Merchandise Management

Merchandise Management refers to the process by which a retailer attempts to offer the right quantity of the right merchandise in the right place to meet the companys financial goal The Buying Organization Evry retailer has its own sytem for grouping categories of merchandise, but the basic structure of the buying organization is similar for the most retailers. The buyers negotiate with vendors to buy the merchandise and the planners (also called assorters) focus on the distribution to specific stores and replenishment. Merchandise Group - It is the highest classification. Each of the four merchandise group is managed by a General Merchandise Manager (GMM)who is often a Senior Vice President of the firm. Department The second level in the merchandise classification scheme. Departments are maneged by Divisional Merchandise Manager (DMM). Classification It is the third level for categorizing merchandise management activities. It is agroup of items targeting the same customer type. Categories The next lower level in the classification scheme. Each buyer manages several merchandise categories. Stock Keeping Unit (SKU) is the smallest unit available for inventory control. In soft goods merchandise a SKU usually means a particular size, color and style. Merchandise Category --- Planning Unit * It is the basic unit of analysis for making merchandising decisions. * An assortment of items that of items that customers see as substitute for the another. Category Management Should have one buyer or category manager who oversees all merchandising activities for the entire categories. Managing by category can help ensure that the best combination of sizesand vendors , the one that will get the most profit from yhe allocated space. Category Captain works with the retailer to develop a better understanding of customer behavior. Create assortments that satisfy consumer needs and improve the profitability of the merchandise category.

Evaluating Merchandise Management Performance GMROI

A financial ratio that assesses a buyers ROI performance on the basis of the factors that the buyer can control is the gross margin return on the inventory investment (GMROI, typically pronounced jim-roy). It measures how many gross margin dollars are earned on every dollar of inventory investment made by the buyer. Thus, GMROI is a similar concept of ROI, except that its components are under the control of the buyer rather than other managers in the firm. Instead of combining the net profit margin and asset turnover, GMROI combines gross margin percentage and the sales-to-stock ratio, which is related to inventory turnover.

GMROI=Gross margin percentage x Sales-to-stock ratio =

Gross Profit Sales

X X

Sales Ave. Inventory at cost

Gross margin Ave. Inventory at cost

Buyers have the control over both components of GMROI. The gross margin component is affected by the prices they set and the prices they negotiate with the vendors when buying merchandise. Like ROI, GMROI assesses not just the profitability of the merchandise decisions but also how effectively the merchandise assets (inventory) are used. Thus, merchandise categories with different margin/turnover profiles can be compared and evaluated

MEASURING SALES-TO-STOCK RATIO Retailers normally express sales to stock ratios (and inventory turnover) on an annual basis rather than for the part of a year. If the sale to stock ratio for a three-month season equals 2.3, the annual sales-to-stock ratio will be four times that number (9.2). Thus, to convert sales to stock ratio based on part of a year to an annual figure, multiply it by the number of such time periods in the year.

MANAGING INVENTORY TURNOVER

As we discussed at the beginning of this chapter, buyers are responsible for investing in and managing merchandise inventory. Inventory turnover (and the related sales-to-stock ratio) helps assess the buyers performance in managing this asset. Retailers want to achieve a high inventory turnover, but just focusing on increasing inventory turnover can actually decrease gross margin and GMROI. Thus, buyers need to consider the tradeoffs associated with managing their inventory turnover.

Benefits of High Turnover Increase sales volume Improve salesperson morale Reduce risk of obsolesce and markdown Provide more resources to take advantage of new buying opportunities Potential problems with approaches for improving inventory turnover

Retailers need to strike a balance in their rate of inventory turnover. Some approaches for improving inventory turnover can lower the GMROI by lowering sales volume, increasing the cost of goods sold, and increasing operating expenses.

MERCHANDISE MANAGEMENT PROCCES

STEP I: forecasting category sales, STEP II: developing an assortment plan, STEP III: determining appropriate inventory levels and product availability,
STEP IV: developing a plan for managing inventory, STEP V: allocating merchandise to stores, and STEP VI: monitoring and evaluating performance and making adjustments.

Forecasting Sales

Category Life Cycles Merchandise categories typically follow a predictable sales pattern: Sales start off low, increase, plateau, and then ultimately decline. This sales pattern, referred to as the category life cycle, is divided into four stages: introduction, growth, maturity, and decline. The shape of the life cycle is not only determined by how quickly consumers adopt the product or service and environmental factors such as the economy and government regulations. It is also affected by the activities undertaken by a retailers and vendors. Variations in Category Life Cycles The characteristics of common variations of the category life cycle- fad, fashion, and staple. The distinguishing attributes between these classifications are the numbers of seasons sales sustained, whether specific styles also sell for many seasons, and whether sales vary dramatically from one season to the next. Fad- is a merchandise category that generates lot of sales for a relatively short time, often less than a season. Fashion- typically last several seasons; however, like fads, sales of the SKUs can vary dramatically from one season to the next. Staple- experience relatively steady sales over an extended period of time. However, even the staple merchandise categories go into decline eventually. Forecasting Staple Merchandise The sales of the staple merchandise are relatively constant from year to year. Thus forecasts are typically based on extrapolating historical sales. Because there are forecasts sales data available, statistical techniques can be used to forecasts future sales of each. Forecasting Fashion Merchandise Categories Forecasting sales for fashion merchandise categories is challenging because some or all of the items in the category are new and different than units offered in previous years. Some sources of information that retailers use to develop forecasts for fashion merchandise categories; 1. 2. 3. 4. 5. Previous sales data Personal awareness Fashion and trend services Vendors Traditional market research

