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Buying and Merchandising

This book is a part of the course by Jaipur National University, Jaipur. This book contains the course content for Buying and Merchandising.

JNU, Jaipur First Edition 2013 The content in the book is copyright of JNU. All rights reserved. No part of the content may in any form or by any electronic, mechanical, photocopying, recording, or any other means be reproduced, stored in a retrieval system or be broadcast or transmitted without the prior permission of the publisher. JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the content whenever the need arises, and to vary it at any time without prior notice.

Index I. Content....................................................................... II II. List of Figures...........................................................VI III. List of Tables......................................................... VII IV. Abbreviations.......................................................VIII V. Case Study.............................................................. 134 VI. Bibliography.......................................................... 141 VII. Self Assessment Answers................................... 144 Book at a Glance

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Contents Chapter I........................................................................................................................................................ 1 Introduction to Merchandising Management............................................................................................ 1 Aim................................................................................................................................................................. 1 Objectives....................................................................................................................................................... 1 Learning outcome........................................................................................................................................... 1 1.1 Introduction to Merchandising.................................................................................................................. 2 1.1.1 Historical Definitions of Merchandising.................................................................................. 3 1.1.2 Principles of Merchandising..................................................................................................... 3 1.1.3 Merchandising Strategy............................................................................................................ 4 1.1.4 Merchandising Mix................................................................................................................... 6 1.1.5 Role and Responsibilities of Merchandiser ............................................................................. 7 1.2 Buying and Merchandising Management................................................................................................. 7 1.3 Planning Merchandise Assortment........................................................................................................... 9 1.4 Buying System........................................................................................................................................ 10 1.4.1 Three Step Process for Buying System................................................................................... 10 1.4.2 Buying Organisation................................................................................................................11 1.4.3 Buying Principles.................................................................................................................... 12 1.4.4 Factors Affecting Buying Function......................................................................................... 13 1.4.5 Roles and Responsibilities of Buyer....................................................................................... 14 1.5 Function of Buying for Different Types of Organisation........................................................................ 14 1.5.1 Buying for a Single or Independent Store.............................................................................. 15 1.5.2 Buying for a Chain Store or a Chain of Department Store..................................................... 15 1.5.3 Buying for Non- Store Retailer............................................................................................... 15 Summary...................................................................................................................................................... 16 References.................................................................................................................................................... 16 Recommended Reading.............................................................................................................................. 17 Self Assessment............................................................................................................................................ 18 Chapter II.................................................................................................................................................... 20 Managing Merchandise and Merchandising Planning Process.............................................................. 20 Aim............................................................................................................................................................... 20 Objectives..................................................................................................................................................... 20 Learning outcome......................................................................................................................................... 20 2.1 Introduction............................................................................................................................................. 21 2.1.1 Merchandise Management...................................................................................................... 21 2.1.2 Merchandise Mix.................................................................................................................... 21 2.1.3 Managing Merchandise Costs................................................................................................. 21 2.1.4 Managing Merchandise Quality.............................................................................................. 22 2.1.5 Merchandise Display and Store Capacity............................................................................... 23 2.2 Supply Chain........................................................................................................................................... 24 2.2.1 Managing Supply chain.......................................................................................................... 24 2.2.2 Warehousing Facility.............................................................................................................. 26 2.3 Merchandise Planning............................................................................................................................. 26 2.3.1 Concept of Merchandise Planning.......................................................................................... 26 2.3.2 Implications of Merchandise Planning................................................................................... 27 2.3.3 Need for Merchandise Planning............................................................................................. 28 2.3.4 Merchandise Planning Components....................................................................................... 28 2.4 Process of Merchandise Planning........................................................................................................... 29 2.5 Technology Tools that Aid Merchandise Planning................................................................................. 31 2.6 Merchandise Planning in a Montgomery Ward...................................................................................... 31

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Summary...................................................................................................................................................... 35 References.................................................................................................................................................... 35 Recommended Reading.............................................................................................................................. 36 Self Assessment............................................................................................................................................ 37 Chapter III................................................................................................................................................... 39 Methods of Merchandise Procurement..................................................................................................... 39 Aim............................................................................................................................................................... 39 Objectives..................................................................................................................................................... 39 Learning outcome......................................................................................................................................... 39 3.1 Introduction............................................................................................................................................. 40 3.1.1 Meaning of Procurement........................................................................................................ 40 3.1.2 Merchandise Procurement...................................................................................................... 40 3.1.3 Definition of Sourcing............................................................................................................ 40 3.1.4 Global Sourcing...................................................................................................................... 41 3.2 Merchandise Sourcing............................................................................................................................ 41 3.2.1 Process of Merchandise Buying............................................................................................. 41 3.3 Purchasing and Procurement................................................................................................................... 45 3.3.1 History of Procurement and Purchasing................................................................................. 45 3.3.2 Factors For Purchasing .......................................................................................................... 46 3.3.3 Role of Purchasing.................................................................................................................. 46 3.3.4 Determining Requirements..................................................................................................... 48 3.3.5 Supply Sourcing...................................................................................................................... 48 3.3.6 Negotiation.............................................................................................................................. 48 3.3.7 Supplier Management............................................................................................................. 49 3.3.8 E-Purchasing and E-Procurement........................................................................................... 49 3.4 Sourcing e-Procurement Services........................................................................................................... 50 3.5 Advantages of e-Procurement Services.................................................................................................. 51 3.6 E-Procurement Trends in Global Market................................................................................................ 51 3.7 E- Procurement Challenges and Opportunities....................................................................................... 52 Summary...................................................................................................................................................... 53 References.................................................................................................................................................... 53 Recommended Reading.............................................................................................................................. 53 Self Assessment............................................................................................................................................ 54 Chapter IV................................................................................................................................................... 56 Pricing of Merchandise............................................................................................................................... 56 Aim............................................................................................................................................................... 56 Objectives..................................................................................................................................................... 56 Learning outcome......................................................................................................................................... 56 4.1 Introduction............................................................................................................................................. 57 4.2 Pricing Framework and a Firm’s Pricing Objectives.............................................................................. 57 4.2.1 Pricing Framework................................................................................................................. 57 4.2.2 Firm’s Pricing Objectives....................................................................................................... 57 4.3 Factors Affecting Pricing........................................................................................................................ 58 4.3.1 Product or Merchandise ......................................................................................................... 58 4.3.2 Place . ..................................................................................................................................... 59 4.3.3 Promotion .............................................................................................................................. 59 4.3.4 Miscellaneous ........................................................................................................................ 59 4.4 Calculation of Retail Price...................................................................................................................... 60 4.5 Pricing Approach.................................................................................................................................... 61 4.6 Price Adjustments................................................................................................................................... 62 4.7 Pricing Strategy....................................................................................................................................... 63 4.7.1 Modern Price Strategy............................................................................................................ 64 4.8 Key Opportunities to Leverage Price Optimisation................................................................................ 64 III/JNU OLE

Summary...................................................................................................................................................... 67 References.................................................................................................................................................... 67 Recommended Reading.............................................................................................................................. 68 Self Assessment............................................................................................................................................ 69 Chapter V..................................................................................................................................................... 71 Visual Merchandising and Financial Merchandising.............................................................................. 71 Aim............................................................................................................................................................... 71 Objectives..................................................................................................................................................... 71 Learning outcome......................................................................................................................................... 71 5.1 Introduction to Visual Merchandising.................................................................................................... 72 5.2 Scope of Visual Merchandising.............................................................................................................. 73 5.3 Visual Merchandising Organisational Chart........................................................................................... 73 5.4 Visual Merchandising Planning Systems................................................................................................ 74 5.4.1 Responsibility for Visual Merchandising within Retail Structure.......................................... 74 5.4.2 Visual Merchandising- A Support for Positioning Strategy.................................................... 75 5.5 Visual Merchandising in Non- Store Retailing....................................................................................... 78 5.6 Cross Merchandising.............................................................................................................................. 78 5.7 Financial Merchandise Management..................................................................................................... 78 5.7.1 Use of Financial Merchandising in Organisation................................................................... 79 Summary...................................................................................................................................................... 81 References.................................................................................................................................................... 81 Recommended Reading.............................................................................................................................. 81 Self Assessment............................................................................................................................................ 82 Chapter VI................................................................................................................................................... 84 Category Management............................................................................................................................... 84 Aim............................................................................................................................................................... 84 Objectives..................................................................................................................................................... 84 Learning outcome......................................................................................................................................... 84 6.1 Introduction to Category Management................................................................................................... 85 6.2 Evolution of Category Management....................................................................................................... 86 6.3 Category Captain.................................................................................................................................... 86 6.4 Category Management Process............................................................................................................... 87 6.4.1 Category Definition................................................................................................................ 88 6.4.2 Category Planning................................................................................................................... 90 6.4.3 Category Implementation....................................................................................................... 92 6.5 Category Management Limitations......................................................................................................... 95 6.6 Behavioural Category Management Benefits......................................................................................... 95 Summary...................................................................................................................................................... 96 References.................................................................................................................................................... 96 Recommended Reading.............................................................................................................................. 97 Self Assessment............................................................................................................................................ 98 Chapter VII............................................................................................................................................... 100 Product Management............................................................................................................................... 100 Aim............................................................................................................................................................. 100 Objectives................................................................................................................................................... 100 Learning outcome....................................................................................................................................... 100 7.1 Introduction to Product Management.................................................................................................. 101 7.2 Historical Overview of Product Management in Retailing................................................................... 101 7.3 Role of Product Management in Retailing............................................................................................ 102 7.3.1 Strategic Role of Product Management in Retailing............................................................ 102 7.4 Product Management Function............................................................................................................. 102 7.4.1 Responsibilities of Product Management Function.............................................................. 103 IV/JNU OLE

7.4.2 Product Management Decision............................................................................................. 103 7.5 Product Classification........................................................................................................................... 104 7.6 Product Line and Product Mix.............................................................................................................. 105 7.7 Product Manager’s Management System............................................................................................. 107 7.8 Product Planning System...................................................................................................................... 108 Summary.....................................................................................................................................................112 References...................................................................................................................................................112 Recommended Reading.............................................................................................................................113 Self Assessment...........................................................................................................................................114 Chapter VIII...............................................................................................................................................116 Vendor Management..................................................................................................................................116 Aim..............................................................................................................................................................116 Objectives....................................................................................................................................................116 Learning outcome........................................................................................................................................116 8.1 Introduction to Vendor Management.....................................................................................................117 8.2 Vendor Selection Process.......................................................................................................................117 8.2.1 Analyse Business Requirements............................................................................................117 8.2.2 Vendor Search........................................................................................................................118 8.2.3 Request for Proposal ( RFP) and Request for Quotation (RFQ)...........................................119 8.2.4 Proposal Evaluation and Vendor Selection........................................................................... 121 8.2.5 Contract Negotiation Strategies............................................................................................ 122 8.2.6 Contract Negotiation Mistakes............................................................................................. 123 8.3 Strategies to Strengthen Vendor Relations............................................................................................ 124 8.4 Vendor Evaluation................................................................................................................................. 124 8.5 Vendor Managed Inventory................................................................................................................... 125 8.5.1 VMI and EDI........................................................................................................................ 125 8.5.2 Benefits of VMI.................................................................................................................... 126 8.5.3 Challenges and Limitations of VMI..................................................................................... 127 8.5.4 Overcoming the Limitations................................................................................................. 127 8.6 Vendor Finance..................................................................................................................................... 127 8.7 Vendor Management Services............................................................................................................... 128 8.8 Vendor Management System................................................................................................................ 129 Summary.................................................................................................................................................... 130 References.................................................................................................................................................. 130 Recommended Reading............................................................................................................................ 131 Self Assessment.......................................................................................................................................... 132

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List of Figures Fig. 1.1 Areas influenced by the merchandise strategy.................................................................................. 4 Fig. 1.2 Steps of merchandise assortments plan............................................................................................. 9 Fig. 1.3 Buying system................................................................................................................................. 10 Fig. 1.4 The buying organisation.................................................................................................................. 12 Fig. 1.5 Theory of merchandise buying behaviour....................................................................................... 13 Fig. 2.1 Factors affecting manufacture’s productivity.................................................................................. 22 Fig. 2.2 Matching process............................................................................................................................. 25 Fig. 2.3 Advantages and disadvantages of warehousing............................................................................... 26 Fig. 2.4 The process of merchandise management....................................................................................... 27 Fig. 2.5 The implications of merchandise planning...................................................................................... 27 Fig. 3.1 Process of e-sourcing....................................................................................................................... 50 Fig. 4.1 The pricing framework.................................................................................................................... 57 Fig. 5.1 Visual merchandising organisation chart......................................................................................... 73 Fig. 6.1 The category lifecycle..................................................................................................................... 90 Fig. 6.2 Category review............................................................................................................................... 92 Fig. 6.3 Category management methodology............................................................................................... 93

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List of Tables Table 2.1 L  ist of 28 stages in introduction of new Montgomery ward private label product requiring tooling expenditures...................................................................................................... 34 Table 5.1 Visual merchandising: local and centralised approaches.............................................................. 75 Table 6.1 Category management process...................................................................................................... 87 Table 6.2 The role of product category......................................................................................................... 89 Table 7.1 Classification of consumer product ........................................................................................... 105 Table 7.2 A product-evaluation matrix having two hypothetical products A and B over three years..........110 Table 7.3 Incorporating sales, market share and profit forecasts into the product evaluation matrix.........110 Table 7.4 Five levels of project evolution matrix........................................................................................111

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Abbreviations DMM - ECR - EDI - EPOS - e-RFI - e-RFP - e-RFQ - FMCG - FOB - GMROI - ISM - KPI - LIFO - NAPM - NGO - NRF - PO - RFI - RFP - RFQ - ROI - SBU - SKU - SLA - VMI - VMS -

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Divisional Merchandise Manager Efficient Consumer Response Electronic Data Interchange Electronic Point of Sale Electronic Requests for Information Electronic Requests for Proposal Electronic Requests for Quotation Fast Moving Consumer Goods Free on Board Gross Margin Return on Inventory Investment Institute for Supply Management Key Performance Indicator Last In First Out National Association of Purchasing Management Non-Government Organisation National Retail Federation Purchase Order Request for Information Request for Proposal Request for Quote Return on Investment Strategic Business Unit Stock Keeping Unit Service Level Agreement Vendor Managed Inventory Vendor Management Services

Chapter I Introduction to Merchandising Management Aim The aim of this chapter is to: •

define merchandising

•

identify the roles and responsibilities of merchandiser

•

introduce the functions of buying for different types of organisations

Objectives The objectives of this chapter are to: •

explain the buying principles

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explicate the three step process of buying system

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classify the roles and responsibilities of buyer

Learning outcome At the end of this chapter, you will be able to: •

understand the factors affecting the buying function

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describe buying and merchandising management

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comprehend the merchandising strategy

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Buying and Merchandising

1.1 Introduction to Merchandising The biggest test in the competitive world of retail is to stay relevant to the customer. For this, a retailer would primarily require an understanding of the changes occurring in the environment, consumers, their lifestyle, and then develop an ability to adapt to them. It is necessary to have the right location and communication for the store; the products to be sold occupy a position of primary importance. The success of any retail operation to great extent, is based on the retailer’s ability to provide the right goods to the consumer at the right time and at the right price. The entire process of creating a product or service needed by the consumer and ensuring that it reaches the place where a consumer can buy it, is integral to the existence of any retail organisation. This process is termed as merchandising. The function of merchandising encompasses the function of buying. It is an integrated, end-to-end business process that runs from planning the merchandise assortment, to sourcing, to distribution, to allocation of the goods to stores, to promoting and selling the assortment to customers and finally, to replenishing inventory as necessary. Merchandising is the heart of retailing. It is the supply chain practice of making products in retail outlets available to consumers, primarily by stocking shelves and displays. It is taking the product (or merchandise) from a company and selling it to the customer. It is ensured that the products are visible in stores and presented in an appealing fashion. Merchandise analysis is identifying need and wants of customers in order to buy the correct merchandise. Merchandising is defined as “a marketing practice in which the brand or image from one product or service is used to sell another”. Merchandising, as commonly used in marketing, also means the promotion of merchandise sales by coordinating production and marketing and developing advertising, display and sales strategies to increase retail sales. It includes disciplines in pricing and discounting, physical presentation of products and displays and the decisions about which products should be presented to which customers at what time. Merchandise management is the process by which a retailer attempts to offer the right quantity of right merchandise at the right place at the right time and at the same time, meeting the organisation’s financial objectives. Every retailer space is most precious and the merchandise has to justify the Return on Investment (ROI). Hence, the buying decision is a very strategic decision to a retailer. Merchandise management is an integrated approach to inventory assortment offerings, marketing communications and selling. It does not limit your approach to inventory selection and pricing issues only. It takes all three; effective merchandising, marketing and sales, to create a highly desired customer experience. An integrative approach will help to create: •

the right management vision to address aged inventory

•

stock balancing

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pricing strategies

•

vendor performance

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assortment planning

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product selection for purchase and repurchase

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managing gross margin return on investment and increasing product turnover

It is highly desirable to adopt an approach to solve the merchandising challenges by taking an integrated approach to managing resources and creating emotional connectivity with your company, brand and products. Merchandise management is the process of analysis, planning, acquisition, handling and control of the merchandise investments of a retail business with the objective of maximising the sales and profits of a category. It sounds simple but involves different processes like buying, sourcing, merchandising and sales. It may be virtually impossible to keep the buying process straight without grouping items into categories. In general, a category is an assortment of items that the customer sees as reasonable substitutes for each other.

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For example, men’s formal apparels, ladies ethnic wear and infant’s apparels are categories. It is important to understand that merchandising is an integral part of the overall strategy for the success of a retail venture. It is much more than simply stocking and arranging the products on shelves. It is truly an integral component of the store’s overall business and can go a long way towards improving its image and consequently, its sales. Merchandising is all about creating a congenial environment in the retail store that aids customers in their overall shopping experiences. It begins long before customers actually enter the store. In this context, the following points are helpful: •

The retail store should look appealing and welcoming to customers.

•

Try to have clear and professional-looking signage that is distinctly visible to the customers.

•

Display merchandise arranged in an orderly fashion.

•

The items should have unambiguous signs showing prices and promotional offers prominently displayed.

•

The interiors should be neat and orderly.

•

The staff should display helpful and pleasing manners to assist customers with their shopping needs.

The role of merchandising is to make customers feel that there is always something new and innovative to look at and shop for every time they come in, to make a purchase. For example, window-dressing does not cost much, but it adds the “professionalism.” If there is really a good window dresser, you will find increase in sales straight away - many products sell out when the customer sees them within a window display. 1.1.1 Historical Definitions of Merchandising According to Copeland and Learned (1933), merchandising is product planning. The job of merchandising is to ascertain the characteristics of the merchandise for which there is a potentially profitable demand, to prepare instructions for the manufacturing plant in order that it may be able to produce goods for which a demand exists, to aid in developing plans for promoting the sales and to supervise various routine operations in connection with these activities. It includes the determination of what to make, how much, at what time, and at what price. The Definition Committee of the National Association of Marketing Teachers, one of the former organisations of the AMA, defined merchandising as follows, " Merchandising – The adjustment of merchandise produced or offered for sale to customer demand. It involves the coordination of selling with production or buying for resale." 1.1.2 Principles of Merchandising The basic principles around which the function of merchandising needs to revolve are: •

Understand the target market: The retailer exists for the customer. Thus, products retailed in the store should be a reflection of consumers’ needs and wants.

•

Build the merchandise plan, one store at a time: Each store is different; the customers visiting each store are different. Hence, they have to be understood as separate entities. While the merchandise plan is built for the company as a whole, there has to be an element, wherein, peculiarities of each store and region are taken into account.

•

Buy what your customers want, not what you want: The buyer is the representative of the consumers, and it is necessary to remember that the choice and taste of target consumers may be very different from the buyer’s.

•

Build the right assortment: In case of most products that are bought and consumed, the consumer is always looking for a choice. A wide assortment of the right kind of goods goes a long way in building consumer loyalty towards the brand.

•

Be consistent: While building a range of products for the consumers, it is necessary to ensure the consistency across all product offerings. Consistency is required not only in the choice of products offered but also in terms of their quality.

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Buying and Merchandising

•

Offer value: The consumer’s decision to buy a product is not always governed by price alone. While taking the buying decision, they seek value made in the purchase. Low price may not always be a factor favouring sales, and the perception of value that the product provides, eventually influences the consumer’s decision.

•

Understand the needs of the vendor and negotiate a win-win situation: While vendors play a key role in the entire buying process, it is necessary that a buyer understands the strengths and weaknesses of each vendor and also motivates them. If the goals of the organisation are consistent with what the vendor seeks to achieve, a better and long-term working relationship is envisaged.

•

Share information: Sharing information with the vendors often goes a long way in creating a sense of responsibility and involvement among them. Crucial information that is shared on a timely basis may even affect the long term success or failure of a product or a range of products.

•

Accept the mistakes committed: A product or a range launched may not always meet with the expected success. When a buyer is informed that some particular merchandise has not met with the success that was anticipated, it is essential to move the goods and open up the selling space to other inventory.

•

Seek to surprise the customer: The merchandise is what draws the consumer to the retail store. If the merchandise in the store excites the customer and exceeds his expectations time and again, the customer will have a reason to keep coming back to the store.

1.1.3 Merchandising Strategy Fundamentally, a strategy defines a company’s position. On the other hand, merchandising refers to the basic product mix that the retailer offers to the end consumer. The figure below shows the areas influenced by the merchandise strategy. A merchandising strategy is defined as “a company’s position with respect to a given product-mix aimed at ensuring optimisation of resources, achieving target sales and margins and reducing stock outs and markdowns.” The merchandising strategy in turn, dictates the position that a particular buyer and merchandise adopts with respect to the following criteria: •

The products to be sourced.

•

The terms and conditions agreed with the vendors and suppliers.

•

The pricing strategy to be adopted.

•

The method of packaging and presentation to the end consumer. Products to be sourced

The method of packaging and presentation

Merchandising strategy

Price to be adopted

Fig. 1.1 Areas influenced by the merchandise strategy 4/JNU OLE

Vendor terms and conditions

Products to be sourced: Retailers may buy product from a variety of sources, which depend on the nature of the business and the product, as well as on the capacity for the inventory. There are different types of sources such as: •

Drop shipping

•

Local sourcing

•

Low volume: wholesalers

•

Mid volume: importers and distributors

•

High volume: manufacturers and liquidation sales

Drop shipping allows the products to be sold without having to hold inventory of the merchandise. The drop shipper holds the stock for the retailer, who is not required to pay until the stock is sold out. It is obvious that drop shipping can be a good sourcing practice to test the market for a specific product. If the product is sold, a bulk order of the product may be placed. Local sourcing is suitable for the products, such as car boot sales, discount shops and local outlet stores. This is a good technique to get started immediately in finding products to sell, but it is the most limited type of product sourcing. Wholesalers are the best option for purchasing low volumes because they are generally very flexible with retailers. Once the business is established and the retailer is in a position to hold larger quantities of product, importers and distributors may be considered for product sourcing; although they have higher minimum order requirements, they can offer pricing arrangements, which can be considerably more profitable than dealing with the wholesalers. The best ways to increase profit margin are to purchase directly from the manufacturers and to import goods from overseas factories and distributors. Many international suppliers can offer low priced, high quality goods that can help increase profitability. But, importing requires dealing with many issues, such as managing suppliers, shipping and importation fees. Liquidation sales are usually bulk lots of merchandise that are being sold when a retail company goes out of business. Buying at liquidation can be a very good way of getting very low priced merchandise for sale, but it does not create an ongoing supply of the product. Vendor’s terms and conditions Vendor’s terms and conditions is an important step in the product merchandising strategy. These depend on the nature of product. The buyer and the vendor negotiate and set the terms and conditions. Some examples are: •

Dispatch and transit time

•

Posting and packaging

•

Payment options

•

Exchanges

•

Defects

•

Returns

•

Lost items

Pricing strategy One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions and promotion.

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Packaging and presentation The packaging and presentation of the product plays an important role in merchandising. No matter how well is it made, a product will not attract the buyer unless it is presented in an attractive manner. It cannot be expected that a car of a new model in a showroom will be presented in a dirty state or having scratches on the body. Similarly, the packaging of a product displayed on the shelves of a supermarket is equally important. It should be: •

Attractive in appearance

•

Easy to handle

•

Showing the brand name prominently and

•

Providing clearly all the information, such as nutrition value, ingredients, weight, price etc.

The corporate strategy of a retail organisation influences the buying strategy. While the corporate strategy serves as a guiding framework for each and every department within the organisation, the buying strategy is more specific. For the organisation, it serves as guide for the function of buying, as well as to decide the time-frame for specific actions to be accomplished. Thus, while the buying strategy is a reflection of the corporate strategy, it is specific only to the company’s buying department. The buying policy not only ascertains the buyer’s duties and responsibilities, but also enables the suppliers and vendors to clearly understand whether the company allows many suppliers to be a part of its sourcing base or restricts its buying from a few suppliers. The method of supplier selection and the terms and conditions that apply to them are also similarly determined. 1.1.4 Merchandising Mix Merchandise refers to the complete range of products that the retailer chooses to offer to its customers. Merchandise mix covers the breadth and depth of products sold by the retailers. Often, it is also referred to as the product assortment. Over a period of time, the merchandise mix may change in keeping with the market conditions and may vary even during the course of the same year. For example, the merchandise mix offered during Diwali is different from that offered in summer time. The merchandise mix comprises of products, which the retailer terms as staple, classic or basic; combined after taking into consideration fashion, fads and seasonal preferences. Staple merchandise lines include those products that are always in demand. Often, they make for the basic necessities of life such as sugar, salt, pulses and so on, or are those products for which there is always a steady demand. Depending on the type of the retail model, the retailer has to ascertain the staple products for its stores. In many cases, these products can also be termed as classics. Some of the examples of the products which can be classified as staples are shirts for men, socks, handkerchiefs, stationery, and so on. Developing a profitable merchandise mix is a continuous process. Using standard metrics and benchmarks makes a consistent review of products and categories possible. Reviewing historical performance, setting objectives and then comparing the actual performance will lead to an actionable strategy for developing an appropriate merchandise mix. It is always advantageous to enlist the assistance of the marketing and creative teams to support the merchandisemix objectives. Merchandise line Merchandise line comprises of a group of closely related products intended for the same end use, and sold to the same customer group. A given merchandise line also falls within the same price range. Thus, we can say that a combination of merchandise lines makes up the merchandise mix.

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1.1.5 Role and Responsibilities of Merchandiser The merchandiser is responsible for particular lines of merchandise, for example, in a department store, there may be merchandiser for menswear, children’s wear and so on. The basic duties of the merchandiser can be divided into four areas. They are planning, directing, co-ordinating and controlling. •

Planning: Though the merchandisers may not be directly involved in the actual purchase of merchandise, they formulate the policies for the areas in which they are responsible. Forecasting sales for the forthcoming budget period is required and this involves estimating consumer demand and the impact of changes in the retail environment. The sales forecasts are then translated into budgets to help the buyers work within the financial guidelines.

•

Directing: Guiding and training buyers as and when the need arises is also a function of the merchandiser. Many a times, the buyers have to be guided to take additional markdowns for products, which may not be doing too well in the stores. Inspiring commitment and performance on the part of the buyers is necessary.

•

Co-ordinating: Usually, merchandise managers supervise the work of more than one buyer. Hence, they need to coordinate the buying effort in terms of how well it fits in with the store image and with the other products being bought by other buyers.

•

Controlling: Buyer’s performance can also be evaluated on the basis of net sales, maintained mark up percentages, gross margin percentages and stock turn. This is necessary to provide control and maintain high performance results.

Role of merchandise manager or Divisional Merchandise Manager (DMM) The role of a divisional merchandise manager, immaterial of the size of the retail organisation, would involve the following functions: •

Forecasting sales for the forthcoming budget period: This involves estimating consumer demand and the impact of changes in the retail environment.

•

Translating the sales forecast into inventory levels in terms of rupees: To do this effectively, the DMM needs to understand and provide for the inventory levels that would be needed to achieve a particular level of sales.

•

Inspiring commitment and performance on part of the merchandisers and buyers: It is believed that divisional merchandise managers can guide the merchandisers in terms of vendor selection, merchandise lines that can be developed and future trends.

•

Assessing not only the merchandise performance but also the buyer’s performance in order to provide control and maintain high performance results.

1.2 Buying and Merchandising Management The buying and merchandise management experience includes all the processes for procuring and selling merchandise, encompassing: •

Merchandise planning: Merchandise planning can be defined as a systematic approach with the aim of maximising return on the investment. It involves appropriate planning of the sales and inventory order. Sales potentials are increased by adopting mark-downs and stock-outs strategies. It is imperative to keep a proper balance between sales and purchases. Besides, constraints imposed by the store-layouts, warehousing and logistics should also be taken into account, while keeping this balance. If we are able to divert our resources from the stocks that suck our profit, to the business generating the revenues, chances of our over-all success will be higher. Assortment planning: Assortment planning is of utmost importance for the success of the retailers. It involves ascertaining the quantities of various products that will be purchased to fit into the overall merchandise plan. It is absolutely necessary to detail out the colour, size, brand and materials, and so on, of each assortment. The primary goal of an assortment plan is to create a balanced assortment of merchandise for the customer. A number of factors affect the assortment planning, the most important factor being the type of merchandise, i.e. basic or staple merchandise, fashion, specialty or convenience goods, to be stocked in the retail store. The amount of money available for investment in the inventory is another important factor. Sometimes, the retailer decides to offer only a particular brand in his store. The availability of space in the store and market constraints is other important factor that is taken into account for assortment planning. 7/JNU OLE

Buying and Merchandising

•

Open-to-Buy management: Open-to-Buy management is a financial budget for retail merchandise. The Opento-Buy eliminates the stress of worrying whether the retailer is buying too much or too little. With Open-to-Buy, the retailer can go to the market with a buying plan for each classification of merchandise for a specific time frame. It is not difficult at all to prepare an Open-to-Buy plan, but it requires some time and thought. It needs the information, planned sales by month, planned or anticipated markdowns and planned monthly beginningof-month inventory levels.

•

Purchasing: As regards the purchasing management, it deals with the monitoring of the right authorisation of the right item, at the right price, quality and quantity, from the right supplier at the right terms and at the right time. The major objectives of the purchase management are: ‚‚ To maintain the quality and value of the products ‚‚ To minimise the cash tied up in inventory ‚‚ To maintain a proper flow of inputs and outputs ‚‚ To enhance the competitive position of the firm

•

Receiving: Receiving can be defined as the point of transfer of the possession of goods from the manufacturer to the retailer. It involves the administrative function involving proper checking of the quality, quantity and condition of the incoming goods before their storage.

•

Distribution: Distribution can be of two types, namely, sore distribution and inter-store transfers. Different tools have been developed to help the retailer to monitor distribution. For example, ‘Merchant Plus’ has been designed to help a merchant better leverage inventory across stores to prevent lost sales and increase stock turn rates, cash flow and margins. These tools also provide for the efficient transfer of merchandise between stores. This programme also records and facilitates transfers both out of and into a store or distribution centre.

•

Import management: The import management involves facilitating all aspects of the import transaction, namely, importing goods, customs clearance, payment of the duties and tariffs and arranging transport, warehousing, and so on.

•

Inventory management: Inventory management refers to the retailer trying to acquire and maintain a proper merchandise assortment so that the cost related to ordering, shipping, handling, and so on, may be kept in check. The inventory management is very crucial to adjust reasonable times between replenishment, asset management, inventory forecasting, inventory valuation, inventory visibility, availability of space for inventory, quality management, directing defective goods and demand forecasting.

•

Vendor management: Vendor management involves a consistent risk classification and necessary efforts to ensure risk assessment that eliminates undue third party risk exposure. A vendor management tool, namely, Vendor Management System (VMS) has been developed. It is an internet-enabled tool that acts as a mechanism for business to manage and procure staffing services. The VMS application includes: ‚‚ Order distribution ‚‚ Consolidated billing ‚‚ Much faster reporting capability

•

Sales processing: The sales processing is a systematic approach for selling a product or service. It includes seller and buyer risk management, standardised customer interaction and measurable revenue generation. The sales process involves a number of specific steps or stages that may vary from company to company. Some of the general steps are initial contact, proposal, negotiations, closing, deal transaction, and so on.

•

Price management and revenue optimisation: Price management and revenue optimisation refers to the capabilities in generating higher margins from competitive and fragmented markets. In this respect, the support extended by the senior management is one of the most important devices of success. Some software tools have been developed for optimum price management and revenue optimisation.

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•

Physical inventory: Physical inventory is a process where a business organisation counts its entire inventory physically. It may be necessary, due to financial accounting rules or the tax regulations, to place an accurate value on the inventory. Business may use several different tactics to minimise the disruption caused by physical inventory.

•

Promotional management: Promotional management refers to coordinating promotional mix elements to develop a controlled and integrated programme for effective marketing. In addition to the regular store promotional schemes, many innovative methods can be used to promote sales. Some of the examples include, special offer for the first time customers, store wide sales, gift certificate and free shipping.

1.3 Planning Merchandise Assortment Assortment planning is the process of trading-off variety, assortment and backup stock. An assortment plan is a list of merchandise that indicates in general terms, what the retailer wants to carry in a particular merchandise category. Thus, an assortment plan tends to be the amalgamation of the Gross Margin Return on Inventory Investment (GMROI) plan, the inventory turnover plan, sales forecasting and assortment planning. The assortment plan provides the merchandise planner with a view of what the composition of a specific category of merchandise should be. Small and large retailers are required to make decisions for thousands of individual items from hundreds of vendors, both nationally as well as internationally in some cases. If the buying process is not organised in a systematic way, it will result in chaos. The planning of merchandise assortment is a three step process. The figure below shows the steps involved in merchandise assortments plan. Organise the buying process by categories

Set merchandise financial objectives

Develop an assortment plan

Fig. 1.2 Steps of merchandise assortments plan Organise the buying process by categories Issues such as what merchandise to purchase and in what quantity, are of strategic significance to every retailer, especially for the multi-store retail chains of today. Therefore, for decisions on these matters, a thorough plan called a merchandise assortment plan has to be adopted. Set merchandise financial objectives In the merchandise assortment plan, the merchandise is split into categories for the purpose of planning. Such categories are managed by buyers and merchandise planners, as well as vendors. Retailers have many tools that help them develop a merchandise plan, such as Gross Margin Return on Inventory Investment (GMROI), inventory turnover and sales forecasting.

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•

GMROI is a tool that helps the retailer to plan and evaluate performance of the merchandise. The GMROI, for a specific category of merchandise, is calculated on the basis of overall financial objectives of the retailer, which are further assigned to specific categories.

•

The gross margin percentage in combination with the inventory turnover evolves into a useful tool for managing merchandise. The most significant issue for a retailer is determination of the inventory turnover and development of the inventory turnover goals. Retailers should avoid the extremes in inventory turnover rates, such as extremely rapid and extremely slow turnover rates.

•

Though rapid inventory turnover is necessary for financial success of a retailer, any attempt of the retailer to push the level of inventory turnover to the maximum will lead to frequent stock-outs and increased costs.

Assortment plan While forecasting sales, retailers should identify the stage of the lifecycle of the specific category, and should determine whether the merchandise category offered is a fad, a fashion, a staple or a seasonal item, so as to plan merchandising accordingly. While making sales forecasts for a specific merchandise category, retailers take information from various sources, such as past sales volume, published secondary data and customer surveys. Determining a merchandise strategy is a crucial issue for a retailer. It involves establishing a trade-off among the variety offered, assortment provided and the availability of the products.

1.4 Buying System Buying system involves buying for fashion merchandise and buying for staple merchandise. These products are allocated to the stores and performance of merchandise are analysed. The figure below represents the buying system which is a three step process.

Fashion merchandise buying systems

Allocate metchandise to stores

Staple merchandise buying systems

Analyse merchandise performance

Fig. 1.3 Buying system 1.4.1 Three Step Process for Buying System The three steps of buying system are described below. Step1: Buying systems for fashion merchandise and staple merchandise In the first step, the retailer needs to decide the budget allocation for each of the first two things. The store will consist of fashion merchandise and staple merchandise. In a typical apparel store, the fashion merchandise will consist of “seasonal” products and range offered by a company in its product category. The staple merchandise for apparel is colours like blue, black and beige and white, which is part of everyone’s basic wardrobe and continuously in

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demand throughout the year. The retailer is limited by the amount of money and space available for merchandise in a store. He has to decide whether to carry large variety of different types (categories) of clothing, for example, shirts, trousers, denims and so on. In a food and grocery store, the staple merchandise will be rice, wheat, pulses, spices that are required in -daily use. Step 2: Allocate merchandise to stores In the second step, the retailer needs to allocate merchandise to store, which includes the backup stock. The more the backup stock, lesser are the chances of running out of stock. In other terms, the more the backup stock, there will be lesser money for other assortments. Therefore, the retailer needs to do a process of trading off variety, assortment and backup stock, which is what assortment planning is all about. Step 3: Analyse merchandise performance In the third step, the retailer needs to analyse performance of each category and brand and allocate budget based on the Return on Investment (ROI). All merchandising plans depend on the performance of each category and the money that needs to be allocated for such category. Therefore, the principles of buying will depend on the performance of each category of product in a store and the returns, it gives on the investment. 1.4.2 Buying Organisation All retailers, even with only one buyer, who may be the owner himself, need to organise the buying activity around categories to maintain an orderly buying process. Each retailer will have its own system of categorising merchandise. However, the National Retail Federation (NRF) has evolved a standard illustrative chart, which shows the various categories and the standard designations of people who handle such categories, which gives an indicative picture of a Buying Organisation Chart that indicates not only the categories but also the persons who head them. The figure illustrates the buying organisation.

