Buying and Merchandising

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This book contains the course content for Buying and Merchandising.

JNU, Jaipur
First Edition 2013

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Index

I. Content....................................................................... II

II. List of Figures...........................................................VI

III. List of Tables......................................................... VII

IV. Abbreviations.......................................................VIII

V. Case Study.............................................................. 134

VI. Bibliography.......................................................... 141

VII. Self Assessment Answers................................... 144

Book at a Glance

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Contents
Chapter I........................................................................................................................................................ 1
Introduction to Merchandising Management............................................................................................ 1
Aim................................................................................................................................................................. 1
Objectives....................................................................................................................................................... 1
Learning outcome........................................................................................................................................... 1
1.1 Introduction to Merchandising.................................................................................................................. 2
1.1.1 Historical Definitions of Merchandising.................................................................................. 3
1.1.2 Principles of Merchandising..................................................................................................... 3
1.1.3 Merchandising Strategy............................................................................................................ 4
1.1.4 Merchandising Mix................................................................................................................... 6
1.1.5 Role and Responsibilities of Merchandiser ............................................................................. 7
1.2 Buying and Merchandising Management................................................................................................. 7
1.3 Planning Merchandise Assortment........................................................................................................... 9
1.4 Buying System........................................................................................................................................ 10
1.4.1 Three Step Process for Buying System................................................................................... 10
1.4.2 Buying Organisation................................................................................................................11
1.4.3 Buying Principles.................................................................................................................... 12
1.4.4 Factors Affecting Buying Function......................................................................................... 13
1.4.5 Roles and Responsibilities of Buyer....................................................................................... 14
1.5 Function of Buying for Different Types of Organisation........................................................................ 14
1.5.1 Buying for a Single or Independent Store.............................................................................. 15
1.5.2 Buying for a Chain Store or a Chain of Department Store..................................................... 15
1.5.3 Buying for Non- Store Retailer............................................................................................... 15
Summary...................................................................................................................................................... 16
References.................................................................................................................................................... 16
Recommended Reading.............................................................................................................................. 17
Self Assessment............................................................................................................................................ 18

Chapter II.................................................................................................................................................... 20
Managing Merchandise and Merchandising Planning Process.............................................................. 20
Aim............................................................................................................................................................... 20
Objectives..................................................................................................................................................... 20
Learning outcome......................................................................................................................................... 20
2.1 Introduction............................................................................................................................................. 21
2.1.1 Merchandise Management...................................................................................................... 21
2.1.2 Merchandise Mix.................................................................................................................... 21
2.1.3 Managing Merchandise Costs................................................................................................. 21
2.1.4 Managing Merchandise Quality.............................................................................................. 22
2.1.5 Merchandise Display and Store Capacity............................................................................... 23
2.2 Supply Chain........................................................................................................................................... 24
2.2.1 Managing Supply chain.......................................................................................................... 24
2.2.2 Warehousing Facility.............................................................................................................. 26
2.3 Merchandise Planning............................................................................................................................. 26
2.3.1 Concept of Merchandise Planning.......................................................................................... 26
2.3.2 Implications of Merchandise Planning................................................................................... 27
2.3.3 Need for Merchandise Planning............................................................................................. 28
2.3.4 Merchandise Planning Components....................................................................................... 28
2.4 Process of Merchandise Planning........................................................................................................... 29
2.5 Technology Tools that Aid Merchandise Planning................................................................................. 31
2.6 Merchandise Planning in a Montgomery Ward...................................................................................... 31

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Summary...................................................................................................................................................... 35
References.................................................................................................................................................... 35
Recommended Reading.............................................................................................................................. 36
Self Assessment............................................................................................................................................ 37

Chapter III................................................................................................................................................... 39
Methods of Merchandise Procurement..................................................................................................... 39
Aim............................................................................................................................................................... 39
Objectives..................................................................................................................................................... 39
Learning outcome......................................................................................................................................... 39
3.1 Introduction............................................................................................................................................. 40
3.1.1 Meaning of Procurement........................................................................................................ 40
3.1.2 Merchandise Procurement...................................................................................................... 40
3.1.3 Definition of Sourcing............................................................................................................ 40
3.1.4 Global Sourcing...................................................................................................................... 41
3.2 Merchandise Sourcing............................................................................................................................ 41
3.2.1 Process of Merchandise Buying............................................................................................. 41
3.3 Purchasing and Procurement................................................................................................................... 45
3.3.1 History of Procurement and Purchasing................................................................................. 45
3.3.2 Factors For Purchasing .......................................................................................................... 46
3.3.3 Role of Purchasing.................................................................................................................. 46
3.3.4 Determining Requirements..................................................................................................... 48
3.3.5 Supply Sourcing...................................................................................................................... 48
3.3.6 Negotiation.............................................................................................................................. 48
3.3.7 Supplier Management............................................................................................................. 49
3.3.8 E-Purchasing and E-Procurement........................................................................................... 49
3.4 Sourcing e-Procurement Services........................................................................................................... 50
3.5 Advantages of e-Procurement Services.................................................................................................. 51
3.6 E-Procurement Trends in Global Market................................................................................................ 51
3.7 E- Procurement Challenges and Opportunities....................................................................................... 52
Summary...................................................................................................................................................... 53
References.................................................................................................................................................... 53
Recommended Reading.............................................................................................................................. 53
Self Assessment............................................................................................................................................ 54

Chapter IV................................................................................................................................................... 56
Pricing of Merchandise............................................................................................................................... 56
Aim............................................................................................................................................................... 56
Objectives..................................................................................................................................................... 56
Learning outcome......................................................................................................................................... 56
4.1 Introduction............................................................................................................................................. 57
4.2 Pricing Framework and a Firm’s Pricing Objectives.............................................................................. 57
4.2.1 Pricing Framework................................................................................................................. 57
4.2.2 Firm’s Pricing Objectives....................................................................................................... 57
4.3 Factors Affecting Pricing........................................................................................................................ 58
4.3.1 Product or Merchandise ......................................................................................................... 58
4.3.2 Place . ..................................................................................................................................... 59
4.3.3 Promotion .............................................................................................................................. 59
4.3.4 Miscellaneous ........................................................................................................................ 59
4.4 Calculation of Retail Price...................................................................................................................... 60
4.5 Pricing Approach.................................................................................................................................... 61
4.6 Price Adjustments................................................................................................................................... 62
4.7 Pricing Strategy....................................................................................................................................... 63
4.7.1 Modern Price Strategy............................................................................................................ 64
4.8 Key Opportunities to Leverage Price Optimisation................................................................................ 64

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Summary...................................................................................................................................................... 67
References.................................................................................................................................................... 67
Recommended Reading.............................................................................................................................. 68
Self Assessment............................................................................................................................................ 69

Chapter V..................................................................................................................................................... 71
Visual Merchandising and Financial Merchandising.............................................................................. 71
Aim............................................................................................................................................................... 71
Objectives..................................................................................................................................................... 71
Learning outcome......................................................................................................................................... 71
5.1 Introduction to Visual Merchandising.................................................................................................... 72
5.2 Scope of Visual Merchandising.............................................................................................................. 73
5.3 Visual Merchandising Organisational Chart........................................................................................... 73
5.4 Visual Merchandising Planning Systems................................................................................................ 74
5.4.1 Responsibility for Visual Merchandising within Retail Structure.......................................... 74
5.4.2 Visual Merchandising- A Support for Positioning Strategy.................................................... 75
5.5 Visual Merchandising in Non- Store Retailing....................................................................................... 78
5.6 Cross Merchandising.............................................................................................................................. 78
5.7 Financial Merchandise Management..................................................................................................... 78
5.7.1 Use of Financial Merchandising in Organisation................................................................... 79
Summary...................................................................................................................................................... 81
References.................................................................................................................................................... 81
Recommended Reading.............................................................................................................................. 81
Self Assessment............................................................................................................................................ 82

Chapter VI................................................................................................................................................... 84
Category Management............................................................................................................................... 84
Aim............................................................................................................................................................... 84
Objectives..................................................................................................................................................... 84
Learning outcome......................................................................................................................................... 84
6.1 Introduction to Category Management................................................................................................... 85
6.2 Evolution of Category Management....................................................................................................... 86
6.3 Category Captain.................................................................................................................................... 86
6.4 Category Management Process............................................................................................................... 87
6.4.1 Category Definition................................................................................................................ 88
6.4.2 Category Planning................................................................................................................... 90
6.4.3 Category Implementation....................................................................................................... 92
6.5 Category Management Limitations......................................................................................................... 95
6.6 Behavioural Category Management Benefits......................................................................................... 95
Summary...................................................................................................................................................... 96
References.................................................................................................................................................... 96
Recommended Reading.............................................................................................................................. 97
Self Assessment............................................................................................................................................ 98

Chapter VII............................................................................................................................................... 100

Product Management............................................................................................................................... 100
Aim............................................................................................................................................................. 100
Objectives................................................................................................................................................... 100
Learning outcome....................................................................................................................................... 100
7.1 Introduction to Product Management.................................................................................................. 101
7.2 Historical Overview of Product Management in Retailing................................................................... 101
7.3 Role of Product Management in Retailing............................................................................................ 102
7.3.1 Strategic Role of Product Management in Retailing............................................................ 102
7.4 Product Management Function............................................................................................................. 102
7.4.1 Responsibilities of Product Management Function.............................................................. 103

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 7.4.2 Product Management Decision............................................................................................. 103
7.5 Product Classification........................................................................................................................... 104
7.6 Product Line and Product Mix.............................................................................................................. 105
7.7 Product Manager’s Management System............................................................................................. 107
7.8 Product Planning System...................................................................................................................... 108
Summary.....................................................................................................................................................112
References...................................................................................................................................................112
Recommended Reading.............................................................................................................................113
Self Assessment...........................................................................................................................................114

Chapter VIII...............................................................................................................................................116
Vendor Management..................................................................................................................................116
Aim..............................................................................................................................................................116
Objectives....................................................................................................................................................116
Learning outcome........................................................................................................................................116
8.1 Introduction to Vendor Management.....................................................................................................117
8.2 Vendor Selection Process.......................................................................................................................117
8.2.1 Analyse Business Requirements............................................................................................117
8.2.2 Vendor Search........................................................................................................................118
8.2.3 Request for Proposal ( RFP) and Request for Quotation (RFQ)...........................................119
8.2.4 Proposal Evaluation and Vendor Selection........................................................................... 121
8.2.5 Contract Negotiation Strategies............................................................................................ 122
8.2.6 Contract Negotiation Mistakes............................................................................................. 123
8.3 Strategies to Strengthen Vendor Relations............................................................................................ 124
8.4 Vendor Evaluation................................................................................................................................. 124
8.5 Vendor Managed Inventory................................................................................................................... 125
8.5.1 VMI and EDI........................................................................................................................ 125
8.5.2 Benefits of VMI.................................................................................................................... 126
8.5.3 Challenges and Limitations of VMI..................................................................................... 127
8.5.4 Overcoming the Limitations................................................................................................. 127
8.6 Vendor Finance..................................................................................................................................... 127
8.7 Vendor Management Services............................................................................................................... 128
8.8 Vendor Management System................................................................................................................ 129
Summary.................................................................................................................................................... 130
References.................................................................................................................................................. 130
Recommended Reading............................................................................................................................ 131
Self Assessment.......................................................................................................................................... 132

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List of Figures
Fig. 1.1 Areas influenced by the merchandise strategy.................................................................................. 4
Fig. 1.2 Steps of merchandise assortments plan............................................................................................. 9
Fig. 1.3 Buying system................................................................................................................................. 10
Fig. 1.4 The buying organisation.................................................................................................................. 12
Fig. 1.5 Theory of merchandise buying behaviour....................................................................................... 13
Fig. 2.1 Factors affecting manufacture’s productivity.................................................................................. 22
Fig. 2.2 Matching process............................................................................................................................. 25
Fig. 2.3 Advantages and disadvantages of warehousing............................................................................... 26
Fig. 2.4 The process of merchandise management....................................................................................... 27
Fig. 2.5 The implications of merchandise planning...................................................................................... 27
Fig. 3.1 Process of e-sourcing....................................................................................................................... 50
Fig. 4.1 The pricing framework.................................................................................................................... 57
Fig. 5.1 Visual merchandising organisation chart......................................................................................... 73
Fig. 6.1 The category lifecycle..................................................................................................................... 90
Fig. 6.2 Category review............................................................................................................................... 92
Fig. 6.3 Category management methodology............................................................................................... 93

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List of Tables
Table 2.1 L
 ist of 28 stages in introduction of new Montgomery ward private label product
requiring tooling expenditures...................................................................................................... 34
Table 5.1 Visual merchandising: local and centralised approaches.............................................................. 75
Table 6.1 Category management process...................................................................................................... 87
Table 6.2 The role of product category......................................................................................................... 89
Table 7.1 Classification of consumer product ........................................................................................... 105
Table 7.2 A product-evaluation matrix having two hypothetical products A and B over three years..........110
Table 7.3 Incorporating sales, market share and profit forecasts into the product evaluation matrix.........110
Table 7.4 Five levels of project evolution matrix........................................................................................111

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Abbreviations
DMM - Divisional Merchandise Manager
ECR - Efficient Consumer Response
EDI - Electronic Data Interchange
EPOS - Electronic Point of Sale
e-RFI - Electronic Requests for Information
e-RFP - Electronic Requests for Proposal
e-RFQ - Electronic Requests for Quotation
FMCG - Fast Moving Consumer Goods
FOB - Free on Board
GMROI - Gross Margin Return on Inventory Investment
ISM - Institute for Supply Management
KPI - Key Performance Indicator
LIFO - Last In First Out
NAPM - National Association of Purchasing Management
NGO - Non-Government Organisation
NRF - National Retail Federation
PO - Purchase Order
RFI - Request for Information
RFP - Request for Proposal
RFQ - Request for Quote
ROI - Return on Investment
SBU - Strategic Business Unit
SKU - Stock Keeping Unit
SLA - Service Level Agreement
VMI - Vendor Managed Inventory
VMS - Vendor Management Services

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Chapter I
Introduction to Merchandising Management

Aim
The aim of this chapter is to:

• define merchandising

• identify the roles and responsibilities of merchandiser

• introduce the functions of buying for different types of organisations

Objectives
The objectives of this chapter are to:

• explain the buying principles

• explicate the three step process of buying system

• classify the roles and responsibilities of buyer

Learning outcome
At the end of this chapter, you will be able to:

• understand the factors affecting the buying function

• describe buying and merchandising management

• comprehend the merchandising strategy

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Buying and Merchandising

1.1 Introduction to Merchandising

The biggest test in the competitive world of retail is to stay relevant to the customer. For this, a retailer would
primarily require an understanding of the changes occurring in the environment, consumers, their lifestyle, and
then develop an ability to adapt to them. It is necessary to have the right location and communication for the store;
the products to be sold occupy a position of primary importance.

The success of any retail operation to great extent, is based on the retailer’s ability to provide the right goods to the
consumer at the right time and at the right price. The entire process of creating a product or service needed by the
consumer and ensuring that it reaches the place where a consumer can buy it, is integral to the existence of any retail
organisation. This process is termed as merchandising. The function of merchandising encompasses the function
of buying. It is an integrated, end-to-end business process that runs from planning the merchandise assortment, to
sourcing, to distribution, to allocation of the goods to stores, to promoting and selling the assortment to customers
and finally, to replenishing inventory as necessary.

Merchandising is the heart of retailing. It is the supply chain practice of making products in retail outlets available to
consumers, primarily by stocking shelves and displays. It is taking the product (or merchandise) from a company and
selling it to the customer. It is ensured that the products are visible in stores and presented in an appealing fashion.
Merchandise analysis is identifying need and wants of customers in order to buy the correct merchandise.

Merchandising is defined as “a marketing practice in which the brand or image from one product or service is used
to sell another”. Merchandising, as commonly used in marketing, also means the promotion of merchandise sales
by coordinating production and marketing and developing advertising, display and sales strategies to increase retail
sales. It includes disciplines in pricing and discounting, physical presentation of products and displays and the
decisions about which products should be presented to which customers at what time.

Merchandise management is the process by which a retailer attempts to offer the right quantity of right merchandise
at the right place at the right time and at the same time, meeting the organisation’s financial objectives. Every retailer
space is most precious and the merchandise has to justify the Return on Investment (ROI). Hence, the buying decision
is a very strategic decision to a retailer.

Merchandise management is an integrated approach to inventory assortment offerings, marketing communications

and selling. It does not limit your approach to inventory selection and pricing issues only. It takes all three; effective
merchandising, marketing and sales, to create a highly desired customer experience. An integrative approach will
help to create:
• the right management vision to address aged inventory
• stock balancing
• pricing strategies
• vendor performance
• assortment planning
• product selection for purchase and repurchase
• managing gross margin return on investment and increasing product turnover

It is highly desirable to adopt an approach to solve the merchandising challenges by taking an integrated approach
to managing resources and creating emotional connectivity with your company, brand and products.

