UNIT 4

MANAGING MERCHANDISE

Managing Merchandise

Structure
4.0

Objectives

4.1

Introduction

4.2

Merchandise Management
4.2.1 Case Study Hughes & Hughes Merchandise Management System

4.3

Supply Chain
4.3.1 Managing Supply Chain
4.3.2 Warehousing Facility

4.4

Managing Merchandise Costs

4.5

Managing Merchandise Quality

4.6

Merchandise Display & Store capacity

4.6.1 Basic Formats of Merchandise Display
4.6.2 Keys to Successful Merchandise Display
4.6.3 Important Tips on Merchandise Display

4.7

Shrinkage & Loss Prevention

4.7.1 Shrinkage
4.7.2 Loss Prevention

4.8

Retail Margin Analysis

4.8.1 Inventory Turnover
4.8.2 GMROI
4.8.3 Break-Even Point
4.8.4 Retail Math Formulas

4.8.5 Measuring Retail Performance and Productivity

4.9

Open-To-Buy Planning: Controlling Your Inventory

4.9.1 Store Level Stock Planning
4.9.2 Avoiding Mismanagement of Merchandise

4.10

Let Us Sum Up

4.11

Keywords

4.12

Answers to Check Your Progress

4.13

Terminal Questions

4.14

Further Readings

4.0

OBJECTIVES

After talking a lot about SO customer and HR, we are here to discuss the
merchandise in detail. By the time you complete this Unit, you will be able to
understand:

how the the process of merchandise management in retail store operations work

know the concept of merchandise supply chain management in retail store

operations

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identify the methods of controlling quality and cost of merchandise sourced

how the basic approaches to merchandise display and optimum utilization of

store space works

state the courses of merchandise shrinking and identify different ways of loss

identify appropriate mathematical methods of evaluating retail performance and

productivity.

4.1

INTRODUCTION

As a retailer, one of your important assets is space. On the other hand, in numerous
situations the quantity of space you 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. Why has retailing turn out
to be such a well-liked method of conducting business? The credit goes to
merchandise which is an easier access to a multiplicity of products, liberty of choice
and elevated levels of customer service.
In previous unit we had observed that the terminology retail is consequential from
the French work retailer, meaning to cut a piece off or to break bulk. The
business processes are organized 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 a middlemanthe retailer, who relates the
producers and the eventually consumers. We gave akreadt stydued an essence of
Customer and Manpower in the preceding two units.
After discussing a lot on how to manage customer and further manpower, the next
important task is management of commodity. The present unit managing
merchandise leads in this direction. This unit provides the learner with a
comprehensive view of managing commodities.

4.2

MERCHANDISE MANAGEMENT

Merchandising has steps 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 a good
idea to which it will be sold and when. In a 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. We will discuss
all these terminologies in a more elaborative manner once we go into the depth
of this unit

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Managing Merchandise

Figure 4.1: Elements pertains to merchandise

Thus from the above figure it had been depict that each of the exceeding elements
ensures that the merchandise received is of right quality at right cost, at right time and
right place; thus, ensuring acceptable accomplishment of customer needs.

4.2.1 Case Study Hughes & Hughes Merchandise Management System

The Company: Hughes & Hughes is Irelands fastest growing, most dynamic book
Quick Facts

Accreditations

Datapac is the leading

Irish business
technologies provider.
200 employees in
Dublin, Wexford, Cork
& Belfast
Turnover of 60 million
in 2007
Over 1,000 customers
entrust their IT support
to Datapac

Just to name a few:

IBM Business Partner
Microsoft Gold Certified
Partner
Microsoft Small Business
Specialist
Microsoft Business
Solutions Partner
HP Preferred Partner &
ASP
Citrix Gold Solution
Advisor
VMware Enterprise
Partner
Cisco Select Certified
Partner
ISO 9001:2000

Services
Datapac offer many
services including:
Retail EPOS solutions
IT support &
maintenance
Virtualization & storage
solutions
Imaging & printing
solutions
Infrastructure design &
delivery
Converged voice & data
networks
Citrix & Access
solutions
Security solutions
ERP solutions
Computer & printer
consumables

retailer, and the only Irish bookseller to expand into the UK. The company has 12
locations in Ireland, one in London city airport and two at Terminal 5 at Heathrow
Airport, employing 260 people. The company has implemented a 600,000 Electronic
Point of Sales System (EPOS) Merchandise Management System in line with a

