Lecture #12: Merchandise Management

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Merchandise management is one of the most important tasks within the retail enterprise. Poor merchandise management can sink the ship quickly. Poor choices of categories or lines can also hinder the business. Thus, it is important to pay careful attention to the merchandise in the store, as its movement and profitability foretell the future of the business.

It all begins by examining the categories being carried in the store. A category is a group of items that consumers see as being reasonable substitutes. These are actually common-sense divisions in a store, like men's wear, women's wear, infant clothing, health and beauty aids (HBA), etc.

There may be divisions within a category that are treated as if they were a stand-alone category. It all depends on how retailers and vendors define their categories. Some may go broad, while others may go narrow.

Each category can have one or more buyers. Much depends on the overall size of the category (with regard to sales, as well as with regard to the number of products available).

Retailers often form an alliance with a key supplier, who functions as the category captain. This firm will provide information and advice for the store, yet it is a mutually-beneficial arrangement. The vendor benefits because it has the retailer's ear, who will often do what the vendor says to do.

Classifications

The largest class in a store is the merchandise group, which is managed by high-level executives. These individuals will govern large categories like clothing, which could include men's wear, women's wear, children's wear, etc.

Next in line are the department managers, who manage one of the departments within a category. Under them are classification buyers, like a particular type of garment in the men's or women's department. Finally, under them come the category buyers, who may purchase products within a classification.

The smallest level of analysis in the store is the SKU, also known as PLU (Price Look-up). These are the individually-bar coded items. Each unique bar code is an SKU. Each product variation is an SKU, like 6 packs, 12 packs, 24 packs, 2-liter bottles, all of Coca Cola.

Objectives

The dominant measure of retailing success is GMROI, which is gross margin return on inventory invstment. It treats inventory like the true investment it is. Mathematically, it is Gross Margin divided by Average inventory. It should be calculated using inventory at cost, since this is the true investment, not the retail value.

The actual amount of inventory investment is the sales-to-stock ratio, which is net sales divided by avergae cost inventory. To calculate inventory turnover from this, take the sales-to-stock ratio and multiple times the cost of goods sold percentage (100% - gross margin %).

Inventory Turnover

While some people may wish for a rapid ITO rate, it does have its benefits and detriments. Among the benefits:

• increased sales volume. Merchandise is available on a more steady basis, and newer goods sell better than older goods.
• Less risk of obsolescence. Stores with merchandise subject to trends and fas, as well as rapid technical innovation, can benefit by stocking less, and moving it out quickly.
• Salesperson morale will likely improve when sales are brisk.
• Rapid sales generate the operating capital needed to buy the next round of inventory.
• Operating expenses can decrease such as inventory holding costs and financing.
• Asset turnover will likewise increase