Merchandise management is the process of analysis, planning, acquisition, handling and control of the merchandise
investments of a retail business with the objective of maximising the sales and profits of a category. It sounds simple
but involves different processes like buying, sourcing, merchandising and sales. It may be virtually impossible to
keep the buying process straight without grouping items into categories. In general, a category is an assortment of
items that the customer sees as reasonable substitutes for each other.

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For example, men’s formal apparels, ladies ethnic wear and infant’s apparels are categories. It is important to
understand that merchandising is an integral part of the overall strategy for the success of a retail venture. It is much
more than simply stocking and arranging the products on shelves. It is truly an integral component of the store’s
overall business and can go a long way towards improving its image and consequently, its sales.

Merchandising is all about creating a congenial environment in the retail store that aids customers in their overall
shopping experiences. It begins long before customers actually enter the store. In this context, the following points
are helpful:
• The retail store should look appealing and welcoming to customers.
• Try to have clear and professional-looking signage that is distinctly visible to the customers.
• Display merchandise arranged in an orderly fashion.
• The items should have unambiguous signs showing prices and promotional offers prominently displayed.
• The interiors should be neat and orderly.
• The staff should display helpful and pleasing manners to assist customers with their shopping needs.

The role of merchandising is to make customers feel that there is always something new and innovative to look
at and shop for every time they come in, to make a purchase. For example, window-dressing does not cost much,
but it adds the “professionalism.” If there is really a good window dresser, you will find increase in sales straight
away - many products sell out when the customer sees them within a window display.

1.1.1 Historical Definitions of Merchandising

According to Copeland and Learned (1933), merchandising is product planning. The job of merchandising is
to ascertain the characteristics of the merchandise for which there is a potentially profitable demand, to prepare
instructions for the manufacturing plant in order that it may be able to produce goods for which a demand exists, to
aid in developing plans for promoting the sales and to supervise various routine operations in connection with these
activities. It includes the determination of what to make, how much, at what time, and at what price.

The Definition Committee of the National Association of Marketing Teachers, one of the former organisations of
the AMA, defined merchandising as follows, " Merchandising – The adjustment of merchandise produced or offered
for sale to customer demand. It involves the coordination of selling with production or buying for resale."

1.1.2 Principles of Merchandising

The basic principles around which the function of merchandising needs to revolve are:
• Understand the target market: The retailer exists for the customer. Thus, products retailed in the store should
be a reflection of consumers’ needs and wants.
• Build the merchandise plan, one store at a time: Each store is different; the customers visiting each store
are different. Hence, they have to be understood as separate entities. While the merchandise plan is built for
the company as a whole, there has to be an element, wherein, peculiarities of each store and region are taken
into account.
• Buy what your customers want, not what you want: The buyer is the representative of the consumers, and it is
necessary to remember that the choice and taste of target consumers may be very different from the buyer’s.
• Build the right assortment: In case of most products that are bought and consumed, the consumer is always
looking for a choice. A wide assortment of the right kind of goods goes a long way in building consumer loyalty
towards the brand.
• Be consistent: While building a range of products for the consumers, it is necessary to ensure the consistency
across all product offerings. Consistency is required not only in the choice of products offered but also in terms
of their quality.

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Buying and Merchandising

• Offer value: The consumer’s decision to buy a product is not always governed by price alone. While taking the
buying decision, they seek value made in the purchase. Low price may not always be a factor favouring sales,
and the perception of value that the product provides, eventually influences the consumer’s decision.
• Understand the needs of the vendor and negotiate a win-win situation: While vendors play a key role in
the entire buying process, it is necessary that a buyer understands the strengths and weaknesses of each vendor
and also motivates them. If the goals of the organisation are consistent with what the vendor seeks to achieve,
a better and long-term working relationship is envisaged.
• Share information: Sharing information with the vendors often goes a long way in creating a sense of
responsibility and involvement among them. Crucial information that is shared on a timely basis may even
affect the long term success or failure of a product or a range of products.
• Accept the mistakes committed: A product or a range launched may not always meet with the expected success.
When a buyer is informed that some particular merchandise has not met with the success that was anticipated,
it is essential to move the goods and open up the selling space to other inventory.
• Seek to surprise the customer: The merchandise is what draws the consumer to the retail store. If the merchandise
in the store excites the customer and exceeds his expectations time and again, the customer will have a reason
to keep coming back to the store.

1.1.3 Merchandising Strategy

Fundamentally, a strategy defines a company’s position. On the other hand, merchandising refers to the basic product
mix that the retailer offers to the end consumer. The figure below shows the areas influenced by the merchandise
strategy. A merchandising strategy is defined as “a company’s position with respect to a given product-mix aimed
at ensuring optimisation of resources, achieving target sales and margins and reducing stock outs and markdowns.”
The merchandising strategy in turn, dictates the position that a particular buyer and merchandise adopts with respect
to the following criteria:
• The products to be sourced.
• The terms and conditions agreed with the vendors and suppliers.
• The pricing strategy to be adopted.
• The method of packaging and presentation to the end consumer.

Products
to be
sourced

The method of Vendor terms

packaging and Merchandising and
presentation strategy conditions

Price to
be adopted

Fig. 1.1 Areas influenced by the merchandise strategy

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Products to be sourced: Retailers may buy product from a variety of sources, which depend on the nature of the
business and the product, as well as on the capacity for the inventory. There are different types of sources such as:
• Drop shipping
• Local sourcing
• Low volume: wholesalers
• Mid volume: importers and distributors
• High volume: manufacturers and liquidation sales

Drop shipping allows the products to be sold without having to hold inventory of the merchandise. The drop shipper
holds the stock for the retailer, who is not required to pay until the stock is sold out. It is obvious that drop shipping
can be a good sourcing practice to test the market for a specific product. If the product is sold, a bulk order of the
product may be placed.

Local sourcing is suitable for the products, such as car boot sales, discount shops and local outlet stores. This is
a good technique to get started immediately in finding products to sell, but it is the most limited type of product
sourcing.

Wholesalers are the best option for purchasing low volumes because they are generally very flexible with retailers.
Once the business is established and the retailer is in a position to hold larger quantities of product, importers and
distributors may be considered for product sourcing; although they have higher minimum order requirements, they
can offer pricing arrangements, which can be considerably more profitable than dealing with the wholesalers.

The best ways to increase profit margin are to purchase directly from the manufacturers and to import goods from
overseas factories and distributors. Many international suppliers can offer low priced, high quality goods that can
help increase profitability. But, importing requires dealing with many issues, such as managing suppliers, shipping
and importation fees.

Liquidation sales are usually bulk lots of merchandise that are being sold when a retail company goes out of business.
Buying at liquidation can be a very good way of getting very low priced merchandise for sale, but it does not create
an ongoing supply of the product.

Vendor’s terms and conditions

Vendor’s terms and conditions is an important step in the product merchandising strategy. These depend on the
nature of product. The buyer and the vendor negotiate and set the terms and conditions. Some examples are:
• Dispatch and transit time
• Posting and packaging
• Payment options
• Exchanges
• Defects
• Returns
• Lost items

Pricing strategy
One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is
related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features,
channel decisions and promotion.

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Buying and Merchandising

Packaging and presentation

The packaging and presentation of the product plays an important role in merchandising. No matter how well is it
made, a product will not attract the buyer unless it is presented in an attractive manner. It cannot be expected that a
car of a new model in a showroom will be presented in a dirty state or having scratches on the body. Similarly, the
packaging of a product displayed on the shelves of a supermarket is equally important. It should be:
• Attractive in appearance
• Easy to handle
• Showing the brand name prominently and
• Providing clearly all the information, such as nutrition value, ingredients, weight, price etc.

The corporate strategy of a retail organisation influences the buying strategy. While the corporate strategy serves as
a guiding framework for each and every department within the organisation, the buying strategy is more specific.
For the organisation, it serves as guide for the function of buying, as well as to decide the time-frame for specific
actions to be accomplished. Thus, while the buying strategy is a reflection of the corporate strategy, it is specific
only to the company’s buying department.

The buying policy not only ascertains the buyer’s duties and responsibilities, but also enables the suppliers and
vendors to clearly understand whether the company allows many suppliers to be a part of its sourcing base or restricts
its buying from a few suppliers. The method of supplier selection and the terms and conditions that apply to them
are also similarly determined.

1.1.4 Merchandising Mix

Merchandise refers to the complete range of products that the retailer chooses to offer to its customers. Merchandise
mix covers the breadth and depth of products sold by the retailers. Often, it is also referred to as the product assortment.
Over a period of time, the merchandise mix may change in keeping with the market conditions and may vary even
during the course of the same year. For example, the merchandise mix offered during Diwali is different from that
offered in summer time.

The merchandise mix comprises of products, which the retailer terms as staple, classic or basic; combined after
taking into consideration fashion, fads and seasonal preferences. Staple merchandise lines include those products
that are always in demand. Often, they make for the basic necessities of life such as sugar, salt, pulses and so on,
or are those products for which there is always a steady demand. Depending on the type of the retail model, the
retailer has to ascertain the staple products for its stores. In many cases, these products can also be termed as classics.
Some of the examples of the products which can be classified as staples are shirts for men, socks, handkerchiefs,
stationery, and so on.

Developing a profitable merchandise mix is a continuous process. Using standard metrics and benchmarks makes
a consistent review of products and categories possible. Reviewing historical performance, setting objectives and
then comparing the actual performance will lead to an actionable strategy for developing an appropriate merchandise
mix.

It is always advantageous to enlist the assistance of the marketing and creative teams to support the merchandise-
mix objectives.

Merchandise line
Merchandise line comprises of a group of closely related products intended for the same end use, and sold to the
same customer group. A given merchandise line also falls within the same price range. Thus, we can say that a
combination of merchandise lines makes up the merchandise mix.

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1.1.5 Role and Responsibilities of Merchandiser
The merchandiser is responsible for particular lines of merchandise, for example, in a department store, there may
be merchandiser for menswear, children’s wear and so on. The basic duties of the merchandiser can be divided into
four areas. They are planning, directing, co-ordinating and controlling.
• Planning: Though the merchandisers may not be directly involved in the actual purchase of merchandise,
they formulate the policies for the areas in which they are responsible. Forecasting sales for the forthcoming
budget period is required and this involves estimating consumer demand and the impact of changes in the retail
environment. The sales forecasts are then translated into budgets to help the buyers work within the financial
guidelines.
• Directing: Guiding and training buyers as and when the need arises is also a function of the merchandiser. Many
a times, the buyers have to be guided to take additional markdowns for products, which may not be doing too
well in the stores. Inspiring commitment and performance on the part of the buyers is necessary.
• Co-ordinating: Usually, merchandise managers supervise the work of more than one buyer. Hence, they need
to coordinate the buying effort in terms of how well it fits in with the store image and with the other products
being bought by other buyers.
• Controlling: Buyer’s performance can also be evaluated on the basis of net sales, maintained mark up percentages,
gross margin percentages and stock turn. This is necessary to provide control and maintain high performance
results.

Role of merchandise manager or Divisional Merchandise Manager (DMM)

The role of a divisional merchandise manager, immaterial of the size of the retail organisation, would involve the
following functions:
• Forecasting sales for the forthcoming budget period: This involves estimating consumer demand and the
impact of changes in the retail environment.
• Translating the sales forecast into inventory levels in terms of rupees: To do this effectively, the DMM needs
to understand and provide for the inventory levels that would be needed to achieve a particular level of sales.
• Inspiring commitment and performance on part of the merchandisers and buyers: It is believed that
divisional merchandise managers can guide the merchandisers in terms of vendor selection, merchandise lines
that can be developed and future trends.
• Assessing not only the merchandise performance but also the buyer’s performance in order to provide control
and maintain high performance results.

1.2 Buying and Merchandising Management

The buying and merchandise management experience includes all the processes for procuring and selling merchandise,
encompassing:
• Merchandise planning: Merchandise planning can be defined as a systematic approach with the aim of
maximising return on the investment. It involves appropriate planning of the sales and inventory order. Sales
potentials are increased by adopting mark-downs and stock-outs strategies. It is imperative to keep a proper
balance between sales and purchases. Besides, constraints imposed by the store-layouts, warehousing and
logistics should also be taken into account, while keeping this balance. If we are able to divert our resources
from the stocks that suck our profit, to the business generating the revenues, chances of our over-all success
will be higher.
Assortment planning: Assortment planning is of utmost importance for the success of the retailers. It involves
ascertaining the quantities of various products that will be purchased to fit into the overall merchandise plan.
It is absolutely necessary to detail out the colour, size, brand and materials, and so on, of each assortment. The
primary goal of an assortment plan is to create a balanced assortment of merchandise for the customer. A number
of factors affect the assortment planning, the most important factor being the type of merchandise, i.e. basic or
staple merchandise, fashion, specialty or convenience goods, to be stocked in the retail store. The amount of
money available for investment in the inventory is another important factor. Sometimes, the retailer decides to
offer only a particular brand in his store. The availability of space in the store and market constraints is other
important factor that is taken into account for assortment planning.

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Buying and Merchandising

• Open-to-Buy management: Open-to-Buy management is a financial budget for retail merchandise. The Open-
to-Buy eliminates the stress of worrying whether the retailer is buying too much or too little. With Open-to-Buy,
the retailer can go to the market with a buying plan for each classification of merchandise for a specific time
frame. It is not difficult at all to prepare an Open-to-Buy plan, but it requires some time and thought. It needs
the information, planned sales by month, planned or anticipated markdowns and planned monthly beginning-
of-month inventory levels.
• Purchasing: As regards the purchasing management, it deals with the monitoring of the right authorisation of
the right item, at the right price, quality and quantity, from the right supplier at the right terms and at the right
time. The major objectives of the purchase management are:
‚‚ To maintain the quality and value of the products
‚‚ To minimise the cash tied up in inventory
‚‚ To maintain a proper flow of inputs and outputs
‚‚ To enhance the competitive position of the firm
• Receiving: Receiving can be defined as the point of transfer of the possession of goods from the manufacturer
to the retailer. It involves the administrative function involving proper checking of the quality, quantity and
condition of the incoming goods before their storage.
• Distribution: Distribution can be of two types, namely, sore distribution and inter-store transfers. Different
tools have been developed to help the retailer to monitor distribution. For example, ‘Merchant Plus’ has been
designed to help a merchant better leverage inventory across stores to prevent lost sales and increase stock turn
rates, cash flow and margins. These tools also provide for the efficient transfer of merchandise between stores.
This programme also records and facilitates transfers both out of and into a store or distribution centre.
• Import management: The import management involves facilitating all aspects of the import transaction, namely,
importing goods, customs clearance, payment of the duties and tariffs and arranging transport, warehousing,
and so on.
• Inventory management: Inventory management refers to the retailer trying to acquire and maintain a proper
merchandise assortment so that the cost related to ordering, shipping, handling, and so on, may be kept in check.
The inventory management is very crucial to adjust reasonable times between replenishment, asset management,
inventory forecasting, inventory valuation, inventory visibility, availability of space for inventory, quality
management, directing defective goods and demand forecasting.
• Vendor management: Vendor management involves a consistent risk classification and necessary efforts to
ensure risk assessment that eliminates undue third party risk exposure. A vendor management tool, namely,
Vendor Management System (VMS) has been developed. It is an internet-enabled tool that acts as a mechanism
for business to manage and procure staffing services. The VMS application includes:
‚‚ Order distribution
‚‚ Consolidated billing
‚‚ Much faster reporting capability
• Sales processing: The sales processing is a systematic approach for selling a product or service. It includes
seller and buyer risk management, standardised customer interaction and measurable revenue generation. The
sales process involves a number of specific steps or stages that may vary from company to company. Some of
the general steps are initial contact, proposal, negotiations, closing, deal transaction, and so on.
• Price management and revenue optimisation: Price management and revenue optimisation refers to the
capabilities in generating higher margins from competitive and fragmented markets. In this respect, the support
extended by the senior management is one of the most important devices of success. Some software tools have
been developed for optimum price management and revenue optimisation.

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• Physical inventory: Physical inventory is a process where a business organisation counts its entire inventory
physically. It may be necessary, due to financial accounting rules or the tax regulations, to place an accurate
value on the inventory. Business may use several different tactics to minimise the disruption caused by physical
inventory.
• Promotional management: Promotional management refers to coordinating promotional mix elements
to develop a controlled and integrated programme for effective marketing. In addition to the regular store
promotional schemes, many innovative methods can be used to promote sales. Some of the examples include,
special offer for the first time customers, store wide sales, gift certificate and free shipping.

1.3 Planning Merchandise Assortment

Assortment planning is the process of trading-off variety, assortment and backup stock. An assortment plan is a list
of merchandise that indicates in general terms, what the retailer wants to carry in a particular merchandise category.
Thus, an assortment plan tends to be the amalgamation of the Gross Margin Return on Inventory Investment
(GMROI) plan, the inventory turnover plan, sales forecasting and assortment planning. The assortment plan provides
the merchandise planner with a view of what the composition of a specific category of merchandise should be.