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change in trading operation where they are moving to a complete central distribution
model.
The Objective: We are moving to a complete central distribution model where
everything is bought centrally, delivered centrally and fed to the stores from our
warehouse, explains Tony Mc Entee, Managing Director at Hughes & Hughes. We
want to have a single invoice point, single delivery point, reduced administration and
the assurance that buyers need to only make one buying decision. We also needed a
system that would report instantly on what is selling along with margin being
generated.Hughes & Hughes had previously used a retail system but found that it
was not cost effective nor could it expand to keep pace with the companys
continued growth and expansion. We needed a retail solution that was very user
friendly with a clearly defined development map, continues Tony. The chosen retail
solution had to benefit the business by providing sophisticated, timely and accurate
reporting from the till and delivering an integrated end-to-end solution, ensuring the
capacity of the business to react quickly to market conditions.
The Solution: Hughes & Hughes selected Microsoft Retail Management System
from Datapac because of Microsofts quality and Datapacs expertise and knowledge
of the solution. We wanted a solution that is SQL server based which will integrate
simply with our finance, logistics and other critical systems and is largely an out of
box solution, says Tony. Hughes & Hughes can carry as many as 100,000 SKUs so
stock control had been extremely difficult and time consuming. As part of the
solution, Datapac is implementing 50 IBM Surepos Tills to allow both the customer
and sales assistants to see the screen with product details. The Sure pos tills are
touch screen box units which will allow staff to know what is in stock and be able to
access the websites to pick up on titles that we dont stock, also allowing them to
look for specific customer requests. They can place orders and take deposits against
specific customer orders, says Tony. The solution also gives us a powerful
promotions module so that we can run a wide range of promotions with full tracking
and reporting facilities. It will also integrate card payment and gift card management
directly through the Hughes & Hughes system which will eliminate using handheld
pdqs. This eliminates error and certain levels of potential fraud along with improving
our efficiencies in reconciling our cash, continues Tony.

Besides the above the 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 etc. and
measuring the same correctly. In order to manage the purchases and replenishments
of stocks systematically, it helps the store management by following an Open-to-Buy
planning method.

4.3

SUPPLY CHAIN

Supply chain products successfully lend a hand to deal with business complication and
optimize the supply chain. With real-time group effort and visibility transversely the
enterprise, decisions are made more speedily and disruptions minimized.

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Managing Merchandise

Source: http://www.micromatter.co.uk
Figure 4.2: Supply Chain in Retail

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 (Mentzer, 2001).
Internet-enabled supply chain applications model the supply chain, and when
combined with advanced execution solutions, substantially get better productivity from
beginning to end quantifiable inventory and product cost reductions. These benefits
are comprehended all the way through sooner response to market opportunities,
enhanced customer satisfaction, and true group effort with suppliers and customers.

4.3.1 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.

a)

The supply chain management necessitates proper understanding of supply &

demand considerations. In order to understand the product demand or
requirement, we shall have to determine:

Demand from customers by product & day

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b)

c)

Plant turnaround time by product

Quantities already shipped to depots by products

Extra inventory for new accounts

Percentage of products to be upgraded

Reports and trend analysis

In order to understand supply realities, we have to determine:

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 we review three types of

documents:

Purchase Orders from Buyer

Shippers Challans/Documents

Goods Received Note of the ware-house

Suppliers Invoices

The three ways matching process is as explained below:

Figure 4.3: Matching Process

These solutions offer an integrated 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 condition of the supply chain and provide
immediate feedback and exception notices.
Supply chain solutions offer the following benefits:
a)

b)

c)

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Delivering benefits in the following areas

enhanced efficiency

superior inventory management

more capacity utilization 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

Managing Merchandise

4.3.2 Warehousing Facility

Warehousing facility should be appropriate to use ub terns of right size, structurally
sound, well maintained and clean). The question arises - should size determine
product volume or product volume determines size? This is defined with the following
parameters - proper equipment on hand (lighting, labeled racks, containers, forklift,
etc.), efficient product flow (LIFO vs. FIFO), security, and centralized or
decentralized facility?
Warehousing had a following advantages and Disadvantages.

it frees up space at individual plants,

central inventory is less than the sum of several
decentralized warehouses,
better purchasing leverage,
faster turnaround on large orders,
more efficient use of labor.

loss of hands on control at plant level,

requirement for mutually agreed upon grading standards,
taping procedures,
hanging/folding standard,
reduced local flexibility,
All eggs are in one basket.

Figure 4.4: Advantages and Disadvantages of Warehouse Facility

Layout of ware-house should enable:

-

Fast tracking Product placement and withdrawals

Reduced travel distance for high volume products

Reduced handling

Portability of storage

Conveyors

Just in Time supplies

LIFO, FIFO and product that is never used

Safety of men and material

4.4

MANAGING MERCHANDISE COSTS

Cutthroat competition in the retail industry is generating a new dilemma for

manufacturers: how to concord with the accumulation of returned merchandise that is
the outcome of a self-motivated liberalization of arrival policies. Merchandise cost
management is a expensive and time-consuming activity for any retail organization.
Now-a-days aggressive retail atmosphere requires real-time data communication
between stores and the corporate office for store-level activitiesincluding item
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look-up, stock counts, and transfersin order to get better the eminence of inventory
information, in-store efficiency, and sell-through. Managing this mountain of
merchandise has turn 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 rising volume of substance, a noteworthy amount of a
manufacturers productivity may depend on its ability to deal with the invalidate flow
of its goods.

