This report can be utilized as a component of your overall category management. Category performance analysis provides insight into merchandise performance by department, category, subcategory and vendor. Product and store managers analyze sales performance to understand which products and categories are selling well and which are selling poorly, as well as to identify the attributes of high and low performers.
Ideally you should run the report at a high level consolidated by departments and review the GMROI, the stock on days and the markdown % are at a department level. These are indicators of what your investment is returning at a department level, how well stocked you are on complimentary product (presuming that your inventory hierarchy has been well planned) and what is the impact of markdowns on your expected pricing models. Just this basic level of knowledge allows managers to optimize their product mix, ensure inventory levels are appropriate, and offer specific product selections demanded locally by consumers.
Use this report in conjunction with your overstocked report to provide you with insight on the impact of certain items within a subpar classification (should you consider discounting or some other merchandising promotion), as low stock turns can impact margin opportunities in other areas. Markdown percent should be evaluated to determine if they are in line with pricing policies, this can be done simply by reviewing departments at category levels and then reviewing by consolidating non performing classifications at subcategory or attribute levels.
Financial managers can review vendor performance to utilize prepay discounts for top performers or negotiate extended terms or discounts for habitual non performers. The AAR can also be used in space planning (high margin items should be placed in high traffic areas, high demand items in low traffic areas, complementary items near each other, item needing frequent restocking placed near storerooms or cash registers, etc.)
Discounting can be quite impactful to a pricing plan if not considered carefully. For example say an item costs $10 and you want to achieve a gross margin equal to 100% of your costs so you price the product at $20. Subsequently the product for various reasons has to be discounted by 20% and now sells for $16, your gross margin is now reduced to 60% of your costs. If your business model plans on a margin of 100% of COGS, depending on the number of times you do this could be fairly impactful. If a review of the AAR shows that this classification historically is being marked down at 20%, it would be beneficial to consider that when establishing your original list price, assuming that the price elasticity is perfectly inelastic.