Small and large retailers are required to make decisions for thousands of individual items from hundreds of vendors,
both nationally as well as internationally in some cases. If the buying process is not organised in a systematic way,
it will result in chaos. The planning of merchandise assortment is a three step process. The figure below shows the
steps involved in merchandise assortments plan.

Organise the buying process by

categories

Set merchandise financial

objectives

Develop an assortment plan

Fig. 1.2 Steps of merchandise assortments plan

Organise the buying process by categories

Issues such as what merchandise to purchase and in what quantity, are of strategic significance to every retailer,
especially for the multi-store retail chains of today. Therefore, for decisions on these matters, a thorough plan called
a merchandise assortment plan has to be adopted.

Set merchandise financial objectives

In the merchandise assortment plan, the merchandise is split into categories for the purpose of planning. Such
categories are managed by buyers and merchandise planners, as well as vendors. Retailers have many tools that
help them develop a merchandise plan, such as Gross Margin Return on Inventory Investment (GMROI), inventory
turnover and sales forecasting.

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Buying and Merchandising

• GMROI is a tool that helps the retailer to plan and evaluate performance of the merchandise. The GMROI, for a
specific category of merchandise, is calculated on the basis of overall financial objectives of the retailer, which
are further assigned to specific categories.
• The gross margin percentage in combination with the inventory turnover evolves into a useful tool for managing
merchandise. The most significant issue for a retailer is determination of the inventory turnover and development
of the inventory turnover goals. Retailers should avoid the extremes in inventory turnover rates, such as extremely
rapid and extremely slow turnover rates.
• Though rapid inventory turnover is necessary for financial success of a retailer, any attempt of the retailer to
push the level of inventory turnover to the maximum will lead to frequent stock-outs and increased costs.

Assortment plan
While forecasting sales, retailers should identify the stage of the lifecycle of the specific category, and should determine
whether the merchandise category offered is a fad, a fashion, a staple or a seasonal item, so as to plan merchandising
accordingly. While making sales forecasts for a specific merchandise category, retailers take information from various
sources, such as past sales volume, published secondary data and customer surveys. Determining a merchandise
strategy is a crucial issue for a retailer. It involves establishing a trade-off among the variety offered, assortment
provided and the availability of the products.

1.4 Buying System

Buying system involves buying for fashion merchandise and buying for staple merchandise. These products are
allocated to the stores and performance of merchandise are analysed. The figure below represents the buying system
which is a three step process.

Fashion
merchandise Allocate Analyse
buying systems metchandise to merchandise
stores performance
Staple merchandise
buying systems

Fig. 1.3 Buying system

1.4.1 Three Step Process for Buying System

The three steps of buying system are described below.

Step1: Buying systems for fashion merchandise and staple merchandise

In the first step, the retailer needs to decide the budget allocation for each of the first two things. The store will consist
of fashion merchandise and staple merchandise. In a typical apparel store, the fashion merchandise will consist of
“seasonal” products and range offered by a company in its product category. The staple merchandise for apparel
is colours like blue, black and beige and white, which is part of everyone’s basic wardrobe and continuously in

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demand throughout the year. The retailer is limited by the amount of money and space available for merchandise
in a store. He has to decide whether to carry large variety of different types (categories) of clothing, for example,
shirts, trousers, denims and so on. In a food and grocery store, the staple merchandise will be rice, wheat, pulses,
spices that are required in -daily use.

Step 2: Allocate merchandise to stores

In the second step, the retailer needs to allocate merchandise to store, which includes the backup stock. The more
the backup stock, lesser are the chances of running out of stock. In other terms, the more the backup stock, there will
be lesser money for other assortments. Therefore, the retailer needs to do a process of trading off variety, assortment
and backup stock, which is what assortment planning is all about.

Step 3: Analyse merchandise performance

In the third step, the retailer needs to analyse performance of each category and brand and allocate budget based on
the Return on Investment (ROI). All merchandising plans depend on the performance of each category and the money
that needs to be allocated for such category. Therefore, the principles of buying will depend on the performance of
each category of product in a store and the returns, it gives on the investment.

1.4.2 Buying Organisation

All retailers, even with only one buyer, who may be the owner himself, need to organise the buying activity around
categories to maintain an orderly buying process. Each retailer will have its own system of categorising merchandise.
However, the National Retail Federation (NRF) has evolved a standard illustrative chart, which shows the various
categories and the standard designations of people who handle such categories, which gives an indicative picture of
a Buying Organisation Chart that indicates not only the categories but also the persons who head them. The figure
illustrates the buying organisation.

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Buying and Merchandising

Chairman
Chairman
Merchandise-oriented
Merchandise-oriented
partner
partner PLANNING GROUP
MERCHANDISE GROUP

Sr. V.P., Sr. V.P.,

Sr. V.P.,
Sr. V.P.,
Chairman merch. mgr.:
Chairman merch. mgr.:
Chairman Chairman Chairman
merch. mgr.: V.P.
merch. mgr.:
Merchandise- men’s
Merchandise- cosmetics,
Merchandise- Merchandise- Merchandise-
soft home planning
women’s
oriented children’s
oriented shoe’s
oriented oriented oriented
furniture
ready-to-wear
partner intimate
partner jewellery
partner partner partner
kitchen
apparel accessories

DEPARTMENT

Div. merch. Div. merch. Div. merch.

Chairman Div. merch.
Chairman Chairman
Chairman Chairman Div. merch.
Chairman Div. dir.
mgr.: mgr.: mgr.:
Merchandise- mgr.:
Merchandise- Merchandise-
Merchandise- Merchandise- mgr.:
Merchandise- planning
men’s suits, men’s children’s
oriented intimate
oriented oriented
oriented oriented young men’s
oriented
slacks sportswear apparel
partner apparel
partner partner
partner partner boy’s apparel
partner
dress shirts Polo

CLASSIFICATION

Chairman Chairman Chairman Chairman

Chairman
Buyer Chairman
Buyer Buyer Buyer Mgr.
Merchandise- Buyer
Merchandise- Buyer
Merchandise- Merchandise-
Merchandise-
Preteen Merchandise-
Girl’s Girl’s Toddler’s planning
oriented Infants’
oriented Little boys’
oriented oriented
oriented
Accessories oriented
size 7-14 size 4-6 Infants’
partner partner partner partner
partner partner

CATEGORY

Sportswear Dresses Swimwear Outerwear

SKU

Girls’ Levi jeans

size 5
stone-washed
blue, straight leg

Fig. 1.4 The buying organisation

It may be noted that each category indicated above is an example of an apparel store, which contains all the categories
and each category will have a buyer who will be handling several vendors respectively.

1.4.3 Buying Principles

The principles of buying facilitate the sales process of the firm. The buying activity for any category will depend
on the depth of merchandise that the store would like to offer. For example, in exclusive footwear store like Bata,
the customer will find depth in merchandise with large varieties and design options, but the same thing in a multi-
brand footwear store, the depth of merchandise will be limited with more breadth by offering several brands. Also,
a Stock Keeping Unit (SKU), which means the smallest unit available for keeping inventory, which usually means
single size, single colour and single style, will be considered as a single SKU. The major principles of buying are
discussed below.

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• Variety: Variety is the number of different merchandising categories within a store or a department. Stores
with large variety are said to have good breadth of merchandise and the terms variety and breadth are often
used interchangeably. For example, an exclusive Levi’s store may carry a large variety of denims and denim
accessories to meet the target customer’s requirements.
• Assortment: Assortment is the number of SKU’s within a category. Stores with large assortments are said to
have good depth. The terms assortment and depth are used interchangeably. For example, an exclusive Zodiac
store may carry a large assortment of formals, casuals, belts, ties and other accessories for men.
• Determining variety and assortment: To determine the variety and assortment for a particular category, the
buyer needs to consider profitability of the merchandise mix, the corporate philosophy of the organisation
towards assortment, physical characteristics of the store and finally the degree to which categories of merchandise
complement each other.

1.4.4 Factors Affecting Buying Function

The function of merchandise buying in a retail organisation is a function of inter- organisational and intra-
organisational factors.

Inter-organisational Intra-organisational
factors factors

Retailer size Type of merchandising

Retailer type Product positioning
Retailer location Regulatory constraint
Management mentality Type of decision

Business Company’s
climate financial position
Merchandise
requirements

Choice Ideal supplier/ Actual/ supplier/

calculus product choice Product choice

Supplier
selection
Business Market
negotiations disturbance

Competitive Corporate Relative

structure image marketing effort

Fig. 1.5 Theory of merchandise buying behaviour

(Source: Pradhan, S., 2009. Retailing management, 3rd ed., Tata McGraw Hill Education Private Limited)

The choice calculus and supplier accessibility are constructs that capture the retailer’s decision rules. The suppliers
that the retailer would consider in a given buying situation are determined on the basis of combination of the
competitive structure, the corporate image of the supplier and the marketing effort that the supplier is willing to
undertake for a retailer.

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Thereafter, the decision on the supplier eventually selected for a range of products, becomes a function of the
supplier and the product choice available. This construct captures the supplier choice that would be the outcome
of a rational and formal decision-making process, if the information about the merchandise requirements and the
accessible suppliers are available.

The negotiations between the manufacturer and the retailer are important in establishing the terms of trade and
whether there will be any trading. If negotiations break down, the retailer will have to settle for a less than ideal
supplier. Similarly, factors like market disturbance, which includes unexpected events like strikes, disasters, economic
sanctions and so on, will also play a role in the buying decision.

1.4.5 Roles and Responsibilities of Buyer

Buyers play an important role in the retail industry. They select and order merchandise to be sold, which directly
affects the sales volume of their store and its share of the total retail market.

Buyers may be responsible for buying for a department, an entire store and a chain of stores. It is important that
buyers maintain a balanced inventory and a budget agreed upon between themselves and the store manager.

Central buyers work for chain stores and mail order houses. They may be located in divisional headquarters, the
parent store of a chain, or in offices in wholesales market areas. Associate or junior buyers usually buy specific items
for a department or division of a firm, which is too large to be served by one buyer. They assume responsibility for
the specified-item purchases, but coordinates with the head buyer.

Assistant buyers are responsible for routine aspects of the work. They coordinate stores, supervise personnel and
maintain sales and inventory records.

The responsibilities of a buyer include:

• Developing the merchandising strategies for the product line.
• Planning and selecting merchandise assortments: This requires a keen understanding of the current market
trends and economic developments. At the same time, it requires an understanding of the needs and wants of
the target customers and locating a product to suit these needs.
• Vendor selection, development and management: Negotiations with vendors for favourable terms and services
are delicate issues handled by the buyers.
• Pricing the merchandise to achieve the required targets in terms of gross margins.
• Inventory management: Allocation of merchandise to the various retail stores is also an integral part of the
functions of the buyer. Hence, a buyer needs to control inventory, which includes not only procurement, but also
providing the goods as per the needs of the stores, so that under ideal circumstances, there is never a situation
when the product is not available in the retail store.

1.5 Function of Buying for Different Types of Organisation

The function of buying and merchandising varies from organisation to organisation. Hence, the role of buyer and
merchandiser would vary. Similarly, levels within the hierarchy would also vary. The buyer needs to monitor and
maintain gross margin plans by controlling mark-ups, markdowns, shortages, turnover and stock levels.

Larger retailers provide more sophisticated merchandise information systems that allow quick and efficient responses
to the changes in the market. They also established planning processes for seasonal planning, forecasting and
assortment planning.

Buying and merchandising may be centralised or decentralised. Central buying occurs when all buying activities
are performed from the central headquarters. Decentralised buying occurs when individual stores are responsible
for the buying function for their particular store.

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1.5.1 Buying for a Single or Independent Store
In every retail store, the most fundamental activities are buying of merchandise and reselling it to end consumers.
In small independent stores, typically one person is the owner and also the manager. The responsibilities of such
person include business operations of the store along with buying and merchandising duties. This person should
have a thorough understanding of the buying process. As owner has direct access to end consumers, there will be a
better understanding of their needs and the function of the buying would be as per the requirements.

The role of a buyer in an organisation involves:

• Coordinating the purchasing for various products required by the store
• Writing orders
• Handling special orders as and when they arise
• Making decisions regarding merchandise returns
• Re-merchandising the store
• Taking decisions with respect to the pricing of the product
• Planning and coordinating various promotional activities and events, and in-store presentation of the
merchandise
• Customer contact and selling

1.5.2 Buying for a Chain Store or a Chain of Department Store

As the operation of a chain store is larger than that of an independent store, the buyer in such an organisation needs
to be specialist. Merchandising in chain stores is characterised by:
• Central buying plans
• Central merchandising plan

A retail chain operates in more than one region. Therefore, the store has to serve the needs of a diverse consumer
market. The needs and wants may be different. Thus, the buyer needs to be aware of these peculiarities in the market,
before progressing with the buying of the merchandise.

1.5.3 Buying for Non- Store Retailer

The process of buying and merchandising for a non-store retailer will vary from that of a store retailer. The mail order
buyer needs to plan well in advance, as the production of the catalogue takes a long time. In addition, large variety
of merchandise need a fair amount of market work. Buyers for an e-tail venture need to have a clear understanding
of the type of products that consumers would buy on the internet. Thus, the nature of organisation is an important
factor affecting the function of merchandising.

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Buying and Merchandising

Summary
• Merchandising is defined as “a marketing practice in which the brand or image from one product or service is
used to sell another.”
• Merchandise management is the process by which a retailer attempts to offer the right quantity of right merchandise
at the right place, at the right time, and meeting the organisation’s financial objectives at the same time.
• The role of merchandising is to make customers feel that there is always something new and innovative to look
at and shop for every time they come in to make a purchase.
• A merchandising strategy is defined as a company’s position with respect to a given product-mix aimed at ensuring
optimisation of resources, achieving target sales and margins and reducing stock outs and markdowns.
• The areas influenced by the merchandise strategy include the products to be sourced, the terms and conditions
agreed with the vendors and suppliers, the pricing strategy to be adopted and the method of packaging and
presentation to the end consumer.
• Merchandise refers to the complete range of products that the retailer chooses to offer to its customers.
• Merchandise mix covers the breadth and depth of products sold by the retailers.
• The merchandise mix comprises of products, which the retailer terms as staple, classic or basic; combined after
taking into consideration fashion, fads and seasonal preferences.
• Merchandise line comprises of a group of closely related products intended for the same end use, and sold to
the same customer group.
• The basic duties of the merchandiser can be divided into four areas, namely, planning, directing, co-ordinating
and controlling.
• Assortment planning is the process of trading-off variety, assortment and backup stock. An assortment plan is
a list of merchandise that indicates in general terms what the retailer wants to carry in a particular merchandise
category.
• GMROI is a tool that helps the retailer to plan and evaluate the performance of merchandise.
• Buying system involves buying for fashion merchandise and buying for staple merchandise.
• The principles of buying facilitate the sales process of the firm. The major principles of buying include variety,
assortment and determining variety and assortment.
• The function of merchandise buying in a retail organisation is a function of inter- organisational and intra-
organisational factors.
• Buyers play an important role in the retail industry. They select and order merchandise to be sold, which directly
affects the sales volume of heir store and its share of the total retail market.

References
• Berman, 2007. Retail Management: A Strategic Approach, 10/E . Pearson Education India, p. 710.
• Usui, K., 2008. Development of Marketing Management, Ashgate Publishing Group.
• Introduction to Buying and Merchandising [pdf] Available at: <http://www.egyankosh.ac.in/
bitstream/123456789/39079/1/UNIT%201.pdf>. [Accessed 10 October 2011].
• Merchandise Management. [pdf] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/39080/1/
UNIT%202.pdf>. [Accessed 10 October 2011].
• RetailTribe, 2010. Merchandising BP: Back to Basics.wmv [Video Online] Available at: <http://www.youtube.
com/watch?v=bakHMeWOUl4&feature=related>. [Accessed 10 October 2011].
• Mcauliffe, J., 2009. Online Merchandising: The Basics [Video Online] Available at: <http://www.youtube.com/
watch?v=txdBi37HcMw&feature=related>. [Accessed 10 October 2011].

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Recommended Reading
• Varley, R., 2006. Retail Product Management: Buying and Merchandising, 2nd ed., Routledge.
• Berman, 2007. Retail Management: A Strategic Approach,10th ed., Pearson Education India.
• Donnella, J., 2007. Merchandise Buying and Management, 3rd ed., Fairchild Publications.

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Buying and Merchandising

Self Assessment
1. The ___________and supplier accessibility are constructs that capture the retailer’s decision rules.
a. choice calculus
b. trading-off variety
c. merchandising
d. assortment

2. Which of the following statements is false?

a. The process of buying and merchandising for a non-store retailer will vary from that of a store retailer.
b. The function of buying and merchandising varies from organisation to organisation.
c. Large buyers work for chain stores and mail order houses.
d. Buyers play an important role in the retail industry.

