14. Merchandise Management

Merchandise Management
Dr. Parveen Nagpal

Buying Organization
• Every retailer has its own system for grouping categories of
merchandise, but the basic structure of the buying organization is
similar for most retailers.
• The highest classification level is the merchandise group, such as:
(1) women’s apparel;
(2) men’s, children’s, and intimate apparel;
(3) cosmetics, shoes, jewelry, and accessories; and
(4) home and kitchen.
Each of the four merchandise groups is managed by a general
merchandise manager (GMM), who is often a senior vice president in
the firm. Each of the GMMs is responsible for several departments.

Buying Organization
• The second level in the merchandise classification scheme is the
department. Departments are managed by divisional merchandise
managers (DMMs). For example, the DMM may be in charge of
children’s apparel and manage the buyers responsible for six
merchandise departments.
• The classification is the third level for categorizing merchandise and
organizing merchandise management activities. A classification is a
group of items targeting the same customer type, such as girls’ sizes 4
to 6.
• Categories are the next lower level in the classification scheme. Each
buyer manages several merchandise categories. For example, the girls’
sizes 4 to 6 buyer manages the sportswear, dresses, swimwear, and
outerwear categories for girls who wear sizes 4 to 6.

Buying Organization
• A stock-keeping unit (SKU) is the smallest unit available for inventory
control. In soft-goods merchandise, for instance, an SKU usually means
a particular size, color, and style. For example, a pair of size 5,
stonewashed, blue, straight legged Levi jeans is an SKU.

Merchandise Category—The Planning Unit
• The merchandise category is the basic unit of analysis for making
merchandising management decisions.
• Merchandise category is an assortment of items that customers see as
substitutes for one another.
• For example, a department store might offer a wide variety of girls’ dresses
sizes 4 to 6 in different colors, styles, and brand names. A mother buying a
dress for her daughter might consider the entire set of dresses when
making her purchase decision. Lowering the price on one dress may
increase the sales of that dress but also decrease the sales of other dresses.
Thus, the buyers’ decisions about pricing and promoting specific SKUs in the
category will affect the sales of other SKUs in the same category. Some
retailers may define categories in terms of brands. E.g. Tommy Hilfiger might
be one category and Polo/Ralph Lauren another category.

Category Management
• While retailers, in general, manage merchandise at the category level, many
supermarkets organize their merchandise management around brands or
vendors.
• Managing merchandise within a category by brand can lead to inefficiencies
because it fails to consider the interdependencies between SKUs in the
category. For example, the three breakfast cereal buyers for a supermarket
chain, one for each major brand, might each decide to stock a new product
line of gluten-free breakfast cereals offered by Kellogg, General Mills, and
General Foods. However, if the brand organized buyers had taken a
category-level perspective, they would have realized that the market for
wheat-free cereals was limited and the supermarket would generate more
sales by stocking one brand of gluten-free cereals and using the space set
aside for the other wheat-free cereal brands to stock a locally produced
cereal that has a strong following among some customers.

Category Management
• According to Institute of Grocery Distribution, “Category Management is the
strategic management of various merchandise groups through trade tie ups
and partnerships which aims to maximize turnover and profit by satisfying
consumer needs and want.”
• According to Nielsen (1992), Category Management is a process of
managing product categories as separate business units and customizing
them to satisfying consumer needs.

Category Management Cycle
1. Category Definition: Defining a category is the first step in the category
management process. In this step retailer classifies the store’s products
into different categories depending on the usage of the product by the
consumers and its packaging.
2. Assess Role of Category: Retailers usually determine the priority level and
then assign a role for the category based on a cross category comparison
considering liking and disliking of consumers, and market trends. Basically
here retailers develop the base for allocating resources for the entire
business. While assessing the role played by a category, retailers should
thoroughly consider the nature and size of product category.