TYPES OF MERCHANDISE MANAGEMENT PLANNING PROCESSES 1. Staple Merchandise Categories - Also called basic merchandise categories, consists of items that are in continues demand over an extended time period. The number of new product introductions in these categories sold in supermarkets, house wares, white paint, copy paper, hosiery, inexpensive watches, basic casual apparel such as t-shirts, and mens underwear. 2. Fashion Merchandise Categories - consists of items that are only in demand for a relatively short period of time. New products are continually introduced into these categories, making the existing products obsolete. 3. Seasonal Merchandise Categories - Categories consist of items whose sales fluctuate dramatically depending on the time of year. Some examples of seasonal merchandise are Halloween candy, Christmas ornaments, swimwear, and snow shovels. Both Staple and fashion merchandise can be seasonal categories. SHOP When visiting your own stores, dont identify yourself. When store employees know you are coming, they are on their best behavior. Surprise them watch how your staff interacts with the shopper. CONVERSE With the costumers, sales clerk, and neighbors. Ask them: What are your favorite bands? ACT Like your customer. For one weekend, become your customer and see your merchandise or stores through the eyes of the consumer. Buy yourself a pair of highwasted jeans, Saucony shoes, and a green cotton shirt. NOTICE Become a cultural sleuth by noticing the things that make you uncomfortable or seem strange and different. FASHION AND TRENDS SERVICES There are many services that buyers, particularly buyers of apparel categories, can subscribe to that forecast the latest fashion colors, and styles. For example, Doneger Creative Services offers a range of services related to trend and color forecasting and analysis for apparel, accessories and lifestyle markets in the womens, mens, and youth

merchandise categories through its print publications, online content, and live presentation. VENDORS Vendors have proprietary information about their marketing plans, such as new products launches and special promotions, that can have a significant impact on retail sales for their products and the entire merchandise category because they typically specialize in fewer merchandise than retailers. MARKET RESEARCH Information on how customers will react to new merchandise can be obtained by asking customers about the merchandise or measuring their reactions to it through sales test. For example, a cashier at a restaurant may ask how a customer liked a new item on the menu. Focus group is a small group of respondents interviewed by a moderator using a loosely structured format. Participants are encouraged to express their views and comment on the views of others in the group.

SALES AND FORECASTING FOR SERVICE RETAILER Due to the perishable nature of services, service retailer faces a more extreme problem than fashion retailers. Their offering perishes at the end of the day not at the end of the season. DEVELOPING AN ASSORTMENT PLAN After forecasting sales for category, the next step in the merchandise management planning process is to develop an assortment plan. CATEGORY VARIETY AND ASSORTMENT The variety or breadth of a retailers merchandise was defined as the number of different merchandising categories offered, and the retailers assortment or depth of merchandise was defined as the number of SKUs within a category.

DETERMINING VARIETY AND ASSORTMENT In attempting to determine the variety and assortment for category like jeans, the buyer considers the following factors: the firm retail strategy, GMROI of the merchandise mix, physical characteristics of the store, tradeoff between too much versus too little assortment, and degree to which categories of merchandise complement one another. Retail Strategy The breadth and depth of the assortment in a merchandise category can affect the retailers brand image. In general, retailers need to offer enough SKUs to satisfy the customers needs and maintain their brand image with the respect to the merchandise category but not too many so that their image is compromised. Selecting the right assortment is referred to as editing the assortment. Physical Characteristics of the Store Retailers must consider how much space to devote to the category. If many SKUs are in the assortment, more space will be required to display and store the merchandise properly. For some merchandise categories, a lot of space is needed to display individual items, limiting the number of SKUs that can be offered in stores. Multichannel retailers address the space limitations in stores by offering a greater assortment through their Internet and catalog channels that they do in stores. Complementary Merchandise When retailers plan to alter their assortment, they must consider whether the merchandise under consideration complements other merchandise in the department. PRODUCT AVAILABILITY is defined as the percentage of demand for a particular SKU that u\is satisfied. The higher the desired product availability, the greater the amount of backup stock, or buffer stock, needed to ensure that the retailer wont be out of stock on a particular SKU when customers want it.