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Managing Your Product Hierarchies
Doing it right will save you time and help you make better decisions
By Cary Allington, Co-Owner, AA Data Company / ActionWatch
Even when I know a change is going to save me time in the long run I still sometimes resist making the change. So I can appreciate it when a retailer tells me they have had the same department classifications since they first opened their store and just don’t want to commit the time to change it even though they know some adjustments would be useful. However, I want to explain how much time properly classified departments can save you and also how little time it can take to make the necessary changes. I will also explain why you should then re-evaluate the next levels in your “product hierarchies.” A common product hierarchy in this industry’s stores is: Department > Class > Brand > Model > Color > Size. How you define these hierarchies for your store and classify your inventory can make a big difference in your ability to make good decisions quickly.
I should mention before you read any further that this article is for retailers using computer software to help them manage their inventory and track sales (a.k.a. “POS” or “retail management” software). For the minority of retailers in this industry who are not using POS software, you can still use department classifications to segment your business into more manageable chunks, but the process will be much more labor intensive.
Re-evaluate your department classifications
Let me start by explaining how appropriate department classifications can save you time and greatly enhance your ability to manage your store. Do you remember learning long division in math class? What is 31,562,465 divided by 44? Nearly impossible to calculate in your head or even on paper unless you break the task down into smaller pieces, which is what they teach you to do. Creating appropriate departments for your store is breaking your store into smaller, manageable pieces.
Let’s say you started selling women’s t-shirts in your store a few years ago and, at the time, did not think women’s clothing would become a very important piece of your business. So, when you made your first women’s clothing order you simply added a single, broad “Women’s Apparel” department into your system. However, a few years later your women’s business has grown quite big. You are carrying a full assortment of women’s clothing including swimwear, denim, sweaters and other categories, but you still classify everything into the one original department. Then last month your Women’s Apparel department fell short of your planned sales. But since you have classified all your women’s apparel into one, broad department, figuring out the root cause of the shortfall requires you to go through every individual item to find out which items did not perform – a very time-consuming process for a big department.
Now imagine that within your Women’s Apparel department, instead of just having a single department, you had created Classes (or Sub-Departments, Categories or whatever your POS software calls the next level). Your classes include Women’s Tees, Women’s Fleece, Women’s Swimwear, Dresses, Skirts and other appropriate classes. Now, instead of having to go through each item in the whole department, you can first analyze just this Class level. You run a report showing your classes within Women’s Apparel and find that all your classes met expectations except for Women’s Fleece. Let’s assume that you also have effectively segmented each item by Brand, so then you run a report showing sales for each Brand within the Women’s Fleece class. The report shows that two of the brands’ sales were far short of expectations. So you dig deeper into those brands and find that they were both very late in shipping you product and then your staff became too busy with holiday shoppers to get the late shipments processed and onto the shelves, resulting in an undersupplied Women’s Fleece category.
In just a few minutes of running reports and narrowing down the list of potential culprits you have been able to find the reason for the sales shortage. This was because of your effective use of your software’s database hierarchy system. A “hierarchy” is like a family tree. Indeed, the levels in a database hierarchy are often called “parent” and “child” to describe their relationships. In the example described previously, Women’s Apparel is the parent and each of the classes, such as Dresses, are the children.
Most POS software includes at least two “Department” hierarchy levels. Unfortunately, Quickbooks POS, one of the most popular POS software applications in our industry has only one department level – a significant oversight in my opinion. However, users of this system and others with only one department level can make their own hierarchy and then do the analysis after exporting reports to Excel. For example, if you are a skate shop, you will obviously want to segment your skate hardgoods into various classes. You need to choose a separator that you will consistently use, such as the “greater than” sign. I like this one because it looks like an arrow pointing from parent to child in the hierarchy. Your skate hardgoods departments then become:
Skate > Decks
Skate > Wheels
Skate > Trucks
Skate > Completes
Skate > Long Completes
…and so on.
Each of these will be considered its own department in your POS software and you may not be able to easily run a report showing all skate hardgoods grouped together. However, you can export a department report into Excel, sort by department and then make a single total for all the departments starting with Skate, regardless of the second part of the department. This allows you to see your numbers for all Skate hardgoods together (the parent) as well as by each class (the children). It is not as convenient as having the multi-level functionality within the POS software, but it can ultimately provide you with almost the same analytical ability.
Using appropriate departments and classes to segment your store has more benefits than just the one I described earlier. It can help you find problem areas or shining stars in your business quickly, but it should also be used to help with other store management issues and buying decision making. The open-to-buy (OTB) planning system that is widely recommended by retail experts is based on the process of evaluating sales and necessary inventory levels by product classification. Using my earlier example, it does not provide much help to conduct OTB planning by evaluating sales and inventory levels of your “Women’s Apparel” department. Swimwear and Fleece have very different sales seasons, so you need to do OTB planning at the Class level (or even Sub-Class level if you use a three-level hierarchy). This is much easier if you can simply run a report from your POS software that gives you the necessary information. It can be difficult to determine your volume, inventory level, profit margin and turnover in women’s swimwear if these products are grouped in with all the other women’s apparel. Good open-to-buy planning must start with having a good department classification system for your store.
So what is a good department classification system for your store? This depends on the type of products you sell, but departments and classes should generally be designed around groups of products that customers find interchangeable (for example, jackets and board shorts would probably not be considered interchangeable). You should also think about volume in your store, because setting up classes for insignificant product groups is a waste of time. If most of your volume is in apparel and footwear and you only carry a few skateboard hardgoods, then you probably don’t need to set up classes for each hardgoods category. But if you do a lot of volume in your skate department, you should set up classes for each significant category, such as decks, completes, wheels, trucks, long completes, long decks, hardware, and any others you deem appropriate (to qualify to be its own class, it should be at least 1% of your total revenue).