3. Category Assessment: The retailer conducts an analysis of the sub
categories with respect to sales, turnover, profits, return on assets by
reviewing consumer, market, retailer and supplier information.
The retailer’s objective to assess categories is to know (a) whether to
continue with the present category categorization, (b) Which categories
require additional effort to generate profits, (c) What are the areas of highest
turnover, profit, and return on asset improvement opportunities, and lastly to
know the gaps existed between the chosen category and the present
performance level of the category.
4. Category Performance: The retailer sets benchmark to measure the
performance of the categories. It involves setting measurable targets in terms
of sales, volume, margins, and gross margin return on investment (GMROI).

5. Category Strategy: Retailers develop marketing and product supply
strategies that determine the category role and performance objectives. The
basic purpose behind developing strategies is the retailer’s intention to
capitalize on category opportunities through creative and optimum utilization
of available resources assigned to a category
6. Category Tactics: Categories tactics are used to determine the optimal
category assortment, pricing promotions, and shelf penetration, essential to
ensure that strategies put are on right track. Category tactics determine and
authenticate the specific actions that are required to implement the category
strategies developed earlier.
The areas covered under category tactics vary from retailer to retailer and
place to place. But pricing, promotions, assortments and the store’s overall
presentation are few commonly used areas where tactics are developed.

7. Category Implementation: This step is to implement the category business
plan through a systematic schedule and list of responsibilities. Implementing
category plan as per the objectives laid down, is the path to the success of
category management. It includes:
I. What specific tasks need to be done?
II. When to do,
III. Where to do, and
IV. Who will do it
Therefore, implementing category plan on the part of a retailer requires to
decide what, where, when a task to accomplish and by whom.

8. Category Revision/ Review: This enables a retailer and concerned supplier
to gauge the performance of a category and identify key areas of opportunity
and threats to overcome by adopting alternate plans.
The category business plans are subject to change with regard to change in
assumptions laid down. For instance, incase of any specific change in business
environment, assumptions made earlier may not be valid. Therefore, business
plan must be modified with respect to change in underlying assumptions
without any delay.

Category Captain
• Some retailers select a vendor to help them manage a particular
category. The vendor, known as the category captain, works with the
retailer to develop a better understanding of shopping behavior, create
assortments that satisfy consumer needs, and improve the profitability
of the merchandise category.
• Selecting vendors as category captains has its advantages for retailers.
It makes merchandise management tasks easier and can increase
profits.
Vendors are often in a better position to manage a category than are
retailers because they have superior information because of their focus
on a specific category.
They have acquired insights from managing the category for other
retailers.

Category Captain
• A potential problem with establishing a vendor as a category captain is
that
 The vendor could take advantage of its position. For example, that Frito-
Lay chose to maximize its own sales, rather than the retailer’s sales, in
managing the salty snack category.
It could suggest an assortment plan that included most of its SKUs and
exclude SKUs that are more profitable to the retailer, such as high-margin,
private-label SKUs. Thus retailers are becoming increasingly reluctant to
turn over these important decisions to their vendors. They have found
that working with their vendors and carefully evaluating their suggestions
is a beneficial approach. However, the vendor category captain could
collude with the retailer to fix prices. It could also block other brands,
particularly smaller ones, from access to shelf space.

Factors Affecting Merchandise Function
A. Organization Structure – This varies according to the size of the store.
B. Size of the Retail Store –
• Single store owner - increase in size, leads to departmentalization
• Chain store- buying is either centralized or decentralized
C. Merchandise to be Carried –
• Basic merchandise
• Fashion merchandise, based on recent
trends

Role of Merchandise Manager
1. Planning: Policy formulation, forecasting sales for budget period,
estimate consumer demand and impact of changes occurring in the
retail environment
2. Directing: Guiding the buyers
3. Co-ordinating: Coordinate buying effort of many buyers and fit into
stores image
4. Controlling: Assessing buyers performance

Type of Merchandise
• Staple Merchandise: Basic merchandise categories, that are in continuous
demand over an extended time period. It is easy to forecast demand for such
merchandise. It requires continuous replenishment. E.gs. milk, eggs, bread
• Fashion: Products which have a cyclical sales due to changing tastes and
lifestyles, in demand only for a relatively short period of time. New products
are continually introduced into these categories, making the existing products
obsolete. It is challenging to forecast sales for such merchandise. It has a short
selling season
• Seasonal: Change according to seasons. This consists of items whose sales
fluctuate dramatically depending on the time of year. • Eg :Diwali Diya,
Christmas goodies etc.
Both staple and fashion merchandise can be seasonal categories.
• Fad: High sales for a short period of time E.g. Video games, Mobile phones.

