulfilling unique customer demand and store requirements?

5 ProfitLogic Confidential 5 But the fundamental merchandising challenge hasn’t changed After merchants decide what to buy, they need to make the following critical merchandising decisions: How Much Should I Buy for each store? How Much Should I Buy for each store? What stores do I send it to? What stores do I send it to? How Should I Price it? How Should I Price it? Assort Allocate Pricing How Should I Price it to most profitably clear it? How Should I Price it to most profitably clear it? Markdown How Should I Promote it? How Should I Promote it? Promote Markdown Promote

6 ProfitLogic Confidential 6 Main Street CEO Comp Store Sales Stock Price Profitability CEO Comp Store Sales Stock Price Profitability Retail really was a simple business Wall Street Buyer: Men’s Casual Clothing OTB Budget: $15M Buyer: Men’s Casual Clothing OTB Budget: $15M Buyer: Women’s High Fashion OTB Budget: $15M Buyer: Women’s High Fashion OTB Budget: $15M Buyer: Women’s Shoes OTB Budget: $20M Buyer: Women’s Shoes OTB Budget: $20M

7 ProfitLogic Confidential 7 Wall Street Fast changing assortments and large-scale expansion have made it a lot more complex 27 years old Liberal Arts degree 4 years in merchandising organization Motivated by fashion and trends 27 years old Liberal Arts degree 4 years in merchandising organization Motivated by fashion and trends Main Street

8 ProfitLogic Confidential 8 Budget: $18M Women’s High Fashion Budget: $18M Women’s High Fashion 27 years old Merchandising Management degree 4 years in merchandising organization Motivated by fashion and trends Would you trust this person to invest your life’s savings? Main Street Wall Street

9 ProfitLogic Confidential 9 It’s no longer a simple business Main Street Wall Street Retail is Detail 1,000 Stores X 50,000 SKUs X 26 Weeks X 4 Measures (Sales, Inventory, Receipts, On Order) X Plan, Actuals, Last Year X 4 Seasons Retail is Detail 1,000 Stores X 50,000 SKUs X 26 Weeks X 4 Measures (Sales, Inventory, Receipts, On Order) X Plan, Actuals, Last Year X 4 Seasons One Trillion Numbers Source: Fortune 50 Retailer

10 ProfitLogic Confidential 10 And management by average doesn’t get the job done 27 years old Liberal Arts degree 4 years in merchandising organization Motivated by fashion and trends 27 years old Liberal Arts degree 4 years in merchandising organization Motivated by fashion and trends Average Hot Store Average Cold Store Average Mall Store Average Small Store Average Urban Store Average Suburban Store Main Street Management by Averages Wall Street Top-down controls Open to buy Top-down merchandise planning Top-down controls Open to buy Top-down merchandise planning Average Hot Store Average Cold Store Average Mall Store Average Small Store Average Urban Store Average Suburban Store Store Visits

11 ProfitLogic Confidential 11 Nor does simple automation Average Hot Store Average Cold Store Average Mall Store Average Small Store Average Urban Store Average Suburban Store Wall Street 27 years old Liberal Arts degree 4 years in merchandising organization Motivated by fashion and trends 27 years old Liberal Arts degree 4 years in merchandising organization Motivated by fashion and trends Main Street No Insight, Just Infrastructure Implement Integrated Infrastructure Automation – Integration - Reconciliation Implement Integrated Infrastructure Automation – Integration - Reconciliation

12 ProfitLogic Confidential 12 X Typical Lifecycle Curve Planned Out Date Result Increased Sales Higher Margins Better Velocity How Should I Price It? Historical averages are used to determine markdown candidates Gut feel is used to determine markdown timing and depth Tendency to markdown items too late and too deep In-Stock Date How Should I Promote It? Guess work to determine the expected lifts of different promotional events and vehicles Tendency to promote whatever worked in the past and over estimate the expected lift Time Sales X How Much Should I Buy? Stores are treated as an average in terms of sales and size profiles Guess work to determine pre-pack quantities to fit required inventory Forced to make big bets up front without visibility to future demand Where Should I Put It? Historical store averages are used to plan allocation quantities Decisions are made at aggregate levels and spread down Tendency to front load inventory with initial push Order Date X Traditional Merchandising Today’s merchandising processes do not reflect each store’s unique customer, demand, and capacity

