Magazine Article | February 1, 2002

Place High Demands On Merchandise Management

Source: Innovative Retail Technologies

To successfully manage your merchandise, be sure to assess customer demand at the store level and operate a flexible supply chain.

Integrated Solutions For Retailers, February 2002

The way in which retailers manage their merchandise has changed extensively over the last 30 years. The trends have gone from a focus on internal supply chain systems, to transaction data management, and have recently landed on considering customer behavior when determining merchandise demand. As more sophisticated systems have been developed, retailers are better able to analyze and understand sales and consumer information. In turn, they can use that data to better determine what sells and what doesn't, but more importantly why sales happen the way they do.

Last year's fluctuations in demand put retail merchandise management systems to the test. "Retailers used to look at sales averages. For example, they might stock their shelves based on a sales average of 20 units a day. Retailers are beginning to understand that averages do not consider that on Thursday a store sells 5 units, and on Saturday it sold all 15 units it had in stock," said Matthew Waller, chief strategy officer at Mercari Technologies. "The variability of demand must be taken into account when developing an overall merchandise strategy."

Part of this shift in thinking involves a reliance on predictive solutions that consider many different areas of the retail business. "The move from order management applications to those that help retailers consider the implications of their decisions are becoming more standard," said David Bagley, chief strategy officer at Retek. "This means incorporating data from many sources [product assortment, price, marketing, the use of space, and customer service] into algorithms."

Zero In On Merchandise At The Store Level
Traditional merchandising decisions relied on variables such as buyer experience, intuition, or a change in season. Looking at merchandise from this perspective is reacting to changes in the environment, not being proactive to the individual customer needs of your stores. To ensure retailers have the right product mix on the shelves, merchandise management technology is working with supply chain management systems to prepare for fluctuations. A consumer study conducted by Anderson Consulting (now Accenture) and the Food Marketing Institute (FMI) showed that of the products consumers want in a grocery store, 6% to 8% are out-of-stock. For promotional items, this number jumps to 25% out-of-stock. The study concluded that the out-of-stock levels add up to about $100 billion in lost sales for retailers.

In order to combat these unfavorable numbers, retailers need to change the way they make merchandise decisions at the store level. Typically, a 100-store retailer collects aggregate data based on the overall trends of his stores. "New technology is better at micromerchandising, which allows for a retailer to plan for a specific store or cluster of stores based on customer base and buying habits," Waller said.

Bagley agreed that retailers need to seriously consider category management based on store and customer segmentation. This might mean developing different pricing strategies in each store. "You can leverage technology to manage every store as if it's your only store. You can tailor the assortment, use of space, and pricing strategies to each store in its local market," Bagley said. If the top shoppers in your store are young families, look at what they purchase most often and make sure you are never out-of-stock in those areas. If you are wondering how you can collect that kind of specific shopper information, talk to your marketing department that has been tracking your loyalty card program. Perhaps it's time your marketing department and merchandise buyers compared numbers. "Good retail CRM (customer relationship management) is about applying customer behavior to merchandise management. In the retail environment, CRM isn't so much about one-to-one relationships as it is about understanding which consumer groups are most important and how those groups vary by store. Then based on that understanding, you can determine how to manage merchandise for those stores," Bagley said.

The Importance Of A Flexible Supply Chain
Since retailers now consider more than just the transaction side of their businesses when making merchandising decisions, fluctuations in demand are not as difficult to handle as they once were. "They have a more flexible business infrastructure and supply chain so they can change the way they are promoting products in the store, adjust a pricing strategy, or change the movement of merchandise from the supplier. The flexibility comes from linkages in communication," Bagley said. This has come from improvements in system integration.

When searching for a merchandise management system it is important to first determine the functions your company needs and then seek out vendors who can partner with the right companies to make it happen. In determining where a company needs to bulk up its systems, Waller suggests retailers first look at how merchandise is managed at the stores and on the shelves. If you have overstocks or out-of-stocks, it's important to determine how to resolve those problems first and then see how issues can be resolved higher up in the supply chain. "The most expensive place to hold merchandise is on the shelf because of all the resources it consumes until that point, such as labor, transportation, and storage costs," Waller said. With so much focus on the supply chain in the last decade, it is important for retailers to now broaden their thinking to include the demand chain and customer behavior into their day-to-day merchandise methods.