Price

Analysis

Savings

Figure 4.5: Productivity may depend on ability

We also need to understand Managing Merchandise Costs consists of purchase price,

processing labor and product longevity. Dealing with suppliers involves:
Bid specifications as follows
1)

Description

2)

Size

3)

Composition (i.e. Nylon or Polyester)

4)

Color

5)

Weight (i.e. lbs per bale)

6)

Construction

7)

Delivery costs and timetables

In order to obtain the Best Value for the purchase, one should ensure:

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1)

Competitive bids from several suppliers

2)

Bid specs and RFPs make Apples vs. Apples comparison possible, among
several bids received.

3)

The analysis of bids should consider the following too:

a.
Freight and terms are made part of the price equation
b.
Technical & sales support
c.
Volume discounts and price guarantees
d.
Best price does not necessarily mean best value
e.
Reliable supply is as important as price
f.
Primary and secondary suppliers

4.5

MANAGING MERCHANDISE QUALITY

Managing Merchandise

Managing Merchandise Quality translates into delivering a product that meets or

exceeds specifications, auditing procedures of new products, quality assurance for
processed products & product security. Some of the quality control activities that are
conducted on receipt of supplies/production are as follows, depending upon the type
of products:
-

Physically counting all or a specified % of received product or weighing bales

Visually inspecting product for defects

Isolating test pieces to measure shrinkage, durability, pilling, color loss, etc.

Individual operator audits

2% + random sample

Generate a quality rating for each operator

Shipped Product Audits

Audit entire containers to develop a plant quality score

Service Dept. Questionnaires

Auditing product at customer locations

Physical inventories

Comparing actual usage to intended usage

4.6

MERCHANDISE DISPLAY & STORE CAPACITY

Merchandise displays are special presentations of a stores products or services to

the buying public. The nature of these displays may range somewhat from industry to
industry, but all merchandise displays are predicated on basic principles designed to
increase product purchases. Indeed, merchandise displays are an integral element of
the overall merchandising concept, which seeks to promote product sales by
coordinating marketing, advertising, and sales strategies.
Many business consultants consider that small business owners are among the
leaders in ground-breaking merchandise display strategies. W. Rae Cowan noted in
Chain Store Age Executive, for example, that in many instances, smaller specialty
chains are leading the way in store ambience supporting their overall marketing
strategy in a broad range of categories from fashion through hardware and house
wares and building supplies areas. By their very nature, specialty stores depend on
their fixturing to generate a differentiation or niche in the marketplace and being
physically smaller in some cases allows for faster response to market trends and
conditions such as, successful retailers today are using their fixturing to productively
dispense their merchandise and communicate an appropriate environment on the retail
floor.

4.6.1 Basic Formats of Merchandise Display

Merchandise displays generally take one of several basic forms as discussed below:
a) 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.
b) Showcase Displays: These typically feature items that (i) are deemed to be too
valuable for display in storefront set-ups, or (ii) are niche items of high interest to
the businesss primary clientele. These display centers are usually located in high

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traffic areas and typically feature multiple tiers for product display and a sliding
door on the clerks side for access.
c)

Found-Space Displays: This term refers to product presentations that utilize

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 popular tools
for publicizing and selling sale items.

4.6.2 Keys to Successful Merchandise Display

Trudy Ralston and Eric Foster, authors of How to Display It: A Practical Guide to
Professional Merchandise Display, cited several key components of successful
merchandise display that are particularly relevant for small business owners.

First, displays should be economical, utilizing only space, materials, and products
that are already available.

Second, displays should be versatile, able to fit almost anywhere, exhibit almost
any merchandise, and convey almost any message.

Finally, displays have to be effective. The ideal display, should be readily visible
to any passer-by and should be arranged so that there is no time or space lag
between when a potential buyer sees the design and when he or she can 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.

4.6.3 Important Tips on Merchandise Display

The effectiveness of these cornerstones of merchandising display strategy can be
increased by remembering several other tips as well, including the following:

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Allocate merchandise display space and expenditures appropriately in

recognition of customer demographics. If the bulk of your business customers
are males between the ages of 20 and 40, the bulk of your displays should
probably be shaped to catch their interest.

Be careful of pursuing merchandise display designs that sacrifice effectiveness

for the sake of originality.

Make certain that the cleanliness and neatness of the display is maintained.

Do not overcrowd a display. Customers tend to pass over messy, busy-looking

displays. Instead, Ralston and Foster affirm that 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. If they dont
it will look as if there is not one design, but several.

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 way so that would-be customers can get a
good look at them without having to solicit the help of a member of the staff.

Pay attention to details when constructing and arranging display backgrounds.

For example, Foster and Ralston counsel business owners to avoid dark
backgrounds when customers will be looking through a window, since this makes
the glass behave as a giant mirror.

Merchandise displays can sometimes be utilized to educate customers. A wellconceived display could, 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, explained Martin Pegler in Visual Merchandising and Display. 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 accessorized. The display may also
supply pertinent information, the price, and other special features.