13 ProfitLogic Confidential 13 The Result Is Impacting All Retailers 8% stock-out condition* 21% overstocking condition* 40-50% excess inventory or non- performing SKUs** Cluttered stores Dissatisfied customers Operational Effects Lost sales High markdowns Lost GM$ Low inventory turns Lost market share Lost brand image Financial Effects * “Putting Products in the Right Places,” Retail Info Systems News, August ** “Product Replenishment on Merchandise Policy Techniques,” December 2000.

14 ProfitLogic Confidential 14 Revenue $1,500K COGS$1,050K -Merchandise -Markdowns -Shrinkage -In-bound Logistics Gross Margin $450K Expenses $400K -Stores -Marketing -Buying -IT -G&A EBITDA $50K 300K 40K 20K 750K 225K 30K 45K Misalignment between business imperatives and I/T priorities has only made the problem worse Legacy systems run an efficient business –Suited for less complex times –Infrastructure, not insight. Automation, not optimization. –Little impact on largest P&L lines Need new focus on effectiveness of decisions Source: AMR Research

15 ProfitLogic Confidential 15 The Solution: Merchandise Optimization

16 ProfitLogic Confidential 16 X Typical Lifecycle Curve Planned Out Date Result Increased Sales Higher Margins Better Velocity How Should I Price It? Maximize lifecycle gross margin by optimizing markdown timing and depth In-Stock Date How Should I Promote It? Plan and execute promotions based on store level analysis and forecasted lift Time Sales X How Much Should I Buy? Maximize profitability and manage risk through local market assortments and optimal order quantities Where Should I Put It? Minimize stockouts and overstocks through optimal allocation quantities based on store level analysis and available pre-packs Order Date X Merchandise Optimization How Does My Customer Buy? Understand each store’s unique customer buying behavior to provide visibility to future demand

17 ProfitLogic Confidential 17 Understanding the Customer Price Changes Sales & Inventory Data by Location Inventory ,000 1,200 9/4/1999 9/18/ /2/ /16/ /30/ /13/ /27/ /11/ /25/1999 1/8/2000 1/22/2000 2/5/2000 2/19/2000 3/4/2000 3/18/2000 4/1/2000 4/15/2000 4/29/2000 5/13/2000 5/27/20006/10/2000 6/24/2000 7/8/2000 7/22/2000 8/5/2000 8/19/2000 9/2/2000 9/16/2000 9/30/ /14/ /28/ /11/ /25/2000 UNIT SALES AND UNIT INVENTORY / 10 $- $5.00 $10.00 $15.00 $20.00 $25.00 PRICE Seasonality How do customers respond to price changes and promotions? How do customers shop during different seasons and holidays? How do customers respond to broken inventory levels? Customer Behavior How customers will respond to different merchandising strategies

18 ProfitLogic Confidential 18 Visibility to Future Demand Last Year Sales Deconstructed Markdowns Promotions Seasonal Lift 25% MD 50% MD Circular BOGO Christmas Next Year Sales Forecast Markdowns Promotions Seasonal Lift 25% MD Circular Christmas 50% MD

19 ProfitLogic Confidential 19 Profitable, Predictable, and Efficient Merchandising Decisions Optimization: 1.Evaluate a complex set of trade-offs 2.Analyze all possible scenarios 3.Asses the risk of each scenario 4.Determine the most profitable scenario that respects business constraints Optimization: 1.Evaluate a complex set of trade-offs 2.Analyze all possible scenarios 3.Asses the risk of each scenario 4.Determine the most profitable scenario that respects business constraints Demand forecasts How customers will respond to different merchandising strategies Demand forecasts How customers will respond to different merchandising strategies Performance criteria Best practices Business rules Constraints Performance criteria Best practices Business rules Constraints Optimal merchandising recommendations