Evaluating Merchandise Management Performance
• 60% – 80% of a typical retailer’s total assets are in inventory, thus inventory
investment performance is important.
• One of the performance measures for evaluating a retail firm is Return on
Assets (ROA), that is composed of two components, asset turnover and net
profit margin percentage.
• However, ROA is not a good measure for evaluating the performance of
merchandise managers because they do not have control over all of the
retailer’s assets or all the expenses that the retailer incurs.
• Merchandise managers have control only over the merchandise they buy
(the retailer’s merchandise inventory assets), the price at which the
merchandise is sold, and the cost of the merchandise. Thus, buyers
generally have control over the gross margin but not operating expenses,
such as store operations, human resources, real estate, and logistics and
information systems.

Gross Margin Return on Inventory Investment (GMROI)
• GMROI measures how many gross margin dollars are earned on every
dollar of inventory investment made by the buyer.
• GMROI combines gross margin percentage and the sales-to-stock ratio,
which is related to inventory turnover.
•

For example, consider a merchandise category with annual sales of $130,000
at a Gross Margin (or Gross Profit) of 49%
• Gross Margin = $63,700
• Average Inventory @Cost = $40,625
• GMROI = $63,700
$40,625
= $1.57
Thus the retailer is getting $1.57 in gross margin back for every $1.00
invested in inventory in this category for the year.

• Buyers have control over both components of GMROI - gross margin
component - prices they set and the prices they negotiate with vendors
when buying merchandise.
• The sales-to-stock ratio is the popularity of the merchandise they buy. If
they buy merchandise that customers want, it sells quickly and the sales-to-
stock ratio is high.
• In order to achieve high GMROI, buyers must focus on margin and turnover.
• Example: In a supermarket, some categories (e.g., wine) are high-margin–
low-turnover, while other categories (e.g., milk) are low-margin–high-
turnover. If the wine category’s performance were compared with that of
milk using inventory turnover alone, the contribution of wine to the
supermarket’s performance would be undervalued. On the contrary, if only
gross margin were used, wine’s contribution would be overvalued.

Merchandise Management
• The success of any retail operation is largely based on the retailer‘s
ability to provide the right goods to the consumer, at the right place, at
the right time and at the right price
• Merchandise management is the process by which a retailer attempts
to offer the right quantity of the right merchandise in the right place at
the right time and meet the company’s financial goals.
• Buyers need to be in touch with and anticipate what customers will
want to buy, but this ability to sense market trends is just one skill
needed to manage merchandise inventory effectively.
• Another more important skill is the ability to analyze sales data
continually and make appropriate adjustments in prices and inventory
levels.

Merchandise Management Process
Forecast Category Sales
Develop Assortment Plan
Determine Appropriate Inventory Level
Develop a Plan for Managing Inventory
Allocate Merchandise for Stores
Buy Merchandise,
Evaluate Performance and Control

1. Forecasting Sales
• Forecasting is the first step that determines the inventory needs of the
product or category, it involves predicting as to what consumers may do
under a given set of conditions.
• A sales forecast may be made by the merchandiser, based on the targets
given by the top management, made for a specific period of time - week,
season, year, short term or long term.
• Forecasts are developed to answer questions such as:
How much of each product will need to be purchased?
Should new products be added to the merchandise assortment?
What price should be charged for the product?