Managing Merchandise

All of these considerations need to be weighed when putting together a merchandise

display. But ultimately, the final barometer of a displays worthiness is its ability to sell
products. As Martin Pegler bluntly stated, The test of a good display today is: Does
it sell?

4.7

SHRINKAGE & LOSS PREVENTION

4.7.1 Shrinkage
The percentage of loss of products between manufacture and point of sale is referred
to as shrinkage, or sometimes called shrink. The average shrink percentage in the
retail industry is about 2% of sales. While that may sound low, shrinkage cost U.S.
retailers over $31 billion in 2001 according to the National Retail Security Survey on
retail theft. Here are the four major sources of inventory shrinkage in retail.
a) Employee Theft: According to the National Retail Security Survey, the number
one source of shrinkage for a retail business is internal theft. Some of the types of
employee theft include discount abuse, refund abuse and even credit card abuse.
Unfortunately, this is one loss prevention area that generally doesnt receive as much
monitoring as customer theft.
b) Shoplifting: Coming in at a close second is shoplifting. Customer theft occurs
through concealment, altering or swapping price tags, or transfer from one container
to another. While shoplifting remains a smaller inventory loss source than employee
theft, stealing by shoppers still costs retailers about $10 billion annually.
c) Administrative Error: Administrative and paperwork errors make up
approximately 15% of shrinkage. Simple pricing mistakes due to markups or
markdowns can cost retailers quite a bit.
d) Vendor Fraud: The smallest percentage of shrink is due to vendor fraud.
Retailers report that vendor fraud occurs most when outside vendors are responsible
to stock inventory within the store.

4.7.2 Loss Prevention

It is concerned with the prevention of disappearance of merchandise and currency
within the store. Most retail establishments take a physical inventory annually, while
some do it semi-annually. This activity is termed as stock taking When the count is
completed, the difference between the actual inventory on hand and what it should be
according to purchase and sales records is called shrinkage.
Loss Prevention Methods: Some of the methods involved with loss prevention
activities are as follows:
a.

Store Mapping: It represents the area identified within the store, within this
area the stock take will be done for all the items displayed or stored. In larger

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stores there are several departments and sections and hence, it is always helpful
to demarcate areas as per different sections to be covered for stock-take
activity.
b.

Wireless LAN: This is necessary to link the POS (point of sales) billing, stock
inward or stock outward system with the main server at a central location, to
keep track of the activities happening at the store level.

c.

Task Assignment: Stock take is an important exercise and hence, needs to be

assigned to people who can do the same objectively. Thus, normally there is
some-one from the central office or a senior member from the accounts or
software team is present who is familiar with the total stock-take process and is
assisted by the staff assigned to this specific task.

d.

Mobile Computers: This is used where the POS system as explained above is
not linked within the LAN (local area network). Here the mobile computer is
used to feed the stock-take data through internet and to get the immediate
feedback from the main office on the variation between the actual physical
stock and the system stock at the main office as per the records of inward,
outward, sales, returns etc.

e.

Barcode Scanning: it is a system whereby through an hand-held electronic

instrument the scanning of barcodes on each of the item is done to get the data
entered into the stock-take software.

f.

Supervisory Control: There needs to be someone at the supervisory level who

is keeping centrally track of physical stocks at various locations and variations if
any in different stores under his/her control and taking necessary corrective
steps about the same.

Figure 4.6: The Process Flow of Stock Control

g.

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Data Exchange: This is a system/process whereby POS data exchange takes

place on-time basis with the main data-base and maintains the information on
various activities like stock inward, stock outward, sales, csutomer returns, and
balance stock position on-time basis. Thus both the person at the store and at the
central office can access the same data on-line basis. In certain cases the Data
Exchange facility is also connected with the vendors thereby they are also in
touch with the day to day operation at the store level and are able to directly

arrange for stock replenishments based on on-time sales activity and stock levels
at the store.
h.

Managing Merchandise

Reports: these are the reports on physical stock take process showing itemwise stock of all the items covered during stock-take (through bar-code
scanning). Report also shows the variation between the system stock and the
actual stock-take. There are other reports related to sales and stock also
generated.

