“Managers complain that there is nothing to sell, and the money for the purchase of the next consignments of goods is ‘tied up’ in illiquid positions accumulated in warehouses …” Is this a familiar situation? Then this article is for you. Oleg Afanasyev and Nikolay Inyakhin, founders Interim Business Association (USA, Poland, Ukraine, Belarus, Kazakhstan), talked about how distributors can increase the marginality of their brand portfolio and what results can be achieved with the help of competent assortment management…
Together with the Interim Business Association, we continue the rubric “Management of the company in times of change.” This section is published weekly on Wednesday. In them you will find useful information and practical advice on management.
You can find out if your company needs help in organizing more effective management right now using express diagnostics through a special bot or by going through diagnostics on the website.
Oleg: Assortment management of a trading (distribution) company belongs to the category of managing the key factors of competitiveness. After all, it is on the relevance of the assortment that the reduction of company risks, an increase in profits, as well as the efficient use of the company’s resources depend.
A properly optimized assortment provides the company with a leading position in the market. In simple terms, the purchased product must be sold in a short time with the planned margin. We suggest looking at the root of the problem.
The problem of spontaneous procurement
Nikolay: In our practice, we noticed that, having outsourced purchases to hired brand managers and category managers, company owners most often lose control over their activities without going into details.
But after all, without defining the boundaries of the assortment policy, they mainly participate only in negotiations with suppliers at the final stage, before signing a contract. In these negotiations, of course, they try to bargain for the best conditions, and then they transfer the initiative in operational purchases to their subordinates, without fully explaining all the nuances of the transaction and the results expected from it.
This is where the first problems with marginality begin. We signed good prices, but did not agree on the assortment of categories A and B. As a result, we received a full set of goods, including those with a large number of SKUs (product item identifier) of category C and below.
In everyday work, there are many nuances that performers who are not immersed in details can miss. It’s not even their fault. It’s just that the company does not have an approved assortment management methodology, when each purchase of any SKU is carried out only on the basis of an ABC analysis of its sales.
As I said, this problem most often occurs in distribution companies and least of all concerns retail chains in which purchases are based only on ABC analysis.
It is especially difficult to manage the dynamics of marginality when there is no automation of business processes, and the company distributes a large assortment of goods, where category managers simply cannot physically keep track of each SKU (item in the assortment).
As a result, a large amount of illiquid goods is collected in the company’s warehouses and autoflows are quickly formed.
(Out-of-stock – lack of hot goods in warehouses and on shelves. – Approx. ed.). Sales managers and sales representatives complain that there is nothing to sell, and the money that should be freed up to purchase the next lots of the desired product is “tied up” in illiquid positions that hang in warehouses.
As a result, cash gaps are formed, which are already a headache for the financial service, which is called upon to monitor the correct turnover of funds. And this is already a problem for the entire company.
Assortment management strategy
Oleg: The answer to this problem can be a clear policy for managing the assortment matrix, based on certain rules set by the owner of the company or his representative represented by the executive director.
The strategy of restoring order in procurement has several stages, which in turn relate to various divisions of the company:
1. Adoption of a classifier of assortment positions on the basis of liquidity-marginality. The main focus should be on products that sell quickly with high margins (marketing department).
2. ABC analysis of the structure of the purchased goods. Subsequent purchases are made based on the speed of sales. First of all, we buy goods with a high sales rate A and B. To them for the assortment we can add goods of category C and below (purchasing department).
3. Determination of the optimal inventory turnover ratio, taking into account the speed of sales. In the warehouse, we keep a stock equal to the monthly sales plan + stock, taking into account the delivery schedule for the next batch of goods from the manufacturer or supplier (marketing department).
4. Creation of a commodity matrix, taking into account the norms of the commodity stock for each SKU. Determined based on the speed of sales and the turnover rate of the inventory (purchasing department).
5. Refusal to purchase low-margin and low-liquid goods based on the ABC analysis. We negotiate with the manufacturer / supplier in the context of current sales by SKU (purchasing department).
6. Development and implementation of the KPI system of the sales team, taking into account the priorities of the product matrix. We motivate the sales department to sell according to the priorities of the product matrix (sales department).
7. Setting goals and sales plans within the approved KPI system of the sales department, taking into account the priorities of the product matrix in pcs. by SKU (sales department).
8. Control of category managers in the matter of maintaining the inventory in accordance with the approved for the period of the commodity matrix and the speed of sales. We compare the shipment and availability of goods in the warehouse / in the store (sales department).
9. Predictable planning of the procurement budget. We compare the plan and the fact of sales in the context of SKU (financial department).
10. Control of timely payment for the delivered goods. We analyze the volume of overdue loans to the volume of sales for the current period and stop shipments to customers with overdue loans (sales and finance departments).
11. Analysis of the dynamics of the gross marginal income of the company (finance department).
12. Search for new suppliers producing high-margin liquid goods (marketing department).
13. Periodic revision of the product matrix in order to increase its economic efficiency (marketing department).
14. Exclusion from the portfolio of category C items (low-turnover and low-margin SKUs imposed by suppliers “in load” and to “maintain the assortment” as a prerequisite for concluding an exclusivity agreement) (marketing department).
What results will the company lead to by competent assortment management?
Nikolay: With the right approach and implementation of the above strategy, we get conscious management of the dynamics of the company’s marginal income. As we said, this is one of the key factors that affects the profitability of a business.
Here are some different real-life examples:
1. Automotive business. The dealer convinced the manufacturer that in his territory he should sell only four running models from the entire large model range. As a result, he reached the ideal turnover ratio (1.5) thanks to correct negotiations with the manufacturer, and not discounts for customers, and received the planned profit.
The product turnover is the time for which the product is sold, i.e. the funds invested in the product are returned with a profit. One of the important characteristics, using which you can:
- Increase profits by optimizing the assortment (identifying products that “turn around” faster within one category or one brand)
- Reduce the amount of the warehouse by optimizing the frequency of purchases (replenishment of stock) and the quantity of purchased goods
- Assess the feasibility of purchasing a particular product, subject to taking out a loan.
The turnover of goods can be calculated in days (turnover period) or in times (turnover ratio). For example, according to the formula: K.Ob = TO / Avg.TZ, where the turnover ratio (K.Ob) is the quotient of the turnover (TO) and the average stock (Avg.TZ). In this case, the turnover rate determines how many times the product has turned around (was sold) during the period you selected.
2. Business in the field of FMCG. The distributor trades high-margin goods with high turnover and a small amount of SKU (tea / coffee). He decided to increase his income and introduced an additional product group. The new assortment had low margins and turnover compared to the tea and coffee assortment, high competition on the shelf and a limited shelf life. Additional sales staff were recruited to promote it.
As a result of these actions, the distributor’s overall margin decreased, the inventory turnover period increased, and accounts receivable increased. In addition, there is also an expired product that needs to be disposed of.
3. Distribution of the products of the world food manufacturer. The global manufacturer supplies distributors with assorted products with different turnover periods. ⅔ of the assortment belong to category A and B, the rest – to category C and below.
The global manufacturer deliberately goes to this in order to maintain its share of the shelf in each category. It reimburses distributors for low-turnover SKUs in their assortment, and also pays for incentive marketing activities to promote them. As a result, the distributor’s marginality does not decrease, and the low-turnover assortment is implemented as planned and does not affect the efficiency indicators that the manufacturer measures.