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“Merchandising the Key element in a Retail Business”

According to Phillip Kotler, “Retailing includes all the activities involved in selling goods or services to the final consumers for personal and non-business use. Retail comes from the Old French word tailer which means “to cut off, clip, pare, divide” in terms of tailoring (1365). It was first recorded as a noun with the meaning of a “sale in small quantities” in 1433 (from the Middle French retail, “piece cut off, shred, scrap,paring”). Some of the “cut” functions retailers perform include sorting and storing, packing and selling in small quantities to the final consumers thus adding value.

Global Retail Scenario

Retailing has played a major role in the global economy. In developed markets, retailing is one of the most prominent industries. In 2011,the US retail sector contributed 31% to the GDP at current market prices. In developed economies, organised retail has a 75-80% share in total retail as compared with developing economies, where un-organised retail has a dominant share.

The US retail market is the largest retail market in the world, and the organised sector constitutes over 85% of the total retail sales. In 2011, the US retail industry recorded sales of US$ 4. 7 trillion, amounting to 31% of the national GDP at current prices.

Merchandising & Retail

Retails core competency lies in merchandising in other words “Customers Merchandising Needs is directly proportional to the Retailers Performance Standards”. The right merchandising mix is equal to the 7R’s in retailing which is Right Products, in Right quantity, In Right place in Right time in Right price with Right Appeal and Right Service.

In other words, we can also describe merchandising as the process of developing,securing, pricing, supporting and communicating the merchandise offered for sale along with the 7R’s.

Some of the key trends in 2014 from a merchandising standpoint are

  • Mobile – It is believed that consumers will make more purchases via their mobile phone than their credit card in 2014.
  • Integration – “One needs to be where the customer is, with both your messaging and your product. If you haven’t already
    noticed, consumers today are both online and offline, and sometimes both–online while shopping offline. Online they are sharing, friend validating,
    researching, learning and developing a point of view. Offline there is touching, brand comparing and brand associating. All of this drives the brand
    of the future. Finding the formula to leverage that online/offline dynamic is critical.”
  • Social – retailers are getting smarter about how to use the social channels to generate customer “delight.” Retailers such as “Target” for example , recently awarded gift cards to a number of customers who were tweeting about them over the Thanksgiving holiday weekend. “Social media is one element in retailers’ arsenal of developing brand awareness across multiple channels. All of these elements, including social media, shape or form the way that a consumer hears about a brand or offering. This contributes not only to awareness, but actual product decisions.”

Let’s now delve a little deeper into the core elements of merchandising. “Merchandise management” focuses on planning and controlling the merchandise mix and the merchandise budget.

Merchandise planning is establishing objectives and implementing plans for these objectives whereas Merchandise control involves designing the policies and procedures for collecting and analyzing merchandise data to ensure these objectives have been met.

Merchandise Budget is a financial tool for planning and controlling the merchandise planning & controlling the merchandise inventory management. To ensure profitable operations, this must be balanced between meeting customer based objectives and company’s financial objectives of profitability. To ensure profitable operations the Merchandise budget must be carefully planned and controlled in relation to: sales volume, stock levels, discounts, mark downs (write offs), purchases and gross profit margins and operating margins of profits.

Merchandise Mix Management is an appropriate combination of:

  • Product lines ie. grouping of related products
  • Product items ie. specific unique product within a line
  • Product units ie. total number of particular item in stock

To plan and control the above, the mix is structured on the basis of

  • Merchandise variety
  • Merchandise assortment &
  • Merchandise support

Variety is number of different product lines stocked. Assortment is number of different items stocked within a particular line. Support is the planning &
controlling of the number of units to have on hand to meet expected sales.

Controlling Merchandise

A store’s inventory is the biggest expense to any retail operation. Too little inventory and you risk losing business because the stock levels are too low and your store looks empty. Too much inventory will result in overcrowded stock rooms,reduced cash flow, reduced profitability and a drain on fiscal resources. If
this happens, your store is exposed to a potentially even greater risk: that of a retail outsourcing company taking over your store operations.

