Evaluating Merchandise Management Performance - GMROI

• Merchandise managers have control over

– The merchandise they buy

– The price at which the merchandise is sold

– The cost of the merchandise

• Merchandise managers do not have control over

– Operating expenses

– Human resources

– Real estate

– Supply chain management

– Information systems

• SO HOW ARE MERCHANTS EVALUATED?

Evaluating Merchandise Plan Using GMROI Measure

At the corporate level return on assets is used to evaluate performance of overall retail operations, using the formula:

Return on Assets= Net Profit X Net Sales Net Sales Total Assets = Net Profit Total Assets

For the Merchandise managers they can evaluate the performance only on the basis of Merchandise. Because they have control only over the merchandise they buy and manage and buyers have control only over gross margin.

For getting to know the financial ratio which will be useful for planning and measuring merchandising performance, the return on investment resource or Gross Margin Return On Inventory Investment or GMROI is considered.

GMROI measures how much gross margin rupees are earned on every rupee or inventory investment.

GMROI uses gross margin percentage and sales –to- stock ratio(similar to inventory turnover)

GMROI=Gross Margin percentage X Sales –to-stock ratio

=Gross Margin X Net Sales Net Sales Average Inventory=Gross Margin Average Inventory

The average inventory in GMROI is taken as a cost because a retailers investment in inventory will be the cost of the inventory and not its retail value.GMROI combines the effects of both profits and turnover enabling the retailer to measure compare and evaluate department merchandise classifications vendor lines and items.

Inventory turnover is used to evaluate how effectively managers utilize their investment in inventory.

Inventory Turnover= Net Sales Average Inventory at retail Or Inventory Turnover= Cost of Goods sold Average inventory at cost

Devising Merchandise Plans

Forecasts• These are projections of expected retail

sales for given periods–Components:

• Overall company projections• Product category projections• Item-by-item projections• Store-by-store projections (if a chain)

Developing a Sales Forecast

• Understanding the nature of the product life cycle

• Collecting data on sales of product and comparable products

• Using statistical techniques to project sales• Work with vendors to coordinate

manufacturing and merchandise delivery with forecasted demand (CPFR)

Types of Merchandise

• Staple merchandise• Assortment merchandise• Fashion merchandise• Seasonal merchandise• Fad merchandise

Staple Merchandise

• Regular products carried by a retailer–Grocery store examples: milk, bread,

canned soup• Basic stock lists specify inventory level,

color, brand, style, category, size, package, etc.

Assortment Merchandise

• Apparel, furniture, auto, and other categories for which the retailer must carry a variety of products in order to give customers a proper selection

• Decisions on Assortment– Product lines, styles, designs, and colors

are projected– Model stock plan

Fashion and Seasonal Merchandise

• Fashion Merchandise: Products that may have cyclical sales due to changing tastes and life-styles

• Seasonal Merchandise: Products that sell well over nonconsecutive time periods

Developing an Assortment Plan• Assortment plan is a list of the SKUs that a

retailer will offer in a merchandise category and reflects the variety and assortment that the retailer plans to offer in a merchandise category

• Variety (breadth) is the number of different merchandising categories within a store or department

• Assortment (depth) is the number of SKUs within a category.

• Product availability defines the percentage of demand for a particular SKU that is satisfied.

Assortment Planning Process

• Merchandise Assortment Planning is a trade off between:

• Variety• Assortment• Product Availability

Assortment Planning Process

• Variety: It refers to the number of different categories of merchandise within a store or department.

Assortment Planning Process

• Assortment: It refers to the number of SKUs within a category.

Assortment Planning Process

• Product Availability: It refers to the percentage of demand for a particular SKU which is satisfied.

Assortment Planning Process

• The Retailer works out on the trade off between variety, assortment and product availability depending upon the particular marketing strategy.

Assortment Planning Process

• The Retail Strategy is worked out keeping the following aspects in mind: -

• 1. The particular target market towards which they are committing their resources.

Assortment Planning Process

• 2. The type of retail offering which the retailer plans to use in order to meet the target market’s needs.

• 3. The bases upon which the retailer will attempt to build up competitive advantage.

Factors affecting Variety and Assortment

• Physical characteristics and layout of the store and internet site.

• Workout a balance between too much versus too little assortment.

• Work at profitable mix of products.

• Corporate strategy towards assortment.

Factors affecting Product Availability1. Work out for a trade off between inventory investment and product availability.

2. Plan sufficient back up of stock to meet each SKU’s stock demand.

Factors affecting Product Availability

• SKU’s stock demand depends upon:

• Product availability the retailer wishes to provide.

• The fluctuations in demand.

Factors affecting Product Availability• Lead time for the

vendor.• Fluctuations in lead

time.• The vendor’s

product availability also affects the retailer’s back up stock.

Chapter 3 Management of Business Logistics, 7th Ed. 27

Collaborative Planning, Forecasting, and Replenishment

• CDFR is recognized as a breakthrough business model for planning, forecasting, and replenishment.

• Uses available Internet-based technologies to collaborate from operational planning through execution.