• The person in charge makes use of market research - awareness of the
changes in the tastes and attitudes of the consumers, the size of the target
market and the changes in their spending patterns.
Process of Developing Sales Forecast
Identifying past sales
Reviewing the changes in the economic conditions
Analyzing the changes in the sales potential
Consider marketing strategies of the retail organization and the
competition
 Creating the sales forecast

Forecasting Sales for Staple Merchandise
Even though sales for staple merchandise categories are relatively
predictable, controllable (openings and closings of stores, promotions, and
placement) and uncontrollable (weather, economic conditions, and new
product introductions by vendors) factors can have significant impact on
them.
Forecasting Sales for Fashion Merchandise
This is challenging because some or all of the items in the category are new
and different than units offered in previous years.
Buyers utilize a variety of sources for information to help in forecasting
decisions for fashion merchandise categories, including examining previous
sales data, personal awareness, fashion and trend services etc.

2. Assortment Plan
After forecasting sales for the category, the next step in the merchandise
management planning process is to develop an assortment plan.
An assortment plan is the set of SKUs that a retailer will offer in a merchandise
category in each of its stores.
The assortment plan thus reflects the breadth and depth of merchandise that
the retailer plans to offer in a merchandise category.
Variety, or breadth of a retailer’s merchandise is the number of different
merchandising categories offered, and the assortment, or depth, of
merchandise is the number of SKUs within a category. In the context of
merchandise planning, the concepts of variety and assortment are applied to a
merchandise category rather than a retail firm or store. At the category level,
variety reflects the number of different types of merchandise, and assortment
is the number of SKUs per type.

The process of determining the variety and assortment for a category is called
editing the assortment.
When editing the assortment for a category, the buyer considers factors such
as:
• Firm’s retail strategy
• Effect of assortments on GMROI
• Complementary Merchandise - When buyers develop assortment plans, they
need to consider the degree to which categories in a department
complement each other
• Effects of assortments on buying behavior
• Physical characteristics of the store.

Planning of merchandise is at two levels:
i. Creation of the merchandise budget
ii. Creation of the assortment plan (It is a list of the SKUs that a retailer will
offer in a merchandise category. The assortment plan thus reflects the
variety and assortment that the retailer plans to offer in a merchandise
category)
Two methods of developing a merchandise plan:
i. Top down planning: Top management prepares the sales plan and passes
down to the merchandising team
ii. Bottom up planning: Individual department managers work on the
estimated sales projections. These are then added up to arrive at the total
sales figures.

The merchandise budget is the first stage in the planning of merchandise- It is
a financial plan, which gives an indication of how much to invest in product
inventories, stated in monetary terms. It usually comprises five parts:
i. The sales plan: how much of each product needs to be sold; department
wise, division wise or store wise.
ii. The stock support plan: indicates how much inventory or stock, is needed
to achieve those sales.
iii. The planned reduction, which may need to be made in case the product,
does not sell.
iv. The planned purchase levels: the quantity of each product that needs to
be procured from the market.
v. The gross margins (the difference between sales and cost of goods sold,)
the department, division or store contributes to the overall profitability.

3. Determining Inventory levels and Product Availability
To determine the model stock plan for the category.
The Model Stock Plan: Number of SKU in the assortment plan that the buyer
wants to have available for purchase in each store.
The number of units of backup stock, also called buffer or safety stock, in the
model stock plan determines product availability.
Product availability is defined as percentage of the demand for a particular
SKU that is satisfied.
For instance, if 100 people go into a supermarket to purchase Dove Shampoo,
but only 90 people can make the purchase before the stock is depleted, the
product availability for that SKU is 90 %
Product availability is also referred to as the level of support or service level.

Methods for Inventory Planning:
1. The Basic Stock Method - used when the retailer believes that it is necessary
to have a given level of inventory on hand, at all times. Basic stock is the
minimum amount of inventory that needs to be maintained for a product,
category or store, even during times of low sales
2. The Percentage Variation Method - used when the stock turnover rate is
more than six times a year. The basic premise is that the inventory levels
should reflect the actual sales.
3. The Week‘s Supply Method – used by grocers, who plan inventories on a
weekly, not on monthly basis, and whose sales do not fluctuate substantially.
4. The Stock/ Sales Ratio Method - It involves maintaining of the inventory
levels at a specific ratio to the sales. It tells the retailer how much inventory
is needed at the beginning of the month, to support the month‘s estimated
sales.

