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METHODOLOGY OF MANAGEMENT OF ASSORTMENT OF GOODS OF COMMODITY DISTRIBUTION NETWORKS

METHODOLOGY OF MANAGEMENT OF ASSORTMENT OF GOODS OF COMMODITY DISTRIBUTION NETWORKS

 

Kiselev V.

Prof.Dr.

Professor of chair of marketing & advertising

The Russian state university of trade and economic. Kemerovo branch.

kisselev.vm@mail.ru

 

Reference: Kiselev, V. Methodology of management of assortment of goods of commodity distribution networks         / V.M. Kiselev //Achieving Commodity & Service Excellence in the Age of Digital Convergence.- The 16th Symposium of IGWT.- Korea: Suwon, 2008.- Proceeding Vol.1.- P. 397-402   

 

 

The article present methods of building and management of assortment of goods in commodity networks, integrated according to the corporate principle. It also suggests quantity and quality criteria of building the assortment of goods, which will allow to increase sales efficiency of all branches of the distribution network. It defines methods of management of the assortment matrix, adequate to the size of the floorspace of the sales area and locations of remote branches of the distribution network.

Assortment of goods, efficiency management, efficiency criteria, assortment building method, assortment matrix.

 

Assortment building methods


One of the approaches that is applied by cutting-edge companies of the industry towards assortment building and management is development of so-called assortment matrixes, which represent a formalized structure of the assortment list of goods and their quantity ratios, linked to specific sales location. At the same time, the noted administrative initiatives are of exclusive local nature, relevant for goals of individual integrated participants of distribution network, measures of protection of commercial interests of enterprises. As a result of that, methodological approaches, that ensure the efficiency of discussed activities are not considered in the available sources of information, and for this reason can not be recommended for broad commercial practice [1].

 


Assortment matrix

The suggest term reflects a contemporary meaning of the assortment matrix, as a methodological tool, used in assortment management. For the purpose of this work, assortment matrix means qualitatively and structurally built assortment list of goods, which maximally meets the requirements of product distribution planners in achieving the efficiency and sales results of peripheral structures of horizontally integrated distribution networks.

Method of achievement of economic efficiency of the assortment

The article suggest efficiency criteria in the considered area of expertise: quantity criteria (content and structure of the assortment matrix, the quality of its constituent goods and their price level) and quality criteria (planogram of sales proposal in connection to shop fixtures and equipment required for product demonstration, optimization of the buyer’s route, product purchase procedure and logistics of the stock of inventory).

Quantity efficiency criteria

Quantity criteria of the assortment matrix are its most important «indicators», reflecting the efficiency of the assortment structure in view of the target buyer audience of the specific sales location, surrounded in its turn by specific competitor environment.

Assortment matrix content – product distribution on the Diagram-of- organizational –buying- decision -making process: buyer perceived value of the product according to its market strength.

Priority area of the distribution network, as shown on the Illustration 1, demonstrates reaching the best competitor position in the coverage area (the size of which is determined based on the best competitor proposal, available in the specified market) for any of the represented product category of the given assortment, for each selling location of the distribution network. The area, called standard proposal, represents structural proposal of products (trade marks, stock numbers and categories), according to their quantity and quality, consistent with the competitor proposal in the coverage area (the size of which should be determined based on the nearest competitor environment) of each location of the distribution network. The area, identified as minimal proposal, reflects the part of the assortment matrix, which represents only the basic product proposal, relevant to expectations of buyer audience in the coverage area, the size of which is determined based on the walking-distance (15 min.) and automobile distance (30 min.) accessibility.

Assortment matrix, developed on the basis of the Diagram-of- organizational –buying- decision-making process, has to meet the following requirements:

  •  It has to offer target buyer audience a full variety of products according to their expectations with the help of sales proposal for each specific sales location;
  • It should be balanced in terms of compliance of economic results from trade business on each specific selling location against operational costs of product distribution;
  • It has to be an understandable proposal for the target buyer audience;
  • It has to be dynamic, and constantly renewing proposal (kaizen -approach), compliant with market changes (merchandise manufacturing, buyer purchasing power, size and structure of buyer demand, competitor proposal). Assortment renewal ratio  is declared as one of the factors of competitor advantages.

