I know you must be amused by seeing the title of the topic, but my dear friend it true now days. Let us start by explaining what Pareto Principle and what Merchandise Planning are at a very high level.
Pareto Principle in respect of Retail means that 80% of sales can be attributed to 20% of Products a retailer carries.
Merchandise Planning is a Systematic Approach aimed at maximizing return on investment, through planning sales and inventory in order to increase profitability. It does it by maximizing sales potential and minimizing losses from mark-downs and stock-outs.
Let’s note some of the Key Points here:
– Systematic Approach
– Maximize ROI (Return on Investment)
– Planning Sales & Inventory
– Increase Profitability
– Maximize Sales
– Minimize Losses
So, traditionally when we didn’t have advanced merchandising softwares, we were not able to extract quality data from our sales. With all advanced applications from JDA, i2 etc, now we can assemble data from POS and other critical customer touch points and determine the effect of different merchandise plans objectively. These applications help us to come up with rational sales and merchandise plan which would maximize the profitability by increasing our sales manifold and controlling two of the extremes of merchandising inefficiency i.e. Stock Outs and Mark Downs (Over Stocking). It does this by helping us place right product at right time at right place for right customers.
Traditionally, in a store 20% of the products use to have a high turnover and they often use to suffer from stock outs. This was because they were not able to build quality data and lack of good analysis tool. Result was loss of opportunity for sale. At the same time rest 80% of the products which didn’t had much turnover use to pile up, building higher space cost for them. So, when we use to allocate profit we use to find that actually 100% of profit can be attributed to those 20% as the contribution from rest 80% use to get adjusted with their space cost.
But with advance applications, we are now able to arrive at optimal product mix for our stores. This negates the Pareto Principle as now contributions are quite uniform and the cost associated with slow moving goods are minimized.
So, we can say that Pareto Principle is actually the result of merchandising inefficiencies…
- 
Rajeev Damani 
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August 26th, 2008 at 4:50 pm
but again the result of increasing efficiency is based on Pareto principle only, as firstly retailer is going to find the 20% of stock using pareto princple and some technology and then expanding it to get optimization. So what it really means is just don’t use Pareto principle as a excuse for ur merchandising inefficiencies but use it as a tool to optimize ur merchandise.
August 27th, 2008 at 12:13 am
no prateek, its not so, actually previously we use to have such that maximum of profit was coming from 20% of merchandise as the revenue which we use to extract from rest 80% use to get adjusted with space, carrying and holding cost of inventory for those categories. But with these advance application we are able to optimize as we keep less of those categories and even scale down some categories. Again with space optimization application we are able to cut the cost more, increasing contribution of these categories. Moreover quality POS and other applications help us to identify the reasons for slow turnover of these categories which further help us to improve them. As i posted in one of my earlier post on IT diversification that:
“Infosys is working on “smart shelves” which automatically track which piles of shirts customers have picked up the most often. This will help Retailers to identify which are the products which attract customer attention but they don’t buy it for some reasons.”
When we have such advance applications, we will be able to bring improvement in many of the categories falling in those 80%.