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Chairman Chairman Merchandise-oriented Merchandise-oriented partner partner

MERCHANDISE GROUP

PLANNING GROUP

Sr. V.P., Chairman merch. mgr.: Merchandisewomen’s oriented ready-to-wear partner

Sr. V.P., merch. mgr.: Chairman men’s Merchandisechildren’s oriented intimate partner apparel

Sr. V.P., merch. mgr.: Chairman cosmetics, Merchandiseshoe’s oriented jewellery partner accessories

Sr. V.P., Chairman merch. mgr.: Merchandisesoft home oriented furniture partner kitchen

Chairman V.P. Merchandiseplanning oriented partner

Div. merch. Chairman mgr.: Merchandisemen’s oriented sportswear partner Polo

Div. merch. Chairman mgr.: Merchandiseyoung men’s oriented boy’s apparel partner

Div. merch. Chairman mgr.: Merchandisechildren’s oriented apparel partner

Div. merch. Chairman mgr.: Merchandiseintimate oriented apparel partner

Chairman Div. dir. Merchandiseplanning oriented partner

DEPARTMENT Div. merch. Chairman mgr.: Merchandisemen’s suits, oriented slacks partner dress shirts CLASSIFICATION Chairman Buyer MerchandisePreteen oriented Accessories partner

Chairman Buyer MerchandiseGirl’s oriented size 7-14 partner

Buyer Girl’s size 4-6

Chairman Buyer MerchandiseToddler’s oriented Infants’ partner

Chairman Buyer MerchandiseInfants’ oriented partner

Chairman Buyer MerchandiseLittle boys’ oriented partner

Chairman Mgr. Merchandiseplanning oriented partner

CATEGORY

Sportswear

Dresses

Swimwear

Outerwear

SKU Girls’ Levi jeans size 5 stone-washed blue, straight leg

Fig. 1.4 The buying organisation It may be noted that each category indicated above is an example of an apparel store, which contains all the categories and each category will have a buyer who will be handling several vendors respectively. 1.4.3 Buying Principles The principles of buying facilitate the sales process of the firm. The buying activity for any category will depend on the depth of merchandise that the store would like to offer. For example, in exclusive footwear store like Bata, the customer will find depth in merchandise with large varieties and design options, but the same thing in a multibrand footwear store, the depth of merchandise will be limited with more breadth by offering several brands. Also, a Stock Keeping Unit (SKU), which means the smallest unit available for keeping inventory, which usually means single size, single colour and single style, will be considered as a single SKU. The major principles of buying are discussed below.

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•

Variety: Variety is the number of different merchandising categories within a store or a department. Stores with large variety are said to have good breadth of merchandise and the terms variety and breadth are often used interchangeably. For example, an exclusive Levi’s store may carry a large variety of denims and denim accessories to meet the target customer’s requirements.

•

Assortment: Assortment is the number of SKU’s within a category. Stores with large assortments are said to have good depth. The terms assortment and depth are used interchangeably. For example, an exclusive Zodiac store may carry a large assortment of formals, casuals, belts, ties and other accessories for men.

•

Determining variety and assortment: To determine the variety and assortment for a particular category, the buyer needs to consider profitability of the merchandise mix, the corporate philosophy of the organisation towards assortment, physical characteristics of the store and finally the degree to which categories of merchandise complement each other.

1.4.4 Factors Affecting Buying Function The function of merchandise buying in a retail organisation is a function of inter- organisational and intraorganisational factors. Inter-organisational factors

Intra-organisational factors

Retailer size Retailer type Retailer location Management mentality

Type of merchandising Product positioning Regulatory constraint Type of decision

Business climate

Merchandise requirements

Choice calculus

Ideal supplier/ product choice

Supplier selection

Competitive structure

Corporate image

Company’s financial position

Actual/ supplier/ Product choice

Business negotiations

Market disturbance

Relative marketing effort

Fig. 1.5 Theory of merchandise buying behaviour (Source: Pradhan, S., 2009. Retailing management, 3rd ed., Tata McGraw Hill Education Private Limited) The choice calculus and supplier accessibility are constructs that capture the retailer’s decision rules. The suppliers that the retailer would consider in a given buying situation are determined on the basis of combination of the competitive structure, the corporate image of the supplier and the marketing effort that the supplier is willing to undertake for a retailer.

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Thereafter, the decision on the supplier eventually selected for a range of products, becomes a function of the supplier and the product choice available. This construct captures the supplier choice that would be the outcome of a rational and formal decision-making process, if the information about the merchandise requirements and the accessible suppliers are available. The negotiations between the manufacturer and the retailer are important in establishing the terms of trade and whether there will be any trading. If negotiations break down, the retailer will have to settle for a less than ideal supplier. Similarly, factors like market disturbance, which includes unexpected events like strikes, disasters, economic sanctions and so on, will also play a role in the buying decision. 1.4.5 Roles and Responsibilities of Buyer Buyers play an important role in the retail industry. They select and order merchandise to be sold, which directly affects the sales volume of their store and its share of the total retail market. Buyers may be responsible for buying for a department, an entire store and a chain of stores. It is important that buyers maintain a balanced inventory and a budget agreed upon between themselves and the store manager. Central buyers work for chain stores and mail order houses. They may be located in divisional headquarters, the parent store of a chain, or in offices in wholesales market areas. Associate or junior buyers usually buy specific items for a department or division of a firm, which is too large to be served by one buyer. They assume responsibility for the specified-item purchases, but coordinates with the head buyer. Assistant buyers are responsible for routine aspects of the work. They coordinate stores, supervise personnel and maintain sales and inventory records. The responsibilities of a buyer include: •

Developing the merchandising strategies for the product line.

•

Planning and selecting merchandise assortments: This requires a keen understanding of the current market trends and economic developments. At the same time, it requires an understanding of the needs and wants of the target customers and locating a product to suit these needs.

•

Vendor selection, development and management: Negotiations with vendors for favourable terms and services are delicate issues handled by the buyers.

•

Pricing the merchandise to achieve the required targets in terms of gross margins.

•

Inventory management: Allocation of merchandise to the various retail stores is also an integral part of the functions of the buyer. Hence, a buyer needs to control inventory, which includes not only procurement, but also providing the goods as per the needs of the stores, so that under ideal circumstances, there is never a situation when the product is not available in the retail store.

1.5 Function of Buying for Different Types of Organisation The function of buying and merchandising varies from organisation to organisation. Hence, the role of buyer and merchandiser would vary. Similarly, levels within the hierarchy would also vary. The buyer needs to monitor and maintain gross margin plans by controlling mark-ups, markdowns, shortages, turnover and stock levels. Larger retailers provide more sophisticated merchandise information systems that allow quick and efficient responses to the changes in the market. They also established planning processes for seasonal planning, forecasting and assortment planning. Buying and merchandising may be centralised or decentralised. Central buying occurs when all buying activities are performed from the central headquarters. Decentralised buying occurs when individual stores are responsible for the buying function for their particular store.

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1.5.1 Buying for a Single or Independent Store In every retail store, the most fundamental activities are buying of merchandise and reselling it to end consumers. In small independent stores, typically one person is the owner and also the manager. The responsibilities of such person include business operations of the store along with buying and merchandising duties. This person should have a thorough understanding of the buying process. As owner has direct access to end consumers, there will be a better understanding of their needs and the function of the buying would be as per the requirements. The role of a buyer in an organisation involves: •

Coordinating the purchasing for various products required by the store

•

Writing orders

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Handling special orders as and when they arise

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Making decisions regarding merchandise returns

•

Re-merchandising the store

•

Taking decisions with respect to the pricing of the product

•

Planning and coordinating various promotional activities and events, and in-store presentation of the merchandise

•

Customer contact and selling

1.5.2 Buying for a Chain Store or a Chain of Department Store As the operation of a chain store is larger than that of an independent store, the buyer in such an organisation needs to be specialist. Merchandising in chain stores is characterised by: •

Central buying plans

•

Central merchandising plan

A retail chain operates in more than one region. Therefore, the store has to serve the needs of a diverse consumer market. The needs and wants may be different. Thus, the buyer needs to be aware of these peculiarities in the market, before progressing with the buying of the merchandise. 1.5.3 Buying for Non- Store Retailer The process of buying and merchandising for a non-store retailer will vary from that of a store retailer. The mail order buyer needs to plan well in advance, as the production of the catalogue takes a long time. In addition, large variety of merchandise need a fair amount of market work. Buyers for an e-tail venture need to have a clear understanding of the type of products that consumers would buy on the internet. Thus, the nature of organisation is an important factor affecting the function of merchandising.

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Summary •

Merchandising is defined as “a marketing practice in which the brand or image from one product or service is used to sell another.”

•

Merchandise management is the process by which a retailer attempts to offer the right quantity of right merchandise at the right place, at the right time, and meeting the organisation’s financial objectives at the same time.

•

The role of merchandising is to make customers feel that there is always something new and innovative to look at and shop for every time they come in to make a purchase.

•

A merchandising strategy is defined as a company’s position with respect to a given product-mix aimed at ensuring optimisation of resources, achieving target sales and margins and reducing stock outs and markdowns.

•

The areas influenced by the merchandise strategy include the products to be sourced, the terms and conditions agreed with the vendors and suppliers, the pricing strategy to be adopted and the method of packaging and presentation to the end consumer.

•

Merchandise refers to the complete range of products that the retailer chooses to offer to its customers.

•

Merchandise mix covers the breadth and depth of products sold by the retailers.

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The merchandise mix comprises of products, which the retailer terms as staple, classic or basic; combined after taking into consideration fashion, fads and seasonal preferences.

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Merchandise line comprises of a group of closely related products intended for the same end use, and sold to the same customer group.

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The basic duties of the merchandiser can be divided into four areas, namely, planning, directing, co-ordinating and controlling.

•

Assortment planning is the process of trading-off variety, assortment and backup stock. An assortment plan is a list of merchandise that indicates in general terms what the retailer wants to carry in a particular merchandise category.

•

GMROI is a tool that helps the retailer to plan and evaluate the performance of merchandise.

•

Buying system involves buying for fashion merchandise and buying for staple merchandise.

•

The principles of buying facilitate the sales process of the firm. The major principles of buying include variety, assortment and determining variety and assortment.

•

The function of merchandise buying in a retail organisation is a function of inter- organisational and intraorganisational factors.

•

Buyers play an important role in the retail industry. They select and order merchandise to be sold, which directly affects the sales volume of heir store and its share of the total retail market.

References •

Berman, 2007. Retail Management: A Strategic Approach, 10/E . Pearson Education India, p. 710.

•

Usui, K., 2008. Development of Marketing Management, Ashgate Publishing Group.

•

Introduction to Buying and Merchandising [pdf] Available at: . [Accessed 10 October 2011].

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Merchandise Management. [pdf] Available at: . [Accessed 10 October 2011].

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RetailTribe, 2010. Merchandising BP: Back to Basics.wmv [Video Online] Available at: . [Accessed 10 October 2011].

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Mcauliffe, J., 2009. Online Merchandising: The Basics [Video Online] Available at: . [Accessed 10 October 2011].

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Recommended Reading •

Varley, R., 2006. Retail Product Management: Buying and Merchandising, 2nd ed., Routledge.

•

Berman, 2007. Retail Management: A Strategic Approach,10th ed., Pearson Education India.

•

Donnella, J., 2007. Merchandise Buying and Management, 3rd ed., Fairchild Publications.

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Self Assessment 1. The ___________and supplier accessibility are constructs that capture the retailer’s decision rules. a. choice calculus b. trading-off variety c. merchandising d. assortment 2. Which of the following statements is false? a. The process of buying and merchandising for a non-store retailer will vary from that of a store retailer. b. The function of buying and merchandising varies from organisation to organisation. c. Large buyers work for chain stores and mail order houses. d. Buyers play an important role in the retail industry. 3. _________inventory is a process where a business organisation counts its entire inventory physically. a. Buffer b. Retail c. Trade-off d. Physical 4. Which of the following is a tool that helps the retailer to plan and evaluate the performance of the merchandise? a. GMROI b. VMS c. ROI d. SKU 5. Buying system involves buying for fashion merchandise and buying for _____ merchandise. a. physical b. trade-off c. staple d. retail 6. Which of the following statements is true? a. Merchandise management is the only approach to inventory assortment offerings, marketing communications and selling. b. Local sourcing is suitable for the products such as car boot sales, discount shops, and local outlet stores. c. Wholesalers are the best option for purchasing low volumes, because they are generally not flexible with retailers. d. Liquidation sales are usually small lots of merchandise that are being sold when a retail company goes out of business. 7. Which of the following allows the products to be sold without having to hold inventory of the merchandise? a. Drop shipping b. Local sourcing c. Merchandising strategy d. Pricing strategy

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8. Match the following. 1. Stock Keeping Unit

A. Tool that helps the retailer to plan and evaluate the performance of the merchandise.

2. Merchandising

B. Defined as a company’s position with respect to a given product-mix aimed at ensuring optimisation of resources, achieving target sales and margins and reducing stock outs and markdowns.

3. GMROI

C. The smallest unit available for keeping inventory which usually means single size, single colour and single style, will be considered as a single unit.

4. Merchandising strategy

D. Defined as “a marketing practice in which the brand or image from one product or service is used to sell another”.

a. 1-C, 2-D, 3-A, 4- B b. 1-D, 2-C, 3-A, 4- B c. 1-C, 2-A, 3-D, 4- B d. 1-D, 2-C, 3-B, 4- A 9. _______ management involves a consistent risk classification and necessary efforts to ensure risk assessment that eliminates undue third party risk exposure. a. Buyer b. Retail c. Store d. Vendor 10. ___________ planning can be defined as a systematic approach with the aim of maximising return on the investment. a. Pricing b. Assortment c. Merchandise d. Promotional

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Chapter II Managing Merchandise and Merchandising Planning Process Aim The aim of this chapter is to: •

define merchandise planning

•

introduce the process of merchandise planning

•

explain the tools used in merchandising planning

Objectives The objectives of this chapter are to: •

enlist the components of merchandise planning

•

elucidate the concept of merchandise mix

•

classify the basic formats of merchandise display

Learning outcome At the end of this chapter, you will be able to: •

comprehend the need for merchandise planning

•

understand the management of merchandise cost and quality

•

describe the role and importance of warehouse facility

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2.1 Introduction As a retailer, one of the important assets is space. On the other hand, in numerous situations, the quantity of space we have is a limited resource. It needs to be well managed. The homelands that have enjoyed the utmost trade and communal development have been those with a well-built retail sector. Retailing has turned out to be a well-liked method of conducting business because of the merchandise, which is an easier access to a multiplicity of products, liberty of choice and elevated levels of customer service. The business processes are organised in a tree structure. The allocation of consumer products commence with the producer and ends at the decisive consumer. Linking the producer and the consumer, there is the retailer, a middleman who relates the producers and eventually the consumers. 2.1.1 Merchandise Management Merchandising has stepped forward to churn out to be so much further than the buying and selling of products. At the instant, no product should be purchased without an idea to which it will be sold and when. In merchandise management, a business model represents a sample business situation in which the product may be used. A merchandise management describes a state of affairs in which various parties use merchandise to achieve their needs. Merchandise management can be defined as managing the various elements of merchandise, such as supply chain, cost management, quality management and shipping procedures. Other important elements in merchandise management are merchandising storage and display. While handling merchandise display and storage, a problem which needs constant monitoring is that of shrinkage and loss prevention. For profitable handling of the merchandise sales, the merchandise needs to be suitably priced and various margin related working needs to be understood. This calls for proper understanding of retail math. Store operations also calls for proper identification of performance parameters against sales, stock, manpower and so on, and correctly measuring the same. In order to manage the purchases and replenishments of stocks systematically, it helps the store management by following an Open-to-Buy planning method. 2.1.2 Merchandise Mix Planning a merchandise mix is a managerial decision that store management has to take. This is an important decision which reflects the store’s positioning platform. The concerned areas here are length and breadth of merchandise. Breadth reflects the product lines, while depth refers to the number of items in each product line. The decision on merchandise mix is implemented by functionaries called buyers. The buyer’s role is to choose specific products. Because of this role, the significance of buyer in a retail operation becomes large. They play a key role in vendor selection and profit generation through negotiation for better deals and allowances. 2.1.3 Managing Merchandise Costs Competition in the retail industry generates a new dilemma for manufacturers regarding how to concord with the accumulation of returned merchandise, which is the outcome of a self-motivated liberalisation of arrival policies. Merchandise cost management is an expensive and time-consuming activity for any retail organisation. Nowadays, aggressive retail atmosphere requires real-time data communication between stores and the corporate office for store-level activities, including item look-up, stock counts and transfers. This is done in order to get better eminence of inventory information, in-store efficiency and sell-through. Managing this mountain of merchandise has turned out to be a principal meet head-on to manufacturers that must be familiar with and live out the products flipside into their allocation channels for purposes of refurbishing, remanufacturing, recycling or liquidating the items returned by end users. With the increasing volume of substance, a significant amount of a manufacturer’s productivity may depend on its ability to deal with invalidate flow of its goods.

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Analysis

Price

Savings

Fig. 2.1 Factors affecting manufacture’s productivity Managing merchandise costs consists of purchase price, processing labour and product longevity. Dealing with suppliers involves bid specifications. These bid specifications are as follows: •

Description

•

Size

•

Composition (i.e., nylon or polyester)

•

Colour

•

Weight

•

Construction

•

Delivery costs and timetables

In order to obtain the best value for the purchase, the following points should be considered. •

One should ensure competitive bids from several suppliers.

•

Bid specs and RFP’s make “Apples vs. Apples” comparison possible, among several bids received.

•

The analysis of bids should consider the following concepts: ‚‚ Freight and terms are made part of the price equation ‚‚ Technical and sales support ‚‚ Volume discounts and price guarantees ‚‚ Best price does not necessarily mean best value ‚‚ Reliable supply is as important as price ‚‚ Primary and secondary suppliers

2.1.4 Managing Merchandise Quality Managing merchandise quality translates into delivering a product that meets or exceeds specifications, auditing procedures of new products, quality assurance for processed products and product security. Some of the quality control activities, conducted on receipt of supplies depending upon the type of products, are as follows: •

Physically counting the total or a specified percentage of received product or weighing bales

•

Visually inspecting product for defects

•

Isolating test pieces to measure shrinkage, durability, pilling, colour loss and so on

•

Individual operator audits

•

2% + random sample

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•

Generate a quality rating for each operator

•

Shipped product audits

•

Audit entire containers to develop a plant quality score

•

Service department questionnaires

•

Auditing product at customer locations

•

Physical inventories

•

Comparing actual usage to intended usage

2.1.5 Merchandise Display and Store Capacity Merchandise displays are special presentations of a store’s products or services to the consumers to buy. The nature of these displays may range from industry to industry to some extent, but all merchandise displays are predicated on basic principles designed to increase product purchases. Merchandise displays are an integral element of the overall merchandising concept, which seeks to promote product sales by coordinating marketing, advertising and sales strategies. Basic formats of merchandise display Merchandise displays generally take one of several basic forms as given below: •

Storefront window displays: These typically open on to a street or shopping mall walk or courtyard and are intended to attract passers-by that might not otherwise enter the store.

•

Showcase displays: These typically feature items that are: ‚‚ deemed to be too valuable for display in storefront set-ups ‚‚ niche items of high interest to the business’s primary clientele These display centres are usually located in high traffic areas and typically feature multiple tiers for product display and a sliding door on the clerk’s side for access.

•

“Found-space” displays: This term refers to product presentations that utilise small but nonetheless usable areas of the store, such as the tops of product carousels or available wall space.

Storefront window displays and “found space” displays are particularly the popular tools for publicising and selling sale items. Keys to successful merchandise display There are certain key components of successful merchandise display that are particularly relevant for small business owners. The ideal displays should be: •

Economical: utilising only space, materials and products that are already available.

•

Versatile: able to fit almost anywhere, exhibit almost any merchandise, and convey almost any message.

•

Effective: readily visible to any passer-by and also arranged so that there is no time or space lag between the situations when a potential buyer sees the design and when they react to it. The ideal display also shows the customer what the product actually looks like, not some flat and intangible picture of it. Few other forms of promotion can give such a vivid presentation of both the merchandise and character of a store.

Important tips on merchandise display The effectiveness of merchandising display strategy can be increased by few important tips given below: •

Space allocation for merchandise display and expenditures should be done according to customer demographics. For instance, if most of the business’ customers are males between the ages of 20 and 40, the bulk of the displays should probably be shaped to catch their interest.

•

Care should be taken with the merchandise display designs where the focus should be the effectiveness rather than the originality.

•

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Display should not be overcrowded. A display should feature a single item or point of interest; every primary article (in a display) must interact with every other so that they all come together as a group.

•

Combine products that are used together in displays. For example, pairing ski goggles with other outdoor apparel is apt to be more effective than placing it alone or with some other product that is only tangentially related to skiing.

•

Small items should be displayed in a manner so that would-be customers can get a good look at them without having to solicit the help of a member of the staff.

•

Attention should be paid while constructing and arranging the display backgrounds.

•

Merchandise displays can also be used to educate customers. Well- managed merchandise conceive display can , for example, illustrate a product use that may not have occurred to most customers. In addition to selling actual merchandise, display can be used to introduce a new product, a fashion trend, and a new ‘look’ or idea. Display can be used to educate the consumer concerning what the new item is, how it can be worn or used, and how it can be accessorised. The display may also supply important information such as, the price, and other special features.

All of the above points need to be weighed while putting together a merchandise display. But ultimately, the final barometer of a display’s worthiness is its ability to sell products.

2.2 Supply Chain Supply chain products helps in dealing with business complication and optimise the supply chain. With real-time group efforts decisions are made more speedily and disruptions are minimised. Supply chain management is defined as “the systemic, strategic co-ordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the longterm performance of the individual companies and the supply chain as a whole”. Internet-enabled supply chain applications model the supply chain, and along with advanced execution solutions, get better productivity from beginning to end quantifiable inventory and product cost reductions. These benefits are comprehended all the way through quicker response to market opportunities, enhanced customer satisfaction and true group effort with suppliers and customers. 2.2.1 Managing Supply chain Managing supply chain involves a definite ambition, information and service level agreements. A goal could be ‘the ability to ship specified products to customers on time.’ In order to successfully administer the supply chain, following information is needed: •

Current average and peak demand for each product supplied

•

Any anticipated increases in demand

•

Length of time to receive new product from supplier

•

Target inventory levels

•

Reorder points and reorder quantities

The supply chain management necessitates proper understanding of supply and demand considerations. In order to understand the product demand or requirement, the following points should be considered: •

Demand of product from customers

•

Plant turnaround time of product

•

Quantities of products already shipped to depots

•

Extra inventory for new accounts

•

Percentage of products to be upgraded

•

Reports and trend analysis

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In order to understand supply realities, the following points should be considered: •

Lead time from each supplier

•

Volume discounts from each supplier

•

Cost from each supplier

•

Quality from each supplier

Ordering documents is the next step, wherein, the four types of documents are reviewed: •

Purchase orders from buyer

•

Shippers’ challans/documents

•

Goods received note of the ware-house

•

Supplier’s invoices

The three ways matching process is explained in the figure given below:

Approved

Shippers’ challans

Fig. 2.2 Matching process These solutions offer a combined suite of advanced forecasting, planning, and scheduling to manage the supply chain. An integrated framework supports various modules and state-of-the art tools for a broad range of business decisions. These enable the business to monitor the supply chain condition and provide immediate feedback and exception notices. Supply chain solutions offer the following benefits: •

Delivering benefits in certain areas ‚‚ Enhanced efficiency ‚‚ Superior inventory management ‚‚ More capacity utilisation and throughput ‚‚ Abridged operating and distribution costs

•

Better visibility ‚‚ Common view of forecast, orders, and inventory across the supply chain ‚‚ Ability to access and use plant information to improve decision making

•

Enhanced response and implementation ‚‚ Reduced time required to respond to opportunities and disruptions ‚‚ Faster recognition of deviations ‚‚ Improved decision-making tools to determine the right response ‚‚ Improved integration for communicating new plans and schedules ‚‚ Information available to support ongoing continuous improvement

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2.2.2 Warehousing Facility Warehousing facility should be appropriate to use in terms of right size, structurally sound, well maintained and clean. Warehousing has certain advantages and disadvantages, which are illustrated in the figure given below.

Advantages

Disadvantages

• frees up space at individual plants • central inventory is less than the sum of several decentralised warehouses • better purchasing leverage • faster turnaround on large orders • more efficient use of labour

• loss of “hands on” control at plant level • requirement for mutually agreed upon grading standards • taping procedures • hanging/folding standard • reduced local flexibility

Fig. 2.3 Advantages and disadvantages of warehousing

2.3 Merchandise Planning Merchandise planning is defined as “the planning and control of the merchandise inventory of the retail firm, in a manner, which balances the expectations of the target customers and the strategy of the firm.” 2.3.1 Concept of Merchandise Planning Merchandise planning is beneficial to both customer and the retailer. The retailer gets benefited as it enhances the possibility of the right assortment of goods, with the adequate amount of depth, to be available at the stores where it is needed. Merchandising planning further enhances the possibility of increased stock turns. This releases important working capital. From customer’s viewpoint, it is beneficial as it increases the choice available and reduces the possibility of facing a situation when the store is out of stock of the merchandise needed. As indicated in the following figure, the business strategy dictates the merchandise strategy, which in turn influences the planning of merchandise in terms of the type of product, the price, the range and then the assortment. Planning for the number of retails stores and the space available for the merchandise display are also taken into account for the purpose of allocating the merchandise to the stores. The next stage in the planning process keeps a view at the sourcing of merchandising and then, its actual allocation to the retail stores. The final stage is the monitoring of merchandise and vendor evaluation.

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Store (Formal) strategy

Business strategy

Merchandise strategy

Merchandise Planning • Product • Price • Range • Assortment • Space

Sourcing Make or buy • Vendor identification • Negotiations • Placing the order

Allocation of merchandise to stores

Performance monitoring & evaluation

Store Operations Planning

Fig. 2.4 The process of merchandise management (Source: Pradhan,S., 2009. Retailing Management, 3rd ed., Tata McGraw Hill Education Private Limited.) 2.3.2 Implications of Merchandise Planning The main objective of merchandise planning is profit improvement. As the buyer plans the buying for each department, a better overview of the profitability that retail organisation will be able to achieve is available. As the function of merchandising deals with the actual procurement of products for the retailer, it has implications on other business areas.

Merchandising planning

Store operations Space planning Communication about new products & their features

Marketing New product introductions Developing advertisements Developing sales promotions

Warehouse and Logistics Details of Purchase order Details of allocations

Finance Payments to suppliers Profitability measurements

Fig. 2.5 The implications of merchandise planning (Source: Pradhan,S., 2009. Retailing Management, 3rd ed., Tata McGraw Hill Education Private Limited) The entire process of merchandise planning helps the buyer arrive at the quantities of the products that need to be bought. Therefore, it has the implications on other departments, which are discussed below. Finance At the end of the merchandise planning process, when the Purchase Order (PO) is raised on a particular supplier, the finance department needs to be informed about it. The reason behind this is that they are finally the ones, who will be making the payments. Finance will also look into the evaluation of the profitability of the merchandise purchased by the buyer. 27/JNU OLE

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Marketing The marketing department needs to be aware of the products that are being purchased, as they are required to create campaigns for advertising the products or for sales promotions. Warehousing and logistics In many retail organisations, these functions may be handled by one department. When orders are placed for new merchandise, this department needs to know as it is the one that will actually receive the products and do the physical verification of the same. The quantities mentioned in the “Purchase Order” need to be tallied with the quantities actually received. Any discrepancies have to be informed to the accounts department and to the merchandiser who has placed the order. This department also needs to know the dispatch details of various products that are received i.e., the quantities, sizes, colours, and so on, of products to be sent to various stores. Stores operations The information on the merchandise purchased needs to be communicated to the retail stores. If it is a new product, the features also need to be communicated. Information on merchandise to be received in the stores also helps in space planning in the retail store. In case the store has the authority to make purchases at a local level, it would help by ensuring that duplication of products does not happen. The person undertaking the buying decisions for a retail organisation must be aware of the consumer needs and wants. An understanding of the consumer buying process is necessary. Apart from this, a clear understanding of what products are actually selling and where, is also necessary. Such information can be obtained from sales records. An interaction with the sales staff is also needed, as they can offer valuable insights into why a particular product is selling or not selling. External sources of information like surveys conducted, magazine anti trade publications and trade associations are other sources of information. Thus, the information gathered needs to be analysed. This analysis forms the basis of the sales forecast, which is the first stage in merchandise planning. 2.3.3 Need for Merchandise Planning Merchandise planning is very important role in creating and maintaining profitability. No other area within a retail business has such a direct impact on bottom line profit (or loss). The merchandise plan is a financial plan allocating a specific amount of money to each department or division for the purchase of an appropriate assortment of fashion merchandise, which meets consumer demand and sales goals. It is crucial that merchandisers have a broad understanding of the best practice approaches that have evolved, in order that they are able to optimise the financial return on the investment that is under their control. Most of the retailers’ primary goal is to sell merchandise. 2.3.4 Merchandise Planning Components The merchandise planning requires planners to develop detailed plans to achieve the company goals. Usually, the merchandise plan is developed once or twice a year by the merchants in an organisation. Prior to the beginning of the planning season, the planner starts the process by seeding Last Year (LY) actual results and This Year (TY) forecast information into the planning layouts which is used as a reference and guide during the planning process. The merchant uses the last year and forecast information to plan an extended set of key performance indicators (KPI’s) and time horizon to meet the company goals. The system displays these KPI’s in a progression format (set of steps) to guide the planner through the process. Once the merchant is satisfied with the plans and submits them to the manager, he or she approves the plans so that they can be incorporated into the reconciliation process. The following are the merchandise planning components: •

Receipt plans: Cost of goods that needs to be received to sell in the store

•

Sales plan: Contains the objectives of the sales process

•

Mark up plan: Adding on to prices to cover costs

•

Mark down plan: Reducing price to move goods

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•

Stock planning: Planning for the material to be stored

•

Gross profit margin: A financial metric is used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. It is also known as “gross margin”.

2.4 Process of Merchandise Planning Planning can be multi-dimensional. •

Time hierarchy: The first dimension to be considered is the time span or the time hierarchy. This can be put to a start with the forecast for the year and then go down to the season, quarter, month, and week and at times, even a transactional level.

•

Location level: The second level of planning would be at the location level, where the plan would first be created for all existing and new stores, then perhaps at the regional level, and then, it would move towards clustering of similar stores. This would be followed by planning for individual stores.

•

Merchandise hierarchy level: Similarly, the third dimension of planning would be at the merchandise hierarchy level, starting with the overall department level and then finally, and coming down to the Stock Keeping Unit (SKU) level. The process of merchandise planning begins with the first step, developing a sales forecast.

Stage I: Developing the sales forecast Forecasting involves the prediction of what the consumer 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 or may be handed down by the top management itself, depending on the retail organisation. The first step in determining the inventory needs of the product or category is sales forecast. The forecasts developed should be able to answer the following questions: •

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?

A sales forecast is made for a specific period of time (weeks, a season or a year). A forecast may be for a short term (a year) or for a long term (more than a year). The person making the forecast for the product group or category needs to be aware of the changes in tastes and attitudes of the consumers, the size of the target market and the changes in their spending patterns. The process of developing sales forecasts involves the following steps: Step I: Reviewing past sales A review of the past sales records is essential to establish if there is any pattern or trend in the sales figures. An overview at the sales figures of the past year for the same period would give an indication of the sales in the current year, for constant conditions. Step II: Analysing the changes in the economic conditions It is essential that the changes happening at the economic front as this has a direct link to the consumer spending patterns are considered. For example, economic slowdowns, increase in unemployment levels, and so on, affects the business. Step III: Analysing the changes in the sales potential Now, it is necessary to relate the demographic changes in the market to that of the store and the products to be sold. Step IV: Analysing the changes in marketing strategies of the retail organisation and the competition While creating the sales forecast, the marketing strategy introduced should be considered and a new store to be opened or an existing store should be remodelled. All these factors needed, are to be taken into consideration.

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Step V: Creating the sales forecast Finally, an estimate of the project increase in sales is considered. This is then applied to the various products and categories to arrive at the projected sales figure. Stage II: Determining the merchandise requirements Planning is essential to provide direction and serve as a basis of control for any merchandise department. One needs to plan a course of action in order to be able to provide the right goods to the consumer at the right place and time. Planning in merchandising happens at two levels: •

The creation of the merchandise budget

•

The assortment plan

There are two methods of developing a merchandise plan. They are: •

Top down planning: In top down planning, the top management works on sales plan, which is passed down to the merchandising team.

•

Bottom up planning: In bottom top planning, individual department managers work on estimated sales projections.

These are then added up to arrive at the total sales figures. After the sales forecasting is complete, inventory levels need to be planned. The merchandise budget (a financial plan) is the first stage in the planning of merchandise. It gives an indication of how much to invest in product inventories, stated in monetary terms. The merchandise budget comprises of five parts: •

Sales plan: how much of each product needs to be sold; this may be department wise, division wise or store wise.

•

Stock support plan: tells us how much inventory or stock is needed to achieve those sales.

•

Planned reductions: may need to be made in case the product, does not sell.

•

The planned purchase levels: the quantity of each product that needs to be procured from the market.

•

Gross margins: the difference between sales and cost of goods sold that the department, division or store contributes to the overall profitability of the company.

On the other hand, the assortment plan details the merchandise sold in each product category, i.e., the complete mix of products made available to the consumer. This is the next stage after having determined the money available for the inventory. Stage III: Merchandise control – the open-to-buy The purpose of the concept of open-to-buy is twofold. Firstly, depending on the sales for the month and the reductions, the merchandise buying can be adjusted. Secondly, the planned relation between the stock and sales can be maintained. When used effectively, open-to-buy ensures that the buyer: •

Limits overbuying and under buying

•

Prevents loss of sales due to unavailability of the required stock

•

Maintains purchases within the budgeted limits

•

Reduces markdowns which may arise due to excess buying

While planning for any given month, the buyer will not be able to purchase the amount equal to the planned stocks for that month. This is because there may be some inventory already on hand or on order but not yet delivered. Calculating the open-to-buy The open-to-buy amount available to a buyer is calculated using the simple formula stated below: Open-to-Buy = Planned EOM Stock - Projected EOM Stock 30/JNU OLE

Open-to-buy is always calculated for current and future periods. This helps the merchandiser to get an idea about the amount available to make purchases, and the products required to be bought. Stage IV: Assortment planning Assortment planning is both extremely important and challenging for retailers. Assortment can be defined as the combination of all products made available in a store and a set of products offered within a product category. These products form a set because they share similar physical characteristics. •

Assortment planning involves determining the quantities of each product that will be purchased to fit into the overall merchandise plan. Details of colour, size, brand, materials etc., have to be specified. The main purpose of creating an assortment plan is to create a balanced assortment of merchandise for the customer.

•

Various factors affect the assortment planning process. The first among these factors is the type of merchandise, to be stocked in the retail store. Merchandise may be classified as basic or staple merchandise, fashion, convenience or specialty goods.

•

Buying staple merchandise is comparatively easier as it can be done by analysing past sales records. Seasonal staples are those products, which are in demand only at a particular time of the year, every year. For example, decorative divas sold during the Diwali season in India or decorative ornaments of the Christmas tree before Christmas or umbrellas and raincoats or rainy shoes in the rainy season.

•

The retailer’s policies with respect to the type of brands stocked and the level of exclusivity to be maintained in the store also affect the merchandise buying decisions. Thus, after arriving at the amount of money available to invest in inventory, a merchandiser would have to determine the variety of merchandise.

2.5 Technology Tools that Aid Merchandise Planning Every merchandiser knows about the complexity of the merchandising process. Assortment plans must relate directly to financial plans, space plans, brand strategies etc. Also the merchandise plans must be accurate down to the local market and store levels. But, several factors make comprehensive planning difficult for retailers. Relevant data is difficult to access quickly, and it is often located on multiple systems throughout an organisation. Also, many retailers struggle to incorporate projected demand into planning efforts. When different planners use their own planning tools and each department their own processes, consistency will remain elusive and assortments will not be profitable. With rapid computerisation, many retailers use different types of softwares for the purpose of merchandise planning.