Assortment matrix structure – quantity ratio of products that belong to different levels of the assortment hierarchy system.

Product quality – is the basis for inclusion into the assortment matrix of stock inventory numbers, categories, trade marks (if any). The priority of product quality selection and product safety is based on the value for money ratio, that each specific target buyer audience develops based on their consumer experience. It should be noted, that the priority parameter, determining product inclusion into the assortment matrix, is high product safety or overrun of the value for money ratio of middle-market products.


Product price level – is selected based on the diagram of retail price and the amount of inventory items (belonging to the same product category, trade marks, types and product variations), as shown on Illustration 2, based on which the following parameters should be identified:

  • A2 – products of this category are targeted towards buyers, who are loyal to (or prefer) specific trade marks of high emotional level. Having said that, the decision to include specific goods into the assortment matrix and justification of their quantity is determined based on the variation of abovementioned preferences (quantity and quality), as well as availability of the competitor proposal in the coverage area, the size of which is determined based on the nearest competitor;
  • B3 – the main part of the product proposal is targeted towards buyers who greatly appreciate value for money ratio in the sales proposal, which exceeds competitor sales proposal in the coverage area, the size of which is determined by walking distance (15 min.) or automobile distance (30 min) accessibility;
  • C4 – a large part of the sales proposal, targeted to attract a wide range of consumer segment, for numerous purchases and various types of products, exceeding competitor proposal in the coverage area the size of which is determined by the best competitor proposal in specific local market.


D1 – products of this segment allow the buyers, who do not have other expectations rather than functional product properties, to purchase in sales locations economically efficient products in each product category within the same coverage area, the size of which is determined based on the best competitor proposal in specific local market;

Efficiency parameters of assortment management from the point of view of the price criteria of the assortment matrix has to be selected as follows:

  • Structure of the assortment matrix has to guarantee to the target buyer group a variety of products in various price categories;
  • Each product category has to have product-indicators, which demonstrate  «best price» level in the coverage area. The question of economic efficiency of selling these products, is related to the quality criteria, such as product purchase from manufacturers at special price, lowered to the minimal level, for example, due to producer cut of marketing costs in favor of simpler packages and development of private trade mark in the distribution network etc.


Quality efficiency criteria

Quality assortment matrix criteria have to reflect regulation of management processes, accompanying product distribution within developed  assortment matrix. The following criteria should be selected for this purpose:

  • Planogram of sales proposal linked to the selling fixtures and equipment, required for product demonstration;
  • Optimization of buyer route; 
  • Procedure of product purchase;
  • Logistics of merchandise management.

Planogram of sales proposal is linked to sales equipment, required for product demonstration. It is developed on methodological basis of contemporary merchandising concepts (categorical and virtual) [5]. It should be noted, that these planograms should be flexible to the changes in structure and size of the assortment matrix, as well as to technological innovations of product, marketing and logistical nature, in order to supply maximum competitor advantages to the sales location. Such methodological approach to product assortment management will allow the most efficient introduction of the developed assortment matrix in view of the actual parameters of the sales location (location, competitor environment, size and configuration of the floorspace). This, in its turn, will help optimize product distribution performance indicators (product turnover speed, size of the product turnover, and product markup, unit rate turnover from one unit of product resources, such as floorspace and sales personnel).

Product purchase procedure – is the central aspect of the product assortment management, addressed with the help of the developed assortment matrix. This criteria suggests the use of techniques (procedures), that ensure economic efficiency while purchasing the products, included in the assortment matrix. The basic parameters of such procedures must include the following principles of building the product assortment: building product categories, regulatory forecasting, development of partnership relationship with the participants of distribution network channels, knowledge and understanding of the demands of the participants, ability to reach their parity and technological intensity of  product turnover [2].

In order to ensure the required level of assortment management process efficiency, the following two conditions should be met during purchasing process within the framework of the assortment matrix.

