Guide to Effective Retail Merchandise Management

This section concerns itself with retail merchandise management which in­volves:

what merchandise to carry in stock

how much to buy and stock of each item

how much selling space to give each item

what price to charge for each item

how to display, advertise and promote each item

Merchandise management is sometimes mistaken with merchandising. Merchandising refers to good in-store display and promotion of merchandise. Merchandise management, as described above, is much more, as will be seen in the discussion to follow.

Selection Of Merchandise

What merchandise should be carried in stock is basic to good mer­chandise management. For this reason, much thought and research must be given to selecting merchandise appropriate for your store. In initiating a new store, as well as during periodic merchandise reviews in an established store, you need to think about your market. What are the people like, who shop in your area? Are they young married with children, or elderly couples, blue or white collar, high or low income? What are their leisure activi­ties, and wants and needs, etc.? Each of these factors has im­pact upon the type of merchandise you would select.

Other ways for obtaining ideas for merchandise selection include:

Studying other stores in the area, watching closely the mer­chandise they do and do not offer. Determining whether mer­chandise not offered may have potential.

Obtaining suggestions from salespeople in similar stores.

Carefully listening and speaking to customers in general about what they like about other stores.

Reading the trade literature.

Following advertisements of chains and department stores.

In general, knowing your customers and their needs is crucial in merchandise selection.

In a more specific way you select merchandise with the use of the tools for merchandise management discussed later in this section.

Generally, if a store is to be successful, sales and inventory should be reviewed periodically to:

See how many units of an item should be stocked and how much space should be given to them

Determine what should be done about slow moving items in inventory, and

Lay plans for sales, promotions and selection of new merchandise.

Two basic tools of merchandise management, which can help to determine how much of an item should be carried in stock, use gross profit as a basis for the calculations. They are:

Gross profit per square foot (or, profit/sq. ft.), and

Gross profit on investment (or, profit/investment)

Both of these tools help determine the average inventory which will bring the highest profit for each item. Once you understand them thoroughly, you can use a simpler tool, called stockturn. When applied properly, it can often replace the more cumbersome calculations.

Gross Profit

Since the two basic tools are built on gross profit, you need a clear view of the meaning of gross profit.

In a retail store, gross profit is the difference between what you pay for merchandise and what you sell it for.

There are two ways of calculating gross profit.

1. The simplest way is to take the selling price and sub­tract the cost.

Selling Price (-) Cost (=)  Gross Profit

2. In a retail store, customers often return merchandise, some of which then has to be sold at less than full price. There are also frequent sales. Accountants and many retailers therefore prefer to calculate gross profit by subtracting the cost of merchandise from net sales. Net sales means total sales (as rung up on the register) less returns. Cost of merchandise, again, is what the store paid for the units which were sold but not returned.

Gross profit can be calculated as shown:

Total Sales (-) Return  (-) Cost of Merchandise (=) Gross Profit

Example: Gross Profit

A retailer buys merchandise for $10 and sells that merchandise for $20. If the retailer sells 1,000 units but accepts 100 units in returns, what is her or his gross profit?

Using the formula above, gross profit can be calculated as follows:

$20,000 Total Sales (-) $ 2,000 For 100 Returns (-) $ 9,000 Cost of Net Merchandise Sold

(=) $ 9,000 Gross Profit

The same answer can also be obtained using the simpler formula: Since the gross profit on each unit is $10 ($20 selling price­$10 cost), and 900 units were sold (and not returned), the gross profit on the merchandise is ($10 x 900 units) or $9,000 - the same as above. In reality, this second calculation may not be as simple because there may have been a special price sale and therefore a different selling price for some of the units.

Please note that expenses such as rent on your store, utilities, cost of labor, and other operating costs are paid out of gross profit. The amount remaining after such expenses are paid is your net profit. Obviously, the higher your gross profit the higher your net profit will be. This is because most of a re­tail store's operating expenses are fixed and do not increase significantly with greater sales.

Also note that gross profit is arrived at by using the cost of the specific merchandise which was actually sold - not your purchases for the same period.

Profit Per Square Foot

Profit per square foot provides an indication of how much profit an item of merchandise brings from each square foot of selling space it occupies. It therefore helps to determine how much space should be allocated to each item. Since floor and shelf space in a store is limited, profit/sq. ft. can be used to help you make the best use of your space.

As the term suggests, profit/sq. ft. is calculated by divid­ing the gross profit of an item by the area of selling space for that item. The formula is shown below:

Profit per Square Foot =

Gross Profit
___________________
Sq. ft. of selling space

Example: Profit per Square Foot

Assume a retailer's business made $4,000 in gross profit last year on a particular line “x”. The selling area for the line was 200 square feet of shelf and floor space. What is the profit per square foot on line 'x'?