Visualize that in each store fixture each shelf in the store is a piece of real-estate, the purpose of which is to earn revenue. The merchandise sitting on that shelf is the tenant. Good tenants pay the rent on time by ‘turning’ or selling frequently. Bad tenants are the ones that don’t sell quickly and sit on the shelf for months. They take up valuable selling space that could and should be  given to a faster moving product. As the landlord, ask yourself how long can you afford to have non-paying tenants on your shelves before it negatively effects the total retail operation? Ideally, nothing should be on your shelves that isn’t a good seller.

Inventory turnover or stock Turn

This is the rate at which stocks deplete and are replenished. Inventory turnover of defined as the number of times during a specific period (usually 1 year) that the average stock on hand is sold.

Inventory turnover = $ Sales at Retail / Average $ stock on Hand


Average stock example          Jan 1               $1000 at retail

                                                Feb1               $ 600 at retail

                                                Mar 1              $ 500 at retail

                                                Mar 31            $1100 at retail

Total Inventory  at retail =                              $3200

Average stock = Total Inventory / No. of Listings = $3200/ 4 = $ 800 at retail

If the sales for 3 months were $4000 at retail, then the inventory turnover rate would be

Inventory turnover = Sales / average stock on hand at retail

Inventory turnover at retail (Jan – Mar) = $ 4000 / 800 = 5 times

There are a number of benefits of High stock turnover which are:

  •   Greater Sales
  • Fresher Merchandise
  • Lower Expenses
  • High returns on inventory investment
  • Efficient use of working capital
  • Fewer write-offs

How to calculate the OTB

Like every item in your annual budget, the OTB starts with the projected sales for a specific period, usually a year. From there you can estimate what your
projected purchases will be for the same period, and then further break that down into easily measurable ‘chunks’ or monthly projections. It is important to
understand that an OTB is a ‘working’ number. It will expand and contract in direct relation to your actual sales and purchases. Remember that OTB is
translated in dollar amounts, not items. That means it will tell you the available dollars to spend for new purchases, not the number of units to

The basic OTB Formula (all numbers are at retail value)

EOM (end of month stock level-desired estimate)

+ Sales (month actual)

+ Markdowns (month actual)

– BOM (beginning of month stock level-actual)

– Merchandise on order


= Open-to-Buy ($ amount available for new purchases)

As an example, let’s say that you have projected annual sales of $212,500, and your goal is to have an average total inventory level of $46,000 and an average inventory turn rate of 4.6 times a year. The following spreadsheet shows what your projected sales and purchasing would look like for the year.

When developing your budget projections, it is best to work with historical data on which to base your estimates for the coming year. Note that the end of month (EOM) inventory is the beginning of the month (BOM) inventory level for the following month.

Now compare the budget projections to what the actual sales and purchases are in this working OTB plan. And remember that the OTB amount is at retail value, not cost value.

In this example, the beginning-of-month inventory (BOM) was right on target with projections at $46,500. But the actual sales for the month were higher than
projections and the markdowns were less than projections. To maintain the desired average inventory level at $46,000 you would need to bring in purchases
of $10,950 (slightly more than projections of $10,000). The inventory-on-order is $7,700. That leaves the OTB, or the available purchasing dollars, at $3,250.
If you spend more than that you will begin to inflate the inventory level, if you spend less you risk losing sales, especially on the fast selling merchandise.

Now let’s look at an example were sales were less than budgeted goals.

With this scenario the OTB is overspent by $500. This means that no more buying should happen until sales increase and the inventory level is reduced, otherwise the inventory level will exceed the desired goal of $46,000.

Utilizing and open to buy plan for your store will enable you to always have sufficient merchandise to meet customer demands, maintain a fresh merchandising selection and optimize your bottom line profitability.

Don’t hesitate to markdown slow moving merchandise. Make the markdown instantly appealing to the customer by offering at least 25% to 40% off the retail price. The faster it is off your shelves, the faster you can bring in a better-selling product that will have a higher profit margin. Your markdown loss will be
counterbalanced by having the better-selling merchandise.

The same OTB is implemented in SAP as follows:

You can map your retail planning in SAP BI using Business Planning and Simulation (BPS) to plan budgets. You can define the budgets flexibly and adjust them to suit your requirements. (The budgets are represented in the system by a unique budget number).

When you have finished planning, you can transfer the budgets to SAP ECC.

