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Check your Assortment Dispersion Index (ADI)

Omni channel retailers product ranges explode. Inventory levels too? In product ranges today the-sky-is-the-limit. Alibaba and Amazon provide millions of different products across many product categories.

Office supplier Staples offers one million products. Omni channel retailers Cool Blue, Wehkamp and Kijkshop each present a long list of products. You can buy anywhere, you can fulfill anywhere and you can return anywhere.

Bartex
My favorite shaving cream Bartex is back on the shelves at my drugstore next to 22 other shaving products. It’s on the shelf next to 34 different mouthwashes and 144 toothpastes. My drugstore also has an online store.
My small local do-it-yourself (DIY) store in Amsterdam now also provides click-and-collect for online orders for DIY products. Customer returns are restocked at this small store. My online grocery supplier also supplies office products. The Starbucks store offers a great selection of teapots and dinnerware. The many ‘nanostores’ at railway stations offer everything; absolutely everything. This blurring of the boundaries between retail sectors could lead to inventory problems.
A further broadening and deepening of product ranges, and making them available for different distribution channels is not without risks. This can lead to high inventory levels and obsolete stock at the end of the product life cycle. How can you avoid inventory problems when broadening and deepening product ranges?

No cost?
What is the real cost of adding a product to your product range? The suppliers can also maintain your product database; look, no hands… You can have it all!
Of course adding products to your product range comes at a cost. You have to make the initial purchase, the invoice must be paid, you have to transport and receive the product, and then find a storage location in your warehouse. The inventory planners should pay attention as well. It also costs money to phase in a new product. What is the return on that investment?

Decisions
With every new product you add and for every new location you have, The management of inventories becomes more complex. For each new article you need to consider the stock locations in your distribution network, the service levels, your order frequencies, the minimum and maximum stock levels for replenishment, and last but not least, the most efficient way of supplying the stock locations. There are many options for consideration.

Assortment Dispersion Index (ADI)
Many retailers are increasing the number of products and the locations in the distribution network where products are maintained in stock. With each new product at additional sales and stock locations, the turnover and the number of transactions for each location will decrease and the variance will increase, leading to more safety stock in the supply chain. The Assortment Dispersion Index (ADI) is an important indicator. The ADI is the range (number of SKU’s) multiplied by the number of stock locations in the supply chain of the retailer.
A high ADI requires special attention of tactical and operational planners.
It is impossible to manage all master data for each product and location manually. This is to complex and labor intensive. ICT systems should support making the right decision based on strategic business rules for inventory management and purchasing; for example, what are the important products and customers, what are the most profitable products, what are the new product introductions.

Dealing with a High ADI
For dealing with a high Assortment Dispersion Index we present five recommendations:

  1. Category management. Be selective when phasing in new products and phasing out end-of-life products. Do these products really contribute to more revenue? What do you do when the sales of new products is disappointing? Perhaps it is wise to first test products in a small number of stores or regional markets. Also ensure that product managers have criteria for phasing out end-of-life products. Product managers should be responsible for the direct product profitability from cradle-to-the-grave.
  2. Big data must be used correctly. The data quality of information gathered in point-of-sales systems is key for data analysts in order to make informed decisions. An important requirement for data quality is whether a relationship can be established between many transactions and many customers.
  3. Product life cycle management. With a high ADI inventory managers must rely on the support of advanced systems for inventory management based on the product life cycle and business rules. Systems for inventory management only function properly if all parameters during the different phases of product life cycle are right. Based on which business rules do you want the inventory planners to plan and control inventories?
  4. Collaboration. Involve suppliers and customers in your product life cycle management. By planning together, you bring complementary information to the table to jointly create an even better demand forecast. Reliable tactical forecasting ultimately determines the operational flexibility and service levels in high ADI situations.
  5. Outsourcing. Is product life cycle management really your core competence? There are companies with better systems and better data offering coordination-as-a-service (CAAS).

A large product range, with higher ADI, sounds great from a customer service perspective. However, it requires making the very best decisions to meet the expectations of your customers, your bottom line, and your profitability. Are you ready for this?

Walther Ploos van Amstel
VU University Amsterdam

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