  1.  Separations of the spheres of responsibility and functional competency of purchase agents of the central chain of the distribution network and supply managers of its peripheral chains. Observance of this condition will allow to reach the expected assortment management result. It has been proved, that suspension from order-supply process (negotiating terms and conditions of the product supply)  of peripheral managers of the distribution network (who have a financial interest) will allow to reach the desired terms of the product supply, which will ensure the required competitor advantages for sales locations of the distribution network without any exceptions. The sphere of functional competency of supply managers (merchandisers) of peripheral chains of distribution network must include only operational tasks, for example, creating and filing supply orders, accepting products based on the quality and quantity, control over product stock;
  2.  In regards to the product supply, the priority in the purchase process should belong to the establishment and management of partnership relationship on all levels of vertically integrated supply chain: suppliers to manufacturers – product manufacturers – product distributors (is such are assumed by product distribution channel) – distribution warehouse (if such is implied by the structure of the product distribution channel) – sales locations. This condition should be met in view of competitor advantages in order to reach the minimal purchase price of the product.

Prevention of negative elements

The key element, required to achieving this criteria of the assortment matrix – is personnel of peripheral chains of the distribution network, involved in the acceptance of the product, that should accomplish the following four functions:

  • Identification of products, supplied to sales locations with the help of digital scanning technology and bar codes, specified  on the labels;
  • Re-calculation of the amount of front-end space and the amount of product in each spot;
  • Identification of manufacturing date by verification of the date on the product label and labels on the transport packaging;
  • Ensure product safety during quality and quantity assessment that takes place at the time of the product acceptance.

OLAP

The decision to accept or to return the product to suppliers (fully or partially) is made based on the OLAP method, which is an on-line analytical processing, which is based on the use of resources of the main server, linked to the computer network of remote computers of peripheral chains. The process implies real-time analysis of abovementioned parameters of supplied products. The decision is made based on this analysis (supply parameters) — full or partial acceptance of the supplied product batch, or decline of the acceptance in case of incompliance with the actual supply parameters with prescribed values. The key success factor of the described criteria of the assortment matrix is the speed of the decision making process and the objectiveness of this decision, or in other words, its independency from negative initiatives of suppliers and accepting agents. As a result of OLAP, a new invoice is printed in the zone of product acceptance, which does not require an additional expertise in terms of product price compliance with supply parameters, specified in the supply procedure. This version of the invoice (front-office) is automatically sent to the central server of the distribution network (for example, accounting office). With such a methodological approach, suppliers only have to approve the front-office version of the invoice, and verify it with a stamp  and signature.

Logistics of merchandise management 

In order to simplify refill ordering procedure, we suggest supplier merchandise management method that is regulated by the supplier. Supply management should be done based on the ERP-system (Enterprise Resource Planning). With the help of this informational system, suppliers receive messages (with the help of Internet, Intranet, paging system, etc), notifying them that the stock level of a specific product in specific location has reached a prescribed value, at which the stock should be re-filled within the time and in the amount, specified by the procedure. Violation of these parameters, approved by both parties of the supply procedure, will lead to automatic sanctions, imposed on the supplier, based on the terms and provisions, approved by the parties in the product supply agreement.

Working with assortment matrix

Many managers believe that by building the assortment matrix they have already accomplished the task of creating the best and most efficient assortment. However, it should be supported by analysis and regular revision and assessment of the assortment matrix. The crucial factor of company’s success as well as the basis of its business strategy should be effective management of product portfolio, and not just its description.

Assortment matrix challenges

The analysis of commercial practice of assortment management in distribution networks in the Russian Federation by using assortment matrix method, allows to make the following conclusions:

  1. Thus, the difference in location of various remote branches suggests differences in the existing parity of FMCG category product supply, predetermined by various supplier approaches of this category to penetration into various geographical segments, that are home to the branches. For this reason, the same suppliers will have different shares in the structure of the assortment list of the given branches, which is not taken into the account in the assortment matrix, designed in the central office of retail network. The latter, in its turn, will fall short meeting customer expectations, will lose customer loyalty and will show smaller product turnover and branch profit.
  2. The difference in the size of the floor-space will lead to the inconsistency of quantity (content and structure of the assortment structure) and quality (planogram of sales proposal). As a result of the abovementioned inconsistency the design economic efficiency of the matrix will decline due to vacant floor-space (in cases, when floor-space of the remote branch exceeds the size, built into the assortment matrix), or, vise versa, over-saturation of the resource (in case the floor-space of the remote branch is less than what’s built into the assortment matrix).
  3. Differences in buyer habits, as a rule, are reflected in consumer demand structure. In retail marketing practice this phenomenon is identified as «narrow-minded patriotism», which reflects increased interest of local buyer audience to products, manufactured in the geographic segment, that is home to sales locations. Designed structure of the assortment matrix does not make provisions for this phenomenon. It is effected, on the one hand, by economic criteria, and on the other hand, organizational constraints. Ultimately, the buyers of the remote branch are deprived of the opportunity to purchase goods that are popular locally. They stop showing loyalty to the selling location, while the remote branch looses profit.