3. _________inventory is a process where a business organisation counts its entire inventory physically.
a. Buffer
b. Retail
c. Trade-off
d. Physical

4. Which of the following is a tool that helps the retailer to plan and evaluate the performance of the
merchandise?
a. GMROI
b. VMS
c. ROI
d. SKU

5. Buying system involves buying for fashion merchandise and buying for _____ merchandise.
a. physical
b. trade-off
c. staple
d. retail

6. Which of the following statements is true?

a. Merchandise management is the only approach to inventory assortment offerings, marketing communications
and selling.
b. Local sourcing is suitable for the products such as car boot sales, discount shops, and local outlet stores.
c. Wholesalers are the best option for purchasing low volumes, because they are generally not flexible with
retailers.
d. Liquidation sales are usually small lots of merchandise that are being sold when a retail company goes out
of business.

7. Which of the following allows the products to be sold without having to hold inventory of the merchandise?
a. Drop shipping
b. Local sourcing
c. Merchandising strategy
d. Pricing strategy

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8. Match the following.
1. Stock Keeping A. Tool that helps the retailer to plan and evaluate the performance of the
Unit merchandise.
B. Defined as a company’s position with respect to a given product-mix
2. Merchandising aimed at ensuring optimisation of resources, achieving target sales and
margins and reducing stock outs and markdowns.

C. The smallest unit available for keeping inventory which usually means
3. GMROI single size, single colour and single style, will be considered as a single
unit.

4. Merchandising D. Defined as “a marketing practice in which the brand or image from one
strategy product or service is used to sell another”.
a. 1-C, 2-D, 3-A, 4- B
b. 1-D, 2-C, 3-A, 4- B
c. 1-C, 2-A, 3-D, 4- B
d. 1-D, 2-C, 3-B, 4- A

9. _______ management involves a consistent risk classification and necessary efforts to ensure risk assessment
that eliminates undue third party risk exposure.
a. Buyer
b. Retail
c. Store
d. Vendor

10. ___________ planning can be defined as a systematic approach with the aim of maximising return on the
investment.
a. Pricing
b. Assortment
c. Merchandise
d. Promotional

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Buying and Merchandising

Chapter II
Managing Merchandise and Merchandising Planning Process

Aim
The aim of this chapter is to:

• define merchandise planning

• introduce the process of merchandise planning

• explain the tools used in merchandising planning

Objectives
The objectives of this chapter are to:

• enlist the components of merchandise planning

• elucidate the concept of merchandise mix

• classify the basic formats of merchandise display

Learning outcome
At the end of this chapter, you will be able to:

• comprehend the need for merchandise planning

• understand the management of merchandise cost and quality

• describe the role and importance of warehouse facility

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2.1 Introduction
As a retailer, one of the important assets is space. On the other hand, in numerous situations, the quantity of space
we 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. Retailing has turned out to be a well-liked
method of conducting business because of the merchandise, which is an easier access to a multiplicity of products,
liberty of choice and elevated levels of customer service.

The business processes are organised 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 the retailer, a middleman
who relates the producers and eventually the consumers.

2.1.1 Merchandise Management

Merchandising has stepped 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 an idea to which it will be sold and when. In 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.

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

2.1.2 Merchandise Mix

Planning a merchandise mix is a managerial decision that store management has to take. This is an important decision
which reflects the store’s positioning platform. The concerned areas here are length and breadth of merchandise.
Breadth reflects the product lines, while depth refers to the number of items in each product line. The decision on
merchandise mix is implemented by functionaries called buyers. The buyer’s role is to choose specific products.
Because of this role, the significance of buyer in a retail operation becomes large. They play a key role in vendor
selection and profit generation through negotiation for better deals and allowances.

2.1.3 Managing Merchandise Costs

Competition in the retail industry generates a new dilemma for manufacturers regarding how to concord with the
accumulation of returned merchandise, which is the outcome of a self-motivated liberalisation of arrival policies.
Merchandise cost management is an expensive and time-consuming activity for any retail organisation. Nowadays,
aggressive retail atmosphere requires real-time data communication between stores and the corporate office for
store-level activities, including item look-up, stock counts and transfers. This is done in order to get better eminence
of inventory information, in-store efficiency and sell-through. Managing this mountain of merchandise has turned
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 increasing volume of substance, a significant amount of a manufacturer’s productivity may
depend on its ability to deal with invalidate flow of its goods.

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Buying and Merchandising

Analysis

Price

Savings

Fig. 2.1 Factors affecting manufacture’s productivity

Managing merchandise costs consists of purchase price, processing labour and product longevity. Dealing with
suppliers involves bid specifications. These bid specifications are as follows:
• Description
• Size
• Composition (i.e., nylon or polyester)
• Colour
• Weight
• Construction
• Delivery costs and timetables

In order to obtain the best value for the purchase, the following points should be considered.
• One should ensure competitive bids from several suppliers.
• Bid specs and RFP’s make “Apples vs. Apples” comparison possible, among several bids received.
• The analysis of bids should consider the following concepts:
‚‚ Freight and terms are made part of the price equation
‚‚ Technical and sales support
‚‚ Volume discounts and price guarantees
‚‚ Best price does not necessarily mean best value
‚‚ Reliable supply is as important as price
‚‚ Primary and secondary suppliers

2.1.4 Managing Merchandise Quality

Managing merchandise quality translates into delivering a product that meets or exceeds specifications, auditing
procedures of new products, quality assurance for processed products and product security. Some of the quality
control activities, conducted on receipt of supplies depending upon the type of products, are as follows:
• Physically counting the total or a specified percentage of received product or weighing bales
• Visually inspecting product for defects
• Isolating test pieces to measure shrinkage, durability, pilling, colour loss and so on
• Individual operator audits
• 2% + random sample

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• Generate a quality rating for each operator
• Shipped product audits
• Audit entire containers to develop a plant quality score
• Service department questionnaires
• Auditing product at customer locations
• Physical inventories
• Comparing actual usage to intended usage

2.1.5 Merchandise Display and Store Capacity

Merchandise displays are special presentations of a store’s products or services to the consumers to buy. The nature
of these displays may range from industry to industry to some extent, but all merchandise displays are predicated
on basic principles designed to increase product purchases. Merchandise displays are an integral element of the
overall merchandising concept, which seeks to promote product sales by coordinating marketing, advertising and
sales strategies.

Basic formats of merchandise display

Merchandise displays generally take one of several basic forms as given below:
• 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.
• Showcase displays: These typically feature items that are:
‚‚ deemed to be too valuable for display in storefront set-ups
‚‚ niche items of high interest to the business’s primary clientele
These display centres are usually located in high traffic areas and typically feature multiple tiers for product
display and a sliding door on the clerk’s side for access.
• “Found-space” displays: This term refers to product presentations that utilise 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 the popular tools for publicising and selling
sale items.

Keys to successful merchandise display

There are certain key components of successful merchandise display that are particularly relevant for small business
owners. The ideal displays should be:
• Economical: utilising only space, materials and products that are already available.
• Versatile: able to fit almost anywhere, exhibit almost any merchandise, and convey almost any message.
• Effective: readily visible to any passer-by and also arranged so that there is no time or space lag between the
situations when a potential buyer sees the design and when they 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.

Important tips on merchandise display

The effectiveness of merchandising display strategy can be increased by few important tips given below:
• Space allocation for merchandise display and expenditures should be done according to customer demographics.
For instance, if most of the business’ customers are males between the ages of 20 and 40, the bulk of the displays
should probably be shaped to catch their interest.
• Care should be taken with the merchandise display designs where the focus should be the effectiveness rather
than the originality.
• The cleanliness and neatness of the display should be maintained.

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Buying and Merchandising

• Display should not be overcrowded. 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.
• 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 manner so that would-be customers can get a good look at them without
having to solicit the help of a member of the staff.
• Attention should be paid while constructing and arranging the display backgrounds.
• Merchandise displays can also be used to educate customers. Well- managed merchandise conceive display
can , 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.
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 accessorised. The display may also supply important information such as, the price, and other
special features.

All of the above points need to be weighed while putting together a merchandise display. But ultimately, the final
barometer of a display’s worthiness is its ability to sell products.

2.2 Supply Chain

Supply chain products helps in dealing with business complication and optimise the supply chain. With real-time
group efforts decisions are made more speedily and disruptions are minimised.

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”.

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

2.2.1 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

The supply chain management necessitates proper understanding of supply and demand considerations. In order to
understand the product demand or requirement, the following points should be considered:
• Demand of product from customers
• Plant turnaround time of product
• Quantities of products already shipped to depots
• Extra inventory for new accounts
• Percentage of products to be upgraded
• Reports and trend analysis

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In order to understand supply realities, the following points should be considered:
• 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, the four types of documents are reviewed:
• Purchase orders from buyer
• Shippers’ challans/documents
• Goods received note of the ware-house
• Supplier’s invoices

The three ways matching process is explained in the figure given below:

Approved Shippers’
challans

Fig. 2.2 Matching process

These solutions offer a combined 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 supply chain condition and provide immediate feedback and
exception notices.

Supply chain solutions offer the following benefits:

• Delivering benefits in certain areas
‚‚ Enhanced efficiency
‚‚ Superior inventory management
‚‚ More capacity utilisation 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

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Buying and Merchandising

2.2.2 Warehousing Facility

Warehousing facility should be appropriate to use in terms of right size, structurally sound, well maintained and
clean. Warehousing has certain advantages and disadvantages, which are illustrated in the figure given below.

• frees up space at individual plants

• central inventory is less than the sum of
several decentralised warehouses
Advantages • better purchasing leverage
• faster turnaround on large orders
• more efficient use of labour

• loss of “hands on” control at plant level

• requirement for mutually agreed upon grading
standards
Disadvantages • taping procedures
• hanging/folding standard
• reduced local flexibility

Fig. 2.3 Advantages and disadvantages of warehousing

2.3 Merchandise Planning

Merchandise planning is defined as “the planning and control of the merchandise inventory of the retail firm, in a
manner, which balances the expectations of the target customers and the strategy of the firm.”

2.3.1 Concept of Merchandise Planning

Merchandise planning is beneficial to both customer and the retailer. The retailer gets benefited as it enhances the
possibility of the right assortment of goods, with the adequate amount of depth, to be available at the stores where it
is needed. Merchandising planning further enhances the possibility of increased stock turns. This releases important
working capital. From customer’s viewpoint, it is beneficial as it increases the choice available and reduces the
possibility of facing a situation when the store is out of stock of the merchandise needed.

As indicated in the following figure, the business strategy dictates the merchandise strategy, which in turn influences
the planning of merchandise in terms of the type of product, the price, the range and then the assortment. Planning
for the number of retails stores and the space available for the merchandise display are also taken into account for
the purpose of allocating the merchandise to the stores. The next stage in the planning process keeps a view at the
sourcing of merchandising and then, its actual allocation to the retail stores. The final stage is the monitoring of
merchandise and vendor evaluation.

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 Store (Formal) strategy

Merchandise Sourcing
Planning Make or buy
• Product • Vendor Allocation of Performance
Business Merchandise • Price identification
strategy merchandise to monitoring &
strategy • Range • Negotiations stores evaluation
• Assortment • Placing the
• Space order

Store Operations Planning

Fig. 2.4 The process of merchandise management

(Source: Pradhan,S., 2009. Retailing Management, 3rd ed., Tata McGraw Hill Education Private Limited.)

2.3.2 Implications of Merchandise Planning

The main objective of merchandise planning is profit improvement. As the buyer plans the buying for each department,
a better overview of the profitability that retail organisation will be able to achieve is available. As the function of
merchandising deals with the actual procurement of products for the retailer, it has implications on other business
areas.

Finance
Payments to suppliers
Profitability measurements
Developing sales promotions
Developing advertisements
New product introductions
Warehouse and Logistics
Details of Purchase order
Details of allocations

Marketing

Merchandising
planning

Store operations
Space planning
Communication about new
products & their features

Fig. 2.5 The implications of merchandise planning

(Source: Pradhan,S., 2009. Retailing Management, 3rd ed., Tata McGraw Hill Education Private Limited)

The entire process of merchandise planning helps the buyer arrive at the quantities of the products that need to be
bought. Therefore, it has the implications on other departments, which are discussed below.

Finance
At the end of the merchandise planning process, when the Purchase Order (PO) is raised on a particular supplier,
the finance department needs to be informed about it. The reason behind this is that they are finally the ones, who
will be making the payments. Finance will also look into the evaluation of the profitability of the merchandise
purchased by the buyer.

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Buying and Merchandising

Marketing
The marketing department needs to be aware of the products that are being purchased, as they are required to create
campaigns for advertising the products or for sales promotions.

Warehousing and logistics

In many retail organisations, these functions may be handled by one department. When orders are placed for new
merchandise, this department needs to know as it is the one that will actually receive the products and do the physical
verification of the same. The quantities mentioned in the “Purchase Order” need to be tallied with the quantities
actually received. Any discrepancies have to be informed to the accounts department and to the merchandiser who
has placed the order. This department also needs to know the dispatch details of various products that are received
i.e., the quantities, sizes, colours, and so on, of products to be sent to various stores.

Stores operations
The information on the merchandise purchased needs to be communicated to the retail stores. If it is a new product,
the features also need to be communicated. Information on merchandise to be received in the stores also helps in
space planning in the retail store. In case the store has the authority to make purchases at a local level, it would help
by ensuring that duplication of products does not happen. The person undertaking the buying decisions for a retail
organisation must be aware of the consumer needs and wants.

An understanding of the consumer buying process is necessary. Apart from this, a clear understanding of what
products are actually selling and where, is also necessary. Such information can be obtained from sales records.
An interaction with the sales staff is also needed, as they can offer valuable insights into why a particular product
is selling or not selling. External sources of information like surveys conducted, magazine anti trade publications
and trade associations are other sources of information. Thus, the information gathered needs to be analysed. This
analysis forms the basis of the sales forecast, which is the first stage in merchandise planning.

2.3.3 Need for Merchandise Planning

Merchandise planning is very important role in creating and maintaining profitability. No other area within a retail
business has such a direct impact on bottom line profit (or loss). The merchandise plan is a financial plan allocating
a specific amount of money to each department or division for the purchase of an appropriate assortment of fashion
merchandise, which meets consumer demand and sales goals.

It is crucial that merchandisers have a broad understanding of the best practice approaches that have evolved, in
order that they are able to optimise the financial return on the investment that is under their control. Most of the
retailers’ primary goal is to sell merchandise.

2.3.4 Merchandise Planning Components

The merchandise planning requires planners to develop detailed plans to achieve the company goals. Usually, the
merchandise plan is developed once or twice a year by the merchants in an organisation. Prior to the beginning
of the planning season, the planner starts the process by seeding Last Year (LY) actual results and This Year (TY)
forecast information into the planning layouts which is used as a reference and guide during the planning process.
The merchant uses the last year and forecast information to plan an extended set of key performance indicators
(KPI’s) and time horizon to meet the company goals. The system displays these KPI’s in a progression format (set
of steps) to guide the planner through the process.

Once the merchant is satisfied with the plans and submits them to the manager, he or she approves the plans so that they
can be incorporated into the reconciliation process. The following are the merchandise planning components:
• Receipt plans: Cost of goods that needs to be received to sell in the store
• Sales plan: Contains the objectives of the sales process
• Mark up plan: Adding on to prices to cover costs
• Mark down plan: Reducing price to move goods

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• Stock planning: Planning for the material to be stored
• Gross profit margin: A financial metric is used to assess a firm’s financial health by revealing the proportion
of money left over from revenues after accounting for the cost of goods sold. It is also known as “gross
margin”.

2.4 Process of Merchandise Planning

Planning can be multi-dimensional.
• Time hierarchy: The first dimension to be considered is the time span or the time hierarchy. This can be put
to a start with the forecast for the year and then go down to the season, quarter, month, and week and at times,
even a transactional level.
• Location level: The second level of planning would be at the location level, where the plan would first be created
for all existing and new stores, then perhaps at the regional level, and then, it would move towards clustering
of similar stores. This would be followed by planning for individual stores.
• Merchandise hierarchy level: Similarly, the third dimension of planning would be at the merchandise hierarchy
level, starting with the overall department level and then finally, and coming down to the Stock Keeping Unit
(SKU) level. The process of merchandise planning begins with the first step, developing a sales forecast.

Stage I: Developing the sales forecast

Forecasting involves the prediction of what the consumer may do under a given set of conditions. A sales forecast
may be made by the merchandiser based on the targets given by the top management or may be handed down by the
top management itself, depending on the retail organisation. The first step in determining the inventory needs of the
product or category is sales forecast. The forecasts developed should be able to answer the following questions:
• How much of each product will need to be purchased?
• Should new products be added to the merchandise assortment?
• What price should be charged for the product?

A sales forecast is made for a specific period of time (weeks, a season or a year). A forecast may be for a short term (a
year) or for a long term (more than a year). The person making the forecast for the product group or category needs
to be aware of the changes in tastes and attitudes of the consumers, the size of the target market and the changes in
their spending patterns. The process of developing sales forecasts involves the following steps:

Step I: Reviewing past sales

A review of the past sales records is essential to establish if there is any pattern or trend in the sales figures. An
overview at the sales figures of the past year for the same period would give an indication of the sales in the current
year, for constant conditions.