• Developed by Wal-Mart and Warner-Lambert in 1995.

Chapter 3 Management of Business Logistics, 7th Ed. 28

Collaborative Planning, Forecasting, and Replenishment

• The CDFR model is illustrated in Figure 3-3.• Emphasizes a sharing of consumer purchasing data

among and between supply chain partners.• Creates a direct link between the consumer and the

supply chain.

1. Front-End Agreement1. Front-End Agreement

2. Joint Business Plan2. Joint Business Plan

3. Create Sales Forecast4. Identify exceptions5. Resolve exceptions

3. Create Sales Forecast4. Identify exceptions5. Resolve exceptions

6. Create Order Forecast7. Identify exceptions8. Resolve exceptions

6. Create Order Forecast7. Identify exceptions8. Resolve exceptions

9. Generate Order9. Generate Order

Once

Once

Qtr

.Q

tr.

Wk,

Mo

Wk,

Mo

Wk,

Mo

Wk,

Mo

Collaborative PlanningCollaborative Planning

Collaborative ForecastingCollaborative Forecasting

Collaborative ReplenishmentCollaborative Replenishment

SellerSeller

BuyerBuyer

Sales ForecastSales Forecast

Order ForecastOrder Forecast

CPFR PROCESS

CPFR® BENEFITS

Distributor / Retailer Manufacturer / SupplierDistributor / Retailer Manufacturer / SupplierVP Merchandising VP SalesVP Merchandising VP Sales

-------------------------------------------------------------------------------------------------------------------------

Confidentiality Goals & Objectives

Measurement of Success

Discussion of Competencies, Resources, and Systems

Responsible People & Departments Information Sharing

Service & Ordering Commitments

Resolution of Disagreements

Buying Decision Process

What to Buy? How much to When to buy? buy?

From whom to buy?

Store Image

Satisfy Cust. Wants

Type of Merchandise

Control Systems

MerchandisePolicies

Financial Obj. Open-to-buy

Mdse.Budget

SalesReductionsInventories

PurchasesShortages

Estimated Sales

Beginning Inv.

Ending Inv.

Suppliers

The Market

Negotiations

Unit Price Terms

33

Role of the Buyer

• Buyers plays an important role in the retail industry. they select and order merchandise to be sold.

• Buyers may be responsible for buying for a department, an entire store, or a chain of stores

1. Developing the merchandising strategies for the product line

2. Planning and selecting merchandise assortments3. Vendor Selection4. Pricing of the merchandise5. Inventory Management

Types of Buying SystemsStaple MerchandisePredictable DemandHistory of Past SalesRelatively Accurate

Forecasts

Fashion MerchandiseUnpredictable DemandLimited Sales HistoryDifficult to Forecast

Sales

Staple Merchandise Buying System

Forecast SKU Sales

Order Merchandise

Monitor Sales and Inventory

Compare Inventory to Basic Stock List

Considerations in Determining How Much to Order

• Basic Stock Plan• Present Inventory• Merchandise on

Order• Sales Forecast

– Rate of Sales of SKU (Velocity)

– Seasonality

Open to Buy

• Monitors Merchandise Flow

• Determines How Much Was Spent and How Much is Left to Spend

An Open-To-Buy relates directly to retail merchandise, is structured specifically to address the needs of retailers, and is a tool designed to assist retailers manage and replenish their most significant asset, their inventory investment. 

Benefits Of OTB PlanAn efficient OTB plan contain the following elements :

Sales forecast,Advance,Stock over,Stocks in order, Etc.

Benefits include:Make an estimate on the amount of working capital

required to be employed in inventory from month to month

Work out the correct inventory level to support planned sales and also achieve the GMROI

Work out the merchandise inventory so that teh outlet receives the right amount of merchandise at the right time

Ensures a continuous flow of fresh merchandise into teh store every month

Perform the controlling function by comparing actual performance with the OTB plan and take corrective actions whereever required

Provide the organisation an opportunity to earn profits through successful merchandising and buying profits.

The process of merchandise planning

3.The Merchandise Control: Open to buy

4.Assortment Planning: Determine the quantity of each product. Details of color,

size brand, materials

Brand Equity is important for three major reasons: 1. Brand Equity creates shareholder value 2. Brand Equity Building is a competency that can be mastered to create competitive advantage 3. Brand Equity management creates an array of growth opportunities for the business thus it helps in increasing the overall profits of the firm . There are lots of benefits of brand equity if a company can manage & build its brand equity well & realize the importance of doing so.

What is Brand Equity?In lay terms, brand equity is the value that a consumer attaches to a certain brand. Although brand equity can be measured tangibly by way of certain indicators, a large component of the concept is intangible, i.e. what perceptions and associations people have of a certain brand, and the familiarity of those brands in the mind of the consumer.

Private Labels

Advantages

• Unique merchandise not

available at competitive

outlets

• Difficult for customers to

compare price with

competitors

• Higher margins

Disadvantages

• Need to develop expertise

in developing and

promoting brand

• Unable to sell excess

merchandise

• Typically less desirable for

customers