Which products should you stock?

Ramnath V and Marshall wrote an excellent article detailing the technique to help retailers improve assortment planning. While the article came out in 2012, there are good pointers which are valid even today.

It’s easy to spot the slow movers in your assortment, of course—sales data will tell you that—but it’s far from obvious what slow sellers should be replaced with. And there is always the nagging concern that a slow seller you delete might be an important product to some of your best customers, prompting them to defect to competitors.
As all retailers know, picking the best assortment is a balancing act; one change can have ripple effects. 
Plenty of software tools claim to support assortment planning. But the tools do little more than facilitate a manual planning process that relies on the judgment of managers for key inputs. They do nothing to reduce the risk inherent in every product assortment decision.

1. Understand Which Attributes Matter Most to Customers. 
Most retailers already think about their products in terms of attributes and can readily identify those that matter in their category. They might include price, brand, size, flavor, and color.

2. Account for what customers will do if you don’t offer their preferred product. 
Customers’ willingness to buy another product if they don’t find their first choice is a crucial input when a retailer considers dropping items. Their willingness depends on the attribute. Customers probably won’t substitute one dress size for another, but they might buy the blue one if red is not in the assortment.

3. Analyze Current and Potential Sales By Attribute
Assemble sales data for a recent period. Forecast demand for all potential SKUs. Refine the forecast. Account for trading up and down. Look for self-fulfilling prophesies.

4. Optimise the Assortment
Decide whether to maximize revenues or profits. Decide on pricing for potential SKUs. Decide on the final assortments.