Step II: Analysing the changes in the economic conditions

It is essential that the changes happening at the economic front as this has a direct link to the consumer spending
patterns are considered. For example, economic slowdowns, increase in unemployment levels, and so on, affects
the business.

Step III: Analysing the changes in the sales potential

Now, it is necessary to relate the demographic changes in the market to that of the store and the products to be
sold.

Step IV: Analysing the changes in marketing strategies of the retail organisation and the competition
While creating the sales forecast, the marketing strategy introduced should be considered and a new store to be
opened or an existing store should be remodelled. All these factors needed, are to be taken into consideration.

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Step V: Creating the sales forecast

Finally, an estimate of the project increase in sales is considered. This is then applied to the various products and
categories to arrive at the projected sales figure.

Stage II: Determining the merchandise requirements

Planning is essential to provide direction and serve as a basis of control for any merchandise department. One needs
to plan a course of action in order to be able to provide the right goods to the consumer at the right place and time.
Planning in merchandising happens at two levels:
• The creation of the merchandise budget
• The assortment plan

There are two methods of developing a merchandise plan. They are:

• Top down planning: In top down planning, the top management works on sales plan, which is passed down
to the merchandising team.
• Bottom up planning: In bottom top planning, individual department managers work on estimated sales
projections.

These are then added up to arrive at the total sales figures. After the sales forecasting is complete, inventory levels
need to be planned. The merchandise budget (a financial plan) is the first stage in the planning of merchandise. It
gives an indication of how much to invest in product inventories, stated in monetary terms.

The merchandise budget comprises of five parts:

• Sales plan: how much of each product needs to be sold; this may be department wise, division wise or store
wise.
• Stock support plan: tells us how much inventory or stock is needed to achieve those sales.
• Planned reductions: may need to be made in case the product, does not sell.
• The planned purchase levels: the quantity of each product that needs to be procured from the market.
• Gross margins: the difference between sales and cost of goods sold that the department, division or store
contributes to the overall profitability of the company.

On the other hand, the assortment plan details the merchandise sold in each product category, i.e., the complete mix
of products made available to the consumer. This is the next stage after having determined the money available for
the inventory.

Stage III: Merchandise control – the open-to-buy

The purpose of the concept of open-to-buy is twofold. Firstly, depending on the sales for the month and the
reductions, the merchandise buying can be adjusted. Secondly, the planned relation between the stock and sales can
be maintained. When used effectively, open-to-buy ensures that the buyer:
• Limits overbuying and under buying
• Prevents loss of sales due to unavailability of the required stock
• Maintains purchases within the budgeted limits
• Reduces markdowns which may arise due to excess buying

While planning for any given month, the buyer will not be able to purchase the amount equal to the planned stocks
for that month. This is because there may be some inventory already on hand or on order but not yet delivered.

Calculating the open-to-buy

The open-to-buy amount available to a buyer is calculated using the simple formula stated below:
Open-to-Buy = Planned EOM Stock - Projected EOM Stock

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Open-to-buy is always calculated for current and future periods. This helps the merchandiser to get an idea about
the amount available to make purchases, and the products required to be bought.

Stage IV: Assortment planning

Assortment planning is both extremely important and challenging for retailers. Assortment can be defined as the
combination of all products made available in a store and a set of products offered within a product category. These
products form a set because they share similar physical characteristics.
• Assortment planning involves determining the quantities of each product that will be purchased to fit into the
overall merchandise plan. Details of colour, size, brand, materials etc., have to be specified. The main purpose
of creating an assortment plan is to create a balanced assortment of merchandise for the customer.
• Various factors affect the assortment planning process. The first among these factors is the type of merchandise, to
be stocked in the retail store. Merchandise may be classified as basic or staple merchandise, fashion, convenience
or specialty goods.
• Buying staple merchandise is comparatively easier as it can be done by analysing past sales records. Seasonal
staples are those products, which are in demand only at a particular time of the year, every year. For example,
decorative divas sold during the Diwali season in India or decorative ornaments of the Christmas tree before
Christmas or umbrellas and raincoats or rainy shoes in the rainy season.
• The retailer’s policies with respect to the type of brands stocked and the level of exclusivity to be maintained
in the store also affect the merchandise buying decisions. Thus, after arriving at the amount of money available
to invest in inventory, a merchandiser would have to determine the variety of merchandise.

2.5 Technology Tools that Aid Merchandise Planning

Every merchandiser knows about the complexity of the merchandising process. Assortment plans must relate directly
to financial plans, space plans, brand strategies etc. Also the merchandise plans must be accurate down to the local
market and store levels. But, several factors make comprehensive planning difficult for retailers.

Relevant data is difficult to access quickly, and it is often located on multiple systems throughout an organisation.
Also, many retailers struggle to incorporate projected demand into planning efforts. When different planners use
their own planning tools and each department their own processes, consistency will remain elusive and assortments
will not be profitable. With rapid computerisation, many retailers use different types of softwares for the purpose
of merchandise planning.

2.6 Merchandise Planning in a Montgomery Ward

The planning stages for introducing a new product in Montgomery ward (private) are:
Label product
Before Montgomery ward introduces a new product, substantial expenditures of time and money are spent to assure
a trouble-free product. These steps include testing of products in laboratories and under real life conditions.
• Developing clear and easy-to-understand owners' guides are essential to full consumer satisfaction.
• An important element of the necessary research provides for comparison of similar products offered in the same
price range by competitors and reports of these studies are made available to the buyer. This will identify both
the better and poorer features of the proposed design. It is the buyer’s responsibility to know much about the
product, and it depends on the expert technical advice provided by the laboratory and design departments.
• There are 28 steps in development of a new private label product. The time sequence under normal circumstances
to complete this cycle is approximately eighteen months.

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This analysis includes a survey of competition, review of field

requirements and current sales trends. Upon completion of analysis
the merchandising theme for the line should be established,
1. Market analysis of product
objectives determined for long-range design planning and general
discussion of promotional plans reflecting the merchandising
theme.

2. Line specification and initial Establish good, better, best strategy target prices-outline of features
cost: by model.

This meeting with the department responsible for basic styling

3. Preliminary design meeting and unit design for the purpose of outlining the details of the
with source line specifications in order that initial design approaches can be
prepared.

This meeting with the design department is to review the initial

design approaches and to resolve with the designers the best
4. First design rendering solution in terms of the merchandising approach, line specifications,
meeting features and styling. From this information the source will begin
the coordinated study of cost estimates and tooling estimates to be
presented at the next design meeting.

The design sketches or paper mock-ups and preliminary cost

estimates will be presented in order to establish more definite
specifications for the first mock-up model and refined cost estimates.
5. Second design rendering In addition, sketches or comprehensive of any graphic material
meeting packaging, labelling, feature tags, informative literature, and so
on, will reflect the merchandising theme, adding sales impact, and
aiding self-selection will be presented for costing in order that costs
can be evaluated.

The first hand built mock-up product model and related graphic
material with general cost estimates will be presented for appearance
6. First mock-up with cost and merchandise features. At this point sufficient information should
be available to the buyer to determine the feasibility of continuing
with the program or resolving necessary adjustments.

Review agreement with source on general tooling of product and

7. Tooling agreement
our own special tooling needed for product.

At the point in the program where definite merchandising and design

features have been tentatively agreed upon, it is then necessary to
8. Prototype testing build models of these to insure their function. The extent of this
testing program is directly related to the unknown elements of the
new design.

After sufficient testing to insure the practicability of design, the

final model would be constructed by the source and more accurate
9. Finished mock-ups and cost
cost estimates of the piece price and tooling be submitted to the
merchandise department.

Management review and approval should be received on the final

mock-up models and product costs. This is necessary at this point
10. Review with management
in the program to eliminate major revisions at a later date when the
cost and production schedule would be materially affected.

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 This release of preliminary drawings will enable the source to
obtain an overall accurate tool cost and piece price estimate. The
11. Preliminary drawing release
detailed revisions will be made at a later date. This information is
necessary to obtain final estimates of tooling.

This represents the date that all final designs will be released from
12. Final design release
the product design department to the source or vendor.

Sufficient information should be available on the product design

based on preliminary drawings and basic cost estimates that a final
13. Final tooling and costs
submission can be made to ward in order to receive authority on
the program.

Internal operation to provide source with special tooling

14. Initial tooling authority
godhead.

This element should represent the amount of time required after

15. Tooling manufacture ward’s release to begin tooling to the completion of all tools
necessary to produce the unit.

This time element should include sufficient time to try out the tools,
16. Pre-production models obtain a limited production from the tooling and build a number
of models for testing.

This element should allow sufficient time to place on test the

preproduction units for final performance approval prior to
17. Pre-production testing production release. The length of time for this testing program
will depend on the number and complexity of design changes from
previous models.

The beginning production date should allow sufficient time to work

18. Planned production
out early production problems.

The initial order should be placed early enough to allow the agreed
19. Ordering upon lead time plus an allowance for possible initial production
delays.

The initial contact with the design department will give a general
outline of the problem considering both display packaging and
shipping carton. This should include functional and display
possibilities as well as a definition of the merchandising theme so
20. Packaging design
that the packaging can be developed as a sales aid. A subsequent
meeting or meetings will serve to review the initial design
approaches together with estimated costs so the complete product
can be evaluated.

If the problem of an individual shipping container is involved, a

request for engineering service should be made with provision,
where needed, for safe transit tests to be run. In addition, the
21. Packaging engineering packaging engineers will develop with the package designer’s forms
and specifications for display packaging, considering both retail
and catalogue problems to develop common packaging whenever
possible.

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The production timetable for the catalogue involved must be checked

to determine when photographs must be taken, and provision then
made for a sample to be available. If changes in outward appearance
22. Catalogue photography
have been made during the product development, provide a
“final” sample if at all possible so that retouching costs will not
be incurred.

Advance notification must be given to the General Service

Department so that:
They may give suggestions relative to product design at the end
23. Service information that installation and service may be as simple as possible.
They have time to study the finished product, to visit the factory,
if necessary, to provide for repair parts, and to issue instructions
to the field staff.

Owner’s Guides should be provided for those items whose details of

correct operation are not readily apparent to the average customer,
24. Owner’s guides-repair lists
and where specific treatment or care should be accorded by the
owner, and where repair service will be ultimately needed.

Determine the need for display or other sales aids to introduce the
new product. The initial meeting with the display department should
25. Store displays - sales aid
arrive at tentative design and cost. After the sample display is ready
properties
and costs known, a second meeting should produce a profitable plan
to present for approval.

A new item of importance requires introductory advertising to be

planned well in advance. A series of follow-up promotional efforts
26. Advertising plans should be planned at the same time. Meetings with the retail sales
promotional group will be held to arrive at approved plans at a cost
in line with expected sales.

Decide whether the new item is different enough and important

enough to justify special sales training aids. If so, a meeting with
27. Sales training aids
the training group will form a basis for deciding the best type of
training aid to use, cost considered.

Our internal operation advising the store replenishment units of

28. Basic list
what, when and how to order the merchandise.

Table 2.1 List of 28 stages in introduction of new Montgomery ward private label product requiring
tooling expenditures

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Summary
• Merchandise management is defined as managing the various elements of merchandise, such as supply chain,
cost management, quality management and shipping procedures.
• While handling merchandise display and storage, a problem which needs constant monitoring is that of shrinkage
and loss prevention.
• Planning a merchandise mix is a managerial decision that store management has to take.
• Merchandise displays are special presentations of a store’s products or services for the buying public.
• Storefront window displays and 'found space' displays are popular tools for publicising and selling sale items.
• 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.
• Warehousing facility should be appropriate to use in terms of right size, structurally sound, well maintained
and clean.
• Merchandise planning is defined as “the planning and control of the merchandise inventory of the retail firm,
in a manner, which balances the expectations of the target customers and the strategy of the firm”.
• The primary objective of merchandise planning is profit improvement.
• The entire process of merchandise planning helps the buyer arrive at the quantities of the products that need
to be bought.
• Merchandise planning plays a pivotal role in creating and maintaining profitability.
• The merchant uses the last year and forecast information to plan an extended set of key performance indicators
(KPI’s) and time horizon to match the company goals.
• There are two methods of developing a merchandise plan, namely, top down planning and bottom up
planning.
• Assortment planning involves determining the quantities of each product that will be purchased to fit into the
overall merchandise plan.

References
• Berman, 2007. Retail Management: A Strategic Approach, 10/E, Tata McGraw-Hill Education.
• Rudrabasavaraj, M.N., 2010. Dynamic Global Retailing Management. Global media.
• Introduction to Buying And Merchandising [pdf] Available at: http://www.egyankosh.ac.in/bitstream/
123456789/39079/1/UNIT%201.pdf [Accessed 10 October 2011].
• 2009. Merchandise Planner [Video Online] Available at: <http://www.youtube.com/watch?v=Qvh-CDdB2bM>
[Accessed 10 October 2011].
• MuseumStoreAssoc, 2010. Merchandise Planning & Open-to-Buy [Video Online] Available at: <http://www.
youtube.com/watch?v=CZJFB8Ac2Gs> [Accessed 10 October 2011].
• Managing Merchandise [pdf] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/39075/1/Unit-4.
pdf> [Accessed 10 October 2011].
• Merchandise Objectives [pdf] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/39084/1/
UNIT%205.pdf> [Accessed 10 October 2011].

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Buying and Merchandising

Recommended Reading
• Donnellan, J., 2007. Merchandise Buying and Management, 3rd ed., Fairchild Publications.
• Chiplunkar, Product Category Management, Tata McGraw-Hill Education.
• Lamba, 2002. The Art Of Retailing (Book Only), Tata McGraw-Hill Education.
• Dunne, M. P., Lusch, R. F & Carver, J. R., 2010. Retailing, 7th ed., Cengage Learning.

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Self Assessment
1. While handling merchandise display and storage, a problem which needs constant monitoring is that of
__________and loss prevention.
a. constant planning
b. shrinkage
c. cost management
d. shipping procedures

2. Which of the following is an important decision that reflects the store’s positioning platform?
a. Assortment planning
b. Warehouse facility
c. Merchandise mix planning
d. Supply chain

3. The decision on merchandise mix is implemented by functionaries called __________.

a. retailers
b. planners
c. buyers
d. managers

4. Which of the following statements is false?

a. Merchandise cost management is an inexpensive and time-consuming activity for any retail organisation.
b. Supply chain products successfully lend a hand to deal with business complication and optimise the supply
chain.
c. An integrated framework supports various modules and state-of-the art tools for a broad range of business
decisions.
d. Merchandise planning is beneficial to both customer and the retailer.

5. Which of the following is a primary objective of merchandise planning?

a. Profit improvement
b. Cost management
c. Product distribution
d. Merchandise management

6. The main purpose of creating an assortment plan is to create balanced __________of merchandise for the
customer.
a. deal
b. distribution
c. management
d. assortment

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Buying and Merchandising

7. Which of the following statements is true?

a. Buying staple merchandise is relatively difficult than other forms as it can be easily done by analysing past
sales records.
b. Assortment planning involves determining the quantities of each product that will be purchased to fit into
the overall merchandise plan.
c. Assortment planning is both complex and challenging for retailers.
d. Distribution is essential to provide direction and serve as a basis of control for any merchandise
department.

8. Which of the following displays is referred to as product presentations that utilise small but nonetheless usable
areas of store, such as the tops of product carousels?
a. Showcase displays
b. Found-space displays
c. Storefront window displays
d. Primary displays

9. The breadth in _________reflects the product lines, while depth refers to the number of items in each product
line.
a. merchandise mix
b. assortment planning
c. product display
d. supply chain

10. Which of the following play a key role in vendor selection and profit generation through negotiation for better
deals and allowances?
a. retailers
b. managers
c. buyers
d. manufacturer

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Chapter III
Methods of Merchandise Procurement

Aim
The aim of this chapter is to:

• introduce the concept of merchandise procurement

• discuss the process of merchandise buying

• describe global sourcing

Objectives
The objectives of this chapter are to:

• discuss the advantages of e-procurement services

• identify the e-procurement trends in global markets

• explain merchandise sourcing

Learning outcome
At the end of this chapter, you will be able to:

• explain purchasing and procurement

• enlist the challenges and opportunities of e-procurement

• comprehend sourcing e-procurement services

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Buying and Merchandising

3.1 Introduction
Conventionally, merchandising retailing is a trading activity. Purchasing and selling merchandise is the most visible
aspect of retail business. Retailer as a buying organisation carries out the task of procuring merchandise from the
supply base through centralised plan and operations with a team of dedicated personnel in order to meet the needs of
customers. It intends to buy quality products at a reasonable price. This is necessary to ensure the product availability
when required by the customers through logistic operations.

For the success of the retail business, a strong supply chain is essential. The term ‘vendor’ is often used. It represents
the short term relationship which is driven by price. The term ‘supplier’ is also a vendor but in that case the relationship
between the parties is collaborative. Though retailing is primarily a trading activity, there are certain retailers having
almost complete control over the value chain.