4. Control System for Managing Inventory
The first three steps in the merchandise planning process—forecasting SKU and
category sales, determining the assortment plan, and establishing the model
stock plan quantify the buyer’s sales expectations and service level.
The fourth step in the merchandise management process is to establish a
control system for how the orders, deliveries, inventory levels, and merchandise
sales will evolve over time.
Merchandise plan has to be developed to establish a control system for how the
orders, deliveries, inventory levels, and merchandise sales will evolve over time.
The objective of this control system is to manage the flow of merchandise into
the stores so that the amount of inventory in a category is minimized but the
merchandise will still be available when customers want to buy it

Control System for Managing Staple Merchandise
• It can be done by using the automated continuous replenishment (ACR)
control system to manage the flow of staple merchandise SKUs and categories.
• The continuous replenishment system monitors the inventory level of each
SKU in a store and automatically triggers a reorder of an SKU when the
inventory falls below a predetermined level.
• Inventory for which the level goes up and down due to the replenishment
process is called cycle stock or base stock .
(Uncertainty is the Backup stock, that is the level of inventory needed to ensure
merchandise is available in light of these uncertainties)

Control System for Managing Inventory of Fashion Merchandise
• The control system for a fashion merchandise category is called a merchandise
budget plan.
• The merchandise budget plan specifies the planned inventory investment in
dollars in a fashion merchandise category on the basis of how much
merchandise will be ordered, delivered, and sold each month during the
selling season.
• It is a financial plan that specifies how many dollars will be spent each month
to support sales and achieve the desired GMROI objectives.

Open to Buy System
After the merchandise is purchased on the basis of the merchandise budget
plan, the open-to-buy system is used to keep track of the actual merchandise
flows— what the present inventory level is, when purchased merchandise is
scheduled for delivery, and how much has been sold to customers.
Buyers need to keep track of the merchandise they purchase and when it is to
be delivered.
Without the open-to-buy system keeping track of merchandise flows,
merchandise could be delivered when it isn’t needed and be unavailable
when it is needed.
The open-to-buy system compares the planned end-of-month inventory to
the actual end-of-month inventory. Differences between actual and plan may
arise because an order was shipped late or sales deviated from the forecast.

5. Allocating Merchandise to Stores
Research indicates that these allocation decisions have a much bigger impact on
profitability than the decisions about the quantity of merchandise to purchase.
In other words, buying too little or too much merchandise has less impact on a
category’s profitability than does making mistakes in allocating the right amount
and type of merchandise to stores.
Allocating merchandise to stores involves three decisions:
i. How much merchandise to allocate to each store?
ii. What type of merchandise to allocate?
iii. When to allocate the merchandise to different stores?

6. Analyzing Merchandise Management Performance
The next step is to analyze the performance of the process and make
adjustments, such as ordering more or less merchandise, lowering prices to
increase sales, allocating different assortments to specific stores, or changing
the assortment and model stock plans.
Three types of analyses related to the monitoring and adjustment step are:
i. The Sell-through Analysis is more useful for examining the performance of
individual SKUs in the merchandise plan. The buyer compares actual with
planned sales to determine whether more merchandise needs to be ordered
or whether the merchandise should be put on sale.
ii. In an ABC Analysis, merchandise is rank-ordered from highest to lowest. The
merchandising team uses this information to set inventory management
policies. For example, the most productive SKUs should carry sufficient
backup stock to never be out of stock.

iii. The Multi-attribute Method is most useful for evaluating vendors’
performance.
The first analysis provides an ongoing evaluation of the merchandise
management plan compared with actual sales. The remaining two analyses offer
approaches for evaluating and altering the assortment plan using the specific
SKUs in the plan and vendors that provide the merchandise to support the plan.