2.6 Merchandise Planning in a Montgomery Ward The planning stages for introducing a new product in Montgomery ward (private) are: Label product Before Montgomery ward introduces a new product, substantial expenditures of time and money are spent to assure a trouble-free product. These steps include testing of products in laboratories and under real life conditions. •

Developing clear and easy-to-understand owners' guides are essential to full consumer satisfaction.

•

An important element of the necessary research provides for comparison of similar products offered in the same price range by competitors and reports of these studies are made available to the buyer. This will identify both the better and poorer features of the proposed design. It is the buyer’s responsibility to know much about the product, and it depends on the expert technical advice provided by the laboratory and design departments.

•

There are 28 steps in development of a new private label product. The time sequence under normal circumstances to complete this cycle is approximately eighteen months.

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1. Market analysis of product

This analysis includes a survey of competition, review of field requirements and current sales trends. Upon completion of analysis the merchandising theme for the line should be established, objectives determined for long-range design planning and general discussion of promotional plans reflecting the merchandising theme.

2. Line specification and initial cost:

Establish good, better, best strategy target prices-outline of features by model.

3. Preliminary design meeting with source

This meeting with the department responsible for basic styling and unit design for the purpose of outlining the details of the line specifications in order that initial design approaches can be prepared.

4. First design rendering meeting

This meeting with the design department is to review the initial design approaches and to resolve with the designers the best solution in terms of the merchandising approach, line specifications, features and styling. From this information the source will begin the coordinated study of cost estimates and tooling estimates to be presented at the next design meeting.

5. Second design rendering meeting

The design sketches or paper mock-ups and preliminary cost estimates will be presented in order to establish more definite specifications for the first mock-up model and refined cost estimates. In addition, sketches or comprehensive of any graphic material packaging, labelling, feature tags, informative literature, and so on, will reflect the merchandising theme, adding sales impact, and aiding self-selection will be presented for costing in order that costs can be evaluated.

6. First mock-up with cost

The first hand built mock-up product model and related graphic material with general cost estimates will be presented for appearance and merchandise features. At this point sufficient information should be available to the buyer to determine the feasibility of continuing with the program or resolving necessary adjustments.

7. Tooling agreement

Review agreement with source on general tooling of product and our own special tooling needed for product.

8. Prototype testing

At the point in the program where definite merchandising and design features have been tentatively agreed upon, it is then necessary to build models of these to insure their function. The extent of this testing program is directly related to the unknown elements of the new design.

9. Finished mock-ups and cost

After sufficient testing to insure the practicability of design, the final model would be constructed by the source and more accurate cost estimates of the piece price and tooling be submitted to the merchandise department.

10. Review with management

Management review and approval should be received on the final mock-up models and product costs. This is necessary at this point in the program to eliminate major revisions at a later date when the cost and production schedule would be materially affected.

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11. Preliminary drawing release

This release of preliminary drawings will enable the source to obtain an overall accurate tool cost and piece price estimate. The detailed revisions will be made at a later date. This information is necessary to obtain final estimates of tooling.

12. Final design release

This represents the date that all final designs will be released from the product design department to the source or vendor.

13. Final tooling and costs

Sufficient information should be available on the product design based on preliminary drawings and basic cost estimates that a final submission can be made to ward in order to receive authority on the program.

14. Initial tooling authority

Internal operation to provide source with special tooling godhead.

15. Tooling manufacture

This element should represent the amount of time required after ward’s release to begin tooling to the completion of all tools necessary to produce the unit.

16. Pre-production models

This time element should include sufficient time to try out the tools, obtain a limited production from the tooling and build a number of models for testing.

17. Pre-production testing

This element should allow sufficient time to place on test the preproduction units for final performance approval prior to production release. The length of time for this testing program will depend on the number and complexity of design changes from previous models.

18. Planned production

The beginning production date should allow sufficient time to work out early production problems.

19. Ordering

The initial order should be placed early enough to allow the agreed upon lead time plus an allowance for possible initial production delays.

20. Packaging design

The initial contact with the design department will give a general outline of the problem considering both display packaging and shipping carton. This should include functional and display possibilities as well as a definition of the merchandising theme so that the packaging can be developed as a sales aid. A subsequent meeting or meetings will serve to review the initial design approaches together with estimated costs so the complete product can be evaluated.

21. Packaging engineering

If the problem of an individual shipping container is involved, a request for engineering service should be made with provision, where needed, for safe transit tests to be run. In addition, the packaging engineers will develop with the package designer’s forms and specifications for display packaging, considering both retail and catalogue problems to develop common packaging whenever possible.

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22. Catalogue photography

The production timetable for the catalogue involved must be checked to determine when photographs must be taken, and provision then made for a sample to be available. If changes in outward appearance have been made during the product development, provide a “final” sample if at all possible so that retouching costs will not be incurred.

23. Service information

Advance notification must be given to the General Service Department so that: They may give suggestions relative to product design at the end that installation and service may be as simple as possible. They have time to study the finished product, to visit the factory, if necessary, to provide for repair parts, and to issue instructions to the field staff.

24. Owner’s guides-repair lists

Owner’s Guides should be provided for those items whose details of correct operation are not readily apparent to the average customer, and where specific treatment or care should be accorded by the owner, and where repair service will be ultimately needed.

25. Store displays - sales aid properties

Determine the need for display or other sales aids to introduce the new product. The initial meeting with the display department should arrive at tentative design and cost. After the sample display is ready and costs known, a second meeting should produce a profitable plan to present for approval.

26. Advertising plans

A new item of importance requires introductory advertising to be planned well in advance. A series of follow-up promotional efforts should be planned at the same time. Meetings with the retail sales promotional group will be held to arrive at approved plans at a cost in line with expected sales.

27. Sales training aids

Decide whether the new item is different enough and important enough to justify special sales training aids. If so, a meeting with the training group will form a basis for deciding the best type of training aid to use, cost considered.

28. Basic list

Our internal operation advising the store replenishment units of what, when and how to order the merchandise.

Table 2.1 List of 28 stages in introduction of new Montgomery ward private label product requiring tooling expenditures

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Summary •

Merchandise management is defined as managing the various elements of merchandise, such as supply chain, cost management, quality management and shipping procedures.

•

While handling merchandise display and storage, a problem which needs constant monitoring is that of shrinkage and loss prevention.

•

Planning a merchandise mix is a managerial decision that store management has to take.

•

Merchandise displays are special presentations of a store’s products or services for the buying public.

•

Storefront window displays and 'found space' displays are popular tools for publicising and selling sale items.

•

Supply chain management is defined as the systemic, strategic co-ordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.

•

Warehousing facility should be appropriate to use in terms of right size, structurally sound, well maintained and clean.

•

Merchandise planning is defined as “the planning and control of the merchandise inventory of the retail firm, in a manner, which balances the expectations of the target customers and the strategy of the firm”.

•

The primary objective of merchandise planning is profit improvement.

•

The entire process of merchandise planning helps the buyer arrive at the quantities of the products that need to be bought.

•

Merchandise planning plays a pivotal role in creating and maintaining profitability.

•

The merchant uses the last year and forecast information to plan an extended set of key performance indicators (KPI’s) and time horizon to match the company goals.

•

There are two methods of developing a merchandise plan, namely, top down planning and bottom up planning.

•

Assortment planning involves determining the quantities of each product that will be purchased to fit into the overall merchandise plan.

References •

Berman, 2007. Retail Management: A Strategic Approach, 10/E, Tata McGraw-Hill Education.

•

Rudrabasavaraj, M.N., 2010. Dynamic Global Retailing Management. Global media.

•

Introduction to Buying And Merchandising [pdf] Available at: http://www.egyankosh.ac.in/bitstream/ 123456789/39079/1/UNIT%201.pdf [Accessed 10 October 2011].

•

2009. Merchandise Planner [Video Online] Available at: [Accessed 10 October 2011].

•

MuseumStoreAssoc, 2010. Merchandise Planning & Open-to-Buy [Video Online] Available at: [Accessed 10 October 2011].

•

Managing Merchandise [pdf] Available at: [Accessed 10 October 2011].

•

Merchandise Objectives [pdf] Available at: [Accessed 10 October 2011].

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Recommended Reading •

Donnellan, J., 2007. Merchandise Buying and Management, 3rd ed., Fairchild Publications.

•

Chiplunkar, Product Category Management, Tata McGraw-Hill Education.

•

Lamba, 2002. The Art Of Retailing (Book Only), Tata McGraw-Hill Education.

•

Dunne, M. P., Lusch, R. F & Carver, J. R., 2010. Retailing, 7th ed., Cengage Learning.

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Self Assessment 1. While handling merchandise display and storage, a problem which needs constant monitoring is that of __________and loss prevention. a. constant planning b. shrinkage c. cost management d. shipping procedures 2. Which of the following is an important decision that reflects the store’s positioning platform? a. Assortment planning b. Warehouse facility c. Merchandise mix planning d. Supply chain 3. The decision on merchandise mix is implemented by functionaries called __________. a. retailers b. planners c. buyers d. managers 4. Which of the following statements is false? a. Merchandise cost management is an inexpensive and time-consuming activity for any retail organisation. b. Supply chain products successfully lend a hand to deal with business complication and optimise the supply chain. c. An integrated framework supports various modules and state-of-the art tools for a broad range of business decisions. d. Merchandise planning is beneficial to both customer and the retailer. 5. Which of the following is a primary objective of merchandise planning? a. Profit improvement b. Cost management c. Product distribution d. Merchandise management 6. The main purpose of creating an assortment plan is to create balanced __________of merchandise for the customer. a. deal b. distribution c. management d. assortment

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7. Which of the following statements is true? a. Buying staple merchandise is relatively difficult than other forms as it can be easily done by analysing past sales records. b. Assortment planning involves determining the quantities of each product that will be purchased to fit into the overall merchandise plan. c. Assortment planning is both complex and challenging for retailers. d. Distribution is essential to provide direction and serve as a basis of control for any merchandise department. 8. Which of the following displays is referred to as product presentations that utilise small but nonetheless usable areas of store, such as the tops of product carousels? a. Showcase displays b. Found-space displays c. Storefront window displays d. Primary displays 9. The breadth in _________reflects the product lines, while depth refers to the number of items in each product line. a. merchandise mix b. assortment planning c. product display d. supply chain 10. Which of the following play a key role in vendor selection and profit generation through negotiation for better deals and allowances? a. retailers b. managers c. buyers d. manufacturer

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Chapter III Methods of Merchandise Procurement Aim The aim of this chapter is to: •

introduce the concept of merchandise procurement

•

discuss the process of merchandise buying

•

describe global sourcing

Objectives The objectives of this chapter are to: •

discuss the advantages of e-procurement services

•

identify the e-procurement trends in global markets

•

explain merchandise sourcing

Learning outcome At the end of this chapter, you will be able to: •

explain purchasing and procurement

•

enlist the challenges and opportunities of e-procurement

•

comprehend sourcing e-procurement services

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3.1 Introduction Conventionally, merchandising retailing is a trading activity. Purchasing and selling merchandise is the most visible aspect of retail business. Retailer as a buying organisation carries out the task of procuring merchandise from the supply base through centralised plan and operations with a team of dedicated personnel in order to meet the needs of customers. It intends to buy quality products at a reasonable price. This is necessary to ensure the product availability when required by the customers through logistic operations. For the success of the retail business, a strong supply chain is essential. The term ‘vendor’ is often used. It represents the short term relationship which is driven by price. The term ‘supplier’ is also a vendor but in that case the relationship between the parties is collaborative. Though retailing is primarily a trading activity, there are certain retailers having almost complete control over the value chain. 3.1.1 Meaning of Procurement Procurement refers to the sourcing and purchasing of goods and services for business use. Individual businesses set procurement policies. Such policies govern the choice of suppliers, products, and the methods and procedures, which are used to communicate with suppliers. For example, businesses often have set procedures for calling and evaluating proposals. Certain issues in procurement include: •

Identifying the needs of customers and suppliers

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Choosing and preparing tools and processes to communicate with suppliers

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Preparing requests for proposals and requests for quotations

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Setting policies for evaluating proposals, quotes and suppliers

Also, there are general trends in procurement. Green procurement is one of the most recent of these, with an increasing number of businesses creating procurement policies that emphasise sourcing and purchasing goods and services, which are less environmentally damaging than comparable alternatives. 3.1.2 Merchandise Procurement Merchandise procurement tool makes it easy for companies to customise the products, which are available to the distributed market, including wholesalers. For example, a sportswear manufacturer may sell its trainers to many different retailers. However, the manufacturer can implement a system, whereby, each individual retailer can simply log in. Also according to certain pre-set rules, it can buy various items direct from the manufacturer, qualify for multi-buys, bulk discounts, special offers and more. 3.1.3 Definition of Sourcing Sourcing is defined on two levels: •

Strategic sourcing

•

Global sourcing

Strategic sourcing is a concept popularised by major consultancy companies in the late 1980’s 1990’s. It is now considered as a standard purchasing strategy used by many blue chip companies. It is the process of taking advantage of purchasing opportunities by continually reviewing current needs against purchasing opportunities. Strategic sourcing was first established by General Motors in the 1980’s. Now, it is a common business purchasing tool. The rise of China and its manufacturing capabilities has opened up various strategic purchasing opportunities. Often, strategic sourcing is used for high valued services, ad hoc purchases and core large values purchases. There are several processes within the strategic sourcing process, which are mentioned below: •

Evaluation of the company’s current purchasing cycles

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Evaluation of what is currently available in the supply market

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A review of the cost benefit analysis of using other suppliers.

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A review of potential vendors.

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An update of the current procurement strategy.

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Negotiations with potential vendors to ensure that they meet the new procurement strategy and cost benefit analysis.

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Implementation of the new vendor relationship

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On a continuous process, review and update the strategic sourcing.

3.1.4 Global Sourcing Global sourcing refers to the sourcing products and services irrespective of national boundaries. It is popular within the EEC countries in Europe and Asia, which are less concerned with geographic boundaries. With the rise of Chinese and Indian manufacturing capabilities, sourcing from these countries has greatly increased in the past few years. Purchasing companies seek low labour and production costs, which are not countered by high delivery costs. Many developing countries also offer attractive tax and tariffs to encourage purchasing from them. Sourcing personnel is another definition of sourcing, which is the use of proactive searching for potentially highly skilled members of staff that may provide the company with a competitive advantage. Sourcing of staff is also a complex procedure, which is used when numerous part time or short term staff is required. Thus, sourcing is defined as “the process of identifying potential vendors, conducting negotiations with them, and then agreeing supply contracts with these vendors.”

3.2 Merchandise Sourcing Sourcing refers to finding out products from different places, manufactures and suppliers. The importance of sourcing in a retail environment is essential because of the fact that sourcing of merchandise is a key element of cost. Sourcing is not without its risks, but at the same time, it holds the key to improve service, product offer and overall profitability. It enables the retailer to have winning products. Therefore, negotiations and cost management play a key role. It becomes necessary to ensure that sourcing is well and truly integrated with the retailer’s overall business strategy, and that sourcing activities closely follow the direction set by the overall business strategy. 3.2.1 Process of Merchandise Buying The process of merchandise buying consists of five steps given as under: •

Identifying the source of supply

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Contacting and evaluating the source of supply

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Negotiating with vendors

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Establishing vendor relations

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Analysing vendor performance

Step I: Identifying the source of supply Identifying the sources of supply needs to be decided, while considering that whether the product will be sourced from the domestic market or from the international market. Domestic sources of supply may be located by visiting central markets, trade shows or expositions. Usually, each city has its own central market where various key suppliers are located. A visit to such a location enables the buyer to understand the market trends and to evaluate the new resources and merchandise offerings. Trade shows and expositions are also a good ground for finding new supply sources. The growth of the retail trade in India and the need among the Indian retailers to source products effectively for their stores, have led to many retail chains reaching out to farmers and even investing in concepts like contract framing .

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In addition to buying from the domestic market, an organisation may seek out foreign sources from where merchandise can be purchased or made. This is a common trend in the West where trade barriers are considerably lower. As retailers operate in a global marketplace today, the sourcing of products internationally is a reality. The fundamental reasons behind international sourcing could be the uniqueness of the merchandise, or the unavailability of the merchandise in the domestic market. In such case, a retailer may also source from a foreign market simply because the merchandise is unique and the fact customers are always looking for a unique product. Also, low cost and good quality are also factors, which could affect this decision. A decision which is closely associated with branding decisions is to determine where the merchandise would be made. Although retailers buying manufacturer’s brands usually are not responsible for determining where the merchandise is made, an origin (country) of product is often used as a signal of quality. The cost associated with global include: •

Country of origin effects: Many a times, where the merchandise has been manufactured makes a difference in the final sale of the product.

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Foreign currency fluctuations: Fluctuations in the international currency rates affect the buying price of the products. At times, due to violent fluctuations in the price, sourcing products internationally may suddenly become viable or unviable.

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Tariffs: Tariffs or duties refer to a list of taxes placed by a government on imports. Import tariffs shield domestic manufacturers from foreign competition and raise money for the government.

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Foreign trade zones: These are special areas within a country that can be used for warehousing, packaging, inspection, labelling, exhibition assembly, fabrication or trans-shipment of imports without being subject to that country’s tariffs.

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Cost of carrying inventory: Purchase of goods is always at a price. Depending on the time when this merchandise is finally sold, makes a very big difference on the varying costs.

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Transportation costs: While sourcing products internationally, it is essential to keep in mind the cost that will be involved in transporting the goods to the various markets that the retailer operates in. This is a cost that has to be added to the cost of goods and eventually, affects the margins that can be earned.

As a retailer, the sourcing process needs to focus on the consumer, who has certain expectations related to a product, a particular price, a time limit and a certain quality. The push system of supply is outdated; customers have easier access to a much wider choice of goods and services, and expect even greater standards of quality and customisation. The sourcing decisions are often made as a reaction to the immediate present and the recent past. Certain factors such as past relationships, past experience of individual buyers, gut feel and immediate price comparisons are common driving forces. These are all internally focused; the decisions are based on what is available within the business rather than what the consumer wants. Common methods of gathering information about new suppliers would include talking to salesperson, going through trade magazines and yellow pages, and visiting trade exhibitions. The sourcing method would vary for different kind of products. Most products may require buyers to contact manufacturers or suppliers. However, products such as books may require the buyer to coordinate with publishing houses or their agents. Step II: Contacting and evaluating the source of supply One of the methods of contracting sources of supply is termed as vendor initiated contact. This may be as simple as having a representative visit to the office and meeting with the buyer and also having a showcase of a collection of the merchandise. The other method of contacting sources of supply is termed as retailer initiated contacts. This may be as simple as the buyer visiting the central market place.

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Central market places may be different for different products and would vary from city to city. They typically are characterised by a collection of a large number of suppliers selling similar or the same product. Thus, the competitive prices are a critical part of this market. A decision now needs to be taken on the potential vendors. The following criteria should be considered: •

The target market for whom the merchandise is being purchased.

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The image of the retail organisation and the fit between the product and the image of the retail organisation.

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The merchandise and prices offered.

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Terms and services offered by the vendor.

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The vendor’s reputation and reliability.

The prime factor which affects these decisions is whether the merchandise offered by a vendor is compatible with the needs and wants of the customers. If the merchandise is not right, the vendor should not be considered. Vendors also vary depending on the way that they conduct their business. Factors such as the ability to meet delivery schedules, adherence to quality procedures and the terms offered, play an integral role in vendor selection. Services provided by the vendor may be a deciding factor. These services could include co-operative advertising, return or exchange privileges, participation in store promotions and the willingness to use technology. Once the sources of supply are identified, they need to be evaluated. The evaluation criteria would vary from retailer to retailer. Key factors which need to be kept in mind are: •

Merchandise: The vendor needs to be evaluated in terms of the suitability of the merchandise for the retailer. The quality of the merchandise is and the price charged for the merchandise is equally important.

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Price: The price that the merchandise is going to be available to the retail chain also needs to be considered.

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Adaptability: The adaptability of the supplier to the requirements of the retailer, in terms of delivery schedules and adjusting production accordingly, needs to be considered. Services that might be provided by the supplier in terms of spacing of deliveries, quantity discounts, recycling and repacking of products, participating in schemes, promotions and advertising are also important. All these factors need to be considered while selecting a vendor.

•

Delivery: It is an important factor in retail. The supplier’s ability to meet the delivery requirements of the retailer in terms of supplying to the warehouse or distribution centres or the stores directly needs to be considered.

Step III: Negotiating with vendors The retail buyer needs to negotiate the price, the delivery dates, the discounts, the shipping terms and possibilities of returns. While negotiating with the vendors, his history, goals and constraints should be kept in mind. At the same time, the buyer needs to be aware of real deadlines and be able to work towards fulfilling them. The types of discounts that could be available to the buyer are as described below. •

Trade discounts: These are reductions in the manufacturer’s suggested retail price, granted to wholesalers or retailers. They may be offered as a single trade discount or as a chain trade discount. It is sometimes referred to as volume discounts or booking discounts. These are reductions (or a series of reductions) from the total value of the purchase order.

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Chain discounts: It is the traditional manner of discounting, where a number of different discounts are taken sequentially from the suggested retail price.

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Quantity discounts: These can be cumulative and non-cumulative; retailers earn quantity discounts by purchasing certain quantities over a specified period of time.

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Seasonal discounts: This is an additional discount offered as an incentive to retailers to order merchandise in advance of the normal buying season.

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Cash discount: It is the reduction in the invoice cost for paying the invoice prior to the end of the discount period.

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Step IV: Establishing vendor relations Retailers have been cautious of sharing information with their suppliers for a long time. With time, many retail organisations work with their suppliers as a team to create a competitive advantage. Shared information is a vital component of the new approach, but only if the right information is shared with the right people, for the right reasons. •

The right people are those individuals or organisations who can use the information given to them to help us. To do this, the retailer needs to understand the importance of the trading relationship to both sides.

•

The right information is information that the right people can actually use to give better service. For example, if you take a new product being sold by a retail group with 100 outlets. The stock is delivered through a single national warehouse operated by the retailer and the retailer does not share information with the manufacturer who supplies products. After the initial delivery is received at the warehouse, some stock is immediately dispatched to the stores and selling commences.

At this stage, the manufacturer has no idea of how sales are going. After a few weeks, stores start sending the orders to replenish their stock. But still the manufacturer has no idea what is happening. The manufacturer at this stage will only be able to estimate the sales when the retailer places another order to replenish the warehouse. If the retailer had shared information on sales and stock with the manufacturer, the latter would then have had the opportunity to anticipate out-of-stock situations and to plan future activities and minimise delays in new production runs. The retailer’s sales forecasts are more significant than sales figures. The historical sales figures may result in the manufacturer producing a forecast, which differs markedly from the retailer’s on which are based erroneous material buying and production plans. It is far better for the retailer to provide the manufacturer with forecasts reflecting the future promotion plans and so on. There are several options regarding the level of detail at which information can be supplied. Very few manufacturers could make use of daily sales by store. Weekly sales by store, might be the maximum level of detail required and many would prefer information just by region or store group. Some of the most important information for the retailer is news about new products and updates. All too often, a retailer will place an order only to find, just after delivery, that a replacement product has been announced. This does not help to ease tension during future negotiations. The supplier can offer very useful data on market share. The supplier is in a unique position to tell the retailer what percentage of market share specific products or product groups hold. Thus, to maintain strategic partnerships with vendors, the buyer needs to build on: •

Mutual trust

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Open communication

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Common goals

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Credible commitments

Step V: Analysing vendor performance Each retailer has his own criteria for the selection of vendors. The starting point can be a vendor registration form, which provides details on address, preferred mode of payment, sales tax number and so on. Registration with the relevant tax authorities, for example, sales tax, is a basic criteria used by many retailers to eliminate suppliers. In case, a buyer is dealing with multiple vendors for a particular product category, the conclusions on vendor performance can be drawn by listing out the following: •

Total orders placed on the vendor in a year

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Total returns to the vendor (the quality of the merchandise)

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Initial mark-up on the products

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Markdown (if any)

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Participation of the vendor in various schemes and promotions

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Transportation expenses if borne by the retailer

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Cash discounts offered by the vendor

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Sales performance of the merchandise

Factual evaluation of the vendors helps the buyers in being unbiased and taking the right decisions for the retail organisation. Respect and co-operation between the buyers and the vendors is necessary to build long-term relationships. In the fast changing retail world, it is also necessary to share information with the vendors timely, so as to avoid stock outs or a situation of heavy markdowns. The rapid pace of change in the world of retail and the increase in connectivity has made sourcing from across the globe a reality for many retail buyers. A proper vendor analysis is essential for evaluating vendor performance and determining whether to continue with the same suppliers or to find new ones. Both quantitative and qualitative factors are considered during this evaluation. Key criteria considered while analysing the performance of vendor are: •

Gross margin contribution: This may be a key factor influencing vendor performance, which is calculated as the total gross profit generated for each supplier versus the number of rupees spent on purchases. Factors affecting this ratio are initial mark-up and total mark-downs.

•

Adherence to company policy: A vendor who does not comply with purchase order instructions can lose merit in the buyer’s eyes. Late shipments, lack of adherence to cancellations dates, and improper packaging, labelling and ticketing of products are costs which have to be incurred by the retailer and eat into the profits of the company.

•

Customer acceptance level: The final test of product success is whether the customer has accepted the product that has been put on the shelf by the retailer or it has been rejected. The acceptability of the product in the market place has a direct impact on the vendor’s success too.

•

Merchandise qualifications: While acceptability of the merchandise may be of great importance, the quality of the merchandise has a great impact on the perception and the brand image of the retailer. A vendor’s ability to deliver a consistent level of excellence is often of prime importance to the retailer. The aim of the function of sourcing is the optimisation of costs through optimisation of vendor performance. It is necessary that the needs and requirements of the retail organisation are synchronised with the abilities and aims of the supplier. Vendor performance has far reaching impact on the value and cost incurred by the retailer, and eventually affects the performance of the retailer.

3.3 Purchasing and Procurement Purchasing and procurement is used to denote the function of and the responsibility for procuring materials, supplies and services. The term “supply management” has been used frequently to describe this process as it pertains to a professional capacity. Employees who serve in this function are known as buyers, purchasing agents or supply managers. Depending on the size of the organisation, buyers may further be ranked as senior buyers or junior buyers. 3.3.1 History of Procurement and Purchasing Prior to 1900, there were few separate and distinct purchasing departments in U.S. business. Most pre-twentiethcentury purchasing departments existed in railroad industry. Early in twentieth century, several books on purchasing were published, while discussion of purchasing practices and concerns were tailored to specific industries in technical trade publications. The year 1915 saw the founding of The National Association of Purchasing Agents. This organisation eventually became known as the National Association of Purchasing Management (NAPM) and is still active today under the name 'The Institute for Supply Management (ISM)'.

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Early buyers were responsible for ensuring a reasonable purchase price and maintaining operations (avoiding shutdowns due to stock-outs). Both World Wars brought more attention to the profession due to the shortage of materials and the alterations in the market. Still, until 1960s, purchasing agents were basically order-placing clerical personnel serving in a staff-support position. In the late 1960s and early 1970s, purchasing personnel became more integrated with a materials system. As materials became a part of strategic planning, the importance of the purchasing department increased. In the 1970s, the oil embargo and the shortage of almost all basic raw materials brought much of business world’s focus to the purchasing arena. The advent of just-in-time purchasing techniques in the 1980s, with its emphasis on inventory control and supplier quality, quantity, timing and dependability, made purchasing a cornerstone of competitive strategy. By the 1990s, the term “supply chain management” had replaced the terms “purchasing” “transportation,” and “operations” and purchasing had assumed a position in organisational development and management. In other words, purchasing had become responsible for acquiring the right materials, services and technology from the right source, at the right time, in the right quantity. 3.3.2 Factors For Purchasing The importance of purchasing in any firm is largely determined by the four factors: •

Availability of materials

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Absolute currency volume of purchases

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Percentage of product cost represented by materials

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Types of materials purchased

While purchasing it should be kept in mind that whether or not the materials used by the firm are readily available in a competitive market or whether some are bought in volatile markets that are subject to shortages and price instability. If the latter condition prevails, creative analysis by top-level purchasing professionals is required. A firm, instead of spending a large percentage of its available capital on materials, can make significant savings with the help of efficient purchasing. Even one unit savings add up quickly when purchased in large volumes. The most important of the four factors mentioned above is the amount of control purchasing and supply personnel actually has over materials availability, quality, costs, and services. Large companies tend to use a wide range of materials, yielding a greater chance that price and service arrangements can be influenced significantly by creative purchasing performance. On the other hand, some firms use a fairly small number of standard production and supply materials, from which even the most seasoned purchasing personnel produce little profit, despite creative management, pricing and supplier selection activities. 3.3.3 Role of Purchasing There are two basic types of purchasing, purchasing for resale and purchasing for consumption or transformation. The former is generally associated with retailers and wholesalers. The latter is defined as industrial purchasing. Purchasing can also be categorised as either strategic or transactional. The words “direct” and “indirect” can be used to distinguish the two types. •

Strategic (direct) buying involves the establishment of mutually beneficial long-term relationship between buyers and suppliers. Usually strategic buying involves purchase of materials that are crucial to the support of the firm’s distinctive competence. This could include raw material and components normally used in the production process.

•

Transactional (indirect) buying involves repetitive purchases, from the same vendor, through a blanket purchase order. These orders can include products and services not listed on the bill of materials, but are used indirectly in producing the item.

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Some experts relate that the purchasing function is responsible for determining the organisation’s requirements, selecting an optimal source of supply, ensuring a fair and reasonable price (for both the purchasing organisation and the supplier), and establishing and maintaining mutually beneficial relationships with the most desirable suppliers. In other words, purchasing departments determine what to buy, where to buy it, how much to pay, and ensure its availability by managing the contract and maintaining strong relationships with suppliers. Specifically, purchasing departments today are responsible for: •

Coordinating purchase needs with user departments

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Identifying potential suppliers

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Conducting market studies for material purchases

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Proposal analysis

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Supplier selection

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Issuing purchase orders

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Meeting with sales representatives

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Negotiating

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Contract administration

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Resolving purchasing-related problems

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Maintenance of purchasing records

As the role of purchasing grows in importance, purchasing departments are being charged with even more responsibilities. Newer responsibilities for purchasing personnel, in addition to all purchasing functions, include participation in the development of material and service requirements and related specifications, conducting material and value-analysis studies, inbound transportation, and also management of recovery activities such as surplus and scrap salvage, as well as its implications for environmental management. A study found that strategic purchasing enables firms to foster close working relationships with a limited number of suppliers, promotes open communication among supply chain partners. Also, it was found that strategic purchasing develops a long-term strategic relationship orientation for achievement of mutual goals. This implies that strategic purchasing plays a synergistic role in fostering value-enhancing relationships and knowledge exchange between the firm and its suppliers, thereby creating value. In addition, supply managers are heavily involved in cross-functional teams charged with determining supplier qualification and selection, as well ensuring early supplier involvement in product design and specification development. A comprehensive list of objectives for purchasing and supply management personnel would include: •

To support the firm’s operations with an uninterrupted flow of materials and services

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To buy competitively and wisely (achieve the best combination of price, quality and service)

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To minimise inventory investment and loss

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To develop reliable and effective supply sources

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To develop and maintain healthy relations with active suppliers and the supplier community

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To achieve maximum integration with other departments, while achieving and maintaining effective working relationships with them

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To take advantage of standardisation and simplification

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To keep up with market trends

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To train, develop and motivate professionally competent personnel

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to avoid duplication, waste and obsolescence

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to analyse and report on long-range availability and costs of major purchased items

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to continually search for new and alternative ideas, products, and materials to improve efficiency and profitability

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to administer the purchasing and supply management function pro-actively, ethically, and efficiently

3.3.4 Determining Requirements In progressive firms, purchasing contributes in the process of new product development. As a part of a product development team, purchasing representatives have the opportunity to help determine the optimal materials to be used in a new product, propose alternative or substitute materials, and assist in making the final decision based on cost and material availability. Purchasing representatives can also participate in a make-or-buy analysis. The design stage is the point at which the vast majority of the cost of making an item can be reduced or controlled. Along with purchasing, the purchasing agent’s input is also required while defining the materials-purchase specifications. Specifications are detailed explanations of what the firm intends to buy in order to get its product to market. If the product requires a standardised component, the specifications are easily communicated by specifying a trade or brand name. A custom part can complicate the situation considerably; if incorrectly manufactured, such a product can severely damage a relationship, resulting in unnecessary costs and possible legal action. It is the buyer’s responsibility to properly communicate the specifications to the supplier to avoid any misunderstanding. 3.3.5 Supply Sourcing A part of the sourcing decision involves determining whether to purchase a part from an outside supplier or to produce the part internally. This is known as a make-or-buy decision. If the buyer chooses to purchase the part externally, then he must find qualified suppliers who are willing to make and sell the product to the firm under the specified conditions. Buyers have a number of options to locate sources of supply, some direct and some indirect. Some of the direct sources would include the Yellow Pages, other purchasing departments, and direct marketing. Purchasing departments have subscription to a number of trade publications for the same purpose. Also, being a subscriber usually puts the buyer’s name on a mailing list so that flyers, postcards, and other varieties of direct marketing find their way into the purchasing department’s hands. In a situation where a suitable supplier cannot be found, the firm is forced to develop a supplier. Supplier development is sometimes referred to as “reverse marketing,” which entails finding the supplier with the maximum potential for success and providing the resources necessary for the supplier to manufacture the needed product. This could include training in production processes, quality, and management assistance, as well as providing temporary personnel, tooling, and even financing. When the purchased product is fairly standard and readily available, most of the firms choose to utilise the competitive bidding process of supplier selection. A request for bids is sent to a limited number of qualified suppliers asking for a price quote for the product, given the terms and conditions of the contract. The contract goes to the lowest bidder. For government bid requests, the contract legally must go to the lowest bidder qualified to fulfil the contract. 3.3.6 Negotiation In case where the competitive bidding is not the appropriate mechanism for reaching the purchasing department’s objectives, the buyer uses the process of negotiation. This is not a second-choice alternative, as the negotiation process is more likely to lead to a complete understanding of all issues involved between the supplier and the purchasing firm.

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The use of negotiation is followed by certain circumstances such as, when a thorough analysis is required to solve a difficult make-or-buy decision, or when the risks and costs involved cannot be accurately predetermined, negotiation can be used. Also, when a buyer is contracting for a portion of the seller’s production capacity rather than a product, negotiation is appropriate to use. Other circumstances where negotiation is favoured include: •

When early supplier involvement is employed.

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When tooling and setup costs represent a large percentage of the supplier’s costs.

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When production is interrupted frequently for change orders.

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When a long time is required to produce the purchased products.

While negotiating the buyer must have a reasonable knowledge of what is being purchased, the process involved, and the factors that may affect cost, quality, delivery and service. A thorough cost and price analysis is essential. The negotiating buyer must also know the strengths and weaknesses of the negotiating supplier, as well as their own. Through proper preparation and some negotiating skill, the purchasing agent are able to secure a contract that fulfils the company’s needs and is adequately beneficial to the supplier as well. 3.3.7 Supplier Management After locating proper suppliers and securing contracts, the next step is for the purchasing department to monitor and control the suppliers’ performance until the contracts are fulfilled—and beyond, if further business is to be conducted. All purchasing organisations need some vehicle for assessing supplier performance. Many firms have formal supplier-evaluation programs that effectively monitor supplier performance in a number of areas, including quality, quantity delivery, on-time delivery, early delivery (just-in-time users do not like early deliveries), cost and intangibles. In some of the firms, consistent supplier performance results in certification. Supplier certification implies (or in some cases formally asserts) that the supplier has been a part of a formal education program, has demonstrated commitment to quality and delivery, and has proven consistency in the processes. Through this, organisations are able to take delivery from certified suppliers and completely bypass the receiving inspection process. The buyer is also responsible for maintaining a congenial relationship with the firm’s suppliers. In cases, where the buyer is an unreasonable negotiator, and does not allow the supplier to make an adequate profit, future dealings may come to a halt. In such a situation the supplier may refuse to deal with the buyer in the future, or the supplier may greatly increase the price of a product that buyer could not obtain elsewhere. It also effect the relations which can become strained, when the buyer consistently asks for favoured treatment such as expediting or constantly changing a particular order’s delivery schedule. 3.3.8 E-Purchasing and E-Procurement The Internet and e-commerce is continuously changing the way purchasing is done. Internet buying has led to the terms such as, “e-purchasing” or “e-procurement.” Communication needed in competitive bidding, purchase order placement, order tracking, and follow-up are enhanced by the speed and ease afforded by establishing online systems. Negotiations can enhanced and reverse auctions can be facilitated through internet . Reverse auctions allow buying firms to specify a requirement and receive bids from suppliers, with the lowest bid winning. E-procurement is considered to be one of the characteristics of a world-class purchasing organisation. The use of e-procurement technologies in some firms has resulted in reduced prices for goods and services, shortened orderprocessing and fulfilment cycles, reduced administrative burdens and costs, improved control over off-contract spending, and better inventory control. It allows the organisations to expand into trading networks and virtual corporations.

