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1. NEXT Back of the House: Inventory Modeling

2. Contents 3 12 17 35

3. How long have you been in run specialty?

4. How long have you been in run specialty?

5. The Goal A model inventory, by size and month, for the top 40 men’s and women’s footwear SKUs that maximizes profitability while minimizing out of stocks.

6. Sample Category Distribution-Month 1

7. Sample Category Distribution-Month 2

8. Month 1

9. Month 2

12. Retail Planning Cycle

13. Retail Planning Cycle Merchandise Financial Planning Category Strategy Strategic Planning Assortment Planning Marketing Plan Evaluation In-Season Management Purchasing Space, Merch Planning

14. Retail Planning Cycle Merchandise Financial Planning Category Strategy Strategic Planning Assortment Planning Marketing Plan Evaluation In-Season Management Purchasing Space, Merch Planning

15. Annual Planning: Footwear Footwear Sales Plan Total Monthly Sales in $, Units Turn Target Footwear Category Plan % of Sales by Category Styles carried Turn target by category Monthly Sales and Inventory Model Stock by Style Model stock by month, by style Monthly model inventory by model and size Unit and $ sales by month by category Target inventory by month by category Determining a model stock at the style level requires establishing an overall sales and category plan to ensure appropriate inventory at all levels.

16. Inventory Management Considerations: Footwear

17. Determining Model Stock Inputs Sales plan by month and category 1 6 Months of sales for top 40 models in each gender 2 Size Run and Confidence by classification (A,B,C) 3 Outputs Classification by model 1 Range of unit sales by model and size 2 Model Inventory by model and size for the month 3 Projected inventory $, Sales $, Margin $, GMROI, and swap sales/special orders by class and gender 4 Projected sales, swaps/special orders by model, size, and category 5

18. Input: Annual Sales Plan 1 2 3 Monthly Sales $, Margin $ prior year Monthly Margin %, Sales % Total Sales 1 2 3

19. Input: Category Distribution 1 2 3 Gender % of sales Category % of sales (for each gender) Average Price by category 1 2 3

20. Input: Top 40 1 Brand, Model, Category, Units Sold, and Unit Cost for each of your top 40 styles within each gender 1

21. Input: Size Runs Sizes stocked for each class and gender 1

22. Running The Model 2 1 Select a month from the drop down menu. Press “Run Simulation”. 1 2

23. Output: Totals

24. Output: Totals • Inventory at Cost • Projected GM $ • Projected Turns • Projected GMROI • Sales $ • Projected Missed Sales, Switches, Special Orders • Inventory at Retail

25. Inventory Distribution

26. Output: Model Inventory

27. Customizing Size Runs Scenario 1 • Full size run in all classifications • Women’s 6-12, Men’s 8-14 Scenario 2 • Tapered Size Run in “B” and “C” classification • A: Women’s 6-12, Men’s 8-14 • B: Women’s 7-11, Men’s 9-13 • C: Women’s 7.5-10, Men’s 9.5-12

28. Effect of Size Runs Scenario 1 • Total Inventory @ C: $240,289 • Turns: 3.39 • GMROI: 2.67 Scenario 2 • Total Inventory @ C: $191,397 -20% • Turns: 4.26 +26.5% • GMROI: 3.35 +25.4%

29. Output: Missed Sales Example

30. Output: Missed Sales Example

31. Output: Size Range Tool

32. Output: Size Range Tool

33. Output: Size Range Tool

34. Output: Size Range Tool

35. Logic without the tool Segment Plan • Segment styles into A, B, C classifications based on sales volume • Specialty styles are managed independently • Implement annual and season planning cycle including category strategy and assortment planning Size • Determine size run for each classification, tapering the sizes carried to reduce stock in shoulder and fringe sizes in B and C styles • Sufficient inventory in A and B styles will ensure that customers always have an option in each category, in each size offered Maintain • Maintain sufficient inventory to achieve near 100% in stock of all “A” styles • Special order B and C fringe/shoulder sizes as necessary • Cut off orders at least 1 month prior to update for “A” and 2 months prior for “B” styles • Place single future orders for “C” styles to establish initial inventory and manage A/O • Train staff to be knowledgeable in segmentation and size availability to facilitate swaps and appropriate customer service

36. Follow up • Model and presentation available online. • TheIRRA.com • KarnanAssociates.com • Model Webinar • A 30 minute webinar will be scheduled during December to demonstrate how to load data and run the model. We’ll send details to the IRRA listserve. • Questions, Comments • Parker@KarnanAssociates.com • David@KarnanAssociates.com

37. Appendix

38. Effect of Size Run Tables Scenario 1 Scenario 2

39. What Exactly Is It Doing?

40. Strategic Value • Strategic value • What category is this model in? • How many other models are in the category? • Will we carry close substitutes? • Is this a model we carry in widths, multiple colors, or fringe sizes? • Size Run • Minimum size run of 5 • Can we justify carrying additional sizes? • For fringe categories, we can’t offer all options in all sizes. • Updated Schedule • Cut off replenishment with the goal to sell down before model is updated • Maximum of 1 month of supply when the new model arrives

41. Product Selling Behavior High • Franchise Styles • Program Monthly • Metrics Exceed Targets • Important but dangerous • Fill or kill • Calendar is king Volume • Strategic products • Taste and chase • Continually reassess • Niche products • Fill in to model stock • Keep Specialty Special Low Low Change High

42. Category Strategy What does the category specific include? Ex: Running Shoes includes all running footwear for men and women. Excludes kids and casual shoes. Define Category Traffic driver, convenience, destination for seasonal purchases, a one-stop-shop.  Retailers may assign different roles to categories within their stores depending on the customers they want to attract.  Define Role What are the metrics and KPIs that will be used to measure the category? What is the category’s current performance? What are the goals for the next season? Evaluation and Scorecard How will the goals and objectives be met? Ex: Expanding the number of SKUs and brands within bras to grow it into a destination. Strategy What specific actions will we take within this category to meet its goals? Ex: 1 feature per month in the newsletter for a new accessory. Ex: Give 75% of customers a new pair of socks for try-on. Tactics How is the category performing? Were the goals met or exceeded? What tactics were successful? Where was growth or decline above or below expectations? Evaluation

43. Category Strategy Template Category Definition and Role Areas of Growth Areas of Decline Tactics Key Needs Strategies

44. In-Season Management: Keep, Kill, or Chase? Objective of in-season assortment and management is to identify: • Solid performers to keep • Low performers to kill • Best performers to chase

45. Inventory Management Process Department • Footwear • Accessories • Apparel • Inventory versus my target/ideal? • Increase or decrease based on the sales plan? Category • Women’s Footwear • Men’s Apparel • Nutrition • Inventory versus my target/ideal? Am I under or over allocated? • Which category (ies) do I need to investigate? Class • Men’s Stability Shoes • Women’s Tops • Is the allocation correct? • Which classes are over/under performing? • Increase or decrease a class? • Am I positioned for success for the month/quarter/season? SKU • Women’s Adrenaline • Men’s Sherpa Short • Mint Chocolate GU • Over or under the model inventory? • When is the SKU retired/replaced? Size • Women’s Adrenaline 8.5 • Men’s Sherpa Short M • Mint Chocolate GU 6-pack • Complete size runs? • Adequate inventory in middle sizes? • Across the class, and category, are there sufficient options to meet customer needs?