Merchandise Buying
• The basic role of buyer is to evaluate, find and select merchandise for
the store
• Retailer has to decide What/When/how much/where/ from whom to
buy
• Key role in developing relationships with the manufacturers and
vendors

Process of Merchandise Buying
1. Identifying the sources of supply
2. Contacting the sources of supply
3. Evaluating the sources of supply
4. Negotiating with the sources of supply - Establishing Vendor
Relations
5. Analyzing Vendor Performance

1. Identifying the sources of supply
• Domestic sources – central markets, trade shows, expositions. Understand
trends in the market, and evaluate the new resources and merchandise
offering
• Foreign sources – trade fairs, resident buying offices. These sources are
used because of the unique merchandise and unavailability in domestic
market
• The costs associated with Global Sourcing are:
Country of origin: where merchandise has been manufactured makes a big
difference to final sale
Foreign currency fluctuations: will affect the buying prices. May render
viable/unviable

Tariffs: duties on imports placed by Government
Cost of carrying inventory
Transportation of goods, that adds to the cost of goods
Resident buying offices - negotiation, contracts
(Reverse Auctions
Rather than negotiating with a specific manufacturer to produce the
merchandise, some retailers use reverse auctions to get quality private-label
merchandise at low prices.
Auctions conducted by retailer buyers of private-label merchandise are called
“reverse auctions” because there is one buyer, the retailer, and many
potential sellers, the manufacturing firms)

2. Contacting the sources of supply
3. Evaluating the sources of supply
• The target market for whom the merchandise is being purchased
• Image of the retail organization and the fit between the product and the
image of the retail organization
• The merchandise and price offered
• Terms and services offered by the vendor
• Vendors reputation and reliability
• Merchandise compatible with the needs and wants of the customers

• Vendors may be at different levels depending upon the ability to meet
delivery schedules, adherence to quality procedures, terms & services
(cooperative advertisement, return/exchange privileges, participation in
store promotion offered etc.)
• Trade discounts: reductions in manufacturers’ MRP
• Quantity discounts: on purchase of certain quantity
• Seasonal discounts
• Cash discounts

4. Establishing Vendor Relations
• Retailers share information with the suppliers
• They may even form a team to gain competitive advantage
• They should maintain strategic partnerships with vendors
• A strategic relationship, also called a partnering relationship, emerges when a
retailer and vendor are committed to maintaining the relationship over the long
term and investing in opportunities that are mutually beneficial to both parties.
• Strategic relationships are based on:
Mutual trust
Open communication
Common goals
Credible commitments

• In this relationship, both the parties have a long-term perspective and are willing
to make short-term sacrifices because they know that they will get their fair
share in the long run.
• Strategic relationships are win-win relationships. Both the retailer and the vendor
increase their sales and profits because the parties in strategic relationships work
together to develop and exploit joint opportunities.
• They depend on and trust each other, share goals and agree on how to
accomplish those goals

5. Analysing Vendor Performance
• Total orders placed with the vendor
• Total returns to the vendor and the quality of merchandise
• The initial markup on the products
• The markdown, if any
• Vendor participation in schemes and discounts
• Transportation costs
• Cash discounts offered by vendor
• Sales performance of the merchandise

References
1. Michael Levy & Barton A Weitz, “Retailing Management”, 8th Edition, Tata
Mc Graw Hill.
2. Swapna Pradhan, “Retailing Management – Text and Cases”, 5th Edition,
Tata Mc Graw Hill.
3. Nagpal, Sharma “Retail Management”, TYBMS, Sheth Publishers
4. http://www.yourarticlelibrary.com/

14. Merchandise Management

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Semelhante a 14. Merchandise Management

Semelhante a 14. Merchandise Management (20)

Mais de Dr. Parveen Kaur Nagpal

Mais de Dr. Parveen Kaur Nagpal (20)

Último

Último (20)

14. Merchandise Management