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Criteria for e-purchasing include: •

Supporting complete requirements of production (direct) and non-production (indirect) purchasing through a single, internet-based, self-service system.

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Delivering a flexible catalogue strategy

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Providing tools for extensive reporting and analysis

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Supporting strategic sourcing

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Enhancing supply-chain collaboration and coordination with partners

3.4 Sourcing e-Procurement Services Sourcing e-procurement services requires prior thought process, planning, and a clearly defined strategy. E-procurement is the business-to-business purchase and sale of supplies and services over the internet. External service providers who are experienced in operating an e-procurement business can provide economies of scale resulting in cost savings for the client. Definition E-Procurement is more than just a system for making purchases online. A true e-procurement system can connect companies and their business processes directly with suppliers, managing all interactions between them. This traditionally includes the management of bids, supplier correspondence, pricing history and an electronic communication system. Services Outsourcing companies provide services covering the design of the strategy through implementation, hosting and maintenance of the on-going operations. The selection of the right service for a company’s requirements is the key to success. Some e-procurement service providers only provide e-sourcing services; others may only provide the hosting services. E-sourcing The whole process from identifying suitable vendors, to obtaining competitive terms and managing the on-going supply relationship constitutes e-sourcing. This process is the central hub of e-procurement, which is illustrated below.

11. Supplier Portals

1. Reverse e-Auctions 2. Forward e-Auctions

10. Collaboration tools

9. Supplier Intelligence Tools

3. Advanced e-Auctions

e-Sourcing Solutions

4. e-RFx (s)

5. Contract Management

8. Programme Management 7. Supplier Performance Management

6. Spend Analytics

Fig. 3.1 Process of e-sourcing (Source: http://www.purchasing-procurement-center.com/e-procurement-services.html) 50/JNU OLE

Reverse auctions are where the suppliers offer their goods for the best price. It is one of the services most offered by e-procurement specialists. The management of the whole sourcing process using a Request for Information or Proposal (e-RFx) through to the finalisation of the contract is a popular service that shows the process to be fully transparent as it is managed by a third party. E-procurement services also include, conducting an analysis of the client’s spending profile, hosting and maintaining a database of suppliers whilst recording their performance history for future negotiations. The more developed and established e-procurement services include supplier and market intelligence, knowledge management and the full range of staff training modules. There is a lot of choice in the level, extent and quality of the services offered in this field. Research is required and references should be taken from existing clients to ensure that the right supplier is engaged. The selection of suitable e-procurement services depends on the maturity of the client and the intended strategy.

3.5 Advantages of e-Procurement Services The key reason companies have embraced e-procurement is to increase productivity, provide visibility into day-today transactions and make it easier for users to get the supplies that they need. E-procurement has its challenges and it has taken time for business managers and procurement departments to fully accept this process. The advantages of e-procurement are given below:: •

Reducing costs: Costs can be reduced by leveraging volume, having structured supplier relationships and by using system improvements to reduce external spend while improving quality and supplier performance. E-procurement eliminates paperwork, rework and errors.

•

Visibility of spend: Centralised tracking of transactions enables full reporting on requisitions, items purchased, orders processes and payments made. E-procurement advantages also include ensuring compliance with existing and established contracts.

•

Productivity: Internal customers can obtain the items they want from a catalogue of approved items through an on-line requisition and ordering system. Through this the procurement staff do not have to work for processing orders and handling low value transactions and they can concentrate on strategic sourcing and improving supplier relationships.

•

Controls: Standardised approval processes and formal workflows ensure that the correct level of authorisation is applied to each transaction. Compliance to policy has improved as users can quickly locate products and services from preferred suppliers. Using technology, E-procurement advantages can only be fully utilised when the systems and processes to manage it are in place. Software tools are needed to create the standard procurement documentation, such as, electronic requests for information (e-RFI), requests for proposal (e-RFP) and requests for quotation (e-RFQ). These are proven methods to source goods and make the framework agreements that offer the best prices.

A proper and fully integrated e-procurement approach is needed for overall success. Additional programs provide the framework for the supplier databases and spend management as well as holding key vendor information and being an electronic repository for contracts. The amount companies pays for e-procurement technology, is considered as an investment, which boosts the efficiency. The longer term reduction in costs will enable companies to direct their resources to more strategic initiatives. E-procurement advantages are significant bottom-line benefits, including cost reduction, process efficiencies, spending controls and compliance.

3.6 E-Procurement Trends in Global Market The e-procurement trends over the past 20 years highlights some successes along with some challenges. E-procurement has grown and evolved into a complex marketplace with many players offering a variety of e-procurement and business-to-business services. 51/JNU OLE

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E-procurement is a term, which incorporates many aspects of electronically-assisted buying. It can include services such as hosting of databases, catalogue management, managing tenders and auctions on behalf of clients through a complete outsourced procurement service. For example, it eliminates tedious manual work associated with preparing and submitting large tenders using customised software. E-procurement trends in the private sector Externally hosted e-procurement services are a part of a growing trend. Some specialise by industry sector, like those serving the oil and gas, pharmaceutical and mining industries all of which have embraced e-procurement more than some other sectors. Some e-procurement service companies provide the full range of supply network services to support global procurement transactions. Another trend supporting e-procurement is where large corporations elect to manage their e-procurement in-house. Successful implementations of e-procurement are considered as one of the measures of a world-class purchasing organisation. For this they need to install enterprise-wide software to manage the database and transactions. E-procurement trends in the government sector Few of the mature economy governments are adopting e-procurement more extensively as it provides structure, audit trails and transparency of transactions. However, governments in emerging markets are often unaware of the benefits that e-procurement can provide. Certain basic requirements need to be fulfilled before an e-procurement system can achieve maximum potential in government. These are recommendations are made by the World Bank which includes expanding ICT services, guaranteeing a secure online environment, development of standards and processes, and most importantly, for purchasers to be trained. E-procurement trends in non-government organisations (NGOs) The development aid and emergency support sector of the economy can benefit greatly from using electronic procurement services. Savings of up to 10% have been achieved on price and there is some evidence available showing savings in processing time. E-procurement allows aid-funded buyers to compare prices quickly and easily, to review specifications and delivery dates from suppliers worldwide.

3.7 E- Procurement Challenges and Opportunities E procurement is an automation tool for corporate purchasing process. The core definition is “a business to business sale using the internet as the medium for order processing”. E procurement can be seen more than the simple shortening of the supply chain with the internet closing time and distance obstacles between suppliers and users of products. It is a comprehensive integrated IT network that encourages purchasing discipline and leverages group buying power for all procurement responsible people in an organisation. E-procurement systems consist of a number of different tools. These include automation of internal ordering processes, online catalogues from approved vendors, and an electronic Request for Proposal (e-RFP) process that leverages online auctions (e-auctions) to accumulate bids on providing goods and services for a specific project. The challenge is that in a capital-tight environment, the cost of acquisition and fielding of an e-procurement system can seem prohibitive. Other challenges to implementation include, as with any other new system fielding, pushback from users. Both internal users and even some vendors can create friction and resist the change. For leaders in organisations, it is critical to prepare both internal customers and actively communicate with vendors to ensure they are on-board with the program. In addition to above, electronic procurement is still growing and changing. Hosted solutions are coming into being, referred to as Procurement Service Providers (PSP) that provide externally hosted procurement systems. For example, like any 3PL or software service provider, for a lower up-front investment, a company can implement the service, though overtime it may prove more expensive. 52/JNU OLE

Summary •

Procurement is the sourcing and purchasing of goods and services for business use.

•

Merchandise procurement makes it easy for companies to customise which of their products are available to the distributed market, including wholesalers.

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Strategic sourcing is the process of taking advantage of purchasing opportunities by continually reviewing current needs against purchasing opportunities.

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Global sourcing is sourcing products and services irrespective of national boundaries.

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The process of merchandise buying consists of five steps given as under: identifying the source of supply, contacting and evaluating the source of supply, negotiating with the sources of supply, establishing vendor performance, and analysing vendor performance.

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Purchasing and procurement is used to denote the function of and the responsibility for procuring materials, supplies and services.

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There are two basic types of purchasing, purchasing for resale and purchasing for consumption or transformation. The former is generally associated with retailers and wholesalers. The latter is defined as industrial purchasing.

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Part of the sourcing decision involves determining whether to purchase a part from an outside supplier or produce the part internally this is known as a make-or-buy decision.

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E-procurement is the business-to-business purchase and sale of supplies and services over the internet.

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The use of e-procurement technologies in some firms has resulted in reduced prices for goods and services, shortened order-processing and fulfilment cycles, reduced administrative burdens and costs, improved control over off-contract spending, and better inventory control.

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E-procurement advantages are significant bottom-line benefits, including cost reduction, process efficiencies, spending controls and compliance.

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Some governments in mature economies are adopting e-procurement more extensively as it provides structure, audit trails and transparency of transactions.

•

E procurement is more than the simple shortening of the supply chain with the internet closing time and distance obstacles between suppliers and users of products.

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The challenge in e-procurement is that in a capital-tight environment, the cost of acquisition and fielding of an e-procurement system can seem prohibitive.

References •

Ward, S., Procurement [Online] Available at: [Accessed 10 October 2011].

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E Procurement - Challenges and Opportunities [Online] Available at: [Accessed 10 October 2011].

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Mcauliffe, J., 2009. Online Merchandising: The Basics [Video Online] Available at: [Accessed 10 October 2011].

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ProProcure, 2008. Marketing Procurement - for manufacturers of promotional products [Video Online] Available at: [Accessed 10 October 2011].

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Pradhan, 2009. Retailing Management 3E, Tata McGraw-Hill Education.

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Madaan, Fundamentals Of Retailing, Tata McGraw-Hill Education.

Recommended Reading •

Diamon, J., 2008. Retail Buying, Gerald Pintel Pearson Education India.

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Ray, 2010. Supply Chain Management for Retailing, Tata McGraw-Hill Education.

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Zapata, A. L., 2005. Buy From The Poor Sell To The Rich, Author House. 53/JNU OLE

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Self Assessment 1. Which of the following tool makes it easy for companies to customise their products that are available to the distributed market, including wholesalers? a. Online merchandising b. Merchandise procurement c. Marketing procurement d. Retail management 2. ___________ is the sourcing and purchasing of goods and services for business use. a. Procurement b. Transportation c. Negotiation d. Production 3. Which of the following statements is true? a. The retail seller then needs to negotiate the price, the delivery dates, the discounts, the shipping terms and possibilities of returns. b. Delivery is an important factor in management. c. Relieving a source of supply may be as simple as having a representative visit the office and meet with the buyer and showcase a collection of the merchandise. d. The term sourcing refers to finding out products from different places, manufactures and suppliers. 4. Strategic buying involves the establishment of mutually beneficial ________relationship between buyers and suppliers. a. long-term b. short-term c. mutual d. cohesive 5. Which of the following statements is false? a. E-procurement advantages are becoming more evident as the wider understandings of its many uses become apparent. b. The selection of the right service for a company’s requirements is the key to success. c. A basic explanation of e-procurement is that it is the customer –to customer purchase and sale of supplies and services over the internet. d. E-procurement is considered one of the characteristics of a world-class purchasing organisation. 6. Which of the following is defined as “the process of identifying potential vendors, conducting negotiations with them, and then agreeing on supply contracts with these vendors”? a. Merchandising b. Procurement c. Supply management d. Sourcing

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7. The term _________refers to finding out products from different places, manufactures and suppliers. a. retailing b. sourcing c. management d. purchasing 8. __________sourcing is the process of taking advantage of purchasing opportunities by continually reviewing current needs against purchasing opportunities. a. Strategic b. Global c. Merchandise d. Procurement 9. Supplier development is sometimes referred to as _____________, which entails finding the supplier with the most potential for success and providing the resources necessary for the supplier to manufacture the needed product. a. negative marketing b. reverse marketing c. global marketing d. strategic marketing 10. Match the following: 1. Trade discounts

A. Reduction in the invoice cost, for paying the invoice prior to the end of the discount period.

2. Chain discounts

B. Reductions in the manufacturer’s suggested retail price, granted to wholesalers or retailers.

3. Quantity discounts

C. Traditional manner of discounting, where a number of different discounts are taken sequentially from the suggested retail price.

4. Cash discounts

D. Can be cumulative and non-cumulative; retailers earn quantity discounts by purchasing certain quantities over a specified period of time.

a. 1-A, 2-D, 3-B, 4-A b. 1-C, 2-B, 3-D, 4-A c. 1-B, 2-C, 3-D, 4-A d. 1-D, 2-C, 3-B, 4-A

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Chapter IV Pricing of Merchandise Aim The aim of this chapter is to: •

discuss firm’s pricing objectives

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identify the factors affecting pricing

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explain the calculation of retail price

Objectives The objectives of this chapter are to: •

classify the pricing strategy

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explain the concept of modern price strategy

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explicate the pricing framework of an organisation

Learning outcome At the end of this chapter, you will be able to: •

explain the role of pricing in merchandise

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recognise various approaches used for pricing

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describe different types of pricing adjustments

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4.1 Introduction Pricing is a balancing decision amongst various pulls and pressures. India is a price-sensitive market and setting the right price is a challenging task. Price sensitivity is the reaction of consumers to the changes in price in terms of quantities bought. It is called price elasticity. If relatively small percentage changes in price leads to substantial percentage change in demand, price elasticity is higher. It happens when good substitutes are available and the urgency to purchase is not much. When there is a substantial change in price, but smaller percentage change in demand, it is called inelastic demand. This happens when the purchase urgency is more, and consumers are not satisfied with the substitutes available, and maintain their brand loyalty.

4.2 Pricing Framework and a Firm’s Pricing Objectives Prices can be easily changed and matched by the competitors. Therefore, the product’s price alone might not provide the company with a sustainable competitive advantage. Thus, prices can attract consumers to different retailers and businesses to different suppliers. Organisations must remember that the prices they charge should be consistent with their offerings, promotions, and distribution strategies. The price, product, promotion, and placement of a good or service should convey a consistent image. 4.2.1 Pricing Framework Before pricing a product, an organisation must determine its pricing objectives. Companies must also estimate demand for the product or service, determine the costs, and analyse all factors (e.g., competition, regulations, and economy) affecting price decisions. For conveying a consistent image, the organisation should choose the most appropriate pricing strategy and determine policies and conditions regarding price adjustments. The basic steps in pricing framework are shown in the figure below.

Set pricing objectives Estimate demand Determine costs Analyse factors affecting pricing decisions Determine pricing strategies and pricing polices for making price adjustments Set initial prices Offer and make price adjustments as needed Fig. 4.1 The pricing framework (Source: http://www.flatworldknowledge.com/pub/1.0/principles-marketing/105030#web-105029) 4.2.2 Firm’s Pricing Objectives Different firms have different set of objectives to accomplish various things with their pricing strategies. For example, one firm may want to capture market share, another may be solely focused on maximising its profits, and another may want to be perceived as having products with prestige. Some pricing objectives that the companies may set include: Earning a targeted return on investment (ROI) ROI (return on investment), is the amount of profit an organisation hopes to make given the amount of assets, or money, it has tied up in a product. ROI is a common pricing objective for most of the firms. Companies typically set a certain percentage, such as 10 percent, for ROI in a product’s first year following its launch.

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Maximising profits Many companies fix the product prices to increase revenues as much as possible relative to costs. These, large revenues do not necessarily translate into higher profits. To maximise its profits, a company must focus on cutting costs or implementing programs to encourage customer loyalty. In weak economic markets, many companies manage to cut costs and increase their profits, even though their sales go down. This is done by the gap cut costs, by doing a better job of controlling its inventory. The retailer also reduce its real estate holdings to increase its profits when its sales are down during the latest economic recession. A firm has to remember, that prices signal value. If consumers do not perceive that a product has a high degree of value, they probably will not pay a high price for it. Furthermore, cutting costs cannot be a long-term strategy if a company wants to maintain its image and position in the marketplace. Maximising sales Maximising sales involves pricing products to generate as much revenue as possible, regardless of what it does to a firm’s profits. When companies are struggling financially, they sometimes try to generate cash quickly to pay their debts. This is done by selling off inventory or cutting prices temporarily. This cash can be used to pay short-term bills, such as payroll. Maximising sales is typically a short-term objective since profitability is not considered. Maximising market share Some organisations try to set the product prices in a way that allows them to capture a larger share of sales in their industries. Capturing more market share doesn’t necessarily mean a firm will earn higher profits, though many companies believe capturing a maximum amount of market share is downright necessary for their survival. In other words, they believe if they remain a small competitor they will fail. For example, the firms in the cellular phone industry. The race to be the biggest cell phone provider has proved futile for the companies like Motorola. Motorola holds only 10 percent of the cell phone market, and its profits on their product lines are negative. Maintaining the status quo A firm’s objective can sometimes just be to maintain the status quo or simply meet, or equal, its competitors’ prices or keep its current prices. Airline companies are a good example. If consumers don’t accept an airline’s increased prices (and extra fees) such as the charge for checking in with a representative at the airport rather than checking in online, other airlines may decide not to implement the extra charge and the airline charging the fee may drop it. Companies, monitor their competitors’ prices closely when they adopt a status quo pricing objective.

4.3 Factors Affecting Pricing Pricing is a part of the marketing mix. Marketing mix consists of product, place or distribution, promotion and price. Thus, price affects the other elements of the marketing mix and in turn is affected by them. It is an interactive decision. Factors affecting pricing are: 4.3.1 Product or Merchandise Merchandise and its nature affect pricing. •

The attributes that consumers seek from the merchandise affects its pricing. The more valuable these attributes are, the more, is the willingness to pay more for them. Sometimes, merchandise is price leveraged for the quality.

•

Sometimes, merchandise of the expected quality comes at less than expected cost. These are all tricky decisions to be taken carefully. The price range being made available to consumer depends on the merchandise selection. A given price is the sum of cost of the merchandise and its mark-up.

•

A retailer can set a particular price by attaining low cost but putting a higher mark-up to cover the overheads and other cost to sell at that price. Alternatively, high cost and lower mark-up and overheads enable a retailer to sell at a specific price.

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4.3.2 Place If a store is located closer to other competing stores, the scope of price flexibility is lesser. We have to fall in line. •

The distance between customers and stores also affect prices. The more remote the store is from its customers, the lesser are the prices to offset the time and cost of commuting to the store.

•

Factory outlets are always cheaper than neighbourhood stores, as they are located at a far-off place. A customer tends to buy in neighbourhood, if the lower prices offered are not enough to cover his travelling expenses. Prestigious locations have stores which charge slightly higher prices.

4.3.3 Promotion Pricing and promotion are interrelated. A heavily promoted store charging reasonable prices experiences more offtake. •

Just high promotion or just lower prices exclusively would not produce an off-take higher than both practiced simultaneously. A low-priced store also needs promotion, so that consumers become aware of its low prices.

•

The retailer’s prices contribute to the store image. Some stores are high-fashion stores or boutiques, their prices are high. Some are discount stores, their prices are less. Though a store keeps all other factors constant, pricing itself is capable to give it an image.

4.3.4 Miscellaneous There are other factors such as credit facilities and customer services which affect pricing. Customer services increases operating expenses. There is a tendency to increase prices to cover these additional costs. But if customers have to pay for services such as alteration of clothes, they are likely to resent. It is better to cut margins and maintain prices. Some stores keep well-informed manpower for guiding customers. Customers are then ready to pay more as their selection is facilitated for certain special merchandise. Some stores appeal to the philanthropic motives of customer, for example, a charitable cause. Returns are accepted readily by certain stores. Such stores can demand certain extra price. In addition, there are certain other factors affecting pricing decision which are described below: •

Discounts: Discounts are sums allowed off a price in consideration for some action. Always expressed as a percentage of list prices, they are given to wholesalers, retailers, distributors, and agents. They include quantity discount, cash discount, functional discount and seasonal discount. ‚‚ Cash discount: It is given to buyers for paying their bills promptly. For example, “2/10 net 30” indicates that payment is due in 30 days but the buyer will enjoy 2 percent discount if payment is made within 10 days. ‚‚ Quantity discount: A price reduction is given for purchasing large quantity. It can be given for each purchase or on a cumulative basis. Whichever method is adopted it must be offered to all customers. ‚‚ Functional discount: Also known as trade discount, such discount is given to trade channel members for performing functions such as warehousing, selling, and record keeping and must be given to all trade channel members. ‚‚ Seasonal discount: It is given to those who buyout of season. Airlines offer seasonal discounts just as do hotels. Allowances are given to encourage buyers to participate in a special programme. For instance trade-in allowance is given when you turn in an old product while buying a new one. Dealers are given promotional allowance for participating in promotional programs.

•

Competitors: The third major factor is the activities of competitors as they affect pricing decisions. There is competition in virtually all markets but what is of major concern to the marketer is the nature of competition. If competitors are few and there exists a dormant player in the market, there is likely to be little reaction to changes in price. On the other hand where there are many competitors with room for more to enter, there is likely to be stiff price competition with high degree price elasticity. It is however possible to reduce price elasticity where the firm has built loyalty towards its brand.

•

Company pricing objectives: It is quite possible that a firm may set out specific objectives through its pricing decisions. However, it is important to note that corporate objectives must be designed with overall marketing mix strategies. 59/JNU OLE

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Corporate pricing objectives: This could include goals such as rapid market growth or penetration (lower prices), return on capital (higher prices), quality (higher prices) attract low-income segment of the market (lower prices) and so on.

•

Survival: If a company is faced with changing consumer taste, intense competition and overcapacity, it must keep prices low in order to keep the plant going and maintain efficient inventory. Profit is not particularly important. The company’s main focus is to cover variable costs and some fixed costs until things pick up.

•

Current profit maximisation: The company is not concerned with long run performance. It estimates demand and costs associated with different price levels, and choose the price that maximises profits.

•

Market-share leadership: Here the company wants to be the dominant player in market. One way of going about this is to set prices as low as possible in the belief that the market leader will ultimately enjoy lowest costs and highest long run profit. Alternatively the company may pursue a target market share say increase from 20 percent to 30 percent in next two years.

•

Product quality leadership: The company intends to produce best quality in market but the product will attract a high price because of high research and development costs associated with high quality.

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Cost recovery: This strategy is used largely by organisations that are set up to provide social services and not to make profit. For such organisations, partial cost recovery is sufficient. Universities and polytechnics set prices that lead to partial recovery of costs and expect to make up from grants and subventions. Their ‘profits’ are measured in terms of the contribution of their products (graduates, skills and research) to the society.

•

Promotional issue: Price communicates to customers about the company and its products. What the price communicates to the customer is quite significant in marketing management and for this reason, pricing decisions must reflect desired corporate image and be appropriate to other marketing mix strategies.

•

Others: Other factors such as taxation, government subsidies, tariffs and duties, trade and legal considerations are important since they influence the pricing decisions of firms. For instance, governments can offer subsidies as incentives for new businesses or organisations engaged in export trade.

4.4 Calculation of Retail Price The term cost of goods indicates cost of the merchandise plus expenses associated with it such as transport of goods from the supplier to the store. Expenses are of two types: •

Fixed expenses: Fixed expenses are called overheads and remain constant, irrespective of the amount of merchandise sold or business done e.g., rents, electricity bill, telephone bill, etc.

•

Variable: Variable expenses vary with the level of sales directly e.g., profit margins. The retail price is fixed keeping our profit expectation or mark-up in mind, which is expressed as a percentage (of retail price or cost price).

Retail price = Cost + Mark up Cost = Retail price – Mark up Mark up = Retail price – Cost



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This mark up is called initial mark up, which could be modified by mark downs, discounts and shrinkages. Mark downs are reductions in the original retail price. The initial mark up equation is:

Initial mark up is the mark up placed on merchandise when the store receives it. Maintained mark up is based on actual prices received for merchandise sold during a period less merchandise cost. Retailers would prefer to have the initial mark up and maintained mark up to be equal, but this rarely happens. The difference between these two mark ups is due to mark downs, added mark ups, shortages and discounts.

The maintained mark up or gross margin is the main factor contributing to profitability, since it is actual difference between the actual selling price and cost of that merchandise. Gross margin = Net sales – Total cost of goods

4.5 Pricing Approach Companies can choose many ways to set their prices. Many stores use cost-plus pricing, in which they take cost of the product and then add a profit to determine a price. Cost-plus pricing is very common. The strategy helps ensure that a company’s products’ costs are covered and the firm earns a certain amount of profit. When companies add a mark-up, or an amount added to cost of a product, they are using a form of cost-plus pricing. When products go on sale, companies mark down prices, but they usually still make a profit. Potential markdowns or price reductions should be considered while deciding on a starting price. •

Many pricing approaches have a psychological appeal. Odd-even pricing occurs when a company prices a product a few cents or a few dollars below the next dollar amount. Prestige pricing occurs when a higher price is utilised to give the product a high-quality image. Some stores have a quality image, and people perceive that perhaps the products from those stores are of higher quality. Many times, two different stores carry the same product, but one store prices it higher because of the store’s perceived higher image.

•

Knowing that people have certain maximum levels that they are willing to pay for gifts, some companies use demand backward pricing. They start with price demanded by consumers (what they want to pay) and create products at that price.

•

Leader pricing involves pricing one or more items low to get people into a store. The products with low prices are often on the front page of store ads and “lead” the promotion. The goal is to get shoppers to buy many more items in addition to low-priced items. Leader or low prices are legal; loss leaders or items priced below cost in an effort to get people into stores are illegal in many states.

•

Sealed bid pricing is the process of offering to buy or sell products at prices designated in sealed bids. Companies must submit their bids by a certain time. The bids are later reviewed all at once, and the most apt one is chosen. Sealed bids can occur on either the supplier or buyer side. For example, via sealed bids, oil companies bid on tracts of land for potential drilling purposes, and the highest bidder is awarded the right to drill on the land. Similarly, consumers sometimes bid on lots to build houses. The highest bidder gets the lot. On the supplier side, contractors often bid on different jobs and lowest bidder is awarded the job. The government often makes purchases based on sealed bids.

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•

Bids are also used online. Online auction sites such as eBay gives customers the chance to bid and negotiate prices with sellers until an acceptable price is agreed upon. When a buyer lists what they want to buy, sellers may submit bids. This process is known as a forward auction. If the buyer not only lists what they want to buy but also states how much they are willing to pay, a reverse auction occurs. The reverse auction is finished when at least one firm is willing to accept the buyer’s price.

•

Going-rate pricing occurs when buyers pay the same price regardless of where they buy the product and from whom. Going-rate pricing is often used on commodity products such as wheat, gold, or silver and people perceive individual products in markets such as these to be almost the same. Therefore, there’s a “going” price for the product that all sellers receive.

•

Price bundling occurs when different products are sold together at a price that’s lower than the total price a customer would pay by buying each product separately. For example, combo meals and value meals sold at restaurants. Companies such as McDonald’s have promoted value meals for a long time in many different markets. Other products such as shampoo and conditioner are sometimes bundled together. Automobile companies bundle product options. For example, power locks and windows are often sold together, regardless of whether customers want only one or the other. The motive behind bundling is to increase an organisation’s revenues.

•

Captive pricing is a strategy firms use where consumers must buy a given product because they are at a certain event or location or they need a particular product because no substitutes will work. For example, concessions at a sporting event or a movie shows how captive pricing is used.

•

Pricing the products that consumers use together, with different profit margins is also a part of product mix pricing. For example, if you want to buy an automobile, the base price might seem reasonable, but options such as floor mats might earn the seller a much higher profit margin.

•

Most of the young people including students have cell phones. It portrays an example of two-part pricing. Twopart pricing means there are two different charges customers pay. In case of a cell phone, a customer might pay a charge for one service such as a thousand minutes, and then pay a separate charge for each minute over one thousand.

•

Payment pricing or allowing customers to pay for products in instalments, is a strategy which helps customers to break up their payments into smaller amounts, which can make them more inclined to buy high-priced products.

•

Promotional pricing is a short-term tactic designed to get people into a store or to increase the sales of a product. Examples of promotional pricing include back-to-school sales, rebates, extended warranties, and going-outof-business sales. Rebates work as a great strategy for companies because consumers think they’re getting a great deal.

•

Price discrimination or charging different customers different prices for the same product is legal in some situations. Price discrimination is used to get more people to use a product or service. Similarly, a company might lower its prices in order to get more customers to buy a product when business is slow. For example, matinees are often cheaper than movies at night; bowling might be less expensive during no league times, and so forth.

4.6 Price Adjustments Organisations should also decide their policies when it comes to making price adjustments or changing the listed prices of their products. Some common price adjustments include quantity discounts, which involves giving customers discounts for larger purchases. Discounts for paying cash for large purchases and seasonal discounts to get rid of inventory and holiday items are other examples of price adjustments. •

A company’s price adjustment policies also need to fix the firm’s shipping charges. Many online merchants offer free shipping on certain products, orders over a certain amount, or purchases made in a given time frame. FOB (free on board) origin and FOB delivered are two common pricing adjustments businesses use to show when the title to a product changes along with who pays the shipping charges. FOB (free on board) means the title changes at the origin i.e., when the product is purchased and the buyer pays the shipping charges. Whereas, FOB (free on board) destination means the title changes at destination i.e., after the product is transported and the seller pays the shipping charges.

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•

Uniform-delivered pricing also known as postage-stamp pricing, means buyers pay same shipping charges regardless of their location. For example, a manufacturer might give a retail store an advertising allowance to advertise the manufacturer’s products in local newspapers. Similarly, a manufacturer might offer a store a discount to restock the manufacturer’s products on store shelves rather than having its own representatives restock the items.

•

Reciprocal agreements are agreements in which merchants agree to promote each other to customers. Customers who patronise a particular retailer might get a discount card to use at a particular restaurant, and customers who go to a restaurant might get a discount card to use at a specific retailer. For example, when customers make a purchase at Diesel, Inc., they get a discount coupon good to use at a certain resort. When customers are at the resort, they get a discount coupon to use at Diesel.

•

A promotion that’s popular during weak economic times is called a bounce back. A bounce back is a promotion in which a seller gives customers discount cards or coupons after purchasing. Consumers can then use these cards and coupons on their next shopping visits. The idea is to get customers to return to the store or online outlets later and purchase more items. Some stores set minimum amounts that consumers need to spend to use the bounce back card.

4.7 Pricing Strategy A pricing strategy could be: •

Demand-oriented

•

Cost-oriented

•

Competition-oriented

Demand-oriented pricing •

In this strategy, an assessment is made about consumer demand at various price points. A consumer perceives that they derive functional and psychological benefits from the merchandise. This is called the value derived. There is always a psychological price-value equation in the consumers mind. There is a feeling that the higher the price, the higher the quality and vice-versa. It is more relevant when other attributes of merchandise are hard to assess and branding plays no signification role in merchandise choice. But when retailer’s image and branding are carefully introduced, price alone, loses its dominant significance.

•

Demand-oriented pricing works when retailer analyses the target market and the value proposition they seek. Prestige pricing assumes that premium products are patronised by status-conscious elite target audience. Prestige pricing also leads to selection of a particular retailer.

Cost-oriented pricing Cost-oriented pricing is the most commonly used pricing strategy. •

Mark up prices factors in the merchandise cost operating expenses and expected profits. The selling price minus the merchandise cost is the mark up. The percentage of mark up depends upon the trade norm, supplier’s suggested price, stock turnover, competition, overheads, alteration costs and the selling effort. It may not be possible to have a single mark up percentage for a product category. Therefore, variable mark up policy is followed. Variable mark ups allows to factor in variable costs, associated with separate merchandise and even in same product category.

•

Variable mark up allows differences in finance locked up in inventory, for example, just-in-time ordering and carrying an entire assortment. Variable mark up recognises the differences in selling efforts and merchandising skills. Certain products carry especially attractive prices to build up traffic. This is possible by adopting variable mark up method.

Competition-oriented pricing Instead of demand and cost being the benchmarks for price setting, a retailer benchmarks its prices against a competitor. A retailer keeps competitive parity while pricing. Competition oriented pricing would be below the market, at the market or above the market. 63/JNU OLE

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4.7.1 Modern Price Strategy Retailers must be more attentive and meticulous with their pricing in this highly competitive retail world. More than ever before, the financial success of companies selling retail goods depends on their price strategy. Consumers demand fair prices in exchange for their business and constantly make comparison on purchase. With the ever-increasing pressures from shrinking margins, rising costs, and competition, winning in the retail arena today demands price strategies that reliably and frequently guide retailers’ decision-making. •

With the new advances in price optimisation science and technology the retailers get an unprecedented opportunity to align pricing policy with strategic business objectives. Aligning business goals and pricing policy is quite an elementary thing, but too often retailers lack the insight and technical ability to plan and price strategically. Instead, retailers too often rely on a basic “cost-plus” strategy to maintain margins, follow their competition, or adopt wholesale-supplied pricing.

•

Competition is an integral part of the modern, optimisation-based price strategy. But modern price strategies reflect an analytical, big-picture approach. They include a far wider variety of factors such as pricing gaps, ending number psychology, brand sensitivity, and product movement. These factors enable retailers to manipulate pricing to align with their broader strategic business objectives. These options were not available earlier, in traditional pricing systems.

•

When competitors introduce a new product or slash prices, retailers who have developed a strategic-level pricing regime can respond with multiple options. The first and most typical option can be to respond immediately with similar changes. However, an optimisation-based strategy can introduce additional options for retailers, providing them a deeper understanding of the long-term financial impacts of reactionary changes. Optimisation environments can provide alternative actions to make up for those losses caused by fierce competition.

•

A modern pricing policy must assure to protect the consumer's perception that they are choosing the best place to shop for their families. Consumers who are confused by non-palatable prices tend to shop elsewhere. Many retailers inadvertently confuse customers by setting prices without a comprehensive policy, and just by reacting to competition or pricing strictly on margin goals.

•

A research indicates that consumers typically rely on three reference points when determining what they think is a fair retail price: ‚‚ How much an item costed in the past? ‚‚ How much competitors charge for the same item? ‚‚ Their perception of the associated costs of selling an item.

4.8 Key Opportunities to Leverage Price Optimisation Most retailers understand that being competitive on price-sensitive items helps build store traffic. But staying competitive on price-sensitive items can result in minimising or sacrificing profit on those items. Below are five key areas of opportunity that can be leveraged to maintain financial stability over long term. A thorough price strategy incorporates each of these components. Zone analysis Many retailers practice grouping stores into zones. These groups were originally set up using a cost-to-serve model driven by geographies, distribution centres, or critical suppliers. Retailers today sit on both ends of the spectrum with only one zone and too many as well. Determining an optimal price strategy through zone configuration requires a deep understanding of many factors, including cost. Cost serves as an important purpose, but certainly should not be the only factor. Even retailers with several outlets in one geographic area do not have identical economic, cultural, and demographic identities within every store. Such store specific insights can empower a retailer to anticipate and react to factors such as job growth, housing, and other economic trends that can greatly impact consumer price sensitivity and competitive activity.

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Category groupings Retailers tend to apply a general margin goal to categories of like items when using price management systems. Mature category management systems, new product innovations, health and wellness attributes, green products, and convenience foods are creating opportunities with new segments within standard categories. Today, it benefits retailers to look inside categories for margin opportunities. For example, the rise in popularity of specialty teas has put those items in a category of their own, capable of performing much better than the general category of coffee and tea. Retailers who lack insight into these buying trends miss opportunities to reshape a price strategy. New-era price optimisation systems are designed to consider how categories and product groupings should be priced and managed much easily than older systems. By breaking up traditional categories and price families, and creating groups based on product benefit, health and organics, or convenience, retailers create profit opportunities in areas not typically leveraged in the past. Creative pricing Creative pricing pushes consumers into action when they consider making a purchase. For items not promoted through advertising, retailers can build their pricing strategy to leverage specialised, creative appeals that drive product movement based on the perception of added value or savings. Successful retailers in every market use tactics like offering better single price points only if multiple purchases are made, cash discounts for purchasing a “set of products”, discounts on fuel for purchases made in-store, and any other strategies to generate larger orders and take customers out of market on key items. Since these prices are built around large purchases, smaller orders can become more profitable as those offers do not apply. These tactics must be supported by: •

Clear, simple communication to both employees and customers.

•

A great in-store merchandising program.

Private label Private label brands and strategies are evolving at a very fast pace. Retailers have experienced that a good private label strategy pays off big dividends in customer loyalty, margin enhancement, and category control over national brand manufacturers. Retailers should be aware of the emerging best practices underpricing private label. Supporting private label growth should be top priority in time and management as it adds profit at a much higher rate than any other category in retail. Establishing an ideal price gap between private label and national brands, and recognising consumer will evaluate the core suite of items (by size). Support a value-price perception by adopting both long-term and seasonal pricing practices that capture margin targets. The line pricing organics products with mainstream items should be avoided. They offer additional benefits and have competitive items of their own to take into consideration. Private label also enables retailers to fill a hole in their product mix with the added advantage of not being subjected to a direct-price comparison by developing new products of a different size, added features, unique flavours, or even different packaging. This practice has resulted in multiple tiers of private label offerings but has some private label items taking on the popularity of a national brand with consumers. By having a comprehensive data file that can be intelligently and systematically analysed, retailers can “reverse engineer” price gaps to identify the right size and package for their new private label initiatives. They can set a competitive price that generates better-than-average margins. In terms of managing gaps between multiple private label tiers, a consistent and purposeful price strategy is critical. Vendor management Retailers have been increasing their reliability on manufacturers and distributors for guidance when it comes to pricing and shelf management. As vendors have traditionally been a great source of information, which has given many vendors a deep knowledge base of customer behaviours and category trends.