20 ProfitLogic Confidential 20 Assortment Optimization Store Clustering by Class Performance & Attribute Analysis Local Market Assortments Volume Climate Size Seasonality Demographics Customer preferences Volume Climate Size Seasonality Demographics Customer preferences Store Group A Sales GM% Volume Climate Size Seasonality Demographics Customer preferences Volume Climate Size Seasonality Demographics Customer preferences Store Group B Volume Climate Size Seasonality Demographics Customer preferences Volume Climate Size Seasonality Demographics Customer preferences Store Group C Performance objectives Open to buy Performance objectives Open to buy Financial Plan Item attributes Flow dates Planned pricing and promotions Store base Item attributes Flow dates Planned pricing and promotions Store base SKU/Store Forecast Assortment breadth and depth by store Local Market Assortments

21 ProfitLogic Confidential 21 Assortment Optimization Receipt Flow Optimization Order Optimization Purchase order quantities and shipments Initial allocations Optimal Order Quantities Pre-season SKU/Store forecast Delivery frequency Flow dates Presentation minimums and maximums Store level size profiles S, M, L, XL Eaches 12 S, 24 M, 12 L, 12 XL Prepack 1 16 S, 16 M, 16 L, 16 XL Prepack 2 12 S, 12 M, 24 L, 24 XL Prepack 3

22 ProfitLogic Confidential 22 Allocation Optimization Volume X X Initial Receipt Second Receipt Promotion Markdown X Final Allocation X Holdback Quantity PushPullPush SKU/Store forecast Coverage period Inventory levels Min/Max presentations SKU/Store forecast Coverage period Inventory levels Min/Max presentations Need by Store Multiple prepack configurations and eaches Min/Max holdback quantities Min/Max allocations & shipments Multiple prepack configurations and eaches Min/Max holdback quantities Min/Max allocations & shipments Purchase Orders & DC Inventory Purchase Orders & DC Inventory Allocation quantity and prepack – eaches configuration by store Hold back quantity Minimize Stockouts & Overstocks

23 ProfitLogic Confidential 23 Promotion Optimization Objective Determine the the effect of promotional vehicles and offers Analysis Evaluation of company wide events – department and class level lifts Evaluation of store wide events – department and class lifts Evaluation of circular driven events – front/center/back page, size, price Recommendations Expected demand and profitability of events on the promotional calendar SKU/Store promotional lift for each promotional event and offer Halo and cannibalization effects of promoted items Optimal recommendation promotional events, offers, items, and stores to meet objective (margin, revenue, traffic, etc.) Company Wide Event Store Wide Event Circular

24 ProfitLogic Confidential 24 Markdown Optimization Optimal Scenario Markdown timing and frequency to maximize lifecycle gross margin Min/Max markdowns Markdown frequency Price ladders Outdates & salvage value Min/Max markdowns Markdown frequency Price ladders Outdates & salvage value Business rules and constraints

25 ProfitLogic Confidential 25 Assortment Optimization I have 1000 Stores. What is the best assortment breadth for each of those stores? Assort Allocate Pricing Markdown Promote

26 ProfitLogic Confidential 26 Case-Pack Optimization I need to buy 50,000 units of a style in pre-packs. What is the optimum configuration of pre-packs for the intended store distribution? LargeMedium Small Assort Allocate Markdown Promote Markdown Promote

27 ProfitLogic Confidential 27 Allocation Optimization I have 75,000 units of a style to allocate to 700 stores. Based on the latest performance of each store, how much should I allocate to each store so as to optimize the inventory balance, and how much should I hold back for a later allocation? Hold Back Pre-allocate Assort Allocate Markdown Promote Markdown Promote

28 ProfitLogic Confidential 28 Promotion Optimization I want to promote a particular item on the front page of my circular, but I’m not sure what my sales lift will be at each of my locations. How much inventory do I need to cover sales for this promotional period, and what will the impact of this promotion be on sales in related categories of merchandise? Assort Allocate Markdown Promote Markdown Promote

29 ProfitLogic Confidential 29 Markdown Optimization I want to liquidate my inventory of a style by a certain date. When, by how much, and how often should I mark it down in order to maximize my margin Dollars? Assort Allocate Markdown Promote Markdown Promote

