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The Power of Optimization
Discussion Points
• Tween Brands Overview
• The Science of Optimization
• Markdown Optimization
• Implementation
- Go Live Process
- ROI
• Merchandise Life Cycle Optimization
Who is Tween Brands, Inc?
World Class Brand for the “Tween Girl" ages 7-14
The Tween Girl
The Tween Girl
• Highly diverse segment of the population
• Influences include:
− Parental Guidance
− Media: movies, music, books
− Pop Culture and Celebrities
− Technology: I-pods, text
messaging, computers
− Peers
− Sports
Who is Tween Brands, Inc?
• Only Retailer exclusively for Tween Girls, delivering
the hottest Fashion Apparel, Lifestyle, Accessories and
Personal Care products for her.
• Over $1 Billion in Sales in 2007.
• Currently 2 Brands:
– Limited Too: Aspirational market
– Justice: Moderate Tier market
• Multi Channel: Stores, Catazine, Web
− 585 Limited Too Mall Based Stores - USA
− 300+ Justice Off Mall Power Centers - USA
• Approximately 3500 Selling Square Feet
− International Franchised Stores
− Each Brand delivers 13 catazines/year, along with other direct
mail pieces.
Who is Tween Brands, Inc?
• Offices & Distribution Center in Columbus, Ohio USA
• Vertical Retailer
− Internally designed, proprietary branded merchandise
− Separate Design, Merchandising, Planning, Allocation,
Marketing and Finance teams for each brand
− Product is sourced via 2 Direct Sourcing offices in Asia, along
with external sourcing arrangements
The Art and Science of Retail
The Science of Optimization
Simply put, Optimization is the process of
choosing the permissible actions that result in the
best outcome.
Optimization technology utilizes modeling, analytics,
predictive demand forecasting and problem solving
capabilities to build decision support solutions aimed
at identifying the best, most profitable strategies for
a business.
The Science of Optimization
Transforming the Decision Making Process
• Pre Optimization:
–
–
–
Intuitive
Emotion based
Experience-oriented dependant
• Post Optimization:
−
Fact Based
−
Structured
−
Consistent
−
Repeatable
−
Adaptable
Merchandising Life Cycle Optimization
• Assortment
• Forecasting
• Revenue
−
Initial
−
Markdown
• Size
• Space
What is Markdown Optimization?
Markdown Optimization is an analytical, factbased approach to Markdown Management
•
The Goal is to maximize Gross Margin $’s on inventory by
using analytics to recommend price moves
•
The objective is not to spend more markdown dollars, but
spend what you have more strategically. Take markdowns on
the right items, in the right zones, to the right depth, at the
right time
What is Markdown Optimization?
• System leverages goals and constraints as set by business
• Comprehensive and systematic evaluation of all items
(Style-Color) in all Price regions
• Objective, fact-based perspective on demand and
inventory goals
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Goal Of Markdown Optimization
The goal is to maximize GM dollars over the entire
lifecycle, not just during the full price selling period.
How MD Optimization Works
Simplified Example
Sample Item:
Knit Top
Total quantity purchased:
10,000 units
Quantity sold to date:
Forecasted Unit Sales for the item
(Based on base demand for the category and
planned promos for the item)
2500 units
4500 units
Total Projected Sales Units (without markdowns)
7000 units
Sell-through target: 90%
9000 units
Projected unit shortfall:
2000 units
Optimization will explore every possible combination of markdowns over the
remaining life of the item, within the constraints of the specified business rules,
to find the most profitable way to sell the “shortfall” of 2000 units.
Result: The markdown recommendation for the appropriate week that
maximizes gross margin dollars while meeting the sell-through target of 90%,
or 9000 units.
Implementation Process
• Executive Buy In and Sponsorship
• Leadership Team Support
– SVP of Stores
– General Merchandise Manager
– IT
– Marketing
– Merchandise Planning
• Compilation of Data & Development of Forecasting Models
• Weekly Process and Status Meetings
– Develop Business Rules and Processes
• Testing
Set up Business Rules
Ensure that the recommended markdowns support
business’s approach to In-Season Price Management and
Inventory Goals.