3.1.1 Meaning of Procurement

Procurement refers to the sourcing and purchasing of goods and services for business use. Individual businesses
set procurement policies. Such policies govern the choice of suppliers, products, and the methods and procedures,
which are used to communicate with suppliers. For example, businesses often have set procedures for calling and
evaluating proposals. Certain issues in procurement include:
• Identifying the needs of customers and suppliers
• Choosing and preparing tools and processes to communicate with suppliers
• Preparing requests for proposals and requests for quotations
• Setting policies for evaluating proposals, quotes and suppliers

Also, there are general trends in procurement. Green procurement is one of the most recent of these, with an increasing
number of businesses creating procurement policies that emphasise sourcing and purchasing goods and services,
which are less environmentally damaging than comparable alternatives.

3.1.2 Merchandise Procurement

Merchandise procurement tool makes it easy for companies to customise the products, which are available to the
distributed market, including wholesalers. For example, a sportswear manufacturer may sell its trainers to many
different retailers. However, the manufacturer can implement a system, whereby, each individual retailer can simply
log in. Also according to certain pre-set rules, it can buy various items direct from the manufacturer, qualify for
multi-buys, bulk discounts, special offers and more.

3.1.3 Definition of Sourcing

Sourcing is defined on two levels:
• Strategic sourcing
• Global sourcing

Strategic sourcing is a concept popularised by major consultancy companies in the late 1980’s 1990’s. It is now
considered as a standard purchasing strategy used by many blue chip companies. It is the process of taking advantage
of purchasing opportunities by continually reviewing current needs against purchasing opportunities. Strategic
sourcing was first established by General Motors in the 1980’s. Now, it is a common business purchasing tool. The
rise of China and its manufacturing capabilities has opened up various strategic purchasing opportunities.

Often, strategic sourcing is used for high valued services, ad hoc purchases and core large values purchases. There
are several processes within the strategic sourcing process, which are mentioned below:
• Evaluation of the company’s current purchasing cycles
• Evaluation of what is currently available in the supply market
• A review of the cost benefit analysis of using other suppliers.

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• A review of potential vendors.
• An update of the current procurement strategy.
• Negotiations with potential vendors to ensure that they meet the new procurement strategy and cost benefit
analysis.
• Implementation of the new vendor relationship
• On a continuous process, review and update the strategic sourcing.

3.1.4 Global Sourcing

Global sourcing refers to the sourcing products and services irrespective of national boundaries. It is popular within
the EEC countries in Europe and Asia, which are less concerned with geographic boundaries. With the rise of Chinese
and Indian manufacturing capabilities, sourcing from these countries has greatly increased in the past few years.
Purchasing companies seek low labour and production costs, which are not countered by high delivery costs. Many
developing countries also offer attractive tax and tariffs to encourage purchasing from them.

Sourcing personnel is another definition of sourcing, which is the use of proactive searching for potentially highly
skilled members of staff that may provide the company with a competitive advantage. Sourcing of staff is also a
complex procedure, which is used when numerous part time or short term staff is required. Thus, sourcing is defined
as “the process of identifying potential vendors, conducting negotiations with them, and then agreeing supply
contracts with these vendors.”

3.2 Merchandise Sourcing

Sourcing refers to finding out products from different places, manufactures and suppliers. The importance of sourcing
in a retail environment is essential because of the fact that sourcing of merchandise is a key element of cost.

Sourcing is not without its risks, but at the same time, it holds the key to improve service, product offer and overall
profitability. It enables the retailer to have winning products. Therefore, negotiations and cost management play a
key role. It becomes necessary to ensure that sourcing is well and truly integrated with the retailer’s overall business
strategy, and that sourcing activities closely follow the direction set by the overall business strategy.

3.2.1 Process of Merchandise Buying

The process of merchandise buying consists of five steps given as under:
• Identifying the source of supply
• Contacting and evaluating the source of supply
• Negotiating with vendors
• Establishing vendor relations
• Analysing vendor performance

Step I: Identifying the source of supply

Identifying the sources of supply needs to be decided, while considering that whether the product will be sourced
from the domestic market or from the international market. Domestic sources of supply may be located by visiting
central markets, trade shows or expositions. Usually, each city has its own central market where various key suppliers
are located.

A visit to such a location enables the buyer to understand the market trends and to evaluate the new resources and
merchandise offerings. Trade shows and expositions are also a good ground for finding new supply sources. The
growth of the retail trade in India and the need among the Indian retailers to source products effectively for their stores,
have led to many retail chains reaching out to farmers and even investing in concepts like contract framing .

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In addition to buying from the domestic market, an organisation may seek out foreign sources from where merchandise
can be purchased or made. This is a common trend in the West where trade barriers are considerably lower. As retailers
operate in a global marketplace today, the sourcing of products internationally is a reality. The fundamental reasons
behind international sourcing could be the uniqueness of the merchandise, or the unavailability of the merchandise
in the domestic market.

In such case, a retailer may also source from a foreign market simply because the merchandise is unique and the
fact customers are always looking for a unique product. Also, low cost and good quality are also factors, which
could affect this decision. A decision which is closely associated with branding decisions is to determine where
the merchandise would be made. Although retailers buying manufacturer’s brands usually are not responsible for
determining where the merchandise is made, an origin (country) of product is often used as a signal of quality.

The cost associated with global include:

• Country of origin effects: Many a times, where the merchandise has been manufactured makes a difference
in the final sale of the product.
• Foreign currency fluctuations: Fluctuations in the international currency rates affect the buying price of the
products. At times, due to violent fluctuations in the price, sourcing products internationally may suddenly
become viable or unviable.
• Tariffs: Tariffs or duties refer to a list of taxes placed by a government on imports. Import tariffs shield domestic
manufacturers from foreign competition and raise money for the government.
• Foreign trade zones: These are special areas within a country that can be used for warehousing, packaging,
inspection, labelling, exhibition assembly, fabrication or trans-shipment of imports without being subject to
that country’s tariffs.
• Cost of carrying inventory: Purchase of goods is always at a price. Depending on the time when this merchandise
is finally sold, makes a very big difference on the varying costs.
• Transportation costs: While sourcing products internationally, it is essential to keep in mind the cost that will
be involved in transporting the goods to the various markets that the retailer operates in. This is a cost that has
to be added to the cost of goods and eventually, affects the margins that can be earned.

As a retailer, the sourcing process needs to focus on the consumer, who has certain expectations related to a product, a
particular price, a time limit and a certain quality. The push system of supply is outdated; customers have easier access
to a much wider choice of goods and services, and expect even greater standards of quality and customisation.

The sourcing decisions are often made as a reaction to the immediate present and the recent past. Certain factors such
as past relationships, past experience of individual buyers, gut feel and immediate price comparisons are common
driving forces. These are all internally focused; the decisions are based on what is available within the business
rather than what the consumer wants.

Common methods of gathering information about new suppliers would include talking to salesperson, going through
trade magazines and yellow pages, and visiting trade exhibitions. The sourcing method would vary for different
kind of products. Most products may require buyers to contact manufacturers or suppliers. However, products such
as books may require the buyer to coordinate with publishing houses or their agents.

Step II: Contacting and evaluating the source of supply

One of the methods of contracting sources of supply is termed as vendor initiated contact. This may be as simple
as having a representative visit to the office and meeting with the buyer and also having a showcase of a collection
of the merchandise. The other method of contacting sources of supply is termed as retailer initiated contacts. This
may be as simple as the buyer visiting the central market place.

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Central market places may be different for different products and would vary from city to city. They typically are
characterised by a collection of a large number of suppliers selling similar or the same product. Thus, the competitive
prices are a critical part of this market. A decision now needs to be taken on the potential vendors. The following
criteria should be considered:
• The target market for whom the merchandise is being purchased.
• The image of the retail organisation and the fit between the product and the image of the retail organisation.
• The merchandise and prices offered.
• Terms and services offered by the vendor.
• The vendor’s reputation and reliability.

The prime factor which affects these decisions is whether the merchandise offered by a vendor is compatible with the
needs and wants of the customers. If the merchandise is not right, the vendor should not be considered. Vendors also
vary depending on the way that they conduct their business. Factors such as the ability to meet delivery schedules,
adherence to quality procedures and the terms offered, play an integral role in vendor selection.

Services provided by the vendor may be a deciding factor. These services could include co-operative advertising,
return or exchange privileges, participation in store promotions and the willingness to use technology. Once the
sources of supply are identified, they need to be evaluated. The evaluation criteria would vary from retailer to retailer.
Key factors which need to be kept in mind are:
• Merchandise: The vendor needs to be evaluated in terms of the suitability of the merchandise for the retailer.
The quality of the merchandise is and the price charged for the merchandise is equally important.
• Price: The price that the merchandise is going to be available to the retail chain also needs to be considered.
• Adaptability: The adaptability of the supplier to the requirements of the retailer, in terms of delivery schedules
and adjusting production accordingly, needs to be considered. Services that might be provided by the supplier
in terms of spacing of deliveries, quantity discounts, recycling and repacking of products, participating in
schemes, promotions and advertising are also important. All these factors need to be considered while selecting
a vendor.
• Delivery: It is an important factor in retail. The supplier’s ability to meet the delivery requirements of the retailer
in terms of supplying to the warehouse or distribution centres or the stores directly needs to be considered.

Step III: Negotiating with vendors

The retail buyer needs to negotiate the price, the delivery dates, the discounts, the shipping terms and possibilities
of returns. While negotiating with the vendors, his history, goals and constraints should be kept in mind. At the
same time, the buyer needs to be aware of real deadlines and be able to work towards fulfilling them. The types of
discounts that could be available to the buyer are as described below.
• Trade discounts: These are reductions in the manufacturer’s suggested retail price, granted to wholesalers or
retailers. They may be offered as a single trade discount or as a chain trade discount. It is sometimes referred
to as volume discounts or booking discounts. These are reductions (or a series of reductions) from the total
value of the purchase order.
• Chain discounts: It is the traditional manner of discounting, where a number of different discounts are taken
sequentially from the suggested retail price.
• Quantity discounts: These can be cumulative and non-cumulative; retailers earn quantity discounts by purchasing
certain quantities over a specified period of time.
• Seasonal discounts: This is an additional discount offered as an incentive to retailers to order merchandise in
advance of the normal buying season.
• Cash discount: It is the reduction in the invoice cost for paying the invoice prior to the end of the discount
period.

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Step IV: Establishing vendor relations

Retailers have been cautious of sharing information with their suppliers for a long time. With time, many retail
organisations work with their suppliers as a team to create a competitive advantage.

Shared information is a vital component of the new approach, but only if the right information is shared with the
right people, for the right reasons.
• The right people are those individuals or organisations who can use the information given to them to help us.
To do this, the retailer needs to understand the importance of the trading relationship to both sides.
• The right information is information that the right people can actually use to give better service. For example,
if you take a new product being sold by a retail group with 100 outlets. The stock is delivered through a single
national warehouse operated by the retailer and the retailer does not share information with the manufacturer who
supplies products. After the initial delivery is received at the warehouse, some stock is immediately dispatched
to the stores and selling commences.

At this stage, the manufacturer has no idea of how sales are going. After a few weeks, stores start sending the orders
to replenish their stock. But still the manufacturer has no idea what is happening. The manufacturer at this stage will
only be able to estimate the sales when the retailer places another order to replenish the warehouse. If the retailer
had shared information on sales and stock with the manufacturer, the latter would then have had the opportunity to
anticipate out-of-stock situations and to plan future activities and minimise delays in new production runs.

The retailer’s sales forecasts are more significant than sales figures. The historical sales figures may result in the
manufacturer producing a forecast, which differs markedly from the retailer’s on which are based erroneous material
buying and production plans. It is far better for the retailer to provide the manufacturer with forecasts reflecting the
future promotion plans and so on. There are several options regarding the level of detail at which information can
be supplied. Very few manufacturers could make use of daily sales by store. Weekly sales by store, might be the
maximum level of detail required and many would prefer information just by region or store group.

Some of the most important information for the retailer is news about new products and updates. All too often, a
retailer will place an order only to find, just after delivery, that a replacement product has been announced. This
does not help to ease tension during future negotiations. The supplier can offer very useful data on market share.
The supplier is in a unique position to tell the retailer what percentage of market share specific products or product
groups hold. Thus, to maintain strategic partnerships with vendors, the buyer needs to build on:
• Mutual trust
• Open communication
• Common goals
• Credible commitments

Step V: Analysing vendor performance

Each retailer has his own criteria for the selection of vendors. The starting point can be a vendor registration form,
which provides details on address, preferred mode of payment, sales tax number and so on. Registration with the
relevant tax authorities, for example, sales tax, is a basic criteria used by many retailers to eliminate suppliers. In case,
a buyer is dealing with multiple vendors for a particular product category, the conclusions on vendor performance
can be drawn by listing out the following:
• Total orders placed on the vendor in a year
• Total returns to the vendor (the quality of the merchandise)
• Initial mark-up on the products
• Markdown (if any)

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• Participation of the vendor in various schemes and promotions
• Transportation expenses if borne by the retailer
• Cash discounts offered by the vendor
• Sales performance of the merchandise

Factual evaluation of the vendors helps the buyers in being unbiased and taking the right decisions for the retail
organisation. Respect and co-operation between the buyers and the vendors is necessary to build long-term
relationships. In the fast changing retail world, it is also necessary to share information with the vendors timely, so
as to avoid stock outs or a situation of heavy markdowns. The rapid pace of change in the world of retail and the
increase in connectivity has made sourcing from across the globe a reality for many retail buyers. A proper vendor
analysis is essential for evaluating vendor performance and determining whether to continue with the same suppliers
or to find new ones. Both quantitative and qualitative factors are considered during this evaluation. Key criteria
considered while analysing the performance of vendor are:
• Gross margin contribution: This may be a key factor influencing vendor performance, which is calculated
as the total gross profit generated for each supplier versus the number of rupees spent on purchases. Factors
affecting this ratio are initial mark-up and total mark-downs.
• Adherence to company policy: A vendor who does not comply with purchase order instructions can lose
merit in the buyer’s eyes. Late shipments, lack of adherence to cancellations dates, and improper packaging,
labelling and ticketing of products are costs which have to be incurred by the retailer and eat into the profits of
the company.
• Customer acceptance level: The final test of product success is whether the customer has accepted the product
that has been put on the shelf by the retailer or it has been rejected. The acceptability of the product in the market
place has a direct impact on the vendor’s success too.
• Merchandise qualifications: While acceptability of the merchandise may be of great importance, the quality
of the merchandise has a great impact on the perception and the brand image of the retailer. A vendor’s ability
to deliver a consistent level of excellence is often of prime importance to the retailer. The aim of the function of
sourcing is the optimisation of costs through optimisation of vendor performance. It is necessary that the needs
and requirements of the retail organisation are synchronised with the abilities and aims of the supplier. Vendor
performance has far reaching impact on the value and cost incurred by the retailer, and eventually affects the
performance of the retailer.

3.3 Purchasing and Procurement

Purchasing and procurement is used to denote the function of and the responsibility for procuring materials, supplies
and services. The term “supply management” has been used frequently to describe this process as it pertains to
a professional capacity. Employees who serve in this function are known as buyers, purchasing agents or supply
managers. Depending on the size of the organisation, buyers may further be ranked as senior buyers or junior
buyers.

3.3.1 History of Procurement and Purchasing

Prior to 1900, there were few separate and distinct purchasing departments in U.S. business. Most pre-twentieth-
century purchasing departments existed in railroad industry.

Early in twentieth century, several books on purchasing were published, while discussion of purchasing practices
and concerns were tailored to specific industries in technical trade publications. The year 1915 saw the founding
of The National Association of Purchasing Agents. This organisation eventually became known as the National
Association of Purchasing Management (NAPM) and is still active today under the name 'The Institute for Supply
Management (ISM)'.

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Early buyers were responsible for ensuring a reasonable purchase price and maintaining operations (avoiding
shutdowns due to stock-outs). Both World Wars brought more attention to the profession due to the shortage of
materials and the alterations in the market. Still, until 1960s, purchasing agents were basically order-placing clerical
personnel serving in a staff-support position. In the late 1960s and early 1970s, purchasing personnel became more
integrated with a materials system. As materials became a part of strategic planning, the importance of the purchasing
department increased.

In the 1970s, the oil embargo and the shortage of almost all basic raw materials brought much of business world’s
focus to the purchasing arena. The advent of just-in-time purchasing techniques in the 1980s, with its emphasis
on inventory control and supplier quality, quantity, timing and dependability, made purchasing a cornerstone of
competitive strategy.

By the 1990s, the term “supply chain management” had replaced the terms “purchasing” “transportation,” and
“operations” and purchasing had assumed a position in organisational development and management. In other
words, purchasing had become responsible for acquiring the right materials, services and technology from the right
source, at the right time, in the right quantity.