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A sophisticated, analytics-based pricing technology now empowers retailers to take control with good reason. Retailer's and vendor's motives are often similar, but not the same. A retailer with a well-reasoned pricing strategy and reliable data is in a position to negotiate effectively towards common goals. The retailer provides reliable pricing leadership by aligning pricing to longer-term goals and strategies that, by and large, account for manufacturer best interests. By making item optimisation metrics available, retailers can negotiate meaningfully with vendors and manufacturers. For example, retailers whose price optimisation systems generate customer demand curves are equipped to talk on-par with manufacturers or vendors on performance criteria, promotional vehicles, floor placement, item authorisation, or cost increases. While negotiating with vendors, and understanding the product demand factors based on different strategies offers a powerful tool.

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Summary •

Price sensitivity is the reaction of consumers to changes in price in terms of the quantities they buy and is known as price elasticity.

•

Some of the common pricing objectives of companies are: earning a targeted return on investment, maximising profits, maximising sales, maximising market share, and maintaining the status quo.

•

Pricing is a part of marketing mix. Marketing mix consists of product, place or distribution, promotion and price.

•

The price range being made available to the consumer depends on merchandise selection.

•

The distance between customers and stores also affects the prices.

•

A heavily promoted store charging reasonable prices experiences more off-take.

•

The term cost of goods indicates the cost of merchandise plus expenses associated with it such as transport of goods from the supplier to the store.

•

Expenses are of two types namely: fixed and variable.

•

Fixed expenses are called overheads and remain constant, irrespective of amount of merchandise sold or business done.

•

Variable expenses as the name itself indicates vary with the level of sales directly.

•

Leader pricing involves pricing one or more items low to get people into a store.

•

Sealed bid pricing is the process of offering to buy or sell products at prices designated in sealed bids.

•

Going-rate pricing occurs when buyers pay the same price regardless of where they buy the product or from whom.

•

Price bundling occurs when different offerings are sold together at a price that’s typically lower than the total price a customer would pay by buying each offering separately.

•

Payment pricing is a strategy that helps customers break up their payments into smaller amounts, which can make them more inclined to buy higher-priced products.

•

Promotional pricing is a short-term tactic designed to get people into a store or to purchase more of a product.

•

A few common price adjustments include quantity discounts, which involves giving customers discounts for larger purchases.

•

A pricing strategy could be of three types namely: demand-oriented, cost-oriented, and competition-oriented.

•

A thorough price strategy incorporates the components: zone analysis, category groupings, creative pricing, and private label, and vendor management.

References •

Pricing Strategies [Online] Available at: [Accessed 10 October 2011].

•

Other Factors Affecting Pricing Decision Making [Online] Available at: [Accessed 10 October 2011].

•

Performance Merchandise Pricing Tips [Video Online] Available at: [Accessed 10 October 2011].

•

Retail Pricing Strategies with Shari Waters [Video Online] Available at: [Accessed 10 October 2011].

•

Chunawalla, S. A., 2009. Contours of Retailing Management. Global Media.

•

Coleman, F.C. Retail Pricing Strategy: Insights and Opportunities [pdf] Available at: [Accessed 10 October 2011].

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Recommended Reading •

Lehmann, 2005. Product Management, 4/E, Tata McGraw-Hill Education.

•

2007. Retail Store Management, Volume 13. LaSalle Extension University.

•

Bennett, A. G., 2009. The Big Book of Marketing. McGraw-Hill Professional.

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Self Assessment 1. The price range available to consumer depends on the _________selection. a. vendor b. merchandise c. strategy d. store 2. Which of the following statements is false? a. Prices can be easily changed and easily matched by the competitors. b. ROI is a common pricing objective for many firms. c. Many companies set their prices to decrease their revenues as much as possible relative to their costs. d. Pricing is a part of marketing mix. 3. Which of the following allows for differences in finance locked up in inventory? a. Pricing b. Stock c. Just-in-time d. Variable mark up 4. Which of the following is also known as postage-stamp pricing? a. Uniform-delivered pricing b. Payment pricing c. Promotional pricing d. Going-rate pricing 5. A __________ is a promotion where a seller gives customers discount cards or coupons after purchasing. a. bounce back b. cost-plus c. mark up d. mark down 6. Which of the following statements is true? a. Private label brands and strategies are evolving slowly. b. Prestige pricing pushes consumers into action when they consider making a purchase. c. Determining a minimum price strategy through zone configuration requires a deep understanding of many factors. d. Consumers demand fair prices in exchange for their business and are constantly make comparison while purchasing. 7. Prestige pricing occurs when a _______ price is utilised to give an offering a high-quality image. a. competitive b. lower c. standard d. higher

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8. Match the following. 1. Price bundling

A. Occurs when buyers pay the same price regardless of where they buy the product or from whom.

2. Payment pricing

B. Occurs when different offerings are sold together at a price that’s typically lower than the total price a customer would pay by buying each offering separately.

3. Promotional pricing

C. A strategy that helps customers break up their payments into smaller amounts, which can make them more inclined to buy higher-priced products.

4. Going-rate D. A short-term tactic designed to get people into a store or to purchase more pricing of a product. a. 1-C, 2-B, 3-A, 4- D b. 1-B, 2-C, 3-D, 4- A c. 1-D, 2-C, 3-B, 4- A d. 1-A, 2-C, 3-D, 4- B 9. Which of the following expenses are called overheads and remain constant, irrespective of the amount of merchandise sold or business done? a. Variable b. Mark-up c. Fixed d. Cost-plus 10. Which of the following strategy is used largely by organisations that are set up to provide social services and not to make profit? a. Cost recovery b. Discount c. Company pricing d. Promotional

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Chapter V Visual Merchandising and Financial Merchandising Aim The aim of this chapter is to: •

introduce the concept of visual merchandising

•

discuss the organisational chart of visual merchandising

•

explain the concept of cross merchandising

Objectives The objectives of this chapter are to: •

explain different ways of product presentation in visual merchandising

•

explicate various planning systems in merchandising management

•

describe the role of visual merchandising for a non-retail store

Learning outcome At the end of this chapter, you will be able to: •

identify the functions of visual merchandising

•

discuss financial merchandise management

•

comprehend the possibilities in visual merchandising

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5.1 Introduction to Visual Merchandising Visual merchandising is a common term used for the aspect of product management that is concerned with presenting a product within a retail outlet to its best advantage. After all the product management work has gone into planning ranges, the product makes its entrance into customer space. This is done by selecting products, liaising with suppliers, and getting the physical product through supply chain. Visual merchandising combines commercial approach with design approach within the store environment. It helps to achieve operational product management objectives; maximising the efforts of buying teams by giving the product best opportunity to sell. Visual merchandising blends with store design to create an environment that sends out strategic messages to consumers in order to reinforce retailer’s brand values. Visual merchandising: definition and function Visual merchandising is the art of implementing effective design ideas to increase store traffic and volume of sales. Creating an attractive product display can draw customers in, for example, sales announce. It is used for displaying merchandise on the shop floor to enable maximum sale. Visual merchandising is a tool to: •

achieve sales and targets

•

enhance merchandise on the floor

•

communicate to a customer and influence his decision to buy

It uses season based displays to introduce new arrivals to customers, and thus increase conversions through a planned and systematic approach by displaying stocks available. Visual merchandising helps to: •

Educate the customers about the product in an effective and creative way.

•

Establish a creative medium to present merchandise in 3D environment, thereby enabling long lasting impact and recall value.

•

Setting the company apart in an exclusive position.

•

Establish linkage among fashion, product design, and marketing by keeping the product in prime focus.

•

Combining the creative, technical and operational aspects of a product and the business.

It is everything a customer sees, both in the exterior and the interior of a store, that creates a positive image of the business and results in getting the attention of the customer, creating interest and desire, convincing the customer of the value of the products, and finally leads to a sale. History of visual merchandising In 18th century, when contemporary methods of visual merchandising were evolving, store owners and managers paid little attention to the appearance of their stores and the presentation of merchandise. Very little merchandise was displayed within the store. Rather, a customer would enter the store and speak with the retailer, who would then present merchandise that was kept in a back room. Sales conversation was more important in convincing a customer of the quality of a product and making a sale. The evolution in store design brought about a new ‘process’ of shopping. The first step in the evolution of store design occurred when small stores began to display their merchandise openly to the public, instead of keeping it stored in backrooms. Gradually, the deliberate displaying of goods became an important tool for retailers. Unattractive stores, that had little or no visual appeal for customers, slowly became exciting shopping venues. Visual merchandising revolution started in early 19th century, as retailers understood that visual displays of goods were necessary to attract retail customers. Store windows became important venues to attractively display the store’s merchandise. 72/JNU OLE

5.2 Scope of Visual Merchandising Visual merchandising has often been used as a synonym for display in retailing, but in today’s retail industry, the term ‘visual merchandising’ incorporates a much wider meaning to it. Visual merchandising allows retailers to make the market place innovative, exciting and stimulating by creating product-led stories supported by merchandising solutions. Visual merchandising encompasses a wide range of activities; across all retail sectors. It may include all or some of the elements as given below: •

Choice of fixtures and fittings to be used

•

Method of product presentation

•

Construction of ‘off-shelf’ displays

•

Choice of store layout (to encourage complementary purchases)

•

Use of point of sale material (to encourage impulse purchases)

•

Construction of window displays

Visual merchandising plays a much greater part in product management process in some retail sectors than others. Fashion and home furnishings have always given considerable resources to display, but even in a grocery superstore elements of visual merchandising can be found. Indeed some grocery retailers have used visual merchandising as a way of providing interest to the customer and as a way of differentiating themselves from their competitors. The computerised planning systems allow space management to combine visual display objectives with space productivity objectives. Some of the most effective in-store visuals are the result of simple creative ideas using everyday objects. Retail outlets have to be better in display if they are to retain an increasingly style conscious customer base.

5.3 Visual Merchandising Organisational Chart The nature and visual merchandising can be seen in organisation chart given below: Vice-President Sales Promotion

Corporate Director of Visual Merchandising

Display Fashion Coordinator Wonend

Production Manager

Window Manager

Display Director Downtown Store

Home furnishing Coordinator

Administrative Asst. Secretary

Interior Manager

Director of branch store display

Display Manager

Display fashion coordinator (Men’s)

Display Manager

Fig. 5.1 Visual merchandising organisation chart (Source: Rudrabasavaraj, M. N., 2010. Dynamic Global Retailing Management, Global media)

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The organisational chart shown in the above figure is a representative of a major department store with branches in out-laying cities, as well as “home” or “base” area. The visual merchandising department may be a part of sales promotion division, aligned with store planning division or a division unto itself, depending upon the management set up of a particular company. The four executives immediately responsible to the corporate usual merchandising director, represent various talents, skills and managerial capabilities. The two display fashion coordinators are qualified display trimmers and possess extraordinary good taste and knowledge of merchandising. On the other hand, the director of brand store display must be knowledgeable in all phases of visual merchandising with the ability to handle multi-faceted responsibility of scheduling, budgeting, and poding of props and even personnel when emergencies arise. The director of downtown or parent store has similar responsibilities to the branch director with additional supervision of production department which must supply special shop decor, fixturing and backgrounds for windows and fashion shows. The home furnishings coordinator’s responsibilities are the home fashion areas and model rooms in all stores. Display trimmers vary greatly. Some display trimmers are mechanically inclined, some are craftsmen in their trade, and others are fashion conscious or extremely innovative. It takes many kinds of personalities and talents in a combined effort of a good display department. It is the duty of the director of visual merchandising to cast each individual in area of position which will more fully utilise his particular and unique capabilities. There are two types of branch stores. There are the branches of the company which are located in the prime marketing area of the main store. Also, there are branches which are many miles from the home market. Thus, it complicates the job of communicating the goals or visual merchandising department. It is essential that more distant branches be kept informed on a day-to-day basis of thinking about the store in order to maintain a consistent store image. While the organisation chart shows a large number of people working full time on visual merchandising, the responsibilities indicated are also found in the smallest of retail operations. The larger the store, the more an individual may concentrate on a single aspect of visual merchandising task and there can be more division of duties and specialisation. Although windows are a major part of visual merchandising, it is one of the major selling tools of the merchant, a selling tool which encompasses a great deal more than just window. It also includes the total “look” of a store, which should enhance the merchandise and set a mood, and is most effective when it gives the customer every bit of information which is very important, where in the store the item can be purchased. Without close cooperation between visual merchandising staff, buyer and divisional merchandise manager, results will not be entirely satisfactory.

5.4 Visual Merchandising Planning Systems Similar to most other areas of retail management, information technology applications are helping to improve the visual merchandising process. Particularly, they are helping to forge stronger links between product range planning, space allocation and product presentation. A fully integrated visual merchandising system such as Compass Software’s SmartVM can provide store personnel access to space planning visualisations via a corporate internet. This system can be used by buyers and merchandisers, as they build ranges for the next season. After that when it is finalised and ready for delivery photographic quality, visual guidelines can be effectively and quickly communicated throughout the retail business. The improved quality of output of this type of system will be particularly helpful for fashion buyers when presenting their ranges within a floor plan context, helping store personnel to understand product linkages. 5.4.1 Responsibility for Visual Merchandising within Retail Structure Responsibility for visual merchandising of product management varies between retail organisations. In some retail organisations, a team of brand managers co-ordinates the visual merchandising effort with other promotional activities, so that it becomes part of marketing activities. In fact, the elements of visual merchandising are sometimes referred to as ‘in store advertising’. Traditionally, advertising refers to communications that are transmitted via paid media, such as magazines or television.

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Therefore, a retailer using his imagery within the store cannot strictly be counted as advertising. However, the retail environment is a place where manufacturers display various types of branded materials, which again appear to be advertisements. The extent to which a manufacturer will have paid the retailer for this privilege can vary from zero to a considerable sum. The term ‘ambient media’ is a useful one in this context and refers to the various ways in which messages about products and services can appear in a selling environment, but do not fall into the traditional definition of advertising. The structure beneath the director is sometimes vague. A visual merchandise manager, supported by area teams, is a format frequently used in multiple retailers. In smaller retail companies, somebody based in the store may be partly or wholly responsible for visual merchandising. Visual merchandising at the implementation level is a creative activity and usually attracts people with a design training or background. Specific training for such aspect of retailing is available. 5.4.2 Visual Merchandising- A Support for Positioning Strategy In an increasingly saturated retail environment which is competitive and subject to international competition, visual merchandising is a way of communicating and differentiating the retail offer. It must be an integral part of any strategy in which a retailer attempts to position or re-position the retail offer in the mind of the consumer. Visual merchandising is frequently used by multiple retailers to strengthen the retail brand, but a highly centralised and inflexible approach to visual merchandising may not be appropriate in all circumstances. The table given below considers local, centralised and decentralised approaches to visual merchandising.

Local approach

Centralised approach

Decentralised approach

•

Can adapt to local market product preferences

•

Can incorporate local themes into displays

•

Can adapt to local competition

•

Controls retail brand communication

•

Promotes a stronger identity, both nationally and

•

internationally

•

Can integrate corporate communication themes and messages with the visual merchandising effort (for example, by using images from media advertising in displays)

Table 5.1 Visual merchandising: local and centralised approaches Fixtures and fittings The way products need to be presented and displayed within the store will largely determine the choice of fixturing. The principal types of fixtures are explained below: Gondolas: The term gondola refers to a system of shelving which offers stacked merchandise to customer in a longitudinal presentation. Gondola is used in the ‘grid format’ where consumers move along aisles between gondolas, which offer merchandise on both sides. The end of the gondola is particularly effective in attracting customers to products as they slow down to turn the corner to view merchandise on the other side. Some gondolas are made up of a number of fixture modules which give flexibility in terms of fixture sizing, and the opportunity to alter the configuration of shelving. Round fixtures: The round fixture offers merchandise in a circular presentation. The merchandise might be hung on a series of prongs (as in the case of belts or bubble packed products) or the fixture may be a more solid structure, showing the variety available in a merchandise type. Gap uses such type of fixturing to show all the colours available in basic tops or sweaters. Round fixtures are useful for showing a variety of merchandise within a single category, but they are not very space efficient because customer access is needed from all sides.

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Four-way: Four-way fixtures offer the retailer flexibility when a degree of co-ordination is needed. The fixture offers a combination of front facing merchandise presentation, with the space efficiency of side hanging. The four-way provides opportunity to present a wide variety of merchandise and is more space efficient than a round fixture. Shelving: Wall space is useful for incorporating the general display of merchandise within the overall interior design of the store. For example, casual clothing retailers often use wall shelving to house large quantities of merchandise, stacked from floor to ceiling, whilst offering interest by showing all alternative colours and shades of denim. Gondolas in various shapes and sizes, incorporate shelving to accommodate different types of product. Rails: Rails can be mounted onto walls, or incorporated into a free standing fixture. Height flexibility can be introduced using adjustable rails and modular rail fixtures provide longitudinal variations. Cascading rails improve the appearance of forward-facing hanging garments, and allow the customer better access to the product. Bins, baskets and tables: Normally, bins and baskets are used to house large quantities of merchandise. They are effective for small items and for heaps of promotional merchandise. They may be filled with one type of product, or the customer may be invited to rummage through a variety of products retailing at a particular price point. In addition, promotional merchandise can be stacked on tables, which provide flexibility in terms of space allocation and display area. However, tables can also be used in a more elegant product display. Increased use of self-service in retailing depicts that use of drawers and cabinets has decreased, but they may still be used for very functional merchandise that does not really need displaying or in instances where merchandise needs protection. For example, traditional hardware stores that sell loose items rather than pre-packaged keep this type of merchandise in drawers. Watches and jewelry are often housed in glass cabinets in order to prevent damage and theft. Many retailers have their own customised fixturing and their own customised terminology for it. Fixturing should have a degree of co-ordination through the store, so that they can be considered in ‘families’, using the same type of materials (whether chrome, wood, acrylic or glass) and the same set of design features. New designs for fixtures often incorporate lighting within the structure so that merchandise on display can be highlighted without the need for spot lighting from walls or ceilings. In all retail circumstances, fixturing should complement and not compete with the merchandise, although the fixturing may be used to reinforce a particular retail brand image. Fixturing also needs to be flexible, so that an ever-evolving product range can be successfully accommodated. Many modern systems are modular enabling a large number of alternative combinations to be built. Product presentation The way of products’ presentation as routine will depend on the type of fixture available but essentially can include: •

Vertical stacking (for example, for magazines or CDs)

•

Horizontal stacking (for example, tinned foods or folded garments)

•

Hanging on hangers or hooks

•

Hanging mounted on card or bubble packed

Merchandise presentation is largely determined by product category or end use of product, but in some instances, other product characteristics may bear a relation to the presentation method. For example, colour is often used effectively and many clothing and home furnishings retailers incorporate a corporate colour palette into the buying plan so that different product categories can be presented together.

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Retailers may group merchandise together according to price levels or even sizes. Price lining can be used both to plan merchandise assortments and provide guidelines for display. For example, women’s clothing retailers may use sizing groups such as petites, regular and ‘plus’, and charity shops generally use product, size and then colour to provide some logic in their disparate merchandise offer. There may also be a case for grouping products according to levels of technical involvement, such as PC World houses software and accessories at the front of store and the full PC systems are positioned at the back. The customer is faced with gradually increasing product complexity as they move through the store. Product presentation can instigate a number of issues for other members of the product management team. Fixturing may determine the size variation a retailer offers. For example, a small convenience store may not find it practical to stock family-size cereal packets as they require such tall shelves; it would be preferable in this type of retailer to offer a smaller pack size and another product item in the same available space. The method of presentation may also determine the packaging or ‘get up’ of product. For example, a folded shirt is likely to need board and pins, or a paper sash around it to keep it looking neat, but all these add to the cost of the item. Small items (such as stationery products) are much more manageable when bubble packed or mounted on card and hung on a wall fixture. It may be necessary to attach an illustration of the product in use if it has little ‘hanger appeal’. For example, a swimsuit tends to look like a crumpled rag on the hanger and most uncooked pre-prepared meals look unappetising, and rely on the photograph on the package to encourage purchase. New approaches to point of purchase presentation methods have been part of the orientation towards category management in the management of customer demand. Dedicated product fixturing can provide clarity and logic to the product presentation, whilst incorporating suggested complementary and impulse purchases in the arrangement. Store layout Visual merchandising also encompasses the design of a store layout. A store layout will be heavily influenced by the assortment and variety on offer and will be constrained by the size and structure of the shop itself. The layout used will also depend on the type of fixturing used. There are a number of different approaches to store layout, although they are all designed with the intention of moving customers to every area in the store in order to expose them to the full range of products. A common store layout has fixtures positioned in the form of a grid. This method maximises the use that can be made of the available space and provides a logical organisation of the products on offer. However, it is rather mechanical in its approach, and rows of gondola-type fixtures with aisles between them can lack interest. An alternative approach is to place fixtures in a more random pattern. This type of layout is appropriate when variety in fixturing is needed and when shopping process involves browsing rather than a more systematic product selection process. Referred to as a free form or a free flow layout, this kind of arrangement can successfully incorporate a mix of small gondolas, hanging rails and shelving units. Although the free-form layout generally offers more opportunity to create interest than the grid layout, an unending mass of fixtures set out in a random fashion can look chaotic and for large expanses of retail space, such as in a department store, some attempt must be made to break up the space and create pockets of interest for the customer. Where the merchandise range is limited, or in situations where a high level of personal selling is desirable or necessary, a ‘boutique’ layout could be used. This layout surrounds the customer with merchandise, most of which is displayed in or on wall fixturing, with one or two other central fixtures offering interest or, perhaps, to house the till. In larger stores a definite guided walkway or ‘racetrack’ is incorporated into the layout, which guides the customer between the main classifications of merchandise, which are often set out in free-form or short grid fixturing. Modern layouts are generally more airy, with voids replacing walls and glass replacing solid partitioning. ‘Decompression zones’ are used to give shoppers time to relax and refocus their attention, for example at the front of the store, or near escalators. Vertical access and visibility is becoming increasingly important as a means of encouraging customers to multi-level retail space, as the amount of available ground floor space decreases in prime shopping centre locations. 77/JNU OLE

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5.5 Visual Merchandising in Non- Store Retailing The objectives of retail design and visual merchandising are same in both store and non-store retailing, and revolve around presenting products attractively, but reflecting customer needs. The non-store retailing presents some additional challenges for visual merchandising, whilst offering some unique opportunities. The fact that non-store retailing relies on product representations rather than ‘real thing’ means that some visual merchandising techniques, like tonnage merchandising and classification dominance displays are less effective. The store environment offers more scope to use the physical presence of the products for impact while restrictions associated with non-store medium can be significant. Catalogues are only able to show a product in two dimensions, and retailer’s web sites have a tendency to be very similar in style and operation, negating many of the efforts that are made by store retailers to achieve differentiation. There are novel ways of presenting products in a lifestyle. The use of corporate colours and high quality photography combined with creativity has all contributed to the success of strong non-store retail branding.

5.6 Cross Merchandising Cross merchandising refers to the display of opposite and unrelated products together to earn additional revenues for the store. Products from different categories are kept together at one place for the customers to find a relation among them and pick up all. According to cross merchandising: •

Unrelated products are displayed together. The retailer makes profits by linking products which are not related in any sense and belong to different categories.

•

Cross merchandising helps the customers to know about the various options which would complement their product.

•

Cross merchandising makes shopping a pleasurable experience as it saves customer’s precious time.

Examples of cross merchandising are: •

Mobile covers displayed next to mobile phones.

•

Recharge coupons with new sim cards

•

Batteries with electronic appliances

•

Neck ties or cuff links displayed with men’ shirt

•

Fashion jewellery, rings, anklets, hand bags with female dresses

•

Shoe laces, shoe shiners, shoe racks with shoes

•

Audio CDs with CD Players

Important guidelines for cross merchandising to be kept in mind: •

The opposite products should be sensibly displayed for the customers to be able to relate them.

•

The merchandise should be neatly arranged without giving a cluttered look to the store.

•

The merchandise must complement each other to create the desired impact.

•

The retailer must make sure the products have some logical connection with each other.

•

Use hangers, pegs, mannequins or suitable fixtures to intelligently display the unrelated goods and prompt the customer to pick all of them.

5.7 Financial Merchandise Management Financial merchandise management stipulates which products are bought by the retailer, when they are bought, and what quantity is bought. Rupee control involves planning and monitoring the inventory investment made during a given period, while unit control relates to quantities of merchandise handled in that period. Financial merchandise management encompasses methods of accounting, merchandise forecasting and budgeting, unit control systems, and integrated dollar and unit controls. 78/JNU OLE

The purpose of financial merchandise management is to stipulate which products are bought by the retailer, when, and in what quantity. Dollar control monitors inventory investment, while unit control relates to the amount of merchandise handled. 5.7.1 Use of Financial Merchandising in Organisation Various uses of financial merchandising in an organisation are explained below: Helpful in studying the merchandise forecasting and budgeting process This is a form of currency control with six stages: •

Designating control units

•

Sales forecasting

•

Inventory-level planning

•

Reduction planning

•

Planning purchases

•

Planning profit margins.

Adjustments require all later stages to be modified. Control units-merchandise categories for which data gathered must be narrow enough to isolate problems and opportunities with specific product lines. Sales forecasting may be the key stage in merchandising and budgeting process. Through inventory-level planning, a firm sets merchandise quantities for specified periods through the basic stock, percentage variation, weeks’ supply, and stock-to-sales methods. Reduction planning estimates expected markdowns, discounts, and stock shortages. Planned purchases are linked to planned sales, reductions, ending inventory, and beginning inventory. Profit margins are related to a retailer’s planned net sales, operating expenses, profit, and reductions. Helpful in integrating currency and unit merchandising control concepts Three aspects of financial inventory control integrate the currency and unit control concepts: •

Stock turnover

•

Gross margin return on investment,

•

When to reorder, and how much to reorder

Stock turnover is the number of times during a period that the average inventory on hand is sold. Gross margin return on investment shows the relationship between gross margin in currency and average inventory investment (at cost). A reorder point calculation-when to reorder-includes the retailer’s usage rate, order lead time, and safety stock. The economic order quantity (how much to order) aids a retailer in choosing how big an order to place, based on both ordering and inventory costs. Helpful in explaining the cost and retail methods of accounting Two accounting techniques for retailers are the cost and retail methods of inventory valuation. Physical and book (perpetual) procedures are possible with each of the techniques. Physical inventory valuation requires counting merchandise at prescribed times. Book inventory valuation relies on accurate book keeping and a smooth flow of data. The cost method obligates a retailer to have careful records for each item bought or code costs on packages. This must be done to find the exact value of ending inventory at cost. Many firms use LIFO accounting to project that value, which let them reduce taxes by having a low ending inventory value. In the retail method, closing inventory value is tied to average relationship between the cost and retail value of merchandise. This more accurately reflects market conditions, but is more complex.

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Helpful alterative method of inventory unit control A unit control system involves physical units of merchandise. It monitors best-sellers and poor sellers, the quantity of goods in hand, inventory age, reorder time, and so on. A physical inventory unit control system may use visual inspection or a stock counting procedure. A perpetual inventory unit control system keeps a running total of the units handled through record keeping entries that adjust for sales, returns, transfers, and so on. A perpetual system can be applied manually, by merchandise tags processed by computers, or by point-of-sale devices. Virtually all large retailers conduct regular physical inventories; two-thirds use a perpetual inventory system.

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Summary •

Visual merchandising is the art of implementing effective design ideas to increase store traffic and volume of sales.

•

The first step in the evolution of store design occurred when small stores began to display their merchandise openly to public, instead of keeping it stored in backrooms.

•

Visual merchandising revolution started in early 19th century, as retailers understood that visual displays of goods were necessary to attract retail customers.

•

Visual merchandising allows retailers to ‘make the market place innovative, exciting and stimulating by creating product-led stories supported by merchandising solutions’.

•

Visual merchandising at the implementation level is a creative activity and usually attracts people with a design training or background, although specific training for this aspect of retailing is available.

•

Visual merchandising is frequently used by multiple retailers to strengthen the retail brand, but a highly centralised and inflexible approach to visual merchandising may not be appropriate in all circumstances.

•

Merchandise presentation is largely determined by product category or end use of product.

•

Price lining can be used both to plan merchandise assortments and provide guidelines for display.

•

Product presentation can instigate a number of issues for other members of the product management team.

•

A store layout is heavily influenced by assortment and variety on offer and will be constrained by the size and structure of the shop itself.

•

Non-store retailing relies on product representations rather than the ‘real thing’.

•

Cross merchandising refers to the display of opposite and unrelated products together to earn additional revenues for the store.

•

Financial merchandise management stipulates which products are bought by the retailer, when they are bought, and what quantity is bought.

References •

Bhalla, S., Visual Merchandising [Online] Available at: [Accessed 10 October 2011].

•

Financial Merchandise Planning and Management [Online] Available at: [Accessed 10 October 2011].

•

Clifton, M., Visual Merchandising Tips [Video Online] Available at: [Accessed 10 October 2011].

•

The Qualities of Effective Visual Merchandising Displays [Video Online] Available at: [Accessed 10 October 2011].

•

Rudrabasavaraj, M. N., 2010. Dynamic Global Retailing Management, Global media.

•

Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge.

Recommended Reading •

Colborne, R. Visual Merchandising: The Business of Merchandise Presentation, Colborne Cengage Learning.

•

Sharma, M., 2009. Product Management: Product Lifecycle and Competitive Marketing Strategy, Global India Publications.

•

Morgan, T., 2008. Visual Merchandising: Window and In-Store Displays for Retail, Laurence King.

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Self Assessment 1. Visual merchandising combines commercial approach with _______ approach within the store environment. a. product b. design c. planning d. visual 2. Which of the following statements is false? a. Visual merchandising plays a much greater part in product management process in some retail sectors than others. b. Responsibility for visual merchandising of product management varies between retail organisations. c. The way products need to be presented and displayed within the store will largely determine the choice of space. d. Wall space is useful for incorporating the general display of merchandise within the overall interior design of the store. 3. Which of the following refers to the display of opposite and unrelated products together to earn additional revenues for the store? a. Cross merchandising b. Product merchandising c. Service merchandising d. Visual merchandising 4. The ________ offers a combination of front facing merchandise presentation, with the space efficiency of side hanging. a. fixture b. Walls c. store layout d. shelves 5. Which of the following statements is true? a. The accounting method obligates a retailer to have careful records for each item bought or code costs on packages. b. Book inventory valuation requires counting merchandise at prescribed times. c. A unit control system involves book units of merchandise. d. Book inventory valuation relies on accurate bookkeeping and a smooth flow of data. 6. Which approach of visual merchandising controls retail brand communication? a. Local approach b. Decentralised approach c. Centralised approach d. Strategic approach

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7. Which of the following form of product presentation is used by gondolas? a. Free flow b. Grid c. Modern d. Boutique 8. __________can be used both to plan merchandise assortments and provide guidelines for display. a. Price lining b. Fixtures c. Store layout d. Product presentation 9. Which of the following layout method maximises the use that can be made of the available space and provides a logical organisation of the products on offer? a. Modern b. Grid c. Race track d. Boutique 10. A _________inventory unit control system keeps a running total of the units handled through recordkeeping entries. a. physical b. book c. prescribed d. perpetual

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Chapter VI Category Management Aim The aim of this chapter is to: •

explain the concept of category management

•

discuss the philosophy of category management

•

describe the role of stock keeping units (SKU) in product category

Objectives The objectives of this chapter are to: •

explicate the evolution of category management

•

explain the concept of category captain

•

highlight the steps in category management

Learning outcome At the end of this chapter, you will be able to: •

recognise the way of formulating the strategy for a category

•

identify the limitations of category management

•

categorise the benefits of behavioural category management

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6.1 Introduction to Category Management Category management is a retailing and supply management concept in which the range of products purchased by a business organisation or sold by a retailer is broken down into discrete groups of similar or related products. These groups are known as product categories, for example, grocery categories might be tinned fish, washing detergent, toothpaste etc. It is a systematic, disciplined approach to manage a product category as a strategic business unit. Definition Category management has been defined as ‘the strategic management of product groups through trade partnerships, which aims to maximise sales and profits by satisfying consumer needs'. The key words within this definition, points to the difference between category management and other buying approaches. •

A category is a strategically managed product group: Rather than products being grouped by departments, into which they are placed according to operational convenience, products are put into groups that are carefully defined according to consumer shopping behaviour. All products within a category can be managed using a strategy that is specifically formulated for that group of products.

•

Category management relies on trade partnerships: In category management, suppliers play a very active role in management of the product group. Suppliers become partners of the retailer that is using category management, and the two parties work together in pursuit of mutual goals.

•

Category management aims to maximise sales and profits: The definition highlights the importance of performance of product group (sales and profits), but by linking this performance to consumer satisfaction. The definition indicates that long-term performance objectives can only be reached if consumer needs, both for products and in shopping process, are met. Additionally, the definition indicates that performance refers to the product group, as opposed to each single product item. A category may include a number of leading manufacturers’ brands, retailers’ own brands and some speciality products, all of which have their own specific sales values and profit margins. However, from the point of view of the retailer, important is the performance of the whole category and its contribution to the company’s overall profitability.

•

Category management satisfies consumer needs: The definition for category management highlights that it is a consumer-led process, and that only by having a deep understanding of consumer needs and providing a product assortment that fully satisfies each shopper as they interact with a product category, can performance be maximised in the long term. Category management relies on having an understanding of a consumer’s relationship with a product type, for example, the level of interest they have in a product category, how they prefer to shop, and how different shopping occasions may influence the decisions they make about buying products within a category.

Category management as a philosophy As an approach to thinking about how products are managed within a retail business, category management requires a broader vision. Rather than being primarily concerned about products from a features and procurement viewpoint, and then forecasting sales for those products, category managers have first and foremost to consider the performance of the category in relation to consumer demand and then strive for the most profitable way to supply that demand. Consideration of features and procurement therefore become a part of, but not the focus of, the category manager’s remit, while forecasting is replaced by responding. Fundamental to the adoption of a category management philosophy is the way in which suppliers are viewed. Whether they are termed partners or allies, the key to the philosophy is supplier integration. Traditional lines defining functions that a supplier performs are broken down, as competencies are shared as well as information. If a supplier is able to perform an aspect of product management more efficiently, then it should contribute that part of the process. If a retailer is more efficient, then it should perform the function. The resulting efficiency gains result in a low-cost product, and cost savings can be negotiated between the parties.

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6.2 Evolution of Category Management The evolution of category management started when the retailers operated their businesses. Most of the retailers built their businesses around the principles of category management through the 1990s. Eventually, the process proved to be too complicated for many retailers to adhere to. There were too many details and variables. It was cumbersome and unwieldy. Too much coordination was needed from too many departments such as logistics and finance. Problems also developed on the manufacturer’s front when sales people were asked to learn the intricacies of category management. Their primary job was developing relationships, moving products, and building the top line. They weren’t analysts. As a result, many manufacturers created category management departments staffed with analysts to support the salespeople. Even after creating all this, training somebody capable with the entire category management process remained a daunting task. Few of the large manufacturers came up with ideas regarding category management. They restricted category management to large retailers by investing their time and effort on full-time account teams of their largest customers. Smaller chains received less interest and support.

6.3 Category Captain Manufacturers and retailers have different profit objectives. A manufacturer wants to maximise the profits of its own brands. The retailer, on the other hand, wants to maximise the profit of the entire product category. In spite of these divergent profit objectives, both manufacturers and retailers are increasingly realising that profit margins of both can be increased through cooperation rather than confrontation. The category captain is not always the supplier with the largest turnover, although that is quite common. However, sometimes there are more than one players who can demonstrate strong expertise in category management. And also, while the job has traditionally been given to brand suppliers, it is now common-place to have switched-on private label suppliers taking the category captaincy job. Despite the improved status, the category captain should not abuse, or be made to abuse the status by blatantly uncompetitive practices such as price fixing or blocking a competitor. For example, Wal-Mart experimented with Proctor & Gamble (P&G), a leading FMCG company, where P&G was considered by Wal-Mart as its partner in progress and not just another vendor in the FMCG category. P&G was allowed to manage the shelf space in all the Wal-Mart Stores and add or reduce inventory based on customer demand. P&G emerged the category captain among FMCG products within a short period contributing over 50% in sales volume its categories through online inventory management system and better shelf-monitoring. Category management is one such cooperative strategy that often involves the appointment of a leading manufacturer as the category captain. A category captain advises the retailer on the best way to price, display, and promote products in a category including those of competitors. This arrangement, therefore, ensures retail efficiency but raises doubt about possible misuse of power by the category captain to circumvent fair competition. Therefore, a perfect understanding and trust can only make this work for the retailer as well as the supplier and vendor. Category management is a retailer-supplier process of managing categories as a strategic business unit (SBU), producing enhanced results by focussing on delivering consumer value. The aim of category management is: •

to satisfy the consumer

•

to grow the category

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This way, the category captain will add value to the retail space and the retailer. In India, Madura garments, a division of Aditya Birla Nuvo is a leading apparel manufacturer and a retail company owning brands such as Van Heusen, Louis Philippe, Allen Solly, Allen Solly Women’s wear, Peter England, Byford, and so on, which are leading apparel among its categories. Madura also retail their brands through its own outlets named Planet Fashion and Trouser Town. Madura has strategic partnership with several multi brands retailers such as Shoppers Stop, Lifestyle, and so on, and are considered category captain in the brands it manufactures and retails throughout the country.

