1. NEXT Back of the House: Inventory Modeling

2. Contents Introduction Annual PlanningEstablishing Model StockTake Aways 3 12 17 35 2

3. How long have you been in run specialty? 3

4. 4

5. The Goal A model inventory, by size and month, for the top 40 men’s and women’s footwear SKUs that maximizes profitability while minimizing out of stocks. 5

6. Sample Category Distribution-Month 1 6

7. Sample Category Distribution-Month 2 7

8. Month 1 8

9. Month 2 9

10. 10

11. 11

12. Retail Planning Cycle 12

13. Retail Planning Cycle Strategic Planning Category Strategy Merchandise Financial Planning Assortment Planning Purchasing In-Season Management Evaluation Space, Merch Planning 13 Marketing Plan

14. Retail Planning Cycle Strategic Planning Category Strategy Merchandise Financial Planning Assortment Planning Purchasing In-Season Management Evaluation Space, Merch Planning 14 Marketing Plan

15. Annual Planning: Footwear 15 Model stock by month, by style Monthly model inventory by model and size Model Stock by StyleFootwear Sales Plan Total Monthly Sales in $, Units Turn Target Footwear Category Plan % of Sales by Category Styles carried Turn target by category Monthly Sales and Inventory Unit and $ sales by month by category Target inventory by month by category Determining a model stock at the style level requires establishing an overall sales and category plan to ensure appropriate inventory at all levels.

16. Inventory Management Considerations: Footwear 16 Super Performer (>24/month/door) : “A” Styles Eliminate out of stocks At least 2 color options in core sizes (9-12, 7-10), multiple widths Minor in-season adjustments Two deliveries/month Core (>8/month/door): “B” Styles Eliminate out of stocks 2 color options in four middle sizes Future based on past performance Fill or correct based on current performance Secondary (>2/month/doors): “C” Styles Limit out of stocks in middle sizes 1 color option, 1 width Do no fill in last 2 months of life No recurring futures, actively manage to model stock Only fill in middle sizes, accept special orders on periphery sizes Specialty Manage based on lifecycle, accept out of stocks at end of life Accept special orders Fill in as needed in core sizes Do not fill within 3 months of change except in middle 2 sizes

17. Determining Model Stock 17 6 Months of sales for top 40 models in each gender 2 Inputs Sales plan by month and category 1 Range of unit sales by model and size 2 Outputs Classification by model 1 Size Run and Confidence by classification (A,B,C) 3 Model Inventory by model and size for the month 3 Projected inventory $, Sales $, Margin $, GMROI, and swap sales/special orders by class and gender 4 Projected sales, swaps/special orders by model, size, and category 5

18. Input: Annual Sales Plan 18 Monthly Sales $, Margin $ prior year Monthly Margin %, Sales % Total Sales 1 2 3 1 2 3

19. Input: Category Distribution 19 Gender % of sales Category % of sales (for each gender) Average Price by category 1 1 2 2 3 3

20. Input: Top 40 20 Brand, Model, Category, Units Sold, and Unit Cost for each of your top 40 styles within each gender 1 1

21. Input: Size Runs 21 Sizes stocked for each class and gender 1

22. Running The Model 22 Select a month from the drop down menu. Press “Run Simulation”. 1 1 2 2

23. Output: Totals 23

24. Output: Totals 24 >Inventory at Cost >Projected GM $ >Projected Turns >Projected GMROI >Sales $ >Projected Missed Sales, Switches, Special Orders >Inventory at Retail

25. Inventory Distribution 25

26. Output: Model Inventory 26

27. Customizing Size Runs Scenario 1 >Full size run in all classifications >Women’s 6-12, Men’s 8-14 Scenario 2 >Tapered Size Run in “B” and “C” classification >A: Women’s 6-12, Men’s 8-14 >B: Women’s 7-11, Men’s 9-13 >C: Women’s 7.5-10, Men’s 9.5-12 27

28. Effect of Size Runs 28 >Total Inventory @ C: $240,289 >Turns: 3.39 >GMROI: 2.67 >Total Inventory @ C: $191,397 -20% >Turns: 4.26 +26.5% >GMROI: 3.35 +25.4% Scenario 1 Scenario 2