3.3.2 Factors For Purchasing

The importance of purchasing in any firm is largely determined by the four factors:
• Availability of materials
• Absolute currency volume of purchases
• Percentage of product cost represented by materials
• Types of materials purchased

While purchasing it should be kept in mind that whether or not the materials used by the firm are readily available
in a competitive market or whether some are bought in volatile markets that are subject to shortages and price
instability. If the latter condition prevails, creative analysis by top-level purchasing professionals is required. A firm,
instead of spending a large percentage of its available capital on materials, can make significant savings with the
help of efficient purchasing. Even one unit savings add up quickly when purchased in large volumes.

The most important of the four factors mentioned above is the amount of control purchasing and supply personnel
actually has over materials availability, quality, costs, and services. Large companies tend to use a wide range of
materials, yielding a greater chance that price and service arrangements can be influenced significantly by creative
purchasing performance. On the other hand, some firms use a fairly small number of standard production and
supply materials, from which even the most seasoned purchasing personnel produce little profit, despite creative
management, pricing and supplier selection activities.

3.3.3 Role of Purchasing

There are two basic types of purchasing, purchasing for resale and purchasing for consumption or transformation.
The former is generally associated with retailers and wholesalers. The latter is defined as industrial purchasing.
Purchasing can also be categorised as either strategic or transactional. The words “direct” and “indirect” can be
used to distinguish the two types.
• Strategic (direct) buying involves the establishment of mutually beneficial long-term relationship between
buyers and suppliers. Usually strategic buying involves purchase of materials that are crucial to the support
of the firm’s distinctive competence. This could include raw material and components normally used in the
production process.
• Transactional (indirect) buying involves repetitive purchases, from the same vendor, through a blanket purchase
order. These orders can include products and services not listed on the bill of materials, but are used indirectly
in producing the item.

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Some experts relate that the purchasing function is responsible for determining the organisation’s requirements,
selecting an optimal source of supply, ensuring a fair and reasonable price (for both the purchasing organisation and
the supplier), and establishing and maintaining mutually beneficial relationships with the most desirable suppliers.
In other words, purchasing departments determine what to buy, where to buy it, how much to pay, and ensure its
availability by managing the contract and maintaining strong relationships with suppliers.

Specifically, purchasing departments today are responsible for:

• Coordinating purchase needs with user departments
• Identifying potential suppliers
• Conducting market studies for material purchases
• Proposal analysis
• Supplier selection
• Issuing purchase orders
• Meeting with sales representatives
• Negotiating
• Contract administration
• Resolving purchasing-related problems
• Maintenance of purchasing records

As the role of purchasing grows in importance, purchasing departments are being charged with even more
responsibilities. Newer responsibilities for purchasing personnel, in addition to all purchasing functions, include
participation in the development of material and service requirements and related specifications, conducting material
and value-analysis studies, inbound transportation, and also management of recovery activities such as surplus and
scrap salvage, as well as its implications for environmental management.

A study found that strategic purchasing enables firms to foster close working relationships with a limited number of
suppliers, promotes open communication among supply chain partners. Also, it was found that strategic purchasing
develops a long-term strategic relationship orientation for achievement of mutual goals. This implies that strategic
purchasing plays a synergistic role in fostering value-enhancing relationships and knowledge exchange between the
firm and its suppliers, thereby creating value. In addition, supply managers are heavily involved in cross-functional
teams charged with determining supplier qualification and selection, as well ensuring early supplier involvement
in product design and specification development.

A comprehensive list of objectives for purchasing and supply management personnel would include:
• To support the firm’s operations with an uninterrupted flow of materials and services
• To buy competitively and wisely (achieve the best combination of price, quality and service)
• To minimise inventory investment and loss
• To develop reliable and effective supply sources
• To develop and maintain healthy relations with active suppliers and the supplier community
• To achieve maximum integration with other departments, while achieving and maintaining effective working
relationships with them
• To take advantage of standardisation and simplification
• To keep up with market trends
• To train, develop and motivate professionally competent personnel

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• to avoid duplication, waste and obsolescence

• to analyse and report on long-range availability and costs of major purchased items
• to continually search for new and alternative ideas, products, and materials to improve efficiency and
profitability
• to administer the purchasing and supply management function pro-actively, ethically, and efficiently

3.3.4 Determining Requirements

In progressive firms, purchasing contributes in the process of new product development. As a part of a product
development team, purchasing representatives have the opportunity to help determine the optimal materials to be
used in a new product, propose alternative or substitute materials, and assist in making the final decision based on
cost and material availability. Purchasing representatives can also participate in a make-or-buy analysis. The design
stage is the point at which the vast majority of the cost of making an item can be reduced or controlled.

Along with purchasing, the purchasing agent’s input is also required while defining the materials-purchase
specifications. Specifications are detailed explanations of what the firm intends to buy in order to get its product to
market.

If the product requires a standardised component, the specifications are easily communicated by specifying a
trade or brand name. A custom part can complicate the situation considerably; if incorrectly manufactured, such a
product can severely damage a relationship, resulting in unnecessary costs and possible legal action. It is the buyer’s
responsibility to properly communicate the specifications to the supplier to avoid any misunderstanding.

3.3.5 Supply Sourcing

A part of the sourcing decision involves determining whether to purchase a part from an outside supplier or to
produce the part internally. This is known as a make-or-buy decision. If the buyer chooses to purchase the part
externally, then he must find qualified suppliers who are willing to make and sell the product to the firm under the
specified conditions.

Buyers have a number of options to locate sources of supply, some direct and some indirect. Some of the direct
sources would include the Yellow Pages, other purchasing departments, and direct marketing. Purchasing departments
have subscription to a number of trade publications for the same purpose. Also, being a subscriber usually puts the
buyer’s name on a mailing list so that flyers, postcards, and other varieties of direct marketing find their way into
the purchasing department’s hands.

In a situation where a suitable supplier cannot be found, the firm is forced to develop a supplier. Supplier development
is sometimes referred to as “reverse marketing,” which entails finding the supplier with the maximum potential for
success and providing the resources necessary for the supplier to manufacture the needed product. This could include
training in production processes, quality, and management assistance, as well as providing temporary personnel,
tooling, and even financing.

When the purchased product is fairly standard and readily available, most of the firms choose to utilise the competitive
bidding process of supplier selection. A request for bids is sent to a limited number of qualified suppliers asking for
a price quote for the product, given the terms and conditions of the contract. The contract goes to the lowest bidder.
For government bid requests, the contract legally must go to the lowest bidder qualified to fulfil the contract.

3.3.6 Negotiation
In case where the competitive bidding is not the appropriate mechanism for reaching the purchasing department’s
objectives, the buyer uses the process of negotiation. This is not a second-choice alternative, as the negotiation
process is more likely to lead to a complete understanding of all issues involved between the supplier and the
purchasing firm.

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The use of negotiation is followed by certain circumstances such as, when a thorough analysis is required to solve a
difficult make-or-buy decision, or when the risks and costs involved cannot be accurately predetermined, negotiation
can be used. Also, when a buyer is contracting for a portion of the seller’s production capacity rather than a product,
negotiation is appropriate to use.

Other circumstances where negotiation is favoured include:

• When early supplier involvement is employed.
• When tooling and setup costs represent a large percentage of the supplier’s costs.
• When production is interrupted frequently for change orders.
• When a long time is required to produce the purchased products.

While negotiating the buyer must have a reasonable knowledge of what is being purchased, the process involved,
and the factors that may affect cost, quality, delivery and service. A thorough cost and price analysis is essential.
The negotiating buyer must also know the strengths and weaknesses of the negotiating supplier, as well as their
own. Through proper preparation and some negotiating skill, the purchasing agent are able to secure a contract that
fulfils the company’s needs and is adequately beneficial to the supplier as well.

3.3.7 Supplier Management

After locating proper suppliers and securing contracts, the next step is for the purchasing department to monitor
and control the suppliers’ performance until the contracts are fulfilled—and beyond, if further business is to be
conducted. All purchasing organisations need some vehicle for assessing supplier performance. Many firms have
formal supplier-evaluation programs that effectively monitor supplier performance in a number of areas, including
quality, quantity delivery, on-time delivery, early delivery (just-in-time users do not like early deliveries), cost and
intangibles.

In some of the firms, consistent supplier performance results in certification. Supplier certification implies (or in
some cases formally asserts) that the supplier has been a part of a formal education program, has demonstrated
commitment to quality and delivery, and has proven consistency in the processes. Through this, organisations are
able to take delivery from certified suppliers and completely bypass the receiving inspection process.

The buyer is also responsible for maintaining a congenial relationship with the firm’s suppliers. In cases, where the
buyer is an unreasonable negotiator, and does not allow the supplier to make an adequate profit, future dealings may
come to a halt. In such a situation the supplier may refuse to deal with the buyer in the future, or the supplier may
greatly increase the price of a product that buyer could not obtain elsewhere. It also effect the relations which can
become strained, when the buyer consistently asks for favoured treatment such as expediting or constantly changing
a particular order’s delivery schedule.

3.3.8 E-Purchasing and E-Procurement

The Internet and e-commerce is continuously changing the way purchasing is done. Internet buying has led to the
terms such as, “e-purchasing” or “e-procurement.” Communication needed in competitive bidding, purchase order
placement, order tracking, and follow-up are enhanced by the speed and ease afforded by establishing online systems.
Negotiations can enhanced and reverse auctions can be facilitated through internet . Reverse auctions allow buying
firms to specify a requirement and receive bids from suppliers, with the lowest bid winning.

E-procurement is considered to be one of the characteristics of a world-class purchasing organisation. The use of
e-procurement technologies in some firms has resulted in reduced prices for goods and services, shortened order-
processing and fulfilment cycles, reduced administrative burdens and costs, improved control over off-contract
spending, and better inventory control. It allows the organisations to expand into trading networks and virtual
corporations.

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Criteria for e-purchasing include:

• Supporting complete requirements of production (direct) and non-production (indirect) purchasing through a
single, internet-based, self-service system.
• Delivering a flexible catalogue strategy
• Providing tools for extensive reporting and analysis
• Supporting strategic sourcing
• Enhancing supply-chain collaboration and coordination with partners

3.4 Sourcing e-Procurement Services

Sourcing e-procurement services requires prior thought process, planning, and a clearly defined strategy.
E-procurement is the business-to-business purchase and sale of supplies and services over the internet. External
service providers who are experienced in operating an e-procurement business can provide economies of scale
resulting in cost savings for the client.

Definition
E-Procurement is more than just a system for making purchases online. A true e-procurement system can connect
companies and their business processes directly with suppliers, managing all interactions between them. This
traditionally includes the management of bids, supplier correspondence, pricing history and an electronic
communication system.

Services
Outsourcing companies provide services covering the design of the strategy through implementation, hosting and
maintenance of the on-going operations. The selection of the right service for a company’s requirements is the key
to success. Some e-procurement service providers only provide e-sourcing services; others may only provide the
hosting services.

E-sourcing
The whole process from identifying suitable vendors, to obtaining competitive terms and managing the on-going
supply relationship constitutes e-sourcing. This process is the central hub of e-procurement, which is illustrated
below.

1. Reverse
e-Auctions
11. Supplier
2. Forward
Portals
e-Auctions

10. Collaboration 3. Advanced

tools e-Auctions

e-Sourcing
Solutions 4. e-RFx (s)
9. Supplier
Intelligence
Tools

5. Contract
8. Programme Management
Management
6. Spend
7. Supplier Analytics
Performance
Management

Fig. 3.1 Process of e-sourcing

(Source: http://www.purchasing-procurement-center.com/e-procurement-services.html)

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Reverse auctions are where the suppliers offer their goods for the best price. It is one of the services most offered
by e-procurement specialists. The management of the whole sourcing process using a Request for Information or
Proposal (e-RFx) through to the finalisation of the contract is a popular service that shows the process to be fully
transparent as it is managed by a third party.

E-procurement services also include, conducting an analysis of the client’s spending profile, hosting and maintaining
a database of suppliers whilst recording their performance history for future negotiations. The more developed and
established e-procurement services include supplier and market intelligence, knowledge management and the full
range of staff training modules.

There is a lot of choice in the level, extent and quality of the services offered in this field. Research is required and
references should be taken from existing clients to ensure that the right supplier is engaged. The selection of suitable
e-procurement services depends on the maturity of the client and the intended strategy.

3.5 Advantages of e-Procurement Services

The key reason companies have embraced e-procurement is to increase productivity, provide visibility into day-to-
day transactions and make it easier for users to get the supplies that they need.

E-procurement has its challenges and it has taken time for business managers and procurement departments to fully
accept this process. The advantages of e-procurement are given below::
• Reducing costs: Costs can be reduced by leveraging volume, having structured supplier relationships and
by using system improvements to reduce external spend while improving quality and supplier performance.
E-procurement eliminates paperwork, rework and errors.
• Visibility of spend: Centralised tracking of transactions enables full reporting on requisitions, items purchased,
orders processes and payments made. E-procurement advantages also include ensuring compliance with existing
and established contracts.
• Productivity: Internal customers can obtain the items they want from a catalogue of approved items through an
on-line requisition and ordering system. Through this the procurement staff do not have to work for processing
orders and handling low value transactions and they can concentrate on strategic sourcing and improving supplier
relationships.
• Controls: Standardised approval processes and formal workflows ensure that the correct level of authorisation
is applied to each transaction. Compliance to policy has improved as users can quickly locate products and
services from preferred suppliers. Using technology, E-procurement advantages can only be fully utilised when
the systems and processes to manage it are in place. Software tools are needed to create the standard procurement
documentation, such as, electronic requests for information (e-RFI), requests for proposal (e-RFP) and requests
for quotation (e-RFQ). These are proven methods to source goods and make the framework agreements that
offer the best prices.

A proper and fully integrated e-procurement approach is needed for overall success. Additional programs provide
the framework for the supplier databases and spend management as well as holding key vendor information and
being an electronic repository for contracts.

The amount companies pays for e-procurement technology, is considered as an investment, which boosts the
efficiency. The longer term reduction in costs will enable companies to direct their resources to more strategic
initiatives. E-procurement advantages are significant bottom-line benefits, including cost reduction, process
efficiencies, spending controls and compliance.

3.6 E-Procurement Trends in Global Market

The e-procurement trends over the past 20 years highlights some successes along with some challenges. E-procurement
has grown and evolved into a complex marketplace with many players offering a variety of e-procurement and
business-to-business services.

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E-procurement is a term, which incorporates many aspects of electronically-assisted buying. It can include services
such as hosting of databases, catalogue management, managing tenders and auctions on behalf of clients through a
complete outsourced procurement service. For example, it eliminates tedious manual work associated with preparing
and submitting large tenders using customised software.

E-procurement trends in the private sector

Externally hosted e-procurement services are a part of a growing trend. Some specialise by industry sector, like
those serving the oil and gas, pharmaceutical and mining industries all of which have embraced e-procurement more
than some other sectors. Some e-procurement service companies provide the full range of supply network services
to support global procurement transactions.

Another trend supporting e-procurement is where large corporations elect to manage their e-procurement in-house.
Successful implementations of e-procurement are considered as one of the measures of a world-class purchasing
organisation. For this they need to install enterprise-wide software to manage the database and transactions.

E-procurement trends in the government sector

Few of the mature economy governments are adopting e-procurement more extensively as it provides structure,
audit trails and transparency of transactions. However, governments in emerging markets are often unaware of the
benefits that e-procurement can provide.

Certain basic requirements need to be fulfilled before an e-procurement system can achieve maximum potential
in government. These are recommendations are made by the World Bank which includes expanding ICT services,
guaranteeing a secure online environment, development of standards and processes, and most importantly, for
purchasers to be trained.

E-procurement trends in non-government organisations (NGOs)

The development aid and emergency support sector of the economy can benefit greatly from using electronic
procurement services. Savings of up to 10% have been achieved on price and there is some evidence available
showing savings in processing time. E-procurement allows aid-funded buyers to compare prices quickly and easily,
to review specifications and delivery dates from suppliers worldwide.

3.7 E- Procurement Challenges and Opportunities

E procurement is an automation tool for corporate purchasing process. The core definition is “a business to business
sale using the internet as the medium for order processing”. E procurement can be seen more than the simple shortening
of the supply chain with the internet closing time and distance obstacles between suppliers and users of products.

It is a comprehensive integrated IT network that encourages purchasing discipline and leverages group buying power
for all procurement responsible people in an organisation.

E-procurement systems consist of a number of different tools. These include automation of internal ordering processes,
online catalogues from approved vendors, and an electronic Request for Proposal (e-RFP) process that leverages
online auctions (e-auctions) to accumulate bids on providing goods and services for a specific project.

The challenge is that in a capital-tight environment, the cost of acquisition and fielding of an e-procurement system
can seem prohibitive. Other challenges to implementation include, as with any other new system fielding, push-
back from users. Both internal users and even some vendors can create friction and resist the change. For leaders
in organisations, it is critical to prepare both internal customers and actively communicate with vendors to ensure
they are on-board with the program.

In addition to above, electronic procurement is still growing and changing. Hosted solutions are coming into being,
referred to as Procurement Service Providers (PSP) that provide externally hosted procurement systems. For example,
like any 3PL or software service provider, for a lower up-front investment, a company can implement the service,
though overtime it may prove more expensive.

