CONCEPT OF MERCHANDISING

Merchandise management focuses on the planning and controlling of the

retailer’s inventories. The role has to balance the financial requirements of the
company with a strategy for merchandise purchasing. We believe the complex
role of merchandise management can be defined as:

“The planning and implementation of the acquisition, handling and

monitoring of merchandise categories for an identified retail organization.”

The definition stresses a number of key points. As merchandise has to be

acquired for future purchase opportunities, forward planning is needed in
relation to changing consumption tastes and demand. There is a need for
acquisition from either wholesalers or manufacturers and for the merchandise to
be handled in an appropriate way to ensure it is able to be sold in perfect
condition. As the financial aspects of buying merchandise can be treated as an
investment decision, there is the final aspect of monitoring all aspects of the
process to ensure adequate returns are achieved.

Nora Aufreiter et al. have tried summarizing the concept of

merchandising very succinctly as follows: ‘Merchandising is not a synonym for
the buying function, it is an integrated, end-to-end business process that runs
from planning the assortment, to sourcing, to distribution, to allocation of the
goods to the stores, to promoting and selling the assortment to the customers
and finally to replenishing inventory as necessary’.

PROCESS OF MERCHANDISING

The process of merchandising involves understanding consumer needs,

identifying & sourcing of right merchandise, deciding the right assortment,
planning distribution of merchandise to different locations in the right
quantities, deciding on the pricing, communicating merchandise offerings to the

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target customers, and taking feedback of consumers. Look at Figure below to
analyse the process of merchandising.

Fig: Process of Mercha

Merchandising

Let us learn the steps involved in the process of merchandising. These steps are
as follows:

(a)Understanding
Understanding consumer needs: The merchandiser should understand the
different ways in which the consumer pres
presently
ently satisfies the need. Let us
assume that the consumer has need for hair care. Based on the study the
merchandiser may find that there are various ways in which the need is being
satisfied. These may be hair soap, oil, lotion, shampoo, cream and dye. With
Wi the
help of consumer survey the method/ product which is most in demand for
satisfying the need is ‘shampoo’.

(b)Identifying
Identifying and sourcing of right merchandise: Further, the merchandiser
may need to identify the right merchandise for shampoo.. For example, in
shampoo the merchandiser may find that there are three variants – herbal,
medicinal, and regular. The merchandiser based on the study of consumer
feedback would like to know, which one is most in demand, or will help the
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retailer to serve the consumer needs. Suppose the merchandiser decides for
‘medicinal shampoo’. For medicinal shampoo, the merchandiser needs to
identify the right suppliers/sources of this type of shampoo. He /she may like to
analyse the brands like Vatika, Sunsilk, Pantene, Head & Shoulder, and
Palmolive which can supply the medicinal shampoo.

(c)Planning the right assortment: Next the merchandiser has to decide on the
different sub-categorization. The sub-categorization can be made, based on the
consumer need for medicinal shampoo. The shampoo may be used to treat
different kinds of hair condition i.e. dull, oily, dry, normal, straight, and curly.
Thus, the merchandiser must know based on past trend, experience or survey,
the right quantities to be maintained under each sub-categorization. In other
words, the assortment should cover needs of different hair conditions.

(d)Planning distribution to different locations: Once the assortment is cleared

then the merchandiser needs to work out the quantities to be dispatched to
different distribution centres. The quantity dispatched should be based on the
number of outlets in each location, the minimum stocks to be maintained,
turnover ratio, the replenishment time, etc. The logistics for delivery of goods
should also be taken into account.

(e)Providing right quantities: Once the goods reach the different distribution
points, the goods further needs to be sent to each of the outlets in the region. For
this the retailer will take into account the consumer requirement in each of the
stores based on previous sales trends or its own study of consumer needs. Thus,
for each store its requirement in terms of different assortment is worked out and
the goods are dispatched.

(f)Deciding the price: Once the goods reach the store, the merchandiser needs
to decide on the pricing of each of the products/items. Normally, the pricing is
decided at the time of assortment stage itself. In case of certain retail chains the
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pricing may be left to the respective store managers also, the manager will work
upon prices as per the guidelines from the chief merchandiser for the product
category. The prices are decided based on the gross margin policy for each of
the products.

(g)Communicating offerings to target consumers: Once, the goods are on the

floor of the shop, the merchandiser will work out the visual merchandising.
He/she will communicate such strategy for the given store or group of stores.
The merchandiser may provide certain props and signages to each of the store to
communication right messages and offerings to consumers. There could be
advertisements in print media or TV or radio or hoardings etc., for giving mass
publicity to the offerings.

(h)Taking/understanding feedback of consumers: The merchandising team

may decide to take feedback on different brands/items to know consumers
reaction to pricing, quality, availability, display, after use effect etc. The
feedback acts as a guideline for improving sourcing and assortment, so as to
provide maximum satisfaction to consumers.

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METHODS OF PLANNING AND CALCULATING INVENTORY L
LEVELS

(a) Basic stock method of planning inventory

The merchandiser may have to plan to have a basic level of stock derived by
the basic stock method (BSM) when it is agreed that there should be a particular
level of inventory available at all times. The inventory with BSM will meet
sales expectations and also allow for a margin of error. This approach is based
on ensuring stock levels are not depleted and customers dissatisfied. It is
especially important if sales are higher than expected or if there could be any
problem with the shipment and delivery of stocks. However, this method is
better suited to a low turnover or when sales may be erratic. It has the advantage
that stock can be added to over time rather than all of it being purchased in
advance, but this method does not take into consideration stockholding costs.

The
he calculations would be made as follows:

Beginning of month stock (BOM) = Planned monthly sales + Basic stock

Where

(b) Percentage variation method

An alternative method for determining planned sto

stock
ck levels, especially when
turnover is higher than 6 or more annually, is the percentage variation method
(PVM). The method is recommended when stock is quite stable since it results
in planned monthly inventories that are closer to the monthly average than
tha other
techniques. If the retailer faces fluctuations in sales but does not want to ensure
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that a given level of inventory is available at all times then this approach would
be acceptable. The technique assumes the monthly percentage fluctuations from
average
rage stock should be half as great as the percentage fluctuations in monthly
sales from average sales. This would be calculated as follows:

(c) Weeks’ supply method

The weeks’ supply method (WSM) for planning inventory involves

forecasting average sales on a weekly rather than a monthly basis. The WSM
formula assumes the inventory carried is in direct proportion to sales. It is
utilized by retailers that need to plan on a weekly basis, such as supermarkets
where sales do not fluctuate by significant amounts. The calculation is based
upon a predetermined number of weeks’ supply that has to be linked to the
stock turnover rate desired. In WSM there is a proportional link between the
value of the stock and the forecast of sales. Thus, if forecasted sale
sales double then
inventory value will triple. In order to understand WSM the following example
can be considered:

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 (d) Stock-to-sales method

One other method that can be employed is known as the stock-to-sales

method. It is beneficial to utilize such an approach if a retailer wants to maintain
a specified ratio of goods on hand to sales. The retailer has to use a beginning of
the month stock-to-sales ratio. This ratio informs the retailer as to the amount of
inventory required in order to sustain that month’s estimated sales. A ratio of 2,
for example, would require a retailer to have twice that month’s expected sales
available in inventory at the beginning of the month. The method is not difficult
to calculate. Stock-to-sales ratios can be calculated from a retailer’s own
historical results or from external sources as long as these are reliable.

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