Assortment Control is the activity of ensuring that the merchandise carried by the stores at any given point of time is in line with the planned assortment. In addition, this activity also looks into taking newer trends in assortment into account.
Controlling merchandise assortment involves both the monitoring and adjusting the types of SKUs that are added and dropped from the merchandise mix. Merchandise support control regulates the flow of product units within the retailer’s inventory system. The two main components of an Assortment Control system are Inventory turnover method and Open-to-buy system. These two systems are explained as follows:
Inventory turnover
This is the rate at which the retailer depletes and replenishes stock. In more specific terms, this is defined as the number of times during a specific period (usually annual) that the average stock on hand is sold. The mathematical formula is expressed as follows:
Inventory Turnover = No. of Units sold / Average stock on hand (units)
Average stock on hand is calculated for a defined time period (usually annual) by taking stock counts at various intervals and taking their average.
The benefits of high turnover are as follows:
- Fresher Merchandise
- Fewer Markdowns and Less Depreciation
- Lower Expenses
- Greater Sales
- Higher Returns
Whereas, the limitations of high turnover are as follows:
- Not taking full advantage of available quantity discounts.
- Adding to the costs of transportation and handling
- Increase in accounting cost due to processing of too many orders
Unit Open-to-Buy
Unit Open-to-Buy is the amount of new merchandise the retailer can buy during a specific time period without exceeding the planned purchases for that period. This represents the difference between what the retailer plans to buy and what has already been bought – planned purchases minus the planned commitments.
This method is most frequently used in controlling the inventory of staple merchandise. This method lends itself to the formal and systematic procedures for reordering merchandise that has well-established and predictable sales trends. These calculations involve the following two steps:
- Step 1: Determine the Maximum Inventory: Maximum Inventory is the number of units that the retailer needs, to cover expected sales during the re-orders and delivery periods plus a safety stock for either unexpected sales during the reorder and delivery periods plus a safety stock for either unexpected sales or problems in obtaining the product. The formula for calculating the Maximum Inventory is as follows:
Max. Inventory = {Reorder period + Delivery period}{Rate of sales} + {Safety Stock}
Here, the Reorder period is the Time Interval between the scheduled place of orders (e.g. number of weeks). The Delivery period is the amount of time between placement of an order and its arrival in stock ready to be sold (e.g. number of weeks). The Rate of sales is the number of units expected to be sold during the specified time period (e.g. on a weekly basis). The Safety stock as described above is the number of reserved units needed to cover any unexpected sales or delivery delays (e.g. a three-week supply).
- Step 2: Compute Open-to-Buy: Maximum inventory represents the number of merchandise units the retailer is open to buy if there is no stock on hand or on order. Unit Open-to-Buy is thus, defined as the maximum inventory minus the stock on hand or on order. The formula for calculating the same is thus:
Unit Open-to-Buy = Maximum Inventory – {Stock on hand + Stock on order}