6.4 Category Management Process Category management is viewed as a step-by-step planning and implementation process that helps retailers and suppliers achieve both performance-based objectives and longer-term strategic aims. This process is outlined in the table given below. Define the category

Determine the products that make up the category from a consumer’s perspective. Consider the role of subcategories or individual SKU’s taken in the category.

Establish the strategic role of the category within the total product assortment of the retailer

Develop a strategic plan for the category, considering long-term trends.

Establish the measures upon which category performance will be assessed.

Determine the way in which the performance of a category will be evaluated. Consider various costing and profitability approaches and include both quantitative and qualitative assessments.

Formulate a strategy for the category.

Develop a marketing and supply development plan to achieve both short-term and long-term category objectives.

Establish the category marketing mix

Determine the various tactics to be used within the marketing and supply plan, for example, space allocation, promotions.

Establish category management roles

Assign responsibilities for category management implementation within both retailer and supply partner organisations.

Category review

Measure, monitor and modify the category.

Category definition

Category planning

Category management implementation

Table 6.1 Category management process

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6.4.1 Category Definition The way in which a category of merchandise should be defined has yet to be fully established but there is a general agreement that it should be established by the way consumers buy the product in question. Generally, products within a category should be reasonable substitutes for one another, although products within some categories might have an element of being complementary to one another. For example, some grocers might consider ‘exotic foods’ as a category, into which products such as refried beans, taco shells and salsa sauce might all fall; these are complementary rather than substitute products, but in the purchase of such products it is more logical for consumers if they are displayed together. The definition of a category is likely to change between retailers, according to the size and degree of specialisation in the format used. Some categories may have recognisable sub-categories, which may become categories in their own right within a specialist retailer; for example, a ‘hair-care’ category might be broken down into sub-categories of shampoo, conditioner, two-in-one conditioners, and styling products. Product management is increasingly providing ‘solutions’ to lifestyles or personal process domains, and so complementary goods that work together to provide those solutions are more likely to define a retail category. The term super-category is used to describe product ranges that provide a high level of customer focus, for example, premium product ranges like Tesco’s Finest or Sainsbury’s Blue Parrot which are geared to the specific needs of certain customer groups. Role of SKU within product category When a retail product manager is reviewing the choice within a product category, the individual roles that are played by the different brands or product variations will be acknowledged. Some products within a category are ‘traffic builders’, generating high sales and have a large market share: they draw customers into the store, and their absence would risk customer loss. Other products, such as own-label goods, have roles that are clearly concerned with achieving sales or profit objectives. Some stock keeping units (SKUs) play a key role in the reinforcement of the retail brand image and some products play roles that are directly confrontational with other members of the category, for example, an own-branded product that fights for market share with a brand leader, or a low price own-label variant of a frequently purchased item, that defends retail market share and promotes store loyalty. Each (SKU) member of the category should be making an individual contribution to the performance of the category. If a brand or variation does not have a clear role, then a product management decision may need to be taken. For example, could one brand be deleted and the sales successfully transferred to another, more profitable brand. The strategic role of the category Product categories have different characteristics, which mean that they have to be managed in different ways in order to achieve optimum profitability. Some categories may be dominated by premium brands, whilst others might be more value driven. The following table shows five different roles that categories might play within a total product assortment.

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Roles

Categories

Retail brand reinforcer

New categories High fashion and symbolic categories High technology product categories Includes strong (retailer or manufacturer) brands Create excitement and theatre in store

Cash-flow contributor

Established categories Non-symbolic categories Consistent value provision

Profit generator

Growing categories Fashion categories Symbolic categories High profit margins

Service provider

Stagnant or declining categories Staple product categories Well established market leading brands Competitive with other category providers – low profit margins

Destination

Growing or well established category Contains leading brands Deep and wide assortment Considered the best retail offer by target customer Table 6.2 The role of product category

If a category is composed largely of premium brands, then most of the brands in the category are, quite profitable. On the other hand, the category is comprised mostly of value and own-label brands, and then the opportunity to obtain higher profit margins will be lower, for both the retailer and the supplier. There may be opportunities for retailers and suppliers to work together to improve the profitability of certain product categories, via product innovation or brand repositioning. For example, ice-cream product category has been upgraded in UK market by the introduction of premium luxury ice-cream, ice-cream confectionery, is the example of other category that have shifted from value to premium. Product category lifecycles While selecting products, retail buyers need to be aware of the cyclical sales pattern that both individual products and product categories tend to follow. The product lifecycle theory has been a great source of debate over the years, but is generally accepted as having some value when it comes to understanding the sales and profit implications of products over time. The product lifecycle relates to a specific product item, or brand, may be of some value to the buyer of branded fast moving consumer goods. The category lifecycle is perhaps a more useful concept for many buying decisions, and has implications for the way a category is managed (refer to the figure given below). The position of a product or category within its lifecycle can guide a buyer while making decisions about the depth of their product assortment, as shown below.

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Total retail sales Maturity Growth

Decline

Introduction

Time Fig. 6.1 The category lifecycle •

Introduction: If a category is in the introduction stage, a retailer will offer limited assortment; for example, one product variation or one brand. It will be keen to minimise risk and investment in terms of space allocated and monetary value, but a new product can create excitement and could be the start of an important product category.

•

Growth: When a category is in the growth stage a retailer has the opportunity to increase assortment, introducing more brand alternatives, and more product variations.

•

Maturity: A large assortment is offered in the maturity phase, including many brands and many product variations (including own-label in most product categories). The category becomes established and more competitive between retailers.

•

Decline: Here, the product category loses appeal, to be replaced by another growth category. Retailers should cut the assortment back to leading brands, and the best-selling variations.

Role of the category within the retailer’s total assortment Category management not only looks at the detail of the product SKU ‘members’ within the category, but is also concerned with the role of the whole product category within the retail outlet, and the contribution which the category makes to strategic positioning of retail brand identity. Retailers are using category management in pursuit of product differentiation to gain a competitive advantage over their rivals; they need suppliers who understand their retail market positioning and who can help them to improve the performance of their strategic product categories, not only from the point of view of short to medium term profitability, but also to enhance an image of creativity, innovation and excitement. Category orientated point of sale display materials can reinforce a strategic product category positioning. The table given above explores various roles that categories might play within the retailer’s total product assortment. 6.4.2 Category Planning Category planning includes the following steps: Establish the performance measures for the category An integral part of a management approach that looks towards efficiency in demand management as well as supply management, category management has profitability as its key performance indicator. The activity-based costing is recommended for evaluating category performance because it not only considers the costs of supply but it also 90/JNU OLE

takes account of the costs associated with demand management, such as costs of product introductions and costs of promotional activity. More recent approaches to performance measurement have included the concept of scorecard, which allows success to be measured across a number of indicators, according to their relevance to the retailer concerned. Formulate a strategy for the category Having defined the category and its role within the retail business, and established optimum profitability as the success indicator, the next step in category management process is to draw up a strategy for that particular group of products. It is at this stage that issues such as promotional activity, product assortment planning, own-brand strategy and proprietary brand support need to be blended together in order to maximise category profit performance. The position of the category within its own lifecycle will impact upon the viability of the strategy. The category mix The set of tactics used to achieve optimum range assortment and obtain efficiency in promotions, product innovation and replenishment, will be determined by the strategy formulated for the category. In essence the category receives its own marketing mix, within the parameters of retail branded identity. For example, by conducting efficient promotions, a retailer does not waste resources by promoting brands whose performance does not pay. Taking a more analytical approach to promotional activity can vastly improve the profitability of a product category, by removing costs associated with promotional activities that are not in the best interests of the retailer’s product range performance. Many promotions require time and effort to set up data input amendments, production of special communications and packaging, and may result in deflecting sales to a product with a lower product profit. Unless promotional activity is going to result in overall better performance of the category, or bring some other long-term benefit to the retailer, it may be better to resist the promotion. Point of sale displays can also be viewed with the same analytical judgement; for example, changes to shelf allocations, or use of point of sale materials should only be undertaken if they have the potential to improve performance of the whole category for the retailer. Prices can also be manipulated in order to maximise category performance. The use of ‘known-value’ items is important in value-driven categories such as packaged bread, where there is considerable price competition, whereas in premium-product driven categories, such as wine, retailers have more opportunity to increase margins and benefit from impulse based promotional offers. Category management as an organisational concept Category management requires an understanding of how customers shop; this has traditionally been the concern of marketers rather than buyers within a retail business. Category management, therefore, brings a much stronger marketing orientation to product management process. Category management has the effect of reducing the role of the buyer, and augmenting the role of the merchandiser, but essentially a category management role is a crossfunctional one. Promotional activity in store is geared towards improving category performance and is included in a category manager’s remit. The implementation of category management relies on collaborative and cooperative supply partnerships. Category management requires a focussed team organisation that spans across both supplier and retailer’s organisational boundaries. Essentially, retailers and suppliers pool their resources to manage various aspects of their partnership with the view of improving category performance. Category management and efficient consumer response (ECR) Category management is a way of organising buying and merchandising activities to make product ranges work hard for both the retailer and the customer. Purpose behind the philosophy of category management is that the product range should be responsive to customer demand. Being truly responsive to the consumer requires not only the retailer’s buying organisation to become responsive, but also the whole of the retailer’s supply chain. Category managers may be observant of performances of their product ranges, but if they are not able to rely on suppliers of goods within those categories to respond quickly, then the contributions of the category to organisational success will diminish. 91/JNU OLE

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Category management therefore is usually part of a broader consumer-led approach within a retailer’s supply chain, which encompasses buying activities, promotional activities and product development; replenishment systems; logistics operations; suppliers and their manufacturing facilities. Efficient consumer response (ECR) is a term that describes this type of all-encompassing supply chain management system. It is a managerial approach that starts with consumer demand, and then gears the whole of supply chain to responding to that demand. It is a customer driven, demand-pull product management system; it is different to a supply-push, or buying-led approach, based on the principles of sales forecasting, with products supplied in preparation for estimated demand. However, ECR encompasses much more than a stock control system; it not only involves all the operational areas of retail management, but also involves the way in which retailers, suppliers and third-party service suppliers work together to achieve two fundamental objectives simultaneously: •

maximising customer satisfaction

•

minimising total costs

6.4.3 Category Implementation Category implementation deals with establishing category management roles that is done by assigning responsibilities for both retailer and supply partner organisations. Each category is reviewed by measuring, monitoring and modifying the category. Plan Implementation

Category Tactics

Category Strategy

CATEGORY REVIEW

Category Scorecard

Category Assessment

Category Role

Category Definition Fig. 6.2 Category review (Source: http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf) Developing a category management methodology Category management is a powerful tool. However, it has traditionally been very expensive to develop, implement and maintain. Full-blown category reviews can require hundreds of hours of work. A retailer could have 200 categories and a consumer goods firm could have thousands of retailers, thus multiplying the overall number of categories that could involve a manufacturer. To streamline the process, reduce investment costs and help companies realise benefits faster, a four-step process supported by a required infrastructure can be a powerful tool which includes:

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•

Organise

•

Develop

•

Monitor

•

Model

Model Develop

Monitor

Organise

Fig. 6.3 Category management methodology (Source: http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf) Organise The first step involves development of a category management strategy and organisation of resources such as people, assets, information, and so on. Companies need to take stock of needs, resources, priorities and overall business strategy: •

Talk to sales and marketing: what are customer needs, what are consumer needs and what are the roadblocks?

•

Communicate with senior management: understand the business strategy, goals, key initiatives, growth plans, strengths, threats, opportunities and weaknesses.

•

Examine current organisation resources: look for information in existing areas of the organisation (R&D, operations, store operations, supply chain, fulfilment, manufacturing, and so on).

•

Begin initial training: develop training materials in a modular format to introduce the company to category management and then build upon initial education with more rigorous analytical training.

•

Develop the core category management team: select or acquire key team members – who will eventually become category managers, data warehousing managers, and so on – to manage the initial category management program.

•

Develop a communications program: develop communications vehicles (meetings, newsletters, status reports, and so on) to communicate at all levels from senior management to analyst.

Develop The second step begins with the core category management process after plans and organisation are in place. This step will become the foundation for ongoing category management. •

Build a consumer attributes map: develop and seek answers to the fundamental questions associated with how consumers make buying decisions in categories:

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‚‚ What is the current shelf configuration/planogram? ‚‚ Are category sub-segments shelved properly? ‚‚ Is a better response to promotions achievable by promoting with other categories? ‚‚ Does the assortment scheme meet consumer needs? ‚‚ Do local neighbourhoods or regional factors affect categories and products? ‚‚ What are the dynamics of price points and merchandising in categories? ‚‚ What are the purchasing patterns of products and categories? ‚‚ What other items are purchased along with specific categories? ‚‚ What are the demographics of the customer base? •

Develop an analysis capability: large amounts of data will need to be analysed, categorised and synthesised: ‚‚ Sales/POS data ‚‚ Item assortments ‚‚ Shelf placements ‚‚ Pricing ‚‚ Promotions

•

Perform key analyses: analysis will need to be done at various levels (category, market, store cluster, individual store and SKU) to develop the base data for category development.

•

Develop categories: by performing the analysis, consulting external industry data and comparing competitor's categories: ‚‚ Staples: high penetration/high frequency ‚‚ Niches: low penetration/high frequency ‚‚ Varieties: high penetration/low frequency ‚‚ Fill-ins: low penetration/low frequency

Monitor Monitoring can be thought as “filling in the scorecard.” This step is critical to maintaining category management, identifying trends, measuring results, making modifications, reporting to senior management and ensuring longterm success. In order to monitor effectively, quantifiable implementation goals and metrics need to be established. Companies must continually monitor and measure results against these predetermined metrics. Clear goals and metrics also enable the administration of incentive programs and mid-course adjustments throughout the category management product cycle. Implementation and financial goals for each individual category must be analysed to measure category manager performance and ensure category business plans are being met at all levels: •

Category

•

Chain

•

Region

•

Store

Model This last step enhances the category review step from the original eight-step process. This step needs to be backed by decision support and modelling capabilities. Category managers need to be able to simulate category performance results from changes in various inputs – category strategies, definitions, roles and tactics.

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6.5 Category Management Limitations Category management as a central concept of the ECR movement which has provided benefits to participating retail–supplier collaborations. It has been suggested that ECR has remained an impenetrable concept, relying too much on theory and jargon, with the costs of achieving efficiencies outweighing the resulting benefits. In addition, many of the initiatives have reflected what many well-run retailers were already doing. However, the far-reaching facets of ECR and the new philosophy of category management certainly support more analytical approach to product management. The full-scale adoption of category management requires a considerable amount of reorganisation within the retailer and has met with a number of inhibiting factors such as: •

skills shortages

•

difficulties associated with accepting suppliers as allies or partners with whom information should be shared

•

reluctance to change inappropriate organizational structures

•

lack of clear strategic plans for product ranges

Another concern with the implementation of category management is the resulting lack of variety being offered to customers. Concentrating on efficiency in logistics and merchandising may result in highly efficient retailing. However, there is a risk that the consumer experience is being given lower priority. This could be a dangerous strategy when store-based retailing is becoming increasingly threatened by much more efficient home based retailing formats. Category-managed product ranges are safe and offer majority of customers in the majority of purchase decisions, ‘efficient’ selections of market-leading products; however, these selections may start to appear boring and overmanaged. A further drawback of category management is the threat to smaller suppliers. The practice of establishing category captains to improve the performance of the entire product category runs the risk of putting larger suppliers in a position where they can abuse their power by improving their own market share at the expense of the other suppliers within the category. It has been suggested that retailers benefit from leading suppliers fighting to contribute the most to the category management process, whilst the second and third tier brands are squeezed off the shelf. Category management has been most successfully adopted in large product categories that include dominant and organised suppliers. Smaller retailers often do not have structure or resources to implement category management and a fragmented supply base is generally not suitable either. The integrated ECR systems that are available today are generally complex and expensive to implement, incorporating a wide range of business activities. Category management may fail to bring anticipated rewards if retailers and suppliers are too focused on their own problems and fail to properly assess customer needs.

6.6 Behavioural Category Management Benefits Behavioural merchandising means to observe and understand the behaviour of each individual shopper as they click through online store, compare it with similar data on all other shoppers, and draw conclusions to deliver relevant, personalised product recommendations. Relevant examples in category management include recommendations based on the current product or cart contents. By adding business rules based on gross profit, or price, the retailer can ensure that only profit drivers are shown as recommendations. This way, the objective of traffic generation can be achieved by putting traffic drivers on sale, while the retailer boosts the sales of profit drivers to maximise profit contribution, more than compensating for the discounts on the traffic drivers. In other words, by excelling at behavioural merchandising, online retailers will also excel at category management by allowing them to beat the competition when it comes to customer acquisition, without sacrificing profit.

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Summary •

Category management is defined as ‘the strategic management of product groups through trade partnerships, which aims to maximise sales and profits by satisfying consumer needs”.

•

The evolution of category management started when retailers operated their businesses.

•

A category captain advises the retailer on the best way to price, display, and promote products in a category including those of the competitors.

•

Category management is a retailer-supplier process of managing categories as a strategic business unit (SBU), producing enhanced results by focussing on delivering consumer value.

•

The aim of the category management is for two purposes: satisfy the consumer, and grow the category.

•

Category management is viewed as a step-by-step planning and implementation process that helps retailers and suppliers achieve both performance-based objectives and longer-term strategic aims.

•

The term super-category is used to describe product ranges that provide a high level of customer focus.

•

Some products within a category are ‘traffic builders’, generating high sales and have a large market share: they draw customers into the store, and their absence would risk customer loss.

•

Stock keeping units (SKUs) play a key role in the reinforcement of retail brand image and some products play roles that are directly confrontational with other members of the category.

•

Retailers use category management in the pursuit of product differentiation to gain a competitive advantage over their rivals.

•

The activity-based costing is recommended for evaluating category performance because it not only considers the costs of supply but it also takes account of the costs associated with demand management.

•

Category management has the effect of reducing the role of the buyer, and augmenting the role of the merchandiser, but essentially a category management role is a cross-functional one.

•

Category management have few limitations like variety being offered to customers, threat to small suppliers and so on.

•

Behavioural merchandising means to observe and understand the behaviour of each individual shopper as they click through the online store.

References •

Building a Category Management Capability [pdf] Available at: [Accessed 10 October 2011].

•

O’Brien, J., Category Management in Purchasing: A Strategic Approach to Maximize Business [Online] Available at: [Accessed 10 October 2011].

•

Webesomar, 2007. S. Needel - What’s the future of category management? part 1. [Video Online] Available at: [Accessed 10 October 2011].

•

2011 . Basics of Category Management [Video Online] Available at : [Accessed 10 October 2011].

•

Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge

•

Behavioural Category Management: A next-generation retail strategy [pdf] Available at: . [Accessed 10 October 2011].

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Recommended Reading •

Nielsen, A. C., Karolefski, J., & John, A. H., 2006. Consumer-Centric Category Management: How to Increase Profits by Managing, Wiley and Sons.

•

Category Management: Positioning Your Organization to Win, NTC Business Books.

•

Chiplunkar, Product Category Management, Tata McGraw-Hill Education.

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Self Assessment 1. The use of ‘known-value’ items is important in ___________categories. a. product-driven b. value-driven c. competition-driven d. retail-driven 2. Which of the following statements is false? a. Prices can also be manipulated in order to minimise category performance. b. Each (SKU) member of the category should make an individual contribution to the performance of the category. c. Category management is a retailer-supplier process of managing categories as a strategic business unit. d. Manufacturers and retailers have different profit objectives. 3. Category management is a cooperative strategy that often involves appointment of a leading manufacturer as _________. a. category captain b. leading supplier c. SKU member d. profit generator 4. Which of the following category is used to describe product ranges that provide a high level of customer focus? a. Luxury-category b. Refined-category c. Super-category d. Traffic builder-category 5. Which of the following statements is true? a. Category management relies on having an understanding of a supplier’s relationship with a product type. b. In category management, suppliers play a very active role in the management of the stores group. c. The evolution of product management started the way the retailers operated their businesses. d. The category captain is not always the supplier with the largest turnover, although that is quite common. 6. ___________ plays a key role in the reinforcement of the retail brand image. a. Category captain b. Traffic builders c. Service providers d. Stock keeping unit 7. In which of the following stage of the product life cycle, a large assortment of products is offered? a. Introduction b. Decline c. Maturity d. Growth

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8. Retailers use category management in the pursuit of product differentiation to gain a ____________ over their rivals. a. competitive advantage b. growth c. value d. market share 9. Which of the following term is used to describe the all-encompassing supply chain management system? a. Stock keeping unit (SKU) b. Strategic business unit (SBU) c. Efficient consumer response (ECR) d. Product life cycle (PLC) 10. Which of the following statements is false? a. Category implementation deals with establishing category management roles that is done by assigning responsibilities for both retailer and supply partner organisations. b. If a brand or variation has a clear role, then a product management decision may need to be taken. c. Product categories have different characteristics, which mean that they have to be managed in different ways in order to achieve optimum profitability. d. The position of a product or category within its lifecycle can guide a buyer while making decisions about the depth of their product assortment.

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Chapter VII Product Management Aim The aim of this chapter is to: •

explain the concept of product management

•

discuss the product classification

•

identify the role and tasks of a product manager

Objectives The objectives of this chapter are to: •

explicate the traditional and present approaches used for product planning

•

highlight the issues in product management

•

comprehend the types of decisions taken in product management

Learning outcome At the end of this chapter, you will be able to: •

recognise the responsibilities of product management functions

•

understand the concept of product line and product mix

•

discuss the role of product management in retailing

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7.1 Introduction to Product Management A marketer’s definition of a product is ‘a physical good, service, idea, person or place that is capable of offering tangible and intangible attributes that individuals or organisations regard as so necessary, worthwhile or satisfying that they are prepared to exchange money, patronage or some other unit of value in order to acquire it’. Along with products, retailers might offer services that help a customer during the purchase decision, for example, a changing room in a clothing retailer. The actual location, layout and design of a retailer might be considered as a service, especially if those elements make the shopping process easier. Where a retailer’s combined product and service offer lies on the product to service continuum depends on the nature of the product range and the type of retail outlet. Some tangible goods are extremely durable, offer a great deal of choice in terms of specific features and benefits, and generally the purchase of them becomes complex, with a high level of involvement on the part of the consumer. Purchases such as household furnishings, cars or large electrical appliances would fit this category. Other tangible goods are consumable and convenience orientated products such as food and toiletries. These products are generally less complex, frequently purchased and being of lower value, involve less risk. Other products are information based at the purchasing stage and are consumed as they are used, such as a travel ticket or a holiday. Some service products are experienced as they are purchased and consumed, like a restaurant meal or a haircut. Service products generally have a very high proportion of intangibility and the product is not ‘distributed’ in the same way; the quality of a service product depends extensively on how the exchange is actually delivered with the ‘product’ experience being immediate and perishable. What is important to appreciate at this stage is that retailing covers all of these ‘products’ and that different types of products require unique sets of product management approaches in order to achieve consumer satisfaction. Meaning of product management Among the four elements of marketing mix, i.e., product, price, place and promotion, all business activities commences and revolves around the first element namely the product. Thus product forms the core to any business enterprise. However the other three elements, their linkage and support is essential in designing the firms business strategy and making the product a success in the market place. Product management is an integral part of marketing function and includes a whole range of activities pertaining to product planning and development and extends itself to brand building and management. Every professionally managed and proactive manufacturing and marketing firms which respond to market needs resort to product planning exercise in relation to its customers, relevant markets, competition and other market forces prevalent. Product planning does include basic corporate plan and marketing plan from which the product plan emerges. Generally in product plan we consider product strategies like product line its length and breadth, line stretching, bet upwards and downwards. The idea of introducing new products does also come under the purview of product planning.

7.2 Historical Overview of Product Management in Retailing It was the abolition of resale price maintenance legislation in 1964 that accelerated changes within the retail distribution industry. Retailers were allowed to determine their own pricing strategy for their product ranges, rather than having to adhere to prices set by the manufacturers. The transfer of power allowed retailers to discount prices in order to increase volume, and thereby profits, and to reinvest the profits in more outlets, resulting in greater buying power. Manufacturers had little choice but to co-operate with the growing multiple retailers, who then wielded their power in many other areas of their business, such as developing their own brands, and improving store formats.

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The more recent advances in information technology have given the retailers even more power, as a result of the sales analysis afforded by EPOS systems, and the database information that can be generated by electronic trading, customer loyalty schemes and other direct communications. The result is a high level of retail concentration: an industry that is dominated by a relatively small number of extremely powerful, marketing orientated organisations. The retailer’s role has always been geared towards customer convenience. Their role in the distribution channel is to provide outlets that are readily accessible to consumers, to store a sufficient quantity of a product, so that consumers can buy products as and when they need, and revisit the outlet when the need arises again. For this service to the customer, the retailer adds a profit margin. The profit that a retailer makes contributes towards the costs of running the outlet(s), such as the costs of staffing, paying rent, rates and other maintenance costs and the costs of financing the stock. It also has to cover the costs incurred by the support activities of the retail organisation, such as sourcing, marketing, distribution and systems. Any profit left can then be distributed to the owners or shareholders of the business.

7.3 Role of Product Management in Retailing Traditionally, the retailer’s role within the distribution channel was to provide suitable selection of products in small quantities, via outlets located close to viable groups of consumers. The most fundamental role that a retailer plays then is to ‘break bulk’. Until about half way through the twentieth century retailers were typically seen as ‘stockists’ of a particular range of manufacturer’s products. However, the role of the retailer has changed significantly, from being a passive distributor to an active intermediary who controls the product range offering by carefully selecting products from manufacturers. 7.3.1 Strategic Role of Product Management in Retailing In order to carry out their traditional role in the distribution channel effectively, retailers need to offer a range of goods that satisfy the requirements of customers who visit their outlet at the time they enter. A retailer is in the best position to know what their customers require because they have direct contact with them, either in the store or via home shopping channels. Whether knowledge is gained informally, for example in the case of a small independent owner retail concern, based on EPOS (electronic point of sale) data generation, retailers may need to adapt part, or all of their product range in line with their customers’ changing requirements. Retailers, therefore, need to have a good level of understanding of who their customers are, what their product preferences are and how their consumer needs and desires change over time. Retailers also need to adapt to long-term changes in customer shopping habits, such as the deflection of shoppers from stores to home shopping. Marketing-led organisations should not only give customers what they need, but should also identify and anticipate customer requirements. The product assortment that a retailer offers and the environment in which it is presented gives the retailer a powerful advantage over the producers of those goods, who now rely on the retailers as masters of this craft. Most successful retailers work in collaboration with their producers and suppliers, pooling resources to make a better job of the identification and anticipation of needs and wants, and then formulating a response to them. Retailers have seized the opportunity to establish close relationships with customers and gain a deep understanding of their purchasing habits, manifesting their authority in the development of strong retail brand identities. The internet and other forms of direct marketing have offered opportunities for producers to fight back, by establishing a channel to take products directly from the producer to the consumer, but it is the retailers who have the greater opportunity to build on their existing knowledge and experience with consumers and use new marketing channels to their advantage.

7.4 Product Management Function Similar to products being offered based on consumer needs and wants the emergence of product management as a function too was an outcome based on the need as determined by the prevalent market forces and changing market dynamics.

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The concept of selling has predominantly ruled in the pre and post independent era with limited number of manufactures offering products to a considerably large number of customers, this resulted in selling whatever goods were produced enabled the sales task to be simple and easy. With the passage of time and industrial polices in order, conscious attempts were made to increase the industrial output and accelerate economic growth which paved way for the onset of the concept of marketing. The concept of marketing was characterised by increased number of manufactures producing similar products, growing markets, change in life styles and fierce competitive environment. As similar products are made by more number of manufactures, consumers had a wide option for adoption. Selling activity thus became a tough and challenging task to the marketer. These factors lead to the need for trained and skilled personnel to understand consumer tastes and preference and accordingly conceive, design, and develop products and offer to the target consumers for adoption and their subsequent repeat purchases. These newly identified taskforce is expected to possess and equip with all the tools and techniques for creating awareness, educating the target consumers and nurture the company’s product. This group of work force in thus designated as product executive or manager depending on the nature and size of the firm, its products and product line and so on. Thus the birth of a well defined and distinct product management department was inevitable, focussing and utilising all the resources of the department towards managing its products. In the current scenario every enterprise does have a separate product management department monitored and controlled by the marketing department. However the viability of a separate department for product management should be weighed on various parameters such as cost benefit analysis, need based in view of the firm’s products in relation to consumer, markets, Vis-à-vis- its competitors. 7.4.1 Responsibilities of Product Management Function The size of the firm, nature of the products, industry, consumers, relevant markets, competition and top management decisions and vision all collectively determine the responsibilities of the product management department in a business organisation. Following are the major areas of responsibilities: •

All activities (both minor and major) related to product and its linkages with other three elements of the marketing mix

•

All related activities and tasks of STP strategies (segmenting, targeting and positioning)

•

Short term and long term production planning in consultation with manufacturing

•

Meticulous planning for promotional activities with communication and advertising department

•

Planning and forecasting sales and market potential with sale department

•

Coordinating marketing research activities with in house and external agencies

•

Co-ordinating with advertising agencies and other external agencies like Government for seeking statutory license and so on

7.4.2 Product Management Decision The product management decisions includes: Product mix decisions The product mix concept refers to the total products offered by an organisation while a product line is a group of products within the product mix that can be classified together on account of criteria like customer needs markets served, channel used or technology employed. In order to decide upon the product mix the product manager also has to take decision regarding width, length, depth and consistency of the product line. Deciding upon the optimality of product mix requires in depth analysis of the profitability, marketability, market share, long term prospects of the product, among other things. Several approaches, including the product portfolio approach have been developed to decide upon optimum product mix.

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Product innovation and modernisation decision Innovation and modernisation of the existing product line is another key concern of the product managers. In some cases the product line length may be adequate but some of the products may have lost competitive edge because of technological obsolescence which will reflect in the overall product returns. The product line would then need to be modernised or substantially innovated. One important concern regarding this is whether to overhaul the complete line all at once or go product by product. The latter approach provides for gauging the consumer and dealer reactions before the entire modernisation programme is put into operation. The disadvantage on the other hand is competitor reaction who may retaliate by copying the modification or coming out with better features and improvements. Product line pruning, product elimination, and product phasing decisions In many organisations weak products are allowed to be continued in product line simply because of emotional or sentimental reasons. A number of costs hidden in continuance of these products are never fully estimated. These costs may include costs associated with varying inventory levels, frequent price reductions, uneconomic production runs and the opportunity cost of investing in new products because of resources being tied up in the retention of weak products. Product line pruning or product elimination decisions therefore have to be taken to prevent unproductive use of resources. New product decision and diversification decisions One of the most common product policy problems relates to addition of new products to existing product line. A rationale for the diversification introduction of new products may emerge out of marketing needs, company’s resources and competences, marketing, production or financial considerations, and the contribution that the new product can make to the corporate objective. Even though the development of new products is a decision fraught with very high risks, continuous innovations are the most reliable key to sustained growth. The addition of new products to the firm’s product line can be done either by internal development or external acquisition. Branding and packaging decision Branding is one of the ways of imparting product distinctiveness and helping the product to attain a specific identity in the consumer’s mind. It increases consumer awareness, improves chances of repeat purchases, facilitates the inculcation of a product image and helps adoption of new products. The issues in branding are whether to use a family brand or individual brand manufacturers brands or distributors brand or separate family names for the different product lines in case of a highly diversified firm. Packaging is defined as the activity of designing and producing the container or the wrapper for a product, can play a minor or a major role in product policy depending upon the product nature and market requirements. In recent times packaging has become an effective marketing tool. Developing an effective package for product requires a number of steps like deciding upon the packaging concept, developing the package designs and package testing.

7.5 Product Classification Product of all categories can be categorised into two types: •

Tangible products

•

Intangible products

Tangible products are those products which are visible to naked eye and include products of all categories from safety pin to aeroplanes. On the contrary, intangibles are characterised as being invisible to the naked eye, has no entity of its own and devoid of physical attributes, for example, consultancy, medical assistance, car servicing and so on. Various parameters for product classification are: •

Based on tangibility and intangibility into durable and non-durable services respectively, for example, soap, milk, newspaper, washing machine, plumbing services and so on.

•

Based on ultimate users and their buying behaviour and attitudes, we come across:

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Consumer products Such products are purchased by households and ultimate users, these products are brought for personal consumption. Traditionally all consumer products based on their nature, durability, utility and involvement of the consumer are further segmented into: •

Convenience product: This is the category of products bought regularly with ease and without any time consumption, for example, milk, vegetables, newspaper and so on.

•

Shopping products: Products in this category are purchased irregularly only after considering factors like price quality, style performance and so on. The prices of these products are generally high along with the consumer involvement, for example, clothing, furniture, household appliance, and so on.

•

Speciality product: These products are purchased irregularly may be once in life time. Majority of these products have no substitutes and they are characterised by high buyer’s involvement, for example, premium cars, audio and video systems, five star restaurants and so on, fall under this category. The brand loyalty is high and consumers are willing to pay a high price for exclusive products as an expression of their attitude, life style and status symbol. Characteristics

Type of Product Convenience

Shopping

Speciality

Example

Grocery items

Clothing, fashion items

Fancy goods, appliances

Major motive

Easy availability

Spend effort to choose the item of personal taste

Making the final selection of brand

Knowledge prior to purchase

High

Medium

Low

Effort spent to acquire product

Minimal

Moderate

As mush as necessary

Frequency of purchase Regular

Season/occasion

Varies

Willingness to accept substitutes

High

Moderate

None

Buyer behaviour

Low information search

Comparing options to acquire best within budget

Intensive consultation before actual purchase

Table 7.1 Classification of consumer product Industrial products These products are purchased either by an individual or a group on behalf of an organisation for the production of other product. Thus, industrial products are characterised as those which go into the manufacturing of other products. All engineering goods, machine tools, auto components, manufacturers fall under this category.

7.6 Product Line and Product Mix Product line includes all closely related or similar products offered by the firm, for example, audio system offered by Philips is a product line, while televisions offered by the same company (Philips) is another product line. While product mix, encompasses and includes all individual products available offered by the firm. Thus, the above example of Philips Audio systems and televisions collectively form the product mix of Philips India Ltd.

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From the above we can conclude that product mix includes all the product lines offered by the firm and further each product line has a range of models, sizes, styles and so on. Product mix is the set of all products lines and items that a particular company offers to buyers. The width of the product mix refers to the number of different product lines a company carries. For example, Philips India Ltd., product mix consists the following product lines namely music systems and video system (television), lighting system and medical electronics catering to different markets across various segment. The depth of product mix refers to the number of variants of each product offered in the line for example; Halo shampoo from Colgate-Palmolive comes in three formulations and three sizes and hence has a product mix depth of nine. Similarly Rasna soft drink concentrate from Pioma industries has seven flavours which also form the depth of the product mix. The consistency of a product mix refers to how closely various product lines are related in end use. Hence, Philips’s product lines are consistent in the sense that they are all electronic products while Wipro has an unrelated product mix. Merits of product mix The product mix: •

Helps in defining firm’s product portfolio based on width, depth and consistency.

•

Appeals to diverse consumer needs across various segments, thus helps in maximising shelf space and sustain dealer support.

The two examples cited above namely, Philips India offering products which are closely related and has consistency in its mix while in case of Wipro, it offers different products (unrelated) product lines like, consumer electronics, information technology products, and FMCG products making it a diversify mix of product offered to the market. By and large consistent mix is easy to manage than diversified mix. It allows the marketer to concentrate on its core competencies; helps build and create a strong image among consumers and trade channels. However, excessive consistency may be risky with limited scope leaving the marketer to a narrow range of business. Agro based companies are good examples in view of their vulnerable to environmental threats and vagaries of business. On the other hand, companies like Wipro, Videocon and so on, enjoy the benefit of diversified product mix. Line refers to the decisions pertaining to adding or dropping items from the product line as and when it is profitable to do so. Line stretching could be upwards, downwards or both ways. Downward stretch is apt when the company finds its offerings are at a high price end of the market and then stretch their line downwards for example, Daewoo motors, small car “Matiz” was originally introduced as a premium high end car with one single variant catering to the top end or the elite segment. Subsequently the feedback from market and research findings made the company to offer a low end variant to tap the low end market segment. This decision made the company a turnaround resulting in increased sales manifolds. On the other hand, upward stretch is possible when the company enters the upper end through a line extension. The reason could be a higher growth rate, increased market share tapping new market segment, better margins and so on. A good example would be that of lifebuoy soap, which was initially positioned as a hygienic soap focussing the semi urban and rural mass markets: currently lifebuoy is also into the high end premium liquid hand wash market catering to the higher strata of the society.