30 ProfitLogic Confidential 30 Merchandise Optimization creates a merchandising organization that: Focuses on how the customer buys versus how they have bought in the past Uses science to support the art of merchandising Focuses on strategic initiatives versus number crunching Understands and predicts the impact of their decisions on financial performance Manages merchandise across the entire product lifecycle Manages centrally and executes locally Maximizes profitability while managing risk Driving Operational Performance through Merchandise Optimization

31 ProfitLogic Confidential 31 Driving Financial Performance through Merchandise Optimization Right product, right place, right time, right quantity, right price Assortments and pricing tailored to local market demand Fresh presentations Satisfied customers Operational Effects Increase sales 2-4% Increase GM$ 5-15% Increase sell through 10-15% Increase inventory turns 10-15% Increase market share and customer conversion Financial Benefits

32 ProfitLogic Confidential 32 Average Customer Benefits Gross Margin Sell Through 5% - 15% Increase 10% - 15% Increase Inventory Turns 10% - 15% Increase

33 ProfitLogic Confidential 33 Keys to Success Executive Sponsorship Drive the importance of the opportunity, accountability, and long term commitment of the organization Strategy, Process, and Technology Alignment Ensure merchandising processes align with business goals and performance criteria Ensure technology and architecture align with merchandising processes Project Management Stage the implementation to accelerate ROI and manage business process change Manage the implementation and process change on a day to day basis Education Educate all impacted areas on process, technology, and accountability Accelerate user adoption through comprehensive training and support Develop power users to drive continuous improvement and education Performance Measurement Document and recognize success to communicate throughout the organization

34 ProfitLogic Confidential 34 Why Now? Fast Flexible Financial Benefits

35 ProfitLogic Confidential 35 Customer Testimonials “We experience a significant improvement in gross margin dollars, GMROI and sell-through when following the ProfitLogic system’s recommendations.” Andy Cowan Senior Vice President, Director of Retail and Catalog Systems

36 ProfitLogic Confidential 36 Customer Testimonials “Our Merchandise Optimization solution was easy to implement and is simple to use. It’s making our lives alot easier and we’re getting better sales and margins.” Steve Schwartz Senior Vice President of Planning and Allocation

37 ProfitLogic Confidential 37 Customer Testimonials “Our Merchandise Optimization solution delivered significant benefits without causing major disruptions to our organization during implementation. We are now using it as the standard merchandising tool that helps us with promotional price and markdown decisions.” Rose Huerta Vice President of Planning

38 ProfitLogic Confidential 38 Customer Testimonials “It’s not just about merchandise anymore. If you add science to the art of merchandising, you can do two things: minimize risks in the event of a bad buy or economic downturn, and maximize profits if you’re hitting everything head on.” Mike Stanek Chief Financial Officer

39 ProfitLogic Confidential 39 Customer Testimonials “We have a fundamental belief in the value of Merchandise Optimization as a driver of short- term and strategic benefit.” Gary Jones Director of Merchandise Process Management THE HOME DEPOT

40 ProfitLogic Confidential 40 Customer Testimonials “Two key benefits drove the decision to use Merchandise Optimization in the Gap division. We were impressed by the financial benefits and quick return on investment we saw at Old Navy, and we were equally impressed by the seamless integration into our merchants’ current processes.” Tom Cawley Senior Vice President of Finance

41 ProfitLogic Confidential 41 Customer Testimonials “I’m not surprised that ProfitLogic has been voted best in customer satisfaction. ProfitLogic is a great partner that is completely focused on our success.” Tom Nakfoor President of Inventory and Supply Chain

42 ProfitLogic Confidential 42 ProfitLogic’s Mission To help retailers transform their merchandising operations and practices with the help of Merchandise Optimization solutions, resulting in dramatically improved financial results and enhanced customer loyalty. 42

43 ProfitLogic Confidential 43

44 ProfitLogic Confidential 44 Questions? Scott Friend Vice-Chairman & President ProfitLogic


Download ppt "Driving Profitability Through Merchandise Optimization Scott C. Friend Vice-Chairman & President ProfitLogic."

Similar presentations


Ads by Google