Physical Stock Takes: Todays organized retailers operate a chain of retail outlets
across the territory of operation, in various formats like Convenience Stores,
Supermarkets and Hypermarkets. Daily groceries, toiletries & cosmetics, and even
fresh vegetables and fruits are on offer. The chains are well spread out with stores
covering large urban and suburban areas. The larger the spread, greater is the
distribution of inventory across the organization.
It is always desirable for these enterprises to carry out physical stock take exercises
for all the Retail Outlets and Distribution Centres, so that stock visibility is 100% and
also reconciliation can be done regularly. This prevents pilferage and stock
irregularities. The exercise is currently done meticulously, but is entirely manual.
Therefore, the time taken is too long and the loss of business is very substantial, since
the store remains closed for business till then. Further, the manual data consolidation
takes too long and is very error prone.
The business wishes to implement a stock taking system that will eliminate these
shortcomings in the manual process, and will carry out the process much sooner so
that there is a reduction in the loss due to closure. Following needs presently partly or
fully exist with respect to the different softwares available for Stock Take Solution in
Retail

Need #1 : To identify, count and record the physical stock available in the store
Need #2 : To reduce manual errors in the process and increase accuracy
Need #3 : To ensure that the entire stock take exercise takes place in a timely
manner so that loss of sale due to closure is minimized
Need #4 : To have the entire data of the stock take exercise ready in a proper
format without the need for any manual data entry
Need #5 : To reduce product movement and handling during the stock take process
Check Your Progress-A
1. Briefly Comment on the following statements.
a) Merchandising management is an integrated approach to inventory
assortment offerings, marketing communications and selling.
.............................................................................................................
.............................................................................................................
.............................................................................................................
b) One important thing is that we usually forget to put the customers on top
of mind when strategies are set.
.............................................................................................................
.............................................................................................................
.............................................................................................................
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c) Merchandising Management integrating the three areas of merchandising,

marketing, and selling are paramount.
.............................................................................................................
.............................................................................................................
.............................................................................................................
2. Fill In the Blanks with the words given in the brackets.
a. Retailers typically want all their staff to understand their
_____________.
[Supplier / Customer]
b. Merchandising cost management is _____________ and time consuming.
[Expensive / Cheaper]
c. Display is used to educate the customer about the happening. _________.
[New / Old]
3. State whether the following statement is True on False.
a. Retail offers a variety of career path such as buying.
b. Buying positions are more number oriented, while store management
positions are more people oriented.
c. Security department is not responsible for safety.
d. Merchandise management attracts people with weak analytical
capabilities.

4.8

RETAIL MARGIN ANALYSIS

Mathematics is used at every level of retailing. From the basic functions of counting
money and making change, to computing the total amount of a sales transaction
involving calculating percentages to determine discounts, sales tax and shipping
charges. More complex retail tasks require more advanced retail math skills. Use
these retail math calculators, retail equations and formulas to calculate gross profit
margins, cash flow, start-up costs, break even analysis, retail profitability, and dollar
planning and control.

4.8.1 Inventory Turnover

Measuring inventory turn is the first step in building an inventory plan which
eliminates unnecessary inventory and frees up cash. Controlling inventory turnover is
the key to keeping our shelves stocked with interesting products and keeping the cash
flowing. We want to buy the merchandise, move it quickly and then repurchase more
products for our customers. However, if the turnover becomes too high, sales may be
lost because of reduced customer selection. Heres how we calculate inventory turns
to help create a proper inventory control:

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1.

Start with the Beginning Inventory at Cost

2.

Add Purchases at Cost

3.

Subtract Ending Inventory at Cost

4.

Subtract Cost of Scrapped and Lost items (if applicable)

5.

Divide by the Cost of Average Inventory at the end of the month for the period
under consideration (so if the average inventory is to be calculated for the past
12 months period, then average cost value is to be taken of the end of the month

inventory during the last 12 months period)

6.

Managing Merchandise

The result is the number of times the average inventory is sold and replaced.
Inventory turnover can be calculated in whole, as well as by department or
merchandise category wise. Inventory turns can be calculated by the month,
quarter, season or year.

4.8.2

GMROI

Gross Margin Return on Inventory Investment (GMROI also knownas GMROII) is

an important tool in analyzing your sales and inventory. The GMROI calculations
assist retailer in evaluating whether a sufficient gross margin is being earned by the
products sold, compared to the investment in inventory required to generate those
gross margin dollars. The procednre for the calculation of GMROI is as follows:
1.

Find the average inventory at cost.

2.

Calculate the gross margin of the item.

3.

Divide the gross margin by the average cost of inventory to get GMROI.

4.

The result is a ratio indicating the number of times gross margin is earned from
the inventory investment.
GMROI calculation can be used to measure the performance of the entire shop,
but it is also more effective if used for a particular department or category of
merchandise.

4.8.3 Break-even Point

The point in business where the sales equal the expenses is defined as the break-even
point. At this point there is no profit and no loss.
Break-Even Point (`) = Fixed Costs Gross Margin per unit

4.8.4 Retail Math Formulas

Use these retail math formulas to track merchandise, measure sales performance and
create pricing strategies. Formulas for calculating markup, gross margin, open to buy
and other retail math equations are given below:

Acid-Test Ratio = (Current Assets Inventory) Current Liabilities

Cost of Goods + Markup = Retail Price

Retail Price - Cost of Goods = Markup
Retail Price - Markup = Cost of Goods

Break-Even (`) = Fixed Costs Gross Margin Percentage

Contribution Margin = Total Sales - Variable Costs

Cost of goods Sold (COGS) = Beginning Inventory + Purchases - Ending

Inventory

Gross Margin = Total Sales - Cost of Goods

GMROI = Gross Margin (`) Average Inventory Cost

Turnover = Net Sales Average Retail Stock

Margin % = (Retail Price - Cost) Retail Price

Markup (`) = Retail Price - Cost

Markup % = Markup Amount Retail Price

Net Sales = Gross Sales - Returns and Allowances

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Average Inventory (Month) = (Beginning of Month Inventory + End of Month

Inventory) 2

Open To Buy (retail) = Planned Sales + Planned Markdowns + Planned End of

Month Inventory - Planned Beginning of Month Inventory

% Increase/Decrease = Difference Between Two Figures Previous Figure

Quick Ratio = Current Assets - Inventory Current Liabilities

Reductions = Markdowns + Employee Discounts + Customer Discounts +

Stock Shortages

Sales per Square Foot = Total Net Sales Square Feet of Selling Space

Sell-Through % = Units Sold Units Received

Stock-to-Sales = Beginning of Month Stock Sales for the Month

4.8.5 Measuring Retail Performance and Productivity

Your shop has customers steadily coming through the doors, employees are busy and
there is the frequent impact of the cash register, but how well is your business really
doing?
One simple way to know if business is good, is to compare this years same-store
sales data to last years revenue. What if your store has been open less than a year?
It is critical for the success of your business to constantly work towards improving
not only the efficiency of employees, but the productivity of the stores selling space
and inventory as well. This can be achieved by using various retail math formulas and
calculations based on sales.
1) Performance of Selling Space
In view of the retail space becoming costlier it has become pertinent to measure the
performance of the space from time to time to ensure that the sales to space
performance ratio is on an upward trend or in pace with the current trends.
a) Sales per Square Foot: The sales per square foot data is most commonly used
for planning inventory purchases. It can also roughly calculate return on investment
and it is used to determine rent on a retail location. When measuring sales per square
foot, keep in mind that selling space does not include the stock room or any area
where products are not displayed.
b) Sales per Linear Foot of Shelf Space: A retail store with wall units and other
shelf space may want to use sales per linear foot of shelf space to determine a
product or product categorys allotment of space.
c) Sales by Department or Product Category: Retailers selling various
categories of products will find the sales by department tool useful in comparing
product categories within a store. For example, a womans clothing store can see
how the sales of the lingerie department compare with the rest of the stores sales.
2) Measuring Productivity of Staff
In the present scenario cost of hiring and maintaining staff including taking care of
their training needs make the cost of staffing a significant expense, and hence, the
retail management needs to keep the costs and relevant performance parameters
under constant control. Some of these parameters are given below:
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a) Sales per Transaction: Also known as sales per customer, the sales per
transaction number tells a retailer what is the average transaction in dollars. A store
dependant on its sales clerks to make a sale will use this formula in measuring the
productivity of staff.

Managing Merchandise

b) Sales per Employee: When factoring sales per employee, retailers need to take
into consideration whether the store has full time or part time workers. Convert the
hours worked by part-time employees during the period to an equivalent number of
full-time workers. This form of measuring productivity is an excellent tool in
determining the amount of sales a business needs to bring in when increasing staffing
levels.
These are just a few of the ways to measure a retail stores performance. As
retailers track these numbers month after month and year after year, it becomes
easier to understand where the sales are generated, by which employees and how the
stores merchandising can maximize sales growth.

4.9

OPEN-TO-BUY PLANNING: CONTROLLING YOUR

INVENTORY

Good inventory control is critical to ensuring an adequate level of stock is on hand for
the amount of sales being generated. A retailer can be sure to stock the right quantity
of the right products at the right time by using an Open-To-Buy (OTB) plan. Some of
the concepts to be implemented along with the open-to-buy plan are explained below:

4.9.1 Store Level Stock Planning

After determining the broad categories of merchandise the store is to stock (mens
clothing, stationary, costume jewelry, etc.), the retailer divides the broad categories
into smaller categories called classifications (mens suits, tuxedoes, raincoats, etc.). In
turn, the classifications are divided into sub-classification (single-breasted, doublebreasted, etc.). A unit stock plan of the number of items to be stocked in each by
price, style, color and size is then prepared. The purpose of this approach is to ensure
that the stock will present an assortment of items that will satisfy the wants and
needs of the broad section of targeted consumers. One element of the stock plan
approach is the model stock or basic stock list. This list will contain those items that
the customer expects to find in stock at all times. These are the musts or never-out of
stock items, which are sometimes referred to as the bread-and-butter items.
The number of items in all stock plans is multiplied by the price line to arrive at the
dollar value of the planned inventory. Adjustments in the stock plan may be necessary
if the financial constraints preclude an ambitious stock assortment.