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Line fillings Adding more items within the existing product range results in, lengthening the line. The reasons for line filling include: •

aiming for incremental profit

•

optimal utilisation of excess and under utilised capacities

•

an attempt to offer a full line of the product

•

in response to dealer complain about lost sales because of missing items on the line

The addition of double tonned milk is an example of line filling. Mother dairy has added the said item to its existing range of full cream, and single tonned milk thereby catering to the health conscious milk consumers. All the categories of milk mentioned above are easily identifiable by their packaging making the exchange process simple and easy.

7.7 Product Manager’s Management System Product is central to the success of a firm. With rapid changes taking place in technology nature of competition and consumer perceptions, product life cycles are becoming shorter in duration. It has therefore become necessary for firms to review their product mix on a continuous basis in order to achieve their growth objectives. Product management satisfies a genuine need in large multi-product companies, divisions or other business where it is otherwise impossible for marketing managers to plan and control closely the profitability of individual major products on a continuing basis. Job of a product manager The job of a product manager will vary with respect to the number and type of distribution channels used, the extent to which each manager influences his products marketing budget, the number of product managers in the organisation and other such factors. In addition, product management variations occur from industry to industry with respect to the responsibility and authority in major decision making areas. Product managers are involved in three major types of activities: •

Significant management tasks performed to some degree by all product managers: These are associated with the administrative process - beginning with the establishment of objectives and ending with the year-end report to management and a re-evaluation of the effective news of the marketing plan employed during the previous year.

•

Marketing decisions: Product managers are not the real decision makers for strategic marketing decisions. It is the job of the marketing directors. The greatest participation of the product manager is with respect to the number of timing of promotions. In a growing company, however, the product manager takes over most of the functions.

•

Budget and marketing plans: Almost in all types and size of organisation, the product manager has a definite say in the annual marketing budget for the product that he manages. This is because probably he is more involved with the day-to-day implementation of the marketing plan set out.

Need for product management system •

The product management concept of organisation is indispensable and apt when a multi-product company has different products whose individual annual volumes are neither so small as to be insignificant nor so large that they begin to take on life or death importance. Companies with only one or two major products usually find the functional form of organisation more suited to their needs.

•

For example, a large soft drink manufacturer abandoned its product management system when it realised that it was basically an organisation with one high volume and a few low volume products. Since lesser products were related to the major one, all of them could be handled by a single product manager.

•

The product manager’s responsibility and authority depends on a number of management levels involved in decision-making and plan approval process.

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Changing role of product manager The product management system should be flexible and the role and scope of a product manager should allow manoeuvring although it should be well-defined. Flexibility in the task assigned to product manager is required under developments like: •

Changes in the number and type of elements employed in the marketing mix.

•

Changes in the number of product managers employed within the same organisational unit.

•

When changes occur in the resources or support services required for the marketing elements located internally or externally. Let us consider each of these separately. ‚‚ When the number and combination of elements employed in the marketing mix change, the product manager’s job also changes. If a company starts de-emphasising advertising in favour of a combination strategy of better margins for the trade and more consumer promotion as in case of consumer durables, the kind of people the product manager will be working with and the skills required for negotiation will differ. ‚‚ When a company expands its product-line some support service used by different products will be the same. However, all product managers may not possess the technical skills to use the support services requiring thereby a team of in-house specialists. Market research and advertising are two examples of in-house staff developments which can grow as the company becomes more marketing oriented. ‚‚ A product manager’s role is also shaped by the support groups controlled by them. If he/she uses an internal resource group it will be shared by other product managers also reducing their overall influences on it. For example, a sales force is an internal resource and no product manager can directly influence it as its time must be apportioned between individual products in accordance with the overall strategy of the company. ‚‚ Lastly, the product manager’s job profile also changes as their product moves through various stages of its life cycle or as shifts occur in the environment in which the product is marketed. The new product requires heavy emphasis a developing trade channel support simultaneously with consumer awareness and acceptance whereas an established product would require more of maintenance and monitoring effort on the part of the product manager.

The role of a product manager is thus very versatile and subject to changes with the growth in size of the organisation or changes in environment or even changes in the overall marketing strategy.

7.8 Product Planning System Development of a strategic product planning system is one of the most critical elements of a company’s product management function. In designing such plans, the management requires adequate information on the current and anticipated performance of its existing products. This information can again be broadly classified into two dimensions: •

The perceptual dimension consisting of the consumer’s perception about the product per se as well as in relation to the products of the competitors.

•

The `objective’ dimension consisting of actual raw information about actual and anticipated performance on relevant criteria such as sales, profits and market share.

Traditional approaches to product planning The product portfolio approach is one of the earlier tools used for product planning and the concept of positioning the product vis-à-vis its competitors. Both these systems show little concern for the measures like sales, market share and profitability taken together comprehensively. Matrix approach to product planning The matrix approach consists of the following phases: Phase A: This requires definition of the relevant universe in terms of the relevant strategic product and market area. It essentially means that:

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•

The definition of the product should be clear and unambiguous inclusive of sub categories of the product.

•

The strategic market should be a well focussed segment to lend specificity to the analysis.

•

The relevant measurement instruments in terms of units of sale and the time period of sales whether monthly or quarterly must be specified.

Phase B: This entails examination of the sales position for the given product in the strategic market area. A graph of industry sales and company sales for a given period is plotted. Thereafter the product is assigned to the stage in the product life cycle on the basis of certain criteria: If the annual sales trend over the past years is: •

Negative, assign to the decline category

•

0%-10% increase, assign to the stable category

•

Over 10% increase, assign to the growth category

Phase C: The market share of the company’s given product in the strategic product market area is then determined using certain criteria to assign into categories. The illustration given below for two products A and B explains the process of assignment to categories and determination of the product’s strategic position. Illustration: Assign product to one of the following categories: Sales

Industry

Company

Decline

…………

…………

Stable

…………

…………

Growth

…………

…………

Marginal market position

…………

…………

Average market position

…………

…………

Leading market position

…………

…………

Below target

…………

…………

Target

…………

…………

Above target

…………

…………

Market Share

Profitability

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A past trend of the product is also plotted to facilitate the assignment process described above: Company Sales Profitability

Industry Sales

Market Share

Growth

Dominant Average Marginal

Stable

Dominant Average Marginal

Decline

Dominant Average Marginal

Decline Below target

Target

Stable Above target

Below target

Target

Growth Above target

Below target

A74

A73

B74 B75

Target

Above target

A75

B73

Table 7.2 A product-evaluation matrix having two hypothetical products A and B over three years On the basis of the assignment done above a product evaluation matrix for two hypothetical products would look somewhat as: Current position (C)

1

Unconditional projection

Conditional forecast (CF)

Industry Company Market Profit- Industry Company Market Profit- Industry Company Market ProfitSales Sales Share ability Sales Sales Share ability Sales Sales Share ability

Decline 2 Decline Decline Stable

Av. Av.

Below Decline Decline Target Decline Stable Target

Av. Av.

Below Decline Target Decline Target Stable

Decline Stable Stable

Marg. Av. Av.

Target Below Target Target

Table 7.3 Incorporating sales, market share and profit forecasts into the product evaluation matrix Here, two products A and B have been traced for three years. Product A which showed a marginal market share in a growth industry had stable but below target profitability in the first year. This improved the growing profits and average market share in the next year to achieve targets. This was followed by an above target profits coupled with an average market share in a growing industry. The performance of product A has thus steadily improved. The product B on the other hand is in a declining industry with an average market share and stable profits on target in the first year but in the next year a decline in profitability is seen. In the third year the decline in profits continues with a drop in the market share as well. Suggested marketing strategy on the basis of the product evaluation matrix: The best course available for product A will be to move from average market share to the leading position maintaining above target profits or sacrificing some profits for the leading position to have targeted or even below target profits. For product B the course of action available would be to improve market share position from marginal to average and also achieve stability in profits although they may be below target. 110/JNU OLE

From the above illustration it can be seen that a product evaluation matrix enables a company to take into account four parameters: •

Industry sales

•

Company sales

•

Market share

•

Profits simultaneously

The following inferences regarding a firm’s product planning exercise include: Inferences: A firm’s major strategic product and market decision alternatives for its existing product line and the component products of that time in a given strategic product market area are: •

Do not change the product or its marketing strategy.

•

Do not change the product but do change its marketing strategy. This may involve a change in the type and level of advertising, distribution and pricing strategies associated with a given positioning and given product attributes.

•

Change the product. This may involve product modifications either within the parameters of the product’s current market positioning or within a new positioning. In either case, a change in the associated marketing strategy is required.

•

Discontinue the product or the product line. This strategy may involve an interim product or product line “run out” strategy, gradual chopping of the product line, or the immediate phasing out of the product or the complete line.

•

Introduce new products into the line of add new product lanes.

In keeping with the varying degree of changes required in the five alternatives suggested above, we can identify different levels of analysis and specificity of guidance provided by the product evaluation matrix. Product evaluation matrix This approach requires five levels of analysis each with an increasing specificity of guidance, for the firm’s strategic marketing decisions. The first level is based upon the evaluation of the product’s current position with regard to industry and company sales, market share -and profitability thus providing limited guidance. The fifth level on the other hand, provides detailed and specific guidance based on projected product performance with regard to sales, market share and profitability under alternative marketing strategies, anticipated competitive actions and alternative environmental conditions. The five levels are summarised in the following table given below. Specificity of guidance

Nature of operation

Lowest

Current product position on industry sales, company sales, market share, and profitability. Project product position on sales, market share and profitability assuming no major changes in the firm’s marketing activities, competitive action and environmental conditions Projected product position on sales, market share and profitability under alternative marketing strategies, assuming no changes in competitive action and environmental conditions. The diagnostic insights into competitive structure and effectiveness of the firm’s marketing activities. Projected product position on sales, market share, and profitability under marketing strategies, anticipated competitive action and alternative environmental conditions.

Highest

Table 7.4 Five levels of project evolution matrix 111/JNU OLE

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Summary •

Product is ‘a physical good, service, idea, person or place that is capable of offering tangible and intangible attributes that individuals or organisations regard as so necessary, worthwhile or satisfying that they are prepared to exchange money, patronage or some other unit of value in order to acquire it’.

•

Product management is an integral part of marketing function and includes a whole range of activities pertaining to product planning and development and extends itself to brand building and management.

•

Product planning includes basic corporate plan and marketing plan from which the product plan emerges.

•

Retailer’s role in the distribution channel is to provide outlets that are readily accessible to consumers, to store a sufficient quantity of a product, so that consumers can buy products as and when they need, and revisit the outlet when the need arises again

•

The product assortment that a retailer offers and the environment in which it is presented gives the retailer a powerful advantage over the producers of those goods, who now rely on the retailers as masters of this craft.

•

Most successful retailers work in collaboration with their producers and suppliers, pooling resources to make a better job of the identification and anticipation of needs and wants, and then formulating a response to them.

•

The product mix concept refers to the total products offered by an organisation.

•

A product line is a group of products within the product mix that can be classified together on account of criteria like customer needs markets served, channel used or technology employed.

•

Packaging is defined as the activity of designing and producing the container or the wrapper for a product, can play a minor or a major role in product policy depending upon the product nature and market requirements.

•

Consumer products are purchased by the households and ultimate users, these products are brought for personal consumption

•

Industrial products are purchased either by an individual or a group on behalf of an organisation for the production of other product.

•

Product line includes all closely related or similar products offered by the firm

•

Product mix is the set of all products lines and items that a particular company offers to buyers. The width of the product mix refers to the number of different product lines a company carries.

•

The role of a product manager is very versatile and subject to changes with the growth in size of the organisation or changes in environment or even changes in the overall marketing strategy.

References •

The Product Management [pdf] Available at: [Accessed 10 October 2011].

•

Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge

•

2010. Getting to the Top in Product Marketing and Product Management [Video Online] Available at: [Accessed 10 October 2011].

•

What Defines Product Management [Video Online] Available at: [Accessed 10 October 2011].

•

Product Management as CEO Trainer [Video Online] Available at: [Accessed 10 October 2011].

•

Product Planning System [pdf] Available at: [Accessed 10 October 2011].

•

Product Management Basic [pdf] Available at: [Accessed 10 October 2011].

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Recommended Reading •

Gorchels, 2004. The Product Manager S Field Guide. Tata McGraw-Hill Education.

•

Lehmann, 2005. Product Management, 4/E .Tata McGraw-Hill Education, 2005.

•

Morse, K., Successful Product Management: A Guide to Strategy, Planning and Development, Page Publishers.

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Self Assessment 1. Which of the following is one of the most critical elements of a company’s product management function? a. Market share and profitability b. Strategic product planning system c. Product mix d. Product line 2. ___________is a set of all product lines and items that a particular company offers to buyers. a. Product mix b. Line stretching c. Line fillings d. Product planning 3. Which of the following statements is true? a. The addition of new products to the firm’s product line can be done either by internal development or external acquisition. b. Product-led organisations should not only give customers what they need, but should also identify and anticipate customer requirements. c. A retailer is in the best position to know what their customers require because they have direct contact with them, either in the store or via home shopping channels. d. The retailer’s role has always been geared towards customer convenience. 4. Which of the following product category is purchased irregularly only after considering factors like price quality, style performance? a. Industrial products b. Convenience product c. Shopping products d. Speciality product 5. Match the following. 1. Industrial products

A. These products are purchased irregularly may be once in life time. Majority of these products have no substitutes and they are characterised by high buyer’s involvement.

2. Speciality product

B. These products are purchased either by an individual or a group on behalf of an organisation for the production of other product.

3. Shopping products

C. This is the category of products bought regularly with ease and without any time consumption.

4. Convenience product

D. Products in this category are purchased irregularly only after considering factors like price quality, style performance and so on.

a. 1-C, 2-B, 3-A, 4-D b. 1-C, 2-A, 3-D, 4-B c. 1-A, 2-B, 3-D, 4-C d. 1-B, 2-A, 3-D, 4-C

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6. The width of the product mix refers to the number of different ________ a company carries. a. product b. brands c. product lines d. shopping channels 7. Which of the following statements is true? a. Product management variations occur from industry to industry with respect to the responsibility and authority in major decision making areas. b. Product managers are the real decision makers for strategic marketing decisions. c. The greatest participation of the product manager is with respect to the number products in the product line. d. Companies with only many products usually find the functional form of organisation more suited to their needs. 8. Which of the following is the element in the marketing mix around which all business activities commences and revolve? a. Price b. Promotion c. Place d. Product 9. ________ is one of the ways of imparting product distinctiveness and helping the product to attain a specific identity in consumer’s mind. a. Branding b. Diversification c. Planning d. Management 10. The consistency of a _________ refers to how closely various product lines are related in end use. a. product mix b. line stretching c. line fillings d. product portfolio

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Chapter VIII Vendor Management Aim The aim of this chapter is to: •

introduce the concept of vendor management system

•

identify the strategies to strengthen vendor relations

•

discuss the vendor management services

Objectives The objectives of this chapter are to: •

explain the concept of vendor managed inventory

•

explain the vendor selection process

•

highlight the limitations and challenges of vendor managed inventory

Learning outcome At the end of this chapter, you will be able to: •

describe the concept of vendor finance

•

explicate request for proposal and request for quotation

•

recognise contract negotiation strategies

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8.1 Introduction to Vendor Management Vendor management has far-reaching value across all industries, including retail, construction, financial, healthcare and government. Verifying that the vendors meet the high standards, as well as regulatory guidelines specific to the industry is essential in running an efficient and profitable business. Vendor management is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and managing third party companies to consistently meet the goals described below. Establishing goals: Just as employees need clearly established goals, operations needs clearly defined performance parameters. While selecting or managing vendors, vendor managers must optimise their opportunity to achieve these goals by using third parties companies. Selecting vendors: The fine art of vendor management is essential in optimising operational results. Different vendors have different strengths and weaknesses, and it is the vendor manager’s responsibility to match the right company with the desired performance characteristics. Failure to consider this comprehensively could lead to complete failure. Managing vendors: On a daily basis, vendor managers must monitor performance, provide feedback, champion new projects, define or approve change control processes, and develop vendors. Consistently meet goals: Operations must perform within statistically acceptable upper and lower control bounds. Everything the vendor manager does should focus on meeting goals, from providing forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have completed all required training. Vendor management is not the same as operations management, although it is remarkably similar. In an outsourcing relationship, vendor managers must understand the drivers of the relationship in order to ensure the vendor is successful. Vendor managers are not empowered to perform all aspects of the outsourced operation. Rather, they must influence the vendor to perform. This level of influence is different from managing employees because of the economic differences in the relationship: a company typically represents 100% of an employee’s income, but rarely represents even 5% of a company’s revenues. Most of the outsourcing contracts are priced by vendors in a way that even if the vendor pay the maximum non-performance penalties they are likely to still be profitable.

8.2 Vendor Selection Process Vendor selection process consists of several steps described below: 8.2.1 Analyse Business Requirements Analysis of the business requirements is the toughest part of the vendor selection process. The correct analysis will put the entire process on the right track for selecting the right vendor at the right price. Lack of effort, poor planning or taking shortcuts will jeopardise the success of the vendor selection process. This component of the process is shorter and less complex for basic part and commodity vendors, and fundamental services, for example, office machine service contracts. It will take longer time for more complex parts and multifaceted services, for example, software outsourcing, call centre services, and so on. Regardless of the size and scope of the material or service we will select a vendor, following these steps will help insure the success of rest of the vendor selection process. Assemble an evaluation team The evaluation team should be composed of decision makers and knowledgeable employees from every area those who have a stake in the successful outcome of selecting a vendor for the product, material or service that is going to be sourced outside of the company. For parts and services that only affect a few areas, a small team of three to five people are sufficient. For larger products and services that affect several areas five to ten people will be required. Examples of large projects include complex subassemblies, computer information services and large customer service call centres.

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Define product, material or service Writing and publishing of the definition of product, material and services, will make stakeholders aware of what the team is trying to accomplish. Secondly, as the project progresses, people may try to add specifications or additional features. This definition can be referred to throughout the project to help keep the team on track and on target. Define technical and business requirements If the vendor selection process is for a part or subassembly, the specifications can be obtained from the bill of materials, engineering drawings or manufacturing procedures. If it is a service or software, then specific business requirements should be defined. The bigger the scope of a project, the more requirements should be. The business requirements for a software package include: •

Integrated inventory, order processing, shipping and accounting system

•

Optional payroll and costing system

•

Inventory part number must be a minimum of 18 characters

•

Customer notes must be available for the order level and for individual order lines

•

Price overrides must be approved by a supervisor

•

Ability to print barcodes for detailed inventory tracking

•

Inventory transaction history must be available online for a minimum of five years

Define vendor requirements The vendor selection process would not be complete without listing the criteria that the vendor himself/ herself must meet in order to be considered and evaluated for the job. The quality of the vendor is as important as the quality of goods or services that they will be delivering. This criteria should be based upon the type of product or service that we seek to outsource and the price that we are willing to pay. Some of the vendor requirements are as follows: •

Have a local delivery service for same-day orders

•

Have a market capitalisation of at least $250 million

•

All employees must be bonded and insured

•

Provide at least five references that can be talked to directly

•

Provide electronic ordering processes

•

At least 50% of the raw material must originate from within the country

•

Technical service must be available from 8:00am to 8:00pm

Publish a requirements document for approval Once all of the above steps are complete, aggregate the findings and requirements into a comprehensive document. The team members will share this document with key employees in their areas and seek feedback. After the team members accomplish this, and the document is updated with appropriate feedback, the leader of the vendor selection team will present the updated requirements document to upper management to seek their feedback and approval. This document will be the basis for generating a Request for Proposal (RFP) or Request for Quote (RFQ). 8.2.2 Vendor Search The second step in the vendor selection process is to execute a vendor search in order to compile a comprehensive list of vendors that may be able to meet the requirements as defined in the business analysis phase. Once completed, we need to narrow the list of vendors down to only those which we want to request more information from.

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Compile a list of possible vendors Use a spreadsheet or database program to start entering the contact information for the list of possible vendors. Depending on the service or product that we are completing the vendor selection process for, we will define the scope of the vendor search in terms of local, regional, national or international. Some searches will be limited to the local area; for example, searching for a janitorial service would not be practical on the international level. On the other hand, a simple mass produced part (in sufficient quantities) would yield itself very well to an international search. Vendor search can be done through internet, business associates, registers and directories. Select vendors to request more information from Depending upon the effort that we put into searching for vendors, the list created may be too long. Assess the number of vendors found, taking into account that we will have to send each one a Request for Information (RFI) and evaluate it upon its return. A targeted “rifle” approach will serve better than a widespread “shotgun” approach. Depending upon the size and scope of the project, anywhere from three to twelve vendors would be an appropriate number to send an RFI to. Write a request for information (RFI) Write a document that will be delivered to each vendor, those we have decided to investigate. For smaller parts and basic services this should be short and simple. For more complex parts and complicated services, a more detail and longer request should be developed. This document should include the following sections: •

Cover letter introducing yourself and your company.

•

A contact person(s) for the vendor to contact with questions and clarifications.

•

Short description of the part or service.

•

Request for product or service and company brochures.

•

Vendor screening criteria questions.

•

Deadline for the vendor to respond.

Evaluate responses and create a “short list” of vendors When the Request for Information (RFI) packages are retuned, review the responses. If there are any ambiguities, contact the vendor for clarification. Gather the vendor evaluation team and decide on the vendors to be short listed. If the vendor does not meet the set criteria, eliminate that vendor and move on to the next one. The short listed vendors should be between two and seven depending upon the size and scope of the project. 8.2.3 Request for Proposal ( RFP) and Request for Quotation (RFQ) A well written Request for Proposal (RFP) or Request for Quotation (RFQ) is the key for writing a RFP or RFQ is not difficult if you understand the objectives and function of the document. Request for Proposal (RFP) is used for services or complex products where quality, service or the engineered final product will be different from each vendor that is responding. Request for Quotation (RFQ) is used for commodities, simple services or uncomplicated parts with little or no room for product or service differentiation between responding vendors. Negotiation points could include: delivery schedules, packaging options, and so on. Objectives of a RFP and RFQ •

Obtain detailed proposals in order to evaluate each vendor’s response so that the best interests of the company are met on all fronts.

•

Leverage the competitive nature of the vendor selection process to negotiate the best possible deal.

•

Insure that the interests of all stakeholders within the company will be met and a consensus reached.

•

Puts the company in control of the entire vendor selection process and sets the selection rules up front.

•

Starts building the partnership between you and the vendor right from the start.

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Sections of the Request for Proposal (RFP) or Request for Quotation (RFQ) The RFP and RFQ should contain the following sections. Keep in mind, that each document will be different depending upon the type of company and product we are searching for. Modify each section on the basis of individual needs: Submission details Deadlines, mailing address of the company, contact person for questions and clarifications. Introduction and executive summary This section should be written after the entire document is finished. This is used to provide prospective vendors with a brief overview of the company and the requirements for the product or service. Business overview and background Give a brief overview of the business, products and market sector that we cater to. This will help the prospective vendors understand what business needs we are trying to fill with the vendor selection process. Also provide important background information that will benefit the vendor while responding. Detailed specifications This should be the longest section of the document. For an RFP, it will contain the qualitative measures and requirements that will drive the vendor selection decision. For an RFQ this section should provide the quantitative measures that we will be looking for in the vendor’s response. Example criterion includes: •

Product drawings

•

Engineering tolerances

•

Service levels

•

Milestones

•

Deliverables and timelines

•

Technical or business requirements

•

Software functionality

•

Hardware requirements

Assumptions and constraints Any assumptions and constraints that the prospective vendors need to be made aware of should be listed here. Failure to be forthright and upfront with the vendor will open the door to renegotiation of the agreement at a later date and runs the possibility of straining the relationship that we have with the vendor. Terms and conditions Any terms and conditions of the contract must be listed in order for the vendor to make a fair and honest response. These may include financing options, contract length, renewal options, warrantees, delivery penalties, service levels, and so on. Selection criteria The final section should be an overview of the selection criteria that we will be using to make the decision. Some companies prefer to keep this information totally confidential; while other companies believe this will help prospective vendors focus on what is important to the company. Distribute the RFP and RFQ to selected vendors Finally, compose a cover letter and send two copies of the RFP or RFQ to each of the vendors that we selected from the search process. Make sure that appropriate contact information is included in order to provide assistance to any vendor that needs it.

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8.2.4 Proposal Evaluation and Vendor Selection The proposal evaluation for the vendor selection process for smaller projects and commodities will be relatively straight forward. For bigger projects, complex parts or multifaceted services, evaluating proposals and coming to a consensus will be more involved. The main objective of this phase is to minimise human emotion and political positioning in order to arrive at a decision that is in the best interest of the company. Be thorough in the investigation, seek input from all stakeholders and use the following methodology which will lead the team to a unified vendor selection decision: Preliminary review of all vendor proposals Before the vendor selection team starts its evaluation and selection process, all proposals must be reviewed for completeness and clarity. Any obvious omissions and ambiguities should be clarified by the submitting vendor. This will insure that the evaluation and selection process, once begun, will be through and efficient. Record business requirements and vendor requirements On a spreadsheet list the business requirements and then vendor requirements that were compiled in the first step, that is analyse business requirements. A thorough and detailed listing of all requirements is essential in order to arrive at a fair and equitable decision. Assign importance value for each requirement For each of the requirements assign an “importance value” using a scale from one to ten; where 1 is extremely unimportant and 10 is extremely important. If the vendor selection team cannot agree upon an important value, then accumulate everyone’s individual value and calculate an “average” across all members. If a team member feels they are not qualified to render an opinion on a certain requirement, they may abstain from submitting a value. Use the average score of all submitted values from the team as the important value for that requirement. If a requirement is dichotomous to the point where we would want to eliminate the vendor immediately if they cannot meet the requirement, then mark that requirement as “Pass/Fail”. For example, if our insurance carrier requires all external contractors that perform work in secured areas to be “bonded and insured,” then any vendor that does not meet this requirement will be immediately eliminated from further consideration. Assign a performance value for each requirement This step can be the longest and most drawn out process of the entire vendor selection process. The team will need to assign a “performance value” that they believe that each vendor performs on each of the requirements. For larger projects we may have to give each team member time to evaluate each proposal in order to arrive at a performance score for each objective. Once again, if the team cannot agree upon a performance value, then accumulate everyone’s individual value and calculate an “average” across all members. If a team member feels they are not qualified to render an opinion on a certain requirement, they may abstain from submitting a value. Use the average score of all submitted values from the team as the performance value for that requirement for that individual vendor. If a requirement is indicated to be “Pass/Fail” and the team agrees that the individual vendor has not met the requirement, that vendor can be immediately removed from further consideration. Calculate a total performance score After calculating the “importance value” for each requirement and a “performance score” for each vendor on each requirement, we can calculate a total performance score for each vendor. Calculate the total performance score by multiplying the individual importance value by the vendor’s performance value. Total the sum of all an individual vendor’s performance score to arrive at a total performance score for the vendor.

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Select the winning vendor The total performance score is not meant to be an absolute value of determination of a vendor’s proposal. It is to be used as a guide to highlight differences between vendors and spark meaningful discussion between team members. Proposals that fall orders-of-magnitude below the front runners can be eliminated if the team agrees. 8.2.5 Contract Negotiation Strategies The final stage in vendor selection process is developing a contract negotiation strategy. Successful contract negotiation means that both sides look for positives that benefit both parties in every area while achieving a fair and equitable deal. A signed contract that benefits both parties will provide a firm foundation to build a long lasting relationship with the vendor. The following contract negotiation objectives can be use to evaluate the contract on each of the following items: •

Explain clearly all essential prerequisites, terms and conditions

•

Goods or services to be provided are unquestionably defined

•

Compensation is clearly stated: Total cost, payment schedule, financing terms

•

Acknowledgement of effective dates, completion or termination dates and renewal dates

•

Identify and address potential risks and liabilities

•

Define and set reasonable expectations for this relationship currently and into the future

Strategies for planning contract negotiations The strategies for planning contract negotiation are described below. List rank the priorities along with alternatives As we develop the contract negotiation strategy, we may keep returning to this area to add additional items. We will not be able to negotiate effectively all areas of the contract at once. We need to be sure what is most important and that is discussed and agreed upon before moving on to less important items. Know the difference between what you need and what you want Review the priorities frequently throughout the contract negotiations planning process and one final time at the end. Be sure to ask the hard questions, for example, “Is this really a priority for our company, or is it a ‘nice to have’?” “Was this priority a result of some internal political jockeying, or is it for real?” Know your bottom line so you know when to walk away Is there a cost or hourly fee that the company cannot exceed? Have you come to realise that one or two of the top priorities are truly non-negotiable and you will be better to walk-away from this contract if the vendor does not agree to it? List these along with the rationale so they are not forgotten. Define any time constraints and benchmarks In any substantial project we will want to set performance measurement standards that we will expect from our vendor. If these are essential to the business, then we will want to negotiate a fair and equitable penalty when they are not met. For example: project completion dates, delivery date for first batch of parts, start date for the service, lead times, and so on. Assess potential liabilities and risks What are the possibilities that something might go wrong? What if unforeseen costs are encountered? Who will be responsible if government regulations are violated? Whose insurance will cover contract workers? These are just a few of the more common questions that must be addressed in any contract. Confidentiality, non-compete, dispute resolution, changes in requirements These are other items that could be a potential negotiation stumbling block or deal closer. For example, if the vendor or an employee has the possibility of being exposed to confidential information than, you should be sure to put a confidentiality clause into the contract with the liability, assumed by the vendor. 122/JNU OLE

Do the same for your vendor Now that we have completed the contract negotiations planning process for our business, repeat the same process as if you were the vendor. What area do you think is most important for them? What risks or liabilities will they want you to assume? Your list won’t be perfect, but it will succeed in putting you into a frame of mind to look at things from their perspective. This is how great partnerships between client and vendors are built. Preparation Before the actual contract negotiations begin, make sure the following items are reviewed and confirmed: Determine if you will need legal counsel Negotiating a contract for one year of janitorial services in a small office is vastly different than negotiating a contract to outsource a fairly large call centre. If you feel the least bit uncomfortable reviewing contract “legalese”, do not hesitate to retain a lawyer specialising in contract negotiations. On-site or teleconference Agree upon where the negotiation sessions will take place. If you think you have the upper-hand by negotiating at the vendor’s site, then propose up front that you will travel to them. If the distance is too far to travel cost effectively, set up a teleconference to accomplish the negotiation session. Make sure it is a video conference because body language speaks louder than words. Make sure the person representing the vendor has authority to negotiate Before your people travel to the vendor’s site or the vendor travels to your site, make sure the person representing the vendor have the authority to negotiate on behalf of the vendor’s company. It would be a huge waste of time to hear at the end of a long negation session. 8.2.6 Contract Negotiation Mistakes The smallest mistake can kill an otherwise productive contract negotiation process. Avoid these contract negotiation mistakes so that you and your vendor will come to an agreement that will benefit both parties. Some of the common mistakes are listed below: Thinking the yard is fenced in: Don’t assume that only a certain subset of resources or conditions can be negotiated. Finding creative and original alternatives that can benefit both parties will result in a better negotiated contract. Do not propose unreasonable alternatives that will destroy your sincerity and integrity. Failure to study your opponent: Too many people fail to research the vendor that they will be negotiating with. They don’t understand the vendor’s market and what other influences control their environment. The larger the contract, the more time should be spend on this. Too aggressive: We need to be certain that the company’s interests are at the forefront of our priorities but at the same time we need to be mindful and sensitive regarding the person representing the vendor. It’s all about price: Look for alternatives that are high on your priority list and low on the vendors. Jumping too quick: No matter how low the opening price is, offer lower or ask for something more. Don’t gloat: When you do end up striking a fantastic deal in your favour, don’t do something unprofessional, as the vendor may then look for loop-holes in the contract to regain some money and pride. Terminology not defined or understood: Every area of the contract that has the possibility of being misunderstood is should be clearly defined along with the technicalities. Inconsistencies within the contract: Look for inconsistencies within the contract and if necessary, have a third party review the contract in order to uncover any inconsistencies.

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Concern in one area will be overridden by another area: Do not assume that a perceived weakness or apprehension in one area of the contract can be compensated by strength in another area. Be specific and direct in all areas. Once the contract is contested in a court of law, then you are left with no control. Avoid redundancies: Stating the same thing twice in different section of the contract will not reinforce their value. In most instances lawyers and the courts will come up with a reason to differentiate and justify both areas; usually with an interpretation that neither party anticipated.

8.3 Strategies to Strengthen Vendor Relations Vendor management helps building a relationship with the suppliers and service providers that will strengthen both businesses. Vendor management is not negotiating the lowest price possible. Vendor management is constantly working with the vendors to come to agreements that will mutually benefit both companies. Some of the strategies to strengthen this relationship are: Share information and priorities: The most important success factor of vendor management is to share information and priorities with the vendors. Appropriate vendor management practices provide only the necessary information at the right time that will allow a vendor to better service your needs. This may include limited forecast information, new product launches, changes in design and expansion or relocation changes, just to name a few. Balance commitment and competition: One of the goals in vendor management is to gain the commitment of the vendors to assist and support the operations of your business. On-the-other-hand, the vendor is expecting a certain level of commitment from you as well. Allow key vendors to help you strategise: If a vendor supplies a key part or service to your operation, invite that vendor to strategic meetings that involve the product they work with. They are the experts in that area and you can tap into that expertise in order to have a competitive advantage. Build partnerships for the long term: Vendor management seeks long term relationships over short term gains and marginal cost savings. Constantly changing vendors in order to save a penny here or there will cost more money in the long run and will impact quality. Other benefits of a long term relationship include trust, preferential treatment and access to insider or expert knowledge. Seek to understand your vendor’s business too: We should not constantly lean on vendors to cut costs because either the quality will suffer or they will go out of business. Part of vendor management is to contribute knowledge or resources that may help the vendor better serve you. Negotiate to a win-win agreement: Good vendor management dictates that negotiations are completed in good faith. Look for negotiation points that can help both sides accomplish their goals. A strong-arm negotiation tactic will only work for so long before one party walks away from the deal. Come together on value: Vendor management is more than getting the lowest price. Most often the lowest price also brings the lowest quality. Vendor management will focus quality for the money that is paid. If the vendor is serious about the quality they deliver, they won’t have a problem specifying the quality details in the contract.

8.4 Vendor Evaluation As a consumer, when we want to purchase an item, whether it is a new car or a flat screen television, we will most likely do some research on the prices of the local stores or from vendors on the internet. When we have narrowed our search we then look at other criteria like, warranty or availability. Lastly, we will look at other less tangible criteria such as the previous experiences with the vendor and how their customer service was. This behaviour is exactly the same for companies when they want to evaluate the vendors in their supply chain. Unless the company only uses one vendor for each item they purchase, there will enviably be occasion when a decision has to be made as to which vendor gets the business. There are a number of different scenarios when this will occur, for example when the item is purchased for the first time and when an item is no longer single sourced. 124/JNU OLE

Purchasing an item for the first time When a decision has to be made between vendors, the purchasing department will use some vendor evaluation methods to be their tool in the decision. If the item is to be bought for the first time, the purchasing department may have contacted a number of vendors and sent them a Request for Quotation (RFQ). Each vendor would then complete the RFQ with the information that was required, normally price and terms. The purchasing department would then use these completed quotations, in conjunction with other information they have collected on the vendors, to make short list for further evaluation or make a final selection. The purchasing department would evaluate the vendors based on a number of criteria they had decided upon which may include objective criteria such as price and warranty and subjective data which would include past experience with the vendor. Based on the weighting given to these criteria the purchasing department would be able to fairly evaluate each vendor. Choosing between vendors If the sourcing of an item has been from a single vendor but another vendor has been approved to supply the same item, a decision would need to be made on vendor selection when a requisition has been received by the purchasing department. Many companies use a vendor evaluation tool that allows transaction data to be analysed to give a comparison between vendors. The vendor evaluation uses criteria that have been determined by the purchasing department to compare vendors such as price, delivery reliability, delivery date adherence and quality of the item. There are few criteria’s that can be used in a comparison and these are usually weighted so that important criteria are given more credence. For example, a company may decide that quality of the items it receives from vendors is more important than price, which in turn is more important that delivery reliability. The company would then weight these criteria so that the overall score reflects that requirement. Vendor evaluation is important as it can reduce supply chain costs and improve the quality and timeliness of the delivery of items to your company. The skill in evaluating vendors is to determine which criterion is important and the weighting that these criteria are given. It is important to remember that these criteria may be different for each item we are sourcing and possibly different between regions or countries. Objective data is useful to compare the information that we can obtain from each purchase order and goods receipt, but sometimes the subjective data that our purchasing agents can provide such as customer service and the willingness of the vendor to accommodate our requirements is quite important in a vendor evaluation. Implement Vendor Evaluation A good purchasing strategy should include a method by which vendors are measured. The evaluation process should include not only delivery performance, but track less obvious metrics such as under or over delivery, quality of items delivered and the performance of the vendor’s customer service. These metrics may not always be a measurable value, but sometimes the metric is subjective. If policy guidelines are implemented for subjective evaluation, then all vendors can be measured equally.