29. Output: Missed Sales Example 29

30. Output: Missed Sales Example 30

31. Output: Size Range Tool 31

32. Output: Size Range Tool 32

33. Output: Size Range Tool 33

34. Output: Size Range Tool 34

35. Logic without the tool 35 >Segment styles into A, B, C classifications based on sales volume >Specialty styles are managed independently Segment >Determine size run for each classification, tapering the sizes carried to reduce stock in shoulder and fringe sizes in B and C styles >Sufficient inventory in A and B styles will ensure that customers always have an option in each category, in each size offered Size >Maintain sufficient inventory to achieve near 100% in stock of all “A” styles >Special order B and C fringe/shoulder sizes as necessary >Cut off orders at least 1 month prior to update for “A” and 2 months prior for “B” styles >Place single future orders for “C” styles to establish initial inventory and manage A/O >Train staff to be knowledgeable in segmentation and size availability to facilitate swaps and appropriate customer service Maintain >Implement annual and season planning cycle including category strategy and assortment planning Plan

36. Follow up >Model and presentation available online. >TheIRRA.com >KarnanAssociates.com >Model Webinar >A 30 minute webinar will be scheduled during December to demonstrate how to load data and run the model. We’ll send details to the IRRA listserve. >Questions, Comments >Parker@KarnanAssociates.com >David@KarnanAssociates.com 36

37. Appendix 37

38. Effect of Size Run Tables 38 Scenario 1 Scenario 2

39. What Exactly Is It Doing? 39

40. Strategic Value Strategic value What category is this model in? How many other models are in the category? Will we carry close substitutes? Is this a model we carry in widths, multiple colors, or fringe sizes? Size Run Minimum size run of 5 Can we justify carrying additional sizes? For fringe categories, we can’t offer all options in all sizes. Updated Schedule Cut off replenishment with the goal to sell down before model is updated Maximum of 1 month of supply when the new model arrives 40

41. Franchise Styles Program Monthly Metrics Exceed Targets Important but dangerous Fill or kill Calendar is king Niche products Fill in to model stock Keep Specialty Special Strategic products Taste and chase Continually reassess Product Selling Behavior Change Volume Low High Low High 41

42. Category Strategy 42 Define Category Define Role Evaluation and Scorecard Strategy Tactics Evaluation What does the category specific include? Ex: Running Shoes includes all running footwear for men and women. Excludes kids and casual shoes. Traffic driver, convenience, destination for seasonal purchases, a one- stop-shop. Retailers may assign different roles to categories within their stores depending on the customers they want to attract. What are the metrics and KPIs that will be used to measure the category? What is the category’s current performance? What are the goals for the next season? What specific actions will we take within this category to meet its goals? Ex: 1 feature per month in the newsletter for a new accessory. Ex: Give 75% of customers a new pair of socks for try-on. How is the category performing? Were the goals met or exceeded? What tactics were successful? Where was growth or decline above or below expectations? How will the goals and objectives be met? Ex: Expanding the number of SKUs and brands within bras to grow it into a destination.

43. Category Strategy Template 43 Areas of GrowthAreas of Decline LYTarget Sales GM % Turns Category Definition and Role StrategiesTacticsKey Needs

44. In-Season Management: Keep, Kill, or Chase? Objective of in-season assortment and management is to identify: >Solid performers to keep >Low performers to kill >Best performers to chase 44

45. Inventory Management Process 45 Department Category Class SKU Size Footwear Accessories Apparel Inventory versus my target/ideal? Increase or decrease based on the sales plan? Women’s Footwear Men’s Apparel Nutrition Inventory versus my target/ideal? Am I under or over allocated? Which category (ies) do I need to investigate? Men’s Stability Shoes Women’s Tops Is the allocation correct? Which classes are over/under performing? Increase or decrease a class? Am I positioned for success for the month/quarter/season? Women’s Adrenaline Men’s Sherpa Short Mint Chocolate GU Over or under the model inventory? When is the SKU retired/replaced? Women’s Adrenaline 8.5 Men’s Sherpa Short M Mint Chocolate GU 6- pack Complete size runs? Adequate inventory in middle sizes? Across the class, and category, are there sufficient options to meet customer needs?