4.9.2 Avoiding Mismanagement of Merchandise

To avoid mismanagement of merchandise, the below plan is applicable to all forms of
retailing at all sales levels. It is most often a six-month merchandise plan but there
can be time frame variations depending upon the merchandise. The first six-month
plan includes February-March-April (spring) and May-June-July (summer). This plan
is prepared and finalized in the previous August to permit early buying of imports and
other merchandise. The second six-month plan includes August-September-October
(fall); and November-December-January (winter). This plan is prepared and finalized
in the previous February for the same reasons as stated above.
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The important items to be considered on monthly basis when developing your sixmonth Merchandise Plan are:
a.

Net Sales: This figure represents a realistic dollar estimate of your monthly
merchandise sales. These sales estimates are based on past experience and on
future considerations including; business conditions, competition, inflation,
promotional plans, merchandising opportunities, and merchandise availability.

b.

Stock: In order to achieve your estimated (planned) sales figure you must
provide sufficient stock to permit a satisfactory selection for your customers.
This stock figure can be determined by calculating your inventory turnover rate
or your sales-stock ratio, or by estimating the maximum quantity for each item or
the stock requirements based on expected weekly sales.

c.

A reduction - Reductions refer to the lowering of retail value of your

inventory and is caused by planned markdowns, shrinkage (stock shortage)
and discounts to employees or other special groups. Since these are the only
three things that can cause the retail value of the inventory at the end of a period
to have a lower valuation than it should have been otherwise, hence, they are to
be included in the plan.

d.

Purchases: This figure represents the dollar value of merchandise the buyer
must purchase to replenish the stock likely to be sold to your retail customers. It
is calculated by subtracting the dollar value of the stock-on-hand at the beginning
of the month from the total dollar value of the planned net sales, shrinkage, and
reduction for the month. The result is the planned purchases for the month..

e.

Open-To-Buy: To arrive at the open-to-buy figure for the month, it is

necessary to subtract (from the above planned purchases figure) the dollar value
of the commitments already placed for delivery during the same month. Since
each month is an entity by itself, it is not possible to carry any unspent open-tobuy commitments over to the next month. Knowledgeable buyers generally
commit about 50 percent of the planned purchase figure in order to allow funds
for reorders, fill-ins, and to take advantage of unexpected marketing
opportunities.

f.

In addition to the above items and depending upon the retail operation, the
following elements may also be included in your six-month plan: turnover, payroll,
advertising, gross margin, number of transactions, and average sale. It should be
noted that the six-month plan is flexible and can be adjusted at any time to meet
changing business conditions.

Check Your Progress-B

1. Briefly Comment on the following statements.
a) Manufacturers often allocate personnel to the receiving function thus
incurring additional costs.
.............................................................................................................
.............................................................................................................
.............................................................................................................
b) Some manufacturers are streamlining their in-house handling of returned
merchandise.
.............................................................................................................
.............................................................................................................
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.............................................................................................................

c) The most successful retailers systematically analyze their entire spectrum

of spend and then develop a comprehensive strategic.

Managing Merchandise

.............................................................................................................
.............................................................................................................
.............................................................................................................
2. Fill In the Blanks with the words given in the brackets.
a. _____________ is used at analytical level of retailing.
[Math / Physics]
b. Sales per square foot data is most _____________ used for planning
inventory.
[Commonly / Rarely]
3. State whether the following statement is True or False
a. Inventory turnover can be calculated by the month, quarter, season or
year.
b. BEP is a point in business where the sales unequal to expenses.
4.

Short Notes
a. GMROI
.............................................................................................................
.............................................................................................................
.............................................................................................................
b. Sales per transaction
.............................................................................................................
.............................................................................................................
.............................................................................................................
c. Sales per employee
.............................................................................................................
.............................................................................................................
.............................................................................................................

4.10

LET US SUM UP

Over the last decade there have been sweeping changes in the general retailing
business. For instance, what was once a strictly made-to-order market for clothing
has now changed into a ready-to-wear market. Flipping through a catalogue, picking
the right colour, size, and type of clothing a person wanted to purchase and then
waiting to have it sewn and shipped was the standard practice in the earlier days.
Merchandise Management is extremely important aspect of Retail Operations Many
consider it the MOST important). Good merchandise management does not guarantee
success but bad merchandise management almost certainly will result in failure
By the turn of the century some retailers set up a storefront where people could
browse, while new pieces were being sewn or customized in the back rooms. Almost
all retail businesses have undergone a similar transition over the years.
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Store Operations-I