The system takes the planned budgets into account in Purchasing in SAP ECC, for example,in the OTB check when creating or changing a purchasing document.

Planning and control of Inventory

This is the 2nd stage in developing a merchandise budget. The inventory panning & controlling efforts need to focus on :

  • Meeting sales expectations
  • Avoiding out of stock situations
  • Guard against overstock conditions &
  • Keep inventory levels at an acceptable level

There are a couple of methods which can be uses such as:

Basic Stock Method

  • Percentage Variation Method
  • Weeks Supply method &
  • Stock to Sales Ratio Method

The stock to Sales Ratio is one of the most preferred method and the basis is that we must maintain a certain ratio of stock on hand to planned Sales

BOM (Beginning of Month ) stock for Month = Planned Monthly sales for Month  X  Desired Stock to Sales Ratio .

An ERP such as SAP provides a number of features for managing the inventory

You use Inventory Management to:

· manage stocks of merchandise on a quantity and value basis.

· plan, enter and provide evidence of all goods movements.

You manage stocks on a site and storage location level, and can assign each site a number of storage locations. If you want to manage a
sophisticated warehouse complex within a storage location, you can link Warehouse Management to Inventory Management.

Inventory Management enables you to have an overview of your current stock situation at all times. Since a document is created for
every transaction, there is a complete audit trail of all goods movements.Inventory Management is required for consumption-based planning, since the system calculates requirements based on the stock on-hand.

Normally, goods movements are valuated automatically and result in updates on the Financial Accounting stock accounts. SAP Retail supports inventory valuation at both cost and retail.




Management of stocks
  on a quantity and value basis, and of others on a value-only basis

Article, Site

Management of stocks
  on a value-only basis at merchandise category level

Merchandise category

Updating stock at
  goods receipt

Goods receipt

Updating of stocks at
  goods receipt for a delivery

Logistics Execution

Creation of transfer
  requirements for goods movements

Warehouse Management

Stock corrections when
  physical inventory differences are posted

Physical inventory

Updating of goods
  movements in RIS statistics

Retail Information
  System (RIS)

Updating of delivered
  values for goods movements in Financial Accounting

Financial Accounting

Updating of account
  assignment objects for goods movements assigned to an account



The following functions are available in Inventory Management:

· Entry of goods movements

· Creation of a document for every goods movement

· Division of the stock into categories (such as unrestricted-use stock, stock in quality inspection, or blocked stock)

· Inventory Management on a value-only basis at value-only article level

· Batch management

· Management of special stocks (assigned to a vendor, for example)

· Special supporting functions (such as for generic articles, structured articles, and empties)

· Various analyses (such as the stock overview

There are several key functions which are supported by an ERP like SAP and which the author has implemented for varied retail customers in the areas of merchandising which include:

  • Supply source determination
  • Seasonal Procurement
  • Perishables Procurement
  • Vendor consignment
  • Promotion
  • Slow Seller Management
  • Replenishment
  • Retails Method Of Accounting


Is merchandising therefore an Art or a science? The art is to appeal to the customer to ensure the purchase decision is made at the right time and the science helps to decides what and how many items to keep, thereby focusing on efficient operations. Many people believe that the science emerges from deep experience of practicing the ‘art’ and there is also a large section which believes the science can substitute a large chunk of the ‘art’. Merchandising will continue to be a mixture of science and art, no matter how solutions mature over time.

With the increasing maturity of predictive models and accuracy of forecasting, a merchant is still required to be updated with market trends. However, with ever changing consumer tastes, macro-economic factors, the ‘intuitive’ capabilities of the merchant has been tested and the validity of the art in itself has been questioned. There are enough examples that indicate how data analysis, tool usage, predictive analytics etc. could have saved or brought in millions of dollars in revenues or margins. This has pushed the argument for increased usage of the ‘science’ of merchandising ensuring that decisions are backed with data and thorough analysis.


Rajesh S has 18 years of Experience, out of which he has spent 13 years in various facets of Enterprise resource Planning particularly SAP in varied areas such as Project Management,Delivery, Presales, Senior Management and also Business development. Currently he works as a Project Manager in the SAP Practice in IGATE. Previously he has worked for large firms including LogicaCMG, HITACHI, Shell, HP & Deutsche Bank

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