Using the formula above, the profit per square foot on line “x” can be figured as follows:

Profit per Sq. Ft. =

$4,000 gross profit on line “x”
_______________________________ = $20
 200 sq. ft. of selling area for item “x”

Everyone Requirements To be knowledgeable about the Decision Making Process. We all rely on information, and tools or techniques,
to help us in our everyday lives.

When we go out To eat, the restaurant is the tool that supplies us with the information required to choose what to purchase and
how much to spend.

Operating a Business also needs making decisions using information and techniques - how much inventory to preserve, what price to
sell it at, what credit agreements to offer, just how many people to hire.

Decision Making Process in business is the systematic process of identifying and solving problems, of asking questions and finding
answers. Decisions usually are created under conditions of uncertainty. The future isn't understood and sometimes even the past is
suspect. This guide opens the door for business owners and managers to find out about the selection of techniques that can be
utilised to boost your decision making process in a world of doubt, change, and uncontrollable circumstances.

A General Approach to Decision Making Procedure. Whether a scientist, an executive of a significant corporation, or a small
business owner you are able to gain from improving your decision making abilities. The overall solution to systematically solving
issues is the same. The following 7 step approach to enhance management decision making can be used to study nearly all issues
faced by a business.

State the problem. A issue first must exist and be recognized. What's the problem and why is it a issue. What is perfect and how
can current operations vary from that ideal. Describe why the symptoms (what is going wrong) and also the causes (why is it going
wrong). Try to specify all terms, theories, factors, and relationships. Quantify the problem to the extent possible. In case the
issue, not correctly and fast fulfilling customer orders, then attempt to determine how many orders were incorrectly full and the
length of time it took to fulfill them.

Define the Objectives. What are the goals of the analysis. Which goals are the most critical. Objectives are stated by an action
verb like to reduce, to grow, or to enhance. Returning to the client order problem, the major objectives is: 1) to increase the
percentage of orders filled properly, and 2) to decrease the time necessary to process and order. A sub-objective could comprise
to simplify and streamline the order fulfilling procedure.

Develop a Diagnostic Framework. Next establish a diagnostic framework, which is, determine what methods are going to be used, what
types of information are needed, and how and where the information is available. Is there going to be a consumer survey, a summary
of company records, time and motion tests, or some thing different. What are the assumptions (facts supposed to be correct) of the
analysis. What are the criteria used to evaluate the study. What time, funding, or other constraints are there. What type of
qualitative or other specific techniques will be used to analyze the data. (Some of which will be covered shortly). To put it
differently, the diagnostic frame determines the extent and processes of the whole study.

Collect and Analyze the Data. The next step is to collect the information (by following the procedures created in Step 3. Raw data
is then tabulated and coordinated to facilitate analysis. Tables, graphs, charts, indexes and matrices are some of the
conventional ways to organize raw data. Analysis is your critical prerequisite of sound business decision making. What does the
data show. What facts, patterns, and trends can be seen in the information. Many of the qualitative methods covered below can be
utilized during the measure to ascertain facts, patterns, and trends in data. Of course, computers have been used extensively
during this measure.

Generate Alternative Solutions. After the analysis was completed, some specific decisions about the nature of the issue and its
resolution must have been reached. The next step is to develop alternative solutions to the problem and position them in order of
their net benefits. But how are alternatives best generated. Again, there are several well established techniques like the Nominal
Group Method, the Delphi Method and Brainstorming, amongst others. In all these methods that a team is involved, all people who
have reviewed the information and analysis. The method is to get an informed group indicating a variety of feasible solutions.

Grow an Action Plan and Implement. Select the best solution to the issue but be sure to understand clearly why it's best, which
is, the way that it accomplishes the goals established in Step 2 better than its alternatives. Then develop a productive method
(Action Plan) to execute the solution. At this stage an important organizational consideration arises - that is going to be
responsible for seeing the implementation through and what authority does he have. The selected manager should be accountable for
seeing that all of tasks, deadlines, and reports have been performed, met, and written. Details are important in this step:
reports, programs, tasks, and communication will be the key elements of any activity program. There are lots of techniques
available to decision makers implementing an action plan. The PERT method is a method of laying out an entire period like an
action program. PERT will be covered shortly.

Evaluate, Obtain Feedback and Monitor. After the Action Plan was implemented to Fix a issue, management has to evaluate its own
effectiveness. Evaluation Criteria have to be ascertained, feedback stations developed, and observation performed. This Measure
ought to be performed following 3 to 5 weeks and at 6 weeks. The target is to answer the bottom line question. Has the problem
been solved?

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