Assortment analysis: identifying weak links

The Pareto principle says that 20% of the effort gives 80% of the result, and in relation to the assortment implies that the largest amount of profit (80%) comes from a fairly small group of products and customers (20%). Using the Pareto principle, all inventories can be divided into 3 main categories:

And - especially valuable goods, which make up 20% of stocks in a warehouse and form 80% of sales;
B - goods of average value, comprising 30% of stocks in a warehouse and 15% of sales;
C - the least valuable goods: 50% of stocks in a warehouse and 5% - sales.

Before applying the Pareto principle to product categories, analyze your retail outlet's turnover. To do this, you need to categorize all the parameters and resources you encounter in your operations into groups based on importance and effectiveness. This is especially easy to do using tables. To create them, follow these steps:

· Identify objects that are significant for your business , such as customers (regular, occasional, wholesale buyers, those looking for rare sizes or models, etc.), suppliers (seasonal shoes, exclusive shoes, discounted shoes, etc.), product groups and subgroups.

Determine the metrics you'll use to evaluate the effectiveness of these assets for your store. This could include the sales volume generated by the asset, the total revenue generated by the asset, average inventory, the number of units sold per asset, the number of orders per asset, etc. For example, you analyze sales and see that a certain group of customers purchases the entire size range of a certain shoe every season, another group only purchases a few popular styles, and yet another customer group focuses on a specific brand. Or, looking at the revenue generated, you see that one product group generates three times more profit than another. Create several tables for each such asset and include all its metrics. The numbers might surprise you!

Sort items by importance and profitability for your store. The data in the tables will help you understand which partners are most effective. Don't forget to analyze the relationship between the tables—this way, you might discover, for example, that a certain group of customers buys the entire size range every time, but this doesn't generate the highest profit margin due to their pricing policy. A certain supplier, meanwhile, supplies less popular models, but these are guaranteed to be purchased by regular customers: thus, this supplier's products practically never create inventory.

· After analyzing all the data, matching all the numbers and graphs, go to the definition priority product groups using the Pareto principle.

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How exactly should the Pareto principle be applied to the data obtained from the tables? As noted above, Group A represents the styles and sizes that generate the majority of profit, the suppliers whose products sell out fastest, and the customers who account for the majority of turnover. Therefore, in the final data, the objects in this group are quite easy to identify: the most popular styles in the collection, the most popular sizes, the shoes that best meet customer demand, and the suppliers who offer these products.

The goods of group A practically do not form residues in the warehouse, therefore also look for objects that are sold as quickly and fully as possible. In general, all the products you selected in this group will amount to no more than 20% of the total.

The next most popular products in Group B account for approximately 30% of the comparison tables. These are items that deliver good average sales—items that will likely sell out, but a certain number of pairs may be stuck in stock: sandals will be held over until fall, and a few pairs of boots will be around into spring.

Group C products generate the least revenue, but are more likely to become long-term inventory. These are typically specialized products—shoes for the discerning buyer, extreme sizes, and exotic styles. These products also find buyers, but very slowly.