Managing Supply Chain involves a defined goal, information and service level
agreements. A goal could be the ability to ship specified products to customers ON
TIME.
In order to understand supply realities we have to determine. Lead time from each
supplier, Volume discounts from each supplier, Cost from each supplier, Quality from
each supplier.
Warehousing facility should be appropriate to use (of right size, structurally sound, and
well maintained and clean). The question arises - should size determine product
volume or product volume determine size?
We also need to understand Managing Merchandise Costs consists of purchase price,
processing labor and product longevity.
Managing Merchandise Quality translates into delivering a product that meets or
exceeds specifications, auditing procedures of new products, quality assurance for
processed products & product security.
Merchandise displays are special presentations of a stores products or services to
the buying public. Indeed, merchandise displays are an integral element of the overall
merchandising concept, which seeks to promote product sales by coordinating
marketing, advertising, and sales strategies.
There are several key components of successful merchandise display that are
particularly relevant for small business owners.
The percentage of loss of products between manufacture and point of sale is referred
to as shrinkage, or sometimes called shrink. The average shrink percentage in the
Indian retail industry is about 2% of sales.
Math is used at every level of retailing. From the basic functions of counting money
and making change, to computing the total amount of a sales transaction involving
calculating percentages to determine discounts, sales tax and shipping charges.
It is critical for the success of your business to constantly work towards improving
not only the efficiency of employees, but the productivity of the stores selling space
and inventory as well. This can be achieved by using various retail math formulas and
calculations based on sales.
Good inventory control is critical to ensuring an adequate level of stock is on hand for
the amount of sales being generated. A retailer can be sure to stock the right amount
of the right products at the right time by using an Open-To-Buy (OTB) plan.

4.11

KEYWORDS

Information

: Integration of processes through the supply chain to

share valuable information, including demand signals,
forecasts, inventory, transportation, potential
collaboration, etc.

Inventory Management : Quantity and location of inventory, including raw

materials, work-in-progress (WIP) and finished goods.

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Cash-Flow

: Arranging the payment terms and methodologies for

exchanging funds crossways entities surrounded by
the supply chain.

Value

: Value is the supplementary profits over and beyond

the costs of structure the network. Co-creating value

and sharing the benefits suitably to persuade effectual

participation is an input challenge for any supply
system.
Retail logistics

: The process of managing the integrated flow of

merchandise from buying, through distribution, into the
retail store, and ultimately into the hands of the
consumer

Sourcing Strategy

: identifying and prioritizing supply and demand

improvement opportunities by area of spend

Managing Merchandise

Sourcing Operating Model : process and organization required to support the

overall sourcing strategy, goals and objectives
Vendor Management

: approach and process required to manage vendors to

ensure that product is provided at the right total cost
with minimized risk

Cost Management

: knowledge of product/service total cost and applying

the understanding of cost drivers in vendor
negotiations

Sourcing Technology

: tools required to enable the sourcing organization to

realize cost-savings goals

4.12

ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress-A

2)

(a) Customer

(b) Expensive

3)

(a) True (b) False

(c) False

(c) New
(d) False

Check Your Progress-B

2)

(a) Math (b) Commonly

3)

(a) True (b) False

4.13

TERMINAL QUESTIONS

1.

How does a merchandising manager change their buying behavior from relying
on their own personal preferences for jewelry and begin to buy based on fashion
trends currently impacting core customers?

2.

What information is required to successfully manage the supply chain? Please

explain each of these elements briefly.

3.

What are the advantages and disadvantages of having a centralized warehouse?

4.

What steps are necessary to obtain the best value for the purchases?

5.

Please list down the activities to be undertaken after receipt of material in order
to ensure right quality product.

6.

Explain the different forms of display methods used.

7.

What are the important keys for effective display?

8.

Discuss some of the important tips about doing a good display.

9.

Which are the major sources of goods shrinkage in a store? Explain them briefly.
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Store Operations-I

10. How does one calculate Inventory Turnover ratio?

11. Explain the process of calculating GMROI.
12. What is the difference between Sales per Employee and Sales per Transaction?
13. Discuss the important elements of Open to Buy Planning method.

4.14

FURTHER READINGS

Books
Tim Jakson, David Show (2008). Mastering fashion buying and merchanidising
management, Palgrave.
Cooper, M.C., Lambert, D.M., & Pagh, J. (1997) Supply Chain Management: More
Than a New Name for Logistics. The International Journal of Logistics Management
Vol 8, Iss 1, pp 114.
Halldorsson, A., Kotzab, H., Mikkola, J. H., Skjoett-Larsen, T. (2007).
Complementary theories to supply chain management . Supply Chain Management:
An International Journal, Volume 12 Issue 4 , 284-296.
Hines, T. 2004. Supply chain strategies: Customer driven and customer focused.
Oxford: Elsevier.
Ketchen Jr., G., & Hult, T.M. (2006). Bridging organization theory and supply chain
management: The case of best value supply chains. Journal of Operations
Management, 25(2) 573-580.
Kouvelis, P.; Chambers, C.; Wang, H. (2006): Supply Chain Management Research
and Production and Operations Management: Review, Trends, and Opportunities. In:
Production and Operations Management, Vol. 15, No. 3, pp. 449469.
Website and Online Resource

CIO Magazines ABCs of Supply Chain Management

Academic blog on supply chain management

Inventory optimisation in supply chains

Reviews of Supply Chain Management Software

Note: These questions/exercises will help you to understand the unit better. Try to
write answers for them. But do not submit your answers to the University
for Assessment. These are for your practice only.

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