If you do a lot of volume in men’s apparel, it may be appropriate for you to set up classes for fleece pullovers, zip fleece, long-sleeve t-shirts, short-sleeve t-shirts, polo shirts, short-sleeve wovens, etc., depending on the specific classes you carry. The idea is to have enough classes to appropriately segment your business but not so many that the classes become unwieldy to manage. If you sell five scarves a year, it would be a waste of time to have a class just for scarves. You should just lump them in with other “miscellaneous accessories.” Most retail experts suggest the rule of 10s – no more than 10 departments and no more than 10 children for each parent in the hierarchy. Said another way, a single department should represent at least 10% of your business and a class within that department should represent at least 10% of that department’s business. It may be appropriate for your store to have only three or four departments, with each department having anywhere from zero to 10 classes (every department does not have to include the same number of classes).
If you are not already using a good multi-level department classification system with appropriate departments and classes for your store, making this change does not mean you have to do it all at once. If you don’t want to convert all your inventory to your new system because you are afraid it will take too much time, just set up the new department and class classifications but use them only for the new products you enter. If you are keeping your inventory fresh it should only take a couple seasons for you to have the vast majority of your inventory classified under the new system. Your reporting will not be very good until you have made the bulk of the transition, but if you are making a change it is because your reporting was not very good anyway. So, during the transition your reporting will be just as bad as it always was – but you are on a road to making it significantly better.
Re-evaluate how you enter Brands, Models, Colors and Sizes
If you have decided to improve your department classifications, you should also take a look at the other fields in your POS software. The next important field to consider is brand (often called “vendor” or “supplier”). Companies develop brands to have their own personalities and reasons to exist, even if multiple brands are owned by the same company. For example, the Etnies brand has a different image than the Emerica brand, and maybe one of those brands is better for your customer base than the other. However, if you enter products from both of these brands as just the parent company, “Sole Tech,” then you will not have an efficient way of determining each brand’s performance in your store.
It is important to be able to determine the sales volume, turnover rate, margin and other measurements for each brand in your store. Just because one vendor supplies multiple brands does not mean they will all perform equally well for you. Each brand should be judged based on how much volume it can produce, how much inventory you have to carry to get that volume, how quickly the brand’s items sell through, what margin the brand produces for you in a season/year (including after markdowns are taken) and other criteria. You can’t effectively manage your brands if you can’t measure their performance.
Looking at it another way, I am suggesting that you think of the brands you carry in the way your customers do – by the brand itself regardless of the brand’s supplier. Your customers don’t care from whom you bought your inventory – they only care about the brands themselves. Your customers will vote for which brands they like most in your store with their wallets. If you can’t determine which brands they are voting for then you are losing valuable information.
Another way brands frequently get lost in POS software is when retailers purchase them from a reseller. For example, many retailers purchase skate hardgoods from Eastern Skate Supply, input this distributor’s name in the brand/vendor field and then put the product’s actual brand name in the “Description” field (i.e. the field used for model names). If your skate hardgoods volume is low then this method is okay since your customers probably do not care very much about the brand names anyway. However, if skate hardgoods is an important part of your business then your customers are probably more brand aware, and this product entry method keeps you from being able to easily determine which brands are important to them and which are not.
Unfortunately, it is very common for POS software to only offer one field appropriate for entering the brand name, and they frequently name the field “vendor” or “supplier.” This makes a retailer naturally tend towards entering the supplier name rather than the brand name. However, some POS applications include a “brand” field in addition to a separate “vendor” field and even allow having multiple vendors for the same product. Using this functionality can effectively keep your brands distinct from the company selling them to you. But if you only have one field available I recommend you enter the brand name in that field because the “pros” usually outweigh the “cons” for this method.
POS software used by retailers who sell apparel should also include fields for color and size. Often there will be multiple “Description” fields available and you can determine which fields you will use for each type of data. Some POS software applications include specific color and size fields and also offer a “matrix” user interface which can greatly reduce the amount of data entry you have to do to keep your colors and sizes distinct. If you don’t have specific color and size fields built in but have additional user-definable fields, I highly recommend entering size and color into separate fields from the model name, because this allows you to use the POS software’s reporting abilities to evaluate the performance of a specific model regardless of its color or size. For example, you want to be able to determine the performance of the Vans Classic Slip-on in your store as a model without having to tally all the numbers from the various colors and sizes you carry. Keeping color and size in separate fields from the model name allows you to do this.
Save time by using your POS software to make purchase orders
If you are entering brand, color and size for each item in your inventory, another way to save time with your regular retailing duties is to use your POS software to make all your purchase orders. You should also enter the manufacturer’s item number, but all POS software has a field for this. Does it make sense to fill out a supplier’s purchase order form, then type the same information into your POS software? Almost all POS software can make a purchase order and can usually include your company logo and offer other customizations. Using this functionality not only helps you look more professional and in control to your suppliers, but also eliminates the need to enter the data twice. You also may be able to email the purchase order directly from your POS software, eliminating the printing/faxing steps and also providing your suppliers with a very clean and readable order. Another big benefit is that you can then use your POS software to easily track when you should be receiving shipments, when suppliers ship early or late and which items from your order are missing from a received shipment.
Modern POS software is truly retail management software that can help you make quicker and better decisions and increase your overall productivity. But you have to use it properly to get these benefits. Having an appropriate department hierarchy system for your store is one of the most important features you should be using. You can also manage your store’s inventory better by tracking your brands separately and keeping your model names, colors and sizes in separate fields. And since you have to enter all your products into your POS software anyway, you should absolutely be using it to make your purchase orders so you don’t have to duplicate your work.