8.5 Vendor Managed Inventory Vendor Managed Inventory or VMI is a process where the vendor creates orders for their customers based on demand information that they receive from the customer. The vendor and customer are bound by an agreement which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance but reducing inventories and eliminating stock-out situations. 8.5.1 VMI and EDI With VMI, the vendor specifies delivery quantities sent to customers through the distribution channel using data obtained from Electronic Data Interchange (EDI). Many vendors use a VMI software package to assist them in determining order requirements. VMI software can be part of an ERP suite such as SAP or be a standalone options, for example, products from Blue Habanero, LevelMonitor, NetVMI and so on.

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The software will verify if the data as accurate and meaningful. It will calculate a reorder point for each item based on the data and any customer information such as promotions, seasonality or new items. The quantity of each item available at the customer is compared with the reorder point for each item at each location. This will determine if an order is needed and the quantities required. One of the benefits of VMI is that the vendor is responsible for supplying the customer when the items are needed. This removes the need for the customer to have significant safety stock. Lower inventories for the customer can lead to significant cost savings. The customer can also be benefited from reduced purchasing costs. Because the vendor receives data and not purchase orders, the purchasing department has to spend less time on calculating and producing purchase orders. In addition, the need for purchase order corrections and reconciliation is removed which further reduces purchasing costs. Cost saving can also be found in reduced warehouse costs. Lower inventories can reduce the need for warehouse space and warehouse resources. The manufacturer can gain some benefits from vendor managed inventory as they can gain access to a customer’s point of sale (POS) data makes their forecasting somewhat easier. Manufacturers can also work their customer’s promotional plans into forecasting models, which means enough stock will be available when their promotions are running. As a manufacturer has more visibility to their customer’s inventory levels, it is easier to ensure that stockouts will not occur as they can see when items need to be produced. 8.5.2 Benefits of VMI The VMI process brings benefits for both retailers and suppliers. Some of those benefits are listed below: Retailer Benefits The benefits to retailers are: •

Reduced inventory: This is the most obvious benefit of VMI. Using the VMI process, the supplier is able to control the lead-time component of order point better than a customer with thousands of suppliers they have to deal with. Additionally, the supplier takes on a greater responsibility to have the product available when needed, thereby lowering the need for safety stock. Also, the supplier reviews the information on a more frequent basis, lowering the safety stock component. These factors contribute to significantly lower inventories.

•

Reduced stock-outs: The supplier keeps track of inventory movement and takes over responsibility of product availability resulting in a reduction of stock outs, there-by increasing end-customer satisfaction.

•

Reduced forecasting and purchasing activities: As the supplier does the forecasting and creating orders based on the demand information sent by the retailer, the retailer can reduce the costs on forecasting and purchasing activities.

•

Increase in sales: Due to less stock out situations, customers will find the right product at right time. Customers will come to the store again and again, there-by reflecting an increase in sales.

Supplier benefits The benefits to suppliers are: •

Improved visibility results in better forecasting: Without the VMI process, suppliers do not exactly know how their customers are going to place orders. To satisfy the demand, suppliers usually have to maintain large amounts of safety stocks. With the VMI process, the retailer sends the POS data directly to the vendor, which improves the visibility and results in better forecasting.

•

Reduces PO errors and potential returns: As the supplier forecasts and creates the orders, mistakes, which could otherwise lead to a return, will come down.

•

Improvement in SLA: Vendor can see the potential need for the item before it is actually ordered and right product is supplied to retailer at right time improving service level agreements (SLA) between retailer and supplier.

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•

Encourages supply chain cooperation: Partnerships and collaborations are formed that smooth the supply chain pipeline.

8.5.3 Challenges and Limitations of VMI The VMI approach has its own set of challenges and limitations: •

Some companies continue to manufacture to stock without leveraging customer specific data effectively for production planning

•

In order to provide priority service to VMI partners, some vendors reserve inventory resulting in shortages to other customers

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Insufficient level of system integration results in incomplete visibility

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High expectations from retailers

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Resistance from sales forces due to concerns of losing control, effecting sales based incentive programs

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Lack of trust and scepticism from employees

8.5.4 Overcoming the Limitations Effective implementation of VMI depends on smoothly overcoming the limitations and addressing the concerns of various stake holders. Some of the concerns can be addressed as explained below: •

Redefine incentive programs based on partnership building instead of sales volume build strong partnerships with management commitment to effective communication, active sharing of information, commitments to problem solving and continued support

•

Conduct simulations and pilots before actual implementation

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Organise training sessions before launching VMI program

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Set reasonable targets for benefits of VMI

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Establish agreements on service levels and process to handle exceptions

8.6 Vendor Finance Vendor finance is the provision of a loan from one company to another so that goods can be purchased from the company providing the loan. Vendor finance has a number of advantages which include: •

The vendor sales increases.

•

The vendor earns interest on the loan which is usually higher than that available from other financial institutions.

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The vendor has a firm business relationship with the borrowing company.

•

Sometimes the purchasing company also provides share in their company as security, thus the vendor gains a hold of the purchasing company.

•

Vendors often imbed the financing within the total solution as opposed to add on packages.

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Price sensitivity is reduced so the purchase becomes more attractive.

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The purchaser is able to buy goods that they would otherwise be unlikely to afford.

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The procurement process is sped up as the purchaser does not need to search for financing.

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The purchaser’s cash flow is eased as they have a fixed payment to make over the next three to five years.

•

During the underwriting and funding process the lending company receives an approximation of the credit worthiness of the borrowing company.

•

Some vendor finance arranges for the lease of products as opposed to full payment. This is tax effective for the purchasers. They can also hand back the product at the end of the contract.

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There is one big disadvantage of vendor finance as any company requiring a loan to purchase their much needed products could well have financial problems. This means that there is a risk that the loan would be written off and the accompanying shares worth reduces. There are financial institutes who specialise in providing vendor finance facilities to blue chip companies, working as a third party. Other financial consultancies specialise in arranging and negotiating vendor finance schemes for small and medium sized businesses. This involves seeking potential purchasers, matching them with vendors and arranging the finance for the pair of them. They obviously receive a commission for this activity.

8.7 Vendor Management Services Vendor Management Services (VMS) are a group of services that are designed to reduce costs, improve vendor performance and also identify and manage risk. These services include: •

Sourcing of vendors, many VMS consultancies have market knowledge.

•

Negotiating with vendors and completing the Master Agreement contract.

•

Identifying the opportunities to cut costs and enhance vendor terms. Enhanced management information feeds the purchaser with considerable information on costs, inventory and lapses between demand and delivery.

•

Identifying vendors that are more appropriate. Sometimes there are suppliers that will provide better terms and price levels. VMS consultancies often have this market knowledge.

•

Identifying opportunities to consolidate vendors. Providing vendors with larger or more frequent orders, often results in better pricing and terms.

•

Evaluation of current vendors with respect to their performance, quality and pricing structures.

•

Evaluation of vendor catalogues in order to find products that are more appropriate.

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Managing the transition from one vendor to another, which can often result in a break of supplies and loss of income.

•

Monitoring and evaluation of vendor activities including quality, and contractual and Service Level Agreement (SLA) compliance so that the vendors comply with agreed delivery times, invoicing procedures and pricing levels.

•

Identifying and monitoring risk, which is particularly important when being supplied from third world countries.

Many companies expect that vendor management services will accrue the following benefits: •

Total cost of procurement will be reduced by identifying areas to save money and fine-tuning the procurement process.

•

Vendor performance will be enhanced by the regular reviews and improvement in processes, communications and purchaser/vendor interaction.

•

Improved information flow between the purchaser and the vendor will increase management information to both companies. It will also allow the purchasing company to cut inventory costs by optimal purchasing.

•

Efficient purchasing will enhance profit levels and provide more fruitful customer supplies.

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Experienced staffs are released from problem solving to concentrate on core purchasing processes.

•

Vendor management services keep the vendor relationship balanced and both companies goals aligned.

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Continual review of the vendor will lessen service problems and service failures. If problems do occur, alerts as to the any penalty costs will be activated.

•

VMS will lessen misunderstandings and miss communications.

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Where there are legal obligations with any purchase – such as in staffing, a VMS will ensure that these obligations are met.

•

Vendor management services are prevalent in the staffing environment, particularly when a company employs many temporary staff. Many vendor management services consultancies will provide the above services using a combination of staff and computer systems.

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8.8 Vendor Management System A Vendor Management System (VMS) is an internet based software application that enables a business to procure and manage temporary and permanent staff as well as contract and contingent staff. The vendor management system usually includes: •

Staff ordering processes or job requisition

•

Automated billing

•

Management reporting

•

Business Intelligent (BI) functionality

•

Workflow engines

•

Service catalogue that includes standardised positions and skills

•

Tracking facilities

•

Approval processes

The installed Vendor Management System will create a centralised internet based environment that will allow a purchaser to enter their staff resource requirements to numerous staffing vendors. Vendors will be able to reply in real time in a standardised method, proposing their particular staffing solutions. The advantages with the use of a VMS include: •

Only approved staffs are hired.

•

All the vendors can bid for their staff to be hired so there is competitive bidding.

•

The purchaser can set up standardised job descriptions.

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All submitted staff details are available in one place and many systems can rank the proposals according to the purchaser’s requirements.

•

There is a central work flow engine that manages the process end to end.

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Questions, interviews and rejections are notated and tracked.

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Staff rates are kept low by the competitive environment as opposed to individual negotiations.

•

The entire process is much quicker and smoother.

•

No time is spent on reviewing staff that are too expensive.

The management of staff on site is also greatly simplified by a vendor management system: •

The same time cards are used by all staff.

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All staff is hired on uniform rates and expenses.

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Time can be reported against multiple projects.

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All consultants will be on identical time reporting schedules.

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There is accurate data about staff utilisation removing overlaps and loss of staff.

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All timesheets can be seen in one place.

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Overtime can be capped or approved automatically.

The vendors benefit from: •

Quick approval for their staff

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Invoices are more accurate and presented far quicker and in a uniform manner.

•

Reporting errors are minimised.

•

They have far quicker access to staffing requirements.

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Summary •

Vendor management is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and managing third party companies to consistently meet the goals

•

Vendor selection process consists of analysing the business requirements, vendor search, request for proposal (RFP) and request for quotation (RFQ), proposal evaluation and vendor selection, contract negotiation strategies, and contract negotiation mistakes

•

An RFQ is used for commodities, simple services or uncomplicated parts with little or no room for product or service differentiation between responding vendors.

•

An RFP is used for services or complex products where quality, service or the engineered final product will be different from each vendor that is responding.

•

Vendor management helps building a relationship with the suppliers and service providers that will strengthen both businesses.

•

Some of the strategies to strengthen the vendor relationship are: share information and priorities, balance commitment and competition, allow key vendors to help you strategise, build partnerships for the long term, seek to understand your vendor’s Business, negotiate to a win-win agreement, and come together on value

•

The vendor evaluation uses criteria that have been determined by the purchasing department to compare vendors such as price, delivery reliability, delivery date adherence and quality of the item

•

Vendor evaluation is important as it can reduce supply chain costs and improve the quality and timeliness of the delivery of items to your company.

•

A good purchasing strategy should include a method by which vendors are measured

•

Vendor managed inventory is a process where the vendor creates orders for their customers based on demand information that they receive from the customer.

•

Vendor finance is the provision of a loan from one company to another so that goods can be purchased from the company providing the loan.

•

Vendor management services (VMS) are a group of services that are designed to reduce costs, improve vendor performance and also identify and manage risk.

•

A vendor management system (VMS) is an internet based software application that enables a business to procure and manage temporary and permanent staff as well as contract and contingent staff.

References •

Introduction to Buying And Merchandising [pdf] Available at: [Accessed 10 October 2011].

•

Vendor Management System – Staff at the Click of a Mouse [Online] Available at: [Accessed 10 October 2011].

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2009. Merchandise Planner [Video Online] Available at: [Accessed 10 October 2011].

•

ArcherTechnologies., 2010. Vendor Management [Video Online] Available at: [Accessed 10 October 2011].

•

Kumar, P. & Kumar, M., 2003. Vendor Managed Inventory in Retail Industry [pdf] Available at: [Accessed 10 October 2011].

•

Analyse Business  Requirements [pdf] Available at: [Accessed 10 October 2011].

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Recommended Reading •

Chiplunkar, Product Category Management, Tata McGraw-Hill Education.

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Mathur, U. C., 2010. Retail Management: Text and Cases, International Pvt Ltd.

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Baschab, J., 2007. The Executive’s Guide to Information Technology, 2nd ed., John Wiley and Sons.

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Self Assessment 1. Which of the following is the toughest part of vendor selection process? a. Vendor search b. Proposal evaluation c. Vendor selection d. Analysis of the business requirements 2. Which of the following statements is false? a. A good purchasing strategy should include a method by which vendors are measured. b. Vendor management is more than getting the lowest price. c. Good vendor management dictates that negotiations are completed in good faith. d. Vendor management seeks short term relationships over long term gains and marginal cost savings. 3. With vendor managed inventory, the vendor specifies delivery quantities sent to customers through distribution channel using data obtained from __________________. a. Electrical Data Interchange b. Electronic Data Interchange c. Electronic Data Exchange d. Electronic Dealer Interchange 4. Which of the following document is used for commodities, simple services or uncomplicated parts with little or no room for product or service differentiation between responding vendors? a. RFQ b. RFI c. RPF d. RIQ 5. Which of the following statements is true? a. One of the goals in vendor management is to gain the commitment of the manufacturers to assist and support the operations of your business. b. The most important success factor of vendor management is to share information and priorities with the customers. c. Vendor management helps building a relationship with the suppliers and service providers that will strengthen both businesses. d. Customer management is constantly working with the vendors to come to agreements that will mutually benefit both companies. 6. A good ___________ strategy should include a method by which vendors are measured. a. purchasing b. planning c. management d. evaluation

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7. _____________ is a group of services that are designed to reduce costs, improve vendor performance and also identify and manage risk. a. Vendor finance b. Vendor management services c. Vendor evaluation d. Service level agreement 8. Match the following. 1. Vendor management system

A. A process where the vendor creates orders for their customers based on demand information that they receive from the customer.

2. Vendor managed inventory

B. The provision of a loan from one company to another so that goods can be purchased from the company providing the loan.

3. Vendor finance

C. A group of services that are designed to reduce costs, improve vendor performance and also identify and manage risk.

4. Vendor management services

D. An internet based software application that enables a business to procure and manage temporary and permanent staff as well as contract and contingent staff.

a. 1-D, 2-A, 3-B, 4-C b. 1-B, 2-A, 3-D, 4-C c. 1-A, 2-D, 3-B, 4-C d. 1-C, 2-A, 3-B, 4-D 9. __________ is the key for selecting the best vendor at the best value for your company. a. VMI b. RFI c. RFP d. VMS 10. The installed vendor management system creates a centralised ________based environment that will allow a purchaser to enter their staff resource requirements to numerous staffing vendors. a. internet b. customer c. vendor d. value

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Case Study I Maruti Udyog Limited - The Pricing Dilemma The case highlights the pricing strategy of Maruti Udyog Limited (MUL), the market leader in the Indian passenger car industry. MUL has launched various models catering to all market segments at various price points. The case provides a brief note on the various models of MUL, their prices and their features. It specifically focuses on the competition between two of MUL’s best selling models - the M800 and Alto. MUL reduced the price difference between these two models positioning them on an almost equal platform, which resulted in confusion in the minds of consumers and industry analysts. M800 had ruled the passenger car market as the only car in the entry-level segment in the Indian automobile industry and was now facing the danger of cannibalisation from one of its own family members, Alto. The case highlights the pricing dilemma faced by MUL and leads to a debate on the right pricing strategy for the company and the future of its flagship product M800. “There is absolutely no question of phasing out the Maruti 800. Why would anybody want to stop producing the car that is selling so well? As long as the customer demands it, we will continue to produce the 800.” - Jagdish Khattar, Managing Director, Maruti Udyog Limited. “There is no fault in what Khattar is doing. Upgrading people from two-wheelers is a great idea. But there is one problem. This is the high-volume-low-margin game. If volumes don’t come through, the company could be in trouble.” - Rama Bijapurkar, Strategic Marketing Consultan The Competition Since 1985, Maruti Udyog Limited (MUL) has been the market leader in the passenger car industry in India. Its flagship product - M800 had the distinction of being the largest selling car model in India since its launch in December 1983. Positioned as people’s car, M800 ruled the Indian passenger car market and remained unchallenged ever since it occupied the top slot, five months after its introduction. In March 2003, MUL sold 20,687 units of M800, the highest ever sales by any single model in a month. It was also the highest sales since M800 debuted, surpassing its previous monthly high of 18,735 units in August 1999. For the first few months of 2004, M800 performed well, selling 15,301 units in January, 13,518 units in February and 15,540 in March. But gradually Alto, another MUL product, began eating into M800’s share. Alto reported sales of 8,399 units, 8,324 and 9,011 units in January, February and March respectively. In April, its sales increased to 9,350 units and in May 2004, Alto took over M800’s position as the largest selling car with sale of 10,373 units, slightly over M800’s sales of 10,016 units. Analysts felt that Alto had taken the top spot because of its price reduction in September 2003 by Rs. 23,000 followed by the launch of the non-AC Alto for Rs. 0.23 mn in the first week of April 2004. On reducing the gap between its bread and butter model M800 and its compact car Alto, MUL said it had “long term” plans for M800. Commenting on Alto’s pricing strategy, Jagdish Khattar (Khattar), managing director of MUL, said, “The new price positioning of the Alto would cannibalise existing A1 segment product the M800 which is also considered an old model.” But, the cannibalisation will remain within the Maruti family and the bigger numbers will help Maruti depreciate Alto faster. Net M800 sales may be less but we would be pushing more Alto and the more we sell the Alto the faster it will depreciate.”3 Though industry analysts said this move would boost MUL’s profits, they also expressed their views that MUL’s long-term plan might be to discontinue M800 and replace the entry segment with Alto. However, Khattar clarified that MUL’s pricing strategy was not meant to replace M800 with Alto. He said, “Now, we have two cars in entry-level. Maruti 800 is still a dream of Indians, how can I replace it? 134/JNU OLE

Background In its efforts to fulfill the growing demand for personal transport vehicles, the Government of India (GoI) established MUL in February 1981 through an Act of Parliament. It was incorporated to take over the assets of the erstwhile Maruti Limited set up in June 1971 and wound up by High Court order in 1978. In October 1982, the GoI signed a joint venture agreement with Suzuki Motor Corporation (SMC) of Japan. MUL received technology support from SMC. On the other hand, SMC got support from the Indian government, which helped it get import clearances for manufacturing equipment and obtain land for its factory. At the time of its establishment, the objectives of MUL were: •

Modernisation of the Indian automobile industry

•

Production of fuel-efficient vehicles to conserve scarce resources

•

Production of large number of motor vehicles, which was necessary for growth

In an era when owning a car was a distant dream for a vast majority of Indians, MUL rolled out its first car, the M800. The company labelled it a people’s car, with a 796cc 3-cylinder engine that delivered 39.5bhp at an affordable price of Rs. 65,000. The first vehicle was released for sale in December 1983. Initially, the car was criticised for its diminutive size, but it proved to be spacious enough to carry four adults. Product Line The Indian passenger car market was divided into various segments and sub-segments on the basis of price, size (i.e., length of the model and its weight) and other factors (including engine capacity). MUL had a presence in all the segments and sub-segments.. Pricing Strategies Due to the fierce competition in the Indian passenger car industry, price emerged as an important factor affecting the purchasing decisions of customers. Since it had been in the industry for more than two decades, and as a market leader, MUL adopted aggressive pricing strategies. The company had products at various price points In the early 2000s, when the passenger car industry was witnessing stagnation, MUL slashed the prices of its various models, to revive the industry... Promotion and Distribution In the early 2000s, MUL also focused on promotion and distribution to face intense competition. The company devised various innovative promotional strategies. With interest rates declining from 12% to as low as 8% in automobile finance, MUL used financing as a major tool to drive up its car sales. The overall percentage of cars being financed through automobile loans increased from 65% in 1998 to over 85% in 2003... Result By 2004, the competition in the Indian passenger car industry had further intensified. However, MUL retained its leadership position mainly due to its aggressive pricing strategy. In December 2004, MUL reported an 18% rise in vehicle sales helped by a sharp increase in exports and rising demand in the domestic market. Domestic sales increased by 11.4 percent amounting to 37,153 units, while exports jumped 78 percent to 6,675 units. After the price reductions and aggressive promotion, M800 and Alto sold in huge volumes in India... (Source: http://www.icmrindia.org/casestudies/catalogue/Marketing/Maruti%20Udyog%20Limited-The%20 Pricing%20Dilemma-Marketing%20Case.htm)

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Questions 1. What problem was faced by MUL for its product M800? Answer The case highlights the pricing dilemma faced by MUL and leads to a debate on the right pricing strategy for the company and the future of its flagship product M800. 2. Why Maruti 800 is facing danger of cannibalisation from one of its own family members? Answer It is because of the Price reduction by Rs. 23000/- in month of September 2007. The new price positioning of the Alto has cannibalise existing A1 segment product the M800 which is also considered an old model. 3. Which promotional strategy was used as a major tool to drive up its car sales by MUL? Answer The company devised various innovative promotional strategies. With interest rates declining from 12% to as low as 8% in automobile finance, MUL used financing as a major tool to drive up its car sales.

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Case Study II Toyota Prius: A Case in New Product Development Abstract The case focuses on the world’s first mass produced hybrid passenger car - Prius - manufactured by the world’s second largest automaker Toyota Motors. The case explains the new hybrid technology used in the car. It also looks for the reasons for the success of the original Prius in the Japanese market and of the subsequent models of the Prius launched in the US and other markets. The strategies for marketing the product in the US are also analysed. The Prius is solid evidence that the ponderous development process that produces new automobiles is finally on the brink of a genuine technological breakthrough.”1 - Popular Science Magazine, July 1997 “We believe that clearing environmental hurdles and offering an attractive driving experience are critical for cars to thrive in the 21st century.” - Hiroyuki Watanabe, Senior Managing Director, Toyota in 2003 Introduction In December 1997, Toyota Motor Corporation (Toyota) of Japan launched its hybrid vehicle Prius in the Japanese market. This was one of the first mass-produced hybrid vehicles in the world. It used the Toyota Hybrid System (THS), which combined an internal combustion engine fuelled by gasoline with an electric motor. Prius achieved a balance between high mileage and low emissions and was the upshot of the company’s initiative to produce environment-friendly automobiles and its goal of manufacturing the ‘Ultimate Eco Car’. The Prius generated a lot of enthusiasm in the industry as it was both efficient and stylish. It was also a safe car. The car conformed to Japanese regulations and standards pertaining to environmental pollution. Having sold more than 100,000 units worldwide by 2002, it was the best selling hybrid car model in the world. The company introduced further refined models in 2000 and 2003. Toyota introduced Prius in the US market in 2000. Before entering, Toyota conducted a research study of the US market and consumer preferences there. It developed various strategies specifically for this market based on its research findings. The price of the new improved Prius was unchanged from that of the original Prius. These initiatives helped Prius to break successfully into the tough US market even though it was based on a new concept of a hybrid car. In 2001, the Automotive Engineering International recognised Prius as the ‘world’s best engineered passenger car.’ By 2002, it was being sold in North America, Japan, Europe, Hong Kong, Australia and Singapore. Analysts opined that the demand for hybrid cars would rise because of the unstable oil prices and the growing need for environment friendly products. Commenting on the future of green technologies and on Prius in particular, Chris Giller of Grist.org said, “In the marketplace, green technologies and industries are among the fastest growing and most innovative developments. The Toyota Prius has defied every prediction to become the must-have car. The organic food business doubles every time you blink. Green architecture is taking off. Renewable energy, emissions trading, environmentally conscious investing: many of the most exciting advances in environmental thinking are happening in the private sector.”

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Background Toyota’s history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into the textile machinery business from his traditional family business of carpentry. He invented a power loom in 1902 and founded the parent organisation of Toyota, the Toyoda Group, in the same year. In 1926, Sakichi invented an automatic loom that stopped operating when a thread broke. This prevented the manufacture of imperfect cloth. (Calling attention to problems and rectifying them at the earliest later became an important part of the Toyota Production System (TPS)). The same year, Sakichi formed the Toyoda Automatic Loom Works (TALW) to manufacture automatic looms. Sakichi’s son Kiichiro, an engineer from Tokyo University, was more interested in automobiles and engines than the family’s textile business. In 1929, he travelled to the US and Europe to study the manufacturing processes in car factories there. After returning to Japan, he spent his time studying car engines and experimenting with better ways to manufacture them. In the early 1930s, Kiichiro convinced his father to launch an automobile business and in 1933, Sakichi established an automobile department within TALW. The first passenger car prototype was developed in 1935. In 1936, Sakichi sold the patent rights of his automatic loom to a company in England to raise money to set up a new automobile business. Hybrid Car Ferdinand Porsche manufactured the first hybrid-electric car in 1898. In the 1960s a few attempts were made to manufacture hybrid cars by applying turbine engines to the production of the vehicles. A turbine-powered race car was introduced in 1967 with the turbine engines powering the wheels through a mechanical transmission. The need for cleaner and more efficient vehicles led to the development of hybrid vehicles in the 1970s. In 1970, a program called the Federal Clean Car Incentive (FCCI) was started by the US government. This program led to the development of a hybrid prototype in 1972. The program was scrapped in 1976 by the Environmental Protection Agency (EPA) of the US. In 1993, another program called the Partnership for a New Generation of Vehicles (PNGV) was launched in the US. The partners in the program: Chrysler, Ford, GM, and a few governmental agencies, developed hybrid prototypes but never commercialized them. Knowledge Management at Toyota According to analysts, Toyota’s success in both the local and global markets was based on its gaining a competitive advantage through implementation of innovative and path-breaking ideas on its production floors. Toyota had focused on learning from the very beginning. At Toyota, knowledge sharing was intertwined with its people-based enterprise culture, referred to as the Toyota Way. The five key principles that summed up the Toyota Way were: challenge, Kaizen (improvement), Genchi Genbutsu (go and see), respect and teamwork. The Toyota Way recognised employees as the company’s strength and attached great importance to developing human abilities through training, coaching and mentoring. The principles of “Respect for People” and “Continuous Improvement” were at the core of the Toyota Way. Most experts agree that the TPS system at Toyota worked by combining its explicit, implicit and tacit knowledge. The Original Pirus The original Prius was powered by the THS. The THS was an advanced version of the EMS. THS is a power train that combined an internal combustion engine and an electric motor. It was based on the series/parallel hybrid system. It contained a power split mechanism that divided and sent power through two passages.

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The First Generation Pirus In 2000, Toyota introduced its first generation model of the Prius in the US, Europe and other markets. This model was also called Prius NHW11 or Prius Classic. A few modifications were made to the vehicle to meet vehicle standards for California, USA. Modifications were made to the engine by increasing the horsepower from 58 to 72... Marketing the First Generation Prius in the US For Toyota, marketing the first generation Prius in the US was a challenge. Commenting on the launch of Prius in the US market, Senior Vice President and General Manager of Toyota Motor Sales, Don Edmond (Edmond) said, “Frankly, it was one of the biggest crapshoots I’ve ever been involved in. Not because we lacked confidence in the quality of the product or the logic of the concept or the significance of this breakthrough technology. The key was to convince consumers in the U.S. that hybrid technology was more than a science project. The Second Generation Pirus Toyota began evaluating the popularity of its first generation. Prius in the market soon after it was launched. The evaluation was based on the price, performance and social aspects of the product as seen by buyers and potential customers. The Testing The most important feature of the new Prius was its enhanced safety. The company had worked toward child safety and reducing the impact of collisions to a remarkable degree. Toyota expected higher demand for the new Prius than the earlier versions. Edmond said, “We are targeting a sales volume of 36,000 for the first full year. That’s three times our sales target for Prius (original) when it launched in the U.S.”. (Source: http://www.scribd.com/doc/37181255/Toyota-Prius-a-Case-in-New-Product-Development) Questions 1. Why did a need for Hybrid Cars in Foreign Market emerge? 2. What are the reasons for Prius to be a successful car? 3. According to you which five key principles made Toyota World famous in automobile industry, explain?

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Case Study III Apple’s Pricing Strategy for iPhone in US In 2007, Apple Inc. raised many eyebrows by reducing the price of its much hyped iPhone by one-third within 10 weeks of the launch. While some analysts felt that adoption of such market skimming strategies and subsequent price cuts by companies selling technological devices was nothing new, others felt that Apple’s decision to reduce the price so drastically just a few weeks after the launch was a public relations fiasco. As a section of the early adopters of iPhone voiced their resentment, Apple went into damage-control mode. Issues: •

Pricing (pricing decisions, market skimming, etc)

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Public relations

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Product adoption and diffusion

On September 5, 2007, Steve Jobs (Jobs), CEO of Apple Inc. (Apple), announced a steep price cut for its much hyped iPhone. The price cut which came within 10 weeks of the launch of the product angered the early adopters who had bought their handsets at a premium price. Some of these customers had waited in queues before Apple stores for days to buy the phone as soon as it was launched. (Source: http://www.icmrindia.org/Short%20Case%20Studies/Marketing%20Management/CLMM036.htm) Questions 1. Critically analyse the pricing decisions that Apple took for its iPhone. What led the company to reduce the price so drastically? 2. What, according to you, could be the possible ramifications of the iPhone price cut? Do you agree with critics that Apple’s decision was nothing short of a PR fiasco? Give reasons for your answer. 3. Discuss how the Apple’s pricing decisions regarding iPhone was expected to impact the early adopters of the phone. 

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Bibliography References •

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2010. Getting to the Top in Product Marketing and Product Management [Video Online] Available at: [Accessed 10 October 2011].

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2011 . Basics of Category Management [Video Online] Available at: [Accessed 10 October 2011].

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Analyse Business  Requirements [pdf] Available at: [Accessed 10 October 2011].

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ArcherTechnologies, 2010. Vendor Management [Video Online] Available at: [Accessed 10 October 2011].

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Behavioural Category Management: A Next-Generation Retail Strategy [pdf] Available at: [Accessed 10 October 2011].

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Building a Category Management Capability [pdf] Available at: [Accessed 10 October 2011].

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Chunawalla, S. A., 2009. Contours of Retailing Management. Global Media.

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Clifton , M. Visual Merchandising Tips [Video Online] Available at: [Accessed 10 October 2011].

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Coleman,, F.C., Retail Pricing Strategy: Insights and Opportunities [pdf] Available at: [Accessed 10 October 2011].

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E Procurement - Challenges and Opportunities [Online] Available at: [Accessed 10 October 2011].

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Financial Merchandise Planning and Management [Online] Available at: [Accessed 10 October 2011].

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Introduction to Buying and Merchandising [pdf] Available at: [Accessed 10 October 2011].

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Kumar, P. & Kumar, M., 2003. Vendor Managed Inventory in Retail Industry [pdf] Available at: [Accessed 10 October 2011].

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Madaan, Fundamentals of Retailing, Tata McGraw-Hill Education.

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Managing Merchandise [pdf] Available at: [Accessed 10 October 2011].

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Mcauliffe, J., 2009. Online Merchandising: The Basics [Video Online] Available at: [Accessed 10 October 2011].

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Merchandise Management [pdf] Available at: [Accessed 10 October 2011].

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Merchandise Objectives [pdf] Available at: [Accessed 10 October 2011].

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MuseumStoreAssoc, 2010. Merchandise Planning & Open-to-Buy [Video Online] Available at: [Accessed 10 October 2011].

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Other Factors Affecting Pricing Decision Making [Online] Available at: [Accessed 10 October 2011].

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Performance Merchandise Pricing Tips [Video Online] Available at: [Accessed 10 October 2011]. 141/JNU OLE

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Pradhan, 2009. Retailing Management 3E, Tata McGraw-Hill Education.

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Pricing Strategies [Online] Available at: [Accessed 10 October 2011].

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Product Management as CEO Trainer [Video Online] Available at: [Accessed 10 October 2011].

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Product Management Basic [pdf] Available at: [Accessed 10 October 2011].

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Product Planning System [pdf] Available at: [Accessed 10 October 2011].

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ProProcure, 2008. Marketing Procurement - for Manufacturers of Promotional Products [Video Online] Available at: [Accessed 10 October 2011].

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Retail Pricing Strategies with Shari Waters [Video Online] Available at: [Accessed 10 October 2011].

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Retail Tribe, 2010. Merchandising BP: Back to Basics.wmv [Video Online] Available at: [Accessed 10 October 2011].

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Rudrabasavaraj, M.N., 2010. Dynamic Global Retailing Management, Global media.

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The Product Management. [pdf] Available at: [Accessed 10 October 2011].

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The Qualities of Effective Visual Merchandising Displays [Video Online] Available at: [Accessed 10 October 2011].

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Usui, K., 2008. Development of Marketing Management, Ashgate Publishing Group.

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Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge.

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Vendor Management System – Staff at the Click of a Mouse [Online] Available at: [Accessed 10 October 2011].

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Ward, S. Procurement [Online] Available at: [Accessed 10 October 2011].

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Webesomar, 2007. S. Needel - What’s the Future of Category Management? Part 1 [Video Online] Available at: .[ Accessed 10 October 2011].

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What Defines Product Management [Video Online] Available at: [Accessed 10 October 2011].

Recommended Reading •

2007. Merchandise Buying and Management, 3rd ed., Fairchild Publications.

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2007. Retail Store Management, Volume 13. LaSalle Extension University.

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Baschab, J., 2007. The Executive’s Guide to Information Technology, 2nd ed., John Wiley and Sons.

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Berman, 2007. Retail Management: A Strategic Approach, 10/E, Pearson Education India.

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Bennett, A. G., 2009. The Big Book of Marketing. McGraw-Hill Professional.

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Category Management: Positioning Your Organization to Win, NTC Business Books.

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Chiplunkar, Product Category Management, Tata McGraw-Hill Education.

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Colborne, R. Visual merchandising: the business of merchandise presentation, Colborne Cengage Learning.

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Diamon, J., 2008. Retail Buying. Gerald Pintel Pearson Education India.

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Donnellan, J., 2007. Merchandise Buying and Management, 3rd ed., Fairchild Publications.

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Dunne, M. P., Lusch, R. F & Carver, J. R., 2010. Retailing, 7th ed., Cengage Learning.

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Gorchels, 2004. The Product Manager S Field Guide. Tata McGraw-Hill Education.

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Lamba, 2002. The Art of Retailing (Book Only), Tata McGraw-Hill Education.

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Lehmann, 2005. Product Management, 4/E,Tata McGraw-Hill Education.

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Mathur, U. C., 2010. Retail Management: Text and Cases, International Pvt. Ltd.

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Morgan, T., 2008. Visual merchandising: window and in-store displays for retail, Laurence King.

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Morse, K, Successful product management: a guide to strategy, planning and development. Page Publishers.

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Nielsen, A. C., Karolefski, J & John, A. H., 2006. Consumer-centric category management: how to increase profits by managing .Wiley and Sons.

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Ray, 2010. Supply Chain Management for Retailing. Tata McGraw-Hill Education.

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Sharma, M., 2009. Product Management: Product Lifecycle and Competitive Marketing Strategy, Global India Publications.

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Varley, R., 2006. Retail product management: buying and merchandising, 2nd ed., Routledge.

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Zapata, A. L., 2005. Buy From The Poor Sell To The Rich. Author House.

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Self Assessment Answers Chapter I 1. a 2. c 3. d 4. a 5. c 6. b 7. a 8. a 9. d 10. c Chapter II 1. b 2. c 3. c 4. a 5. a 6. d 7. b 8. b 9. a 10. c Chapter III 1. b 2. a 3. d 4. a 5. c 6. d 7. b 8. a 9. b 10. c Chapter IV 1. b 2. c 3. d 4. a 5. a 6. d 7. d 8. b 9. c 10. a

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Chapter V 1. b 2. c 3. a 4. a 5. d 6. c 7. b 8. a 9. b 10. d Chapter VI 1. b 2. a 3. a 4. c 5. d 6. d 7. c 8. a 9. c 10. b Chapter VII 1. b 2. a 3. b 4. c 5. d 6. c 7. a 8. d 9. a 10. a Chapter VIII 1. d 2. d 3. b 4. a 5. c 6. a 7. b 8. a 9. c 10. a

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