Solutions to the problem

These disadvantages of the abovementioned matrix approach of assortment management in retail network, challenge the economic efficiency of this method. In order to eliminate the abovementioned disadvantages, matrix method of assortment building and management includes such parameters, that make provisions for three abovementioned disadvantages.

Taking into account the difference in location of various remote branches

Efficiency indicators of the assortment matrix must take into account the difference in location between various remote brunches in such a way, that the sum total size of product turnover of braches, located in the most favorable geographical locations, may significantly differ from the least favorable locations. This issue could be addressed via application of adjustment coefficients to the estimation of assortment matrix content (as a whole and also to some of its structural parts). These adjustment coefficients have to make provisions for integral buyer activity in various geographic locations.

During the calculation of the assortment matrix content value in remote branches of distribution network, the base value should be adjusted by coefficients, depending on the location of the town or village, that is home to the remote branch (К1), location of the branch itself in town (К2), as well as the size of the floor-space (К3) according to the formula 1:

Нi = Нб * К123   (1),

Where: Нi – assortment matrix content for i- remote branch;

Нб – value of assortment matrix content, calculated per 1 m2;

With that, К1  coefficient is recommended  within 0,8 — 1,5 range; the value of К2 is recommended from 0,8 (for regions with low buyer activity) to 1,8 (for regions with high buyer activity); К3 coefficient has to make provisions for the adjustment of the base profit, estimated per 1 m2 of the floorspace and is recommended from 1,0 (for small floor-space of the selling area, with less than 25 m2) to 0,5 (with average size floor-space, exceeding 500 m2).


Taking into account different floor-space sizes of remote branches

In case of the significant reduction of spreading of the assortment matrix against its base content value, preserving the structure of the matrix becomes especially significant. At the same time, large reduction of various functional parts of the assortment matrix will lead to uneven reduction of its parts, since small parts will be reduced to lower than one value, while larger structural parts will keep full numeric value. In order to preserve competitor advantages of the assortment matrix, it is reasonable to use the exponential correlation of the reduction size of structural elements of the matrix depending on their content. In that case, the size of smaller parts of such matrix will remain 1:1, while the size of larger parts will be– 1:10.

Taking into account the difference in consumer habits of various remote branches

The share of product categories, that obtained loyalty of local consumers, that is not a characteristic of other brunches of the same distribution network, should amount to 15% from the total quantity of the product assortment. This value should be deducted from the total number of inventory items of the assortment matrix. The excess should be divided according to the size of the reduction.

 

References:

  1. Киселев В. М., Мазанько Е. И. Управление ассортиментом товаров: учебное пособие.- Кемерово; М.: Издательское объединение «Российские университеты»: Кузбассвузиздат-АСШТ, 2006
  2. Киселев В. М. Теоретические основы концепции паритета потребностей и методологии формирования ассортимента товаров // Эксклюзивный маркетинг, 2006.- №3.- С. 32-42
  3. Киселев В. М. Методология управления ассортиментом товаров в интегрированных торговых каналах  // Управление каналами дистрибуции, 2006.- №2.- С. 120-130
  4. Киселев В. М. Управление ассортиментом: маркетинговый и товароведный подходы (монография).- Объединенное издательство «Российские университеты», М.-Кемерово.- 2004
  5. Киселев В. М., Парамонова Т. Н., Казанцев А. А. Визуальный мерчандайзинг: теория и практика визуальных коммуникаций в товаропроводящих каналах: учебное пособие.- Изд. 2-е, перераб. и доп.- Кемерово; М.: Издательство «Российские университеты»: Кузбассвузиздат-АСШТ, 2007

 

Киселев Владимир