Constrain the engine’s choices and proposed markdowns
• Key Considerations:
–
–
–
–
–
–
–
Exit Date
Sell Through Target
Item Start Date,
No Touch Periods
Maximum Number of Markdowns
Markdown Calendar
Price Ladders, Minimum/Maximum % Off
Too Made More GM $ Through More Precise MDs
•Markdowns on the Right Items
– Optimize markdowns at the Style/Color level
• Markdowns by Price Zones
– Optimize markdowns for 8 Price Zones. Climate, Volume and
BTS Peak Week
• Markdowns to the Right Price Points
– Markdowns will be stickered to specific price points – no more
“% Off Redlines”, using default price ladders
• Markdowns at the Right Time
− Because you can get the biggest lift from the smallest
markdown when base demand is greatest, markdowns may
be considered earlier in life
Business Process Changes
• Role of Merchant & Planner Driving the Markdown Process
• Timing of Markdowns, including 2nd’s and 3rd’s
• Optimize to Budget
• Store Execution Processes
• In Store Placement of Markdowns
• In Store Signage and Stickering
Benefits of Markdown Optimization
• Improve Operational Efficiency
−Increase workforce productivity
−Redirect focus of merchant team
−Decrease decision making time
−Provided a more structured process
• Drive Additional Sales
• Maximize Merchandise Margin- Op Income… 15%
• Increase Inventory Turns
• Open up OTB ($’s and Space) for Full Priced Inventory
• Speed to Value. Immediate ROI
• Self Funding and Also Funds Additional Technology
Another MD Optimization User - Kohl’s
• Family focused, value oriented,
specialty department store
• $15.5B+ sales in 2007
• 817 stores
• Adding 400 stores over the next 5
years
• Earnings growth of 15 - 20% per
year
“We are upgrading shares of KSS to a !M (Buy, Medium Risk) rating for the following reasons:
1.Technology initiatives could drive gross margin improvement
2.Rollout of new and exclusive brands will establish KSS as a fashion destination…”
The following is a summary of the basis of our upgrade for Kohl’s:
1) Technology Initiatives to Drive Additional Gross Margin Improvement.
We believe there are two significant potential technology rollouts under the SAS
Revenue Optimization Suite that can drive gross margin improvement
meaningfully: 1) Size Optimization, and 2) Markdown Optimization. We have
upped our gross margin assumptions beginning in 4Q05 to reflect…the rollout of
[these] technologies..”
Results!!
• 20% Reduction in
Markdown Rate
• 2.7 Point
Improvement in
Gross Margin
Life Cycle Merchandise Intelligence
Issues with Traditional Assortment Planning
• Too many manual analysis and planning steps
• Hard to enforce planning standards and quality
• Difficult to integrate multiple systems with disparate data
• No analytic insight
- How many products in each price-point, vendor, color?
- Am I over or under-bought?
- Cluster formulation by volume but doesn’t identify true selling patterns
- History doesn’t take into account trends, new stores, etc.
Consequences: missed opportunities, over/under stocked,
high markdowns
Assortment Planning Optimization
• Key Concepts:
•
Automate a best-practice
analytic process to
produce a set of optimized
assortment plans by
category
•
Identify:
• Who are my customers?
• How and what do they buy?
• Which products do I need and
in what quantities to meet
the projected demand next
season?
Demand Forecasting
Eliminating the Guesswork…..
"Prediction is very difficult, especially if
it's about the future."
--Nils Bohr, Nobel laureate in Physics
Size Optimization
Size Optimization - Objectives
• Get the Right Size to the Right Store at the Right
Time.
Time
• Recognize customer differences by store location, by
department and by category.
• Improve In Stocks by size for basic, seasonal basic and
fashion merchandise.
Investor Support
“I am amazed at the impact that retail technology has had across the
retailers’ income statements and balance sheets. It has driven
profitability to a new level that investors did not think possible.”
“I believe the continued expansion of retail technology will allow
retailers to be increasingly innovative with site selection, increase
operating margins and drive profitability.”
“Based on my more than 10 years experience following retailers on Wall
Street, I believe that technology has had the greatest impact on 5 key
measures:
1. Comparable Store Sales
2. Operating Margin
3. Square Footage Growth
4. Inventory Turns
5. Returns on Invested Capital
Quote by Deborah Weinswig, Citi Investment Research
SAS Retail –Optimization Solutions
Contact Information
• Susan Meeder- Merchandise Planning Concepts
• E Mail: Smeeder@live.com