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Summary
• Procurement is the sourcing and purchasing of goods and services for business use.
• Merchandise procurement makes it easy for companies to customise which of their products are available to
the distributed market, including wholesalers.
• Strategic sourcing is the process of taking advantage of purchasing opportunities by continually reviewing
current needs against purchasing opportunities.
• Global sourcing is sourcing products and services irrespective of national boundaries.
• The process of merchandise buying consists of five steps given as under: identifying the source of supply,
contacting and evaluating the source of supply, negotiating with the sources of supply, establishing vendor
performance, and analysing vendor performance.
• Purchasing and procurement is used to denote the function of and the responsibility for procuring materials,
supplies and services.
• There are two basic types of purchasing, purchasing for resale and purchasing for consumption or transformation.
The former is generally associated with retailers and wholesalers. The latter is defined as industrial
purchasing.
• Part of the sourcing decision involves determining whether to purchase a part from an outside supplier or produce
the part internally this is known as a make-or-buy decision.
• E-procurement is the business-to-business purchase and sale of supplies and services over the internet.
• The use of e-procurement technologies in some firms has resulted in reduced prices for goods and services,
shortened order-processing and fulfilment cycles, reduced administrative burdens and costs, improved control
over off-contract spending, and better inventory control.
• E-procurement advantages are significant bottom-line benefits, including cost reduction, process efficiencies,
spending controls and compliance.
• Some governments in mature economies are adopting e-procurement more extensively as it provides structure,
audit trails and transparency of transactions.
• E procurement is more than the simple shortening of the supply chain with the internet closing time and distance
obstacles between suppliers and users of products.
• The challenge in e-procurement is that in a capital-tight environment, the cost of acquisition and fielding of an
e-procurement system can seem prohibitive.

References
• Ward, S., Procurement [Online] Available at: <http://sbinfocanada.about.com/od/management/g/procurement.
htm > [Accessed 10 October 2011].
• E Procurement - Challenges and Opportunities [Online] Available at: <http://www.purchasing-procurement-
center.com/e-procurement.html> [Accessed 10 October 2011].
• Mcauliffe, J., 2009. Online Merchandising: The Basics [Video Online] Available at: <http://www.youtube.com/
watch?v=txdBi37HcMw&feature=related> [Accessed 10 October 2011].
• ProProcure, 2008. Marketing Procurement - for manufacturers of promotional products [Video Online] Available at:
<http://www.youtube.com/watch?v=u4yMHki3QJQ> [Accessed 10 October 2011].
• Pradhan, 2009. Retailing Management 3E, Tata McGraw-Hill Education.
• Madaan, Fundamentals Of Retailing, Tata McGraw-Hill Education.

Recommended Reading
• Diamon, J., 2008. Retail Buying, Gerald Pintel Pearson Education India.
• Ray, 2010. Supply Chain Management for Retailing, Tata McGraw-Hill Education.
• Zapata, A. L., 2005. Buy From The Poor Sell To The Rich, Author House.

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Self Assessment
1. Which of the following tool makes it easy for companies to customise their products that are available to the
distributed market, including wholesalers?
a. Online merchandising
b. Merchandise procurement
c. Marketing procurement
d. Retail management

2. ___________ is the sourcing and purchasing of goods and services for business use.
a. Procurement
b. Transportation
c. Negotiation
d. Production

3. Which of the following statements is true?

a. The retail seller then needs to negotiate the price, the delivery dates, the discounts, the shipping terms and
possibilities of returns.
b. Delivery is an important factor in management.
c. Relieving a source of supply may be as simple as having a representative visit the office and meet with the
buyer and showcase a collection of the merchandise.
d. The term sourcing refers to finding out products from different places, manufactures and suppliers.

4. Strategic buying involves the establishment of mutually beneficial ________relationship between buyers and
suppliers.
a. long-term
b. short-term
c. mutual
d. cohesive

5. Which of the following statements is false?

a. E-procurement advantages are becoming more evident as the wider understandings of its many uses become
apparent.
b. The selection of the right service for a company’s requirements is the key to success.
c. A basic explanation of e-procurement is that it is the customer –to customer purchase and sale of supplies
and services over the internet.
d. E-procurement is considered one of the characteristics of a world-class purchasing organisation.

6. Which of the following is defined as “the process of identifying potential vendors, conducting negotiations with
them, and then agreeing on supply contracts with these vendors”?
a. Merchandising
b. Procurement
c. Supply management
d. Sourcing

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7. The term _________refers to finding out products from different places, manufactures and suppliers.
a. retailing
b. sourcing
c. management
d. purchasing

8. __________sourcing is the process of taking advantage of purchasing opportunities by continually reviewing

current needs against purchasing opportunities.
a. Strategic
b. Global
c. Merchandise
d. Procurement

9. Supplier development is sometimes referred to as _____________, which entails finding the supplier with the
most potential for success and providing the resources necessary for the supplier to manufacture the needed
product.
a. negative marketing
b. reverse marketing
c. global marketing
d. strategic marketing

10. Match the following:

A. Reduction in the invoice cost, for paying the invoice prior to the
1. Trade discounts
end of the discount period.

B. Reductions in the manufacturer’s suggested retail price, granted to

2. Chain discounts
wholesalers or retailers.

C. Traditional manner of discounting, where a number of different

3. Quantity discounts
discounts are taken sequentially from the suggested retail price.

D. Can be cumulative and non-cumulative; retailers earn quantity

4. Cash discounts discounts by purchasing certain quantities over a specified period
of time.
a. 1-A, 2-D, 3-B, 4-A
b. 1-C, 2-B, 3-D, 4-A
c. 1-B, 2-C, 3-D, 4-A
d. 1-D, 2-C, 3-B, 4-A

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Chapter IV
Pricing of Merchandise

Aim
The aim of this chapter is to:

• discuss firm’s pricing objectives

• identify the factors affecting pricing

• explain the calculation of retail price

Objectives
The objectives of this chapter are to:

• classify the pricing strategy

• explain the concept of modern price strategy

• explicate the pricing framework of an organisation

Learning outcome
At the end of this chapter, you will be able to:

• explain the role of pricing in merchandise

• recognise various approaches used for pricing

• describe different types of pricing adjustments

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4.1 Introduction
Pricing is a balancing decision amongst various pulls and pressures. India is a price-sensitive market and setting
the right price is a challenging task. Price sensitivity is the reaction of consumers to the changes in price in terms
of quantities bought. It is called price elasticity. If relatively small percentage changes in price leads to substantial
percentage change in demand, price elasticity is higher. It happens when good substitutes are available and the urgency
to purchase is not much. When there is a substantial change in price, but smaller percentage change in demand, it
is called inelastic demand. This happens when the purchase urgency is more, and consumers are not satisfied with
the substitutes available, and maintain their brand loyalty.

4.2 Pricing Framework and a Firm’s Pricing Objectives

Prices can be easily changed and matched by the competitors. Therefore, the product’s price alone might not provide
the company with a sustainable competitive advantage. Thus, prices can attract consumers to different retailers and
businesses to different suppliers. Organisations must remember that the prices they charge should be consistent with
their offerings, promotions, and distribution strategies. The price, product, promotion, and placement of a good or
service should convey a consistent image.

4.2.1 Pricing Framework

Before pricing a product, an organisation must determine its pricing objectives. Companies must also estimate
demand for the product or service, determine the costs, and analyse all factors (e.g., competition, regulations, and
economy) affecting price decisions. For conveying a consistent image, the organisation should choose the most
appropriate pricing strategy and determine policies and conditions regarding price adjustments. The basic steps in
pricing framework are shown in the figure below.

Set pricing objectives

Estimate demand

Determine costs

Analyse factors affecting pricing decisions

Determine pricing strategies and pricing polices for making price adjustments

Set initial prices

Offer and make price adjustments as needed

Fig. 4.1 The pricing framework

(Source: http://www.flatworldknowledge.com/pub/1.0/principles-marketing/105030#web-105029)

4.2.2 Firm’s Pricing Objectives

Different firms have different set of objectives to accomplish various things with their pricing strategies. For example,
one firm may want to capture market share, another may be solely focused on maximising its profits, and another
may want to be perceived as having products with prestige. Some pricing objectives that the companies may set
include:

Earning a targeted return on investment (ROI)

ROI (return on investment), is the amount of profit an organisation hopes to make given the amount of assets, or
money, it has tied up in a product. ROI is a common pricing objective for most of the firms. Companies typically
set a certain percentage, such as 10 percent, for ROI in a product’s first year following its launch.

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Maximising profits
Many companies fix the product prices to increase revenues as much as possible relative to costs. These, large
revenues do not necessarily translate into higher profits. To maximise its profits, a company must focus on cutting
costs or implementing programs to encourage customer loyalty.

In weak economic markets, many companies manage to cut costs and increase their profits, even though their sales
go down. This is done by the gap cut costs, by doing a better job of controlling its inventory. The retailer also reduce
its real estate holdings to increase its profits when its sales are down during the latest economic recession. A firm
has to remember, that prices signal value. If consumers do not perceive that a product has a high degree of value,
they probably will not pay a high price for it. Furthermore, cutting costs cannot be a long-term strategy if a company
wants to maintain its image and position in the marketplace.

Maximising sales
Maximising sales involves pricing products to generate as much revenue as possible, regardless of what it does to a
firm’s profits. When companies are struggling financially, they sometimes try to generate cash quickly to pay their
debts. This is done by selling off inventory or cutting prices temporarily. This cash can be used to pay short-term
bills, such as payroll. Maximising sales is typically a short-term objective since profitability is not considered.

Maximising market share

Some organisations try to set the product prices in a way that allows them to capture a larger share of sales in their
industries. Capturing more market share doesn’t necessarily mean a firm will earn higher profits, though many
companies believe capturing a maximum amount of market share is downright necessary for their survival. In other
words, they believe if they remain a small competitor they will fail. For example, the firms in the cellular phone
industry. The race to be the biggest cell phone provider has proved futile for the companies like Motorola. Motorola
holds only 10 percent of the cell phone market, and its profits on their product lines are negative.

Maintaining the status quo

A firm’s objective can sometimes just be to maintain the status quo or simply meet, or equal, its competitors’ prices
or keep its current prices. Airline companies are a good example. If consumers don’t accept an airline’s increased
prices (and extra fees) such as the charge for checking in with a representative at the airport rather than checking
in online, other airlines may decide not to implement the extra charge and the airline charging the fee may drop it.
Companies, monitor their competitors’ prices closely when they adopt a status quo pricing objective.

4.3 Factors Affecting Pricing

Pricing is a part of the marketing mix. Marketing mix consists of product, place or distribution, promotion and
price. Thus, price affects the other elements of the marketing mix and in turn is affected by them. It is an interactive
decision. Factors affecting pricing are:

4.3.1 Product or Merchandise

Merchandise and its nature affect pricing.
• The attributes that consumers seek from the merchandise affects its pricing. The more valuable these attributes are,
the more, is the willingness to pay more for them. Sometimes, merchandise is price leveraged for the quality.
• Sometimes, merchandise of the expected quality comes at less than expected cost. These are all tricky decisions
to be taken carefully. The price range being made available to consumer depends on the merchandise selection.
A given price is the sum of cost of the merchandise and its mark-up.
• A retailer can set a particular price by attaining low cost but putting a higher mark-up to cover the overheads
and other cost to sell at that price. Alternatively, high cost and lower mark-up and overheads enable a retailer
to sell at a specific price.

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4.3.2 Place
If a store is located closer to other competing stores, the scope of price flexibility is lesser. We have to fall in line.
• The distance between customers and stores also affect prices. The more remote the store is from its customers,
the lesser are the prices to offset the time and cost of commuting to the store.
• Factory outlets are always cheaper than neighbourhood stores, as they are located at a far-off place. A customer
tends to buy in neighbourhood, if the lower prices offered are not enough to cover his travelling expenses.
Prestigious locations have stores which charge slightly higher prices.

4.3.3 Promotion
Pricing and promotion are interrelated. A heavily promoted store charging reasonable prices experiences more off-
take.
• Just high promotion or just lower prices exclusively would not produce an off-take higher than both practiced
simultaneously. A low-priced store also needs promotion, so that consumers become aware of its low prices.
• The retailer’s prices contribute to the store image. Some stores are high-fashion stores or boutiques, their prices
are high. Some are discount stores, their prices are less. Though a store keeps all other factors constant, pricing
itself is capable to give it an image.

4.3.4 Miscellaneous
There are other factors such as credit facilities and customer services which affect pricing. Customer services
increases operating expenses. There is a tendency to increase prices to cover these additional costs. But if customers
have to pay for services such as alteration of clothes, they are likely to resent. It is better to cut margins and maintain
prices. Some stores keep well-informed manpower for guiding customers. Customers are then ready to pay more
as their selection is facilitated for certain special merchandise. Some stores appeal to the philanthropic motives of
customer, for example, a charitable cause. Returns are accepted readily by certain stores. Such stores can demand
certain extra price.

In addition, there are certain other factors affecting pricing decision which are described below:
• Discounts: Discounts are sums allowed off a price in consideration for some action. Always expressed as a
percentage of list prices, they are given to wholesalers, retailers, distributors, and agents. They include quantity
discount, cash discount, functional discount and seasonal discount.
‚‚ Cash discount: It is given to buyers for paying their bills promptly. For example, “2/10 net 30” indicates that
payment is due in 30 days but the buyer will enjoy 2 percent discount if payment is made within 10 days.
‚‚ Quantity discount: A price reduction is given for purchasing large quantity. It can be given for each purchase
or on a cumulative basis. Whichever method is adopted it must be offered to all customers.
‚‚ Functional discount: Also known as trade discount, such discount is given to trade channel members for
performing functions such as warehousing, selling, and record keeping and must be given to all trade
channel members.
‚‚ Seasonal discount: It is given to those who buyout of season. Airlines offer seasonal discounts just as do
hotels. Allowances are given to encourage buyers to participate in a special programme. For instance trade-in
allowance is given when you turn in an old product while buying a new one. Dealers are given promotional
allowance for participating in promotional programs.
• Competitors: The third major factor is the activities of competitors as they affect pricing decisions. There is
competition in virtually all markets but what is of major concern to the marketer is the nature of competition. If
competitors are few and there exists a dormant player in the market, there is likely to be little reaction to changes
in price. On the other hand where there are many competitors with room for more to enter, there is likely to be
stiff price competition with high degree price elasticity. It is however possible to reduce price elasticity where
the firm has built loyalty towards its brand.
• Company pricing objectives: It is quite possible that a firm may set out specific objectives through its pricing
decisions. However, it is important to note that corporate objectives must be designed with overall marketing
mix strategies.

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• Corporate pricing objectives: This could include goals such as rapid market growth or penetration (lower
prices), return on capital (higher prices), quality (higher prices) attract low-income segment of the market (lower
prices) and so on.
• Survival: If a company is faced with changing consumer taste, intense competition and overcapacity, it must keep
prices low in order to keep the plant going and maintain efficient inventory. Profit is not particularly important.
The company’s main focus is to cover variable costs and some fixed costs until things pick up.
• Current profit maximisation: The company is not concerned with long run performance. It estimates demand
and costs associated with different price levels, and choose the price that maximises profits.
• Market-share leadership: Here the company wants to be the dominant player in market. One way of going
about this is to set prices as low as possible in the belief that the market leader will ultimately enjoy lowest costs
and highest long run profit. Alternatively the company may pursue a target market share say increase from 20
percent to 30 percent in next two years.
• Product quality leadership: The company intends to produce best quality in market but the product will attract
a high price because of high research and development costs associated with high quality.
• Cost recovery: This strategy is used largely by organisations that are set up to provide social services and not to
make profit. For such organisations, partial cost recovery is sufficient. Universities and polytechnics set prices
that lead to partial recovery of costs and expect to make up from grants and subventions. Their ‘profits’ are
measured in terms of the contribution of their products (graduates, skills and research) to the society.
• Promotional issue: Price communicates to customers about the company and its products. What the price
communicates to the customer is quite significant in marketing management and for this reason, pricing decisions
must reflect desired corporate image and be appropriate to other marketing mix strategies.
• Others: Other factors such as taxation, government subsidies, tariffs and duties, trade and legal considerations
are important since they influence the pricing decisions of firms. For instance, governments can offer subsidies
as incentives for new businesses or organisations engaged in export trade.

4.4 Calculation of Retail Price

The term cost of goods indicates cost of the merchandise plus expenses associated with it such as transport of goods
from the supplier to the store. Expenses are of two types:
• Fixed expenses: Fixed expenses are called overheads and remain constant, irrespective of the amount of
merchandise sold or business done e.g., rents, electricity bill, telephone bill, etc.
• Variable: Variable expenses vary with the level of sales directly e.g., profit margins. The retail price is fixed
keeping our profit expectation or mark-up in mind, which is expressed as a percentage (of retail price or cost
price).

Retail price = Cost + Mark up

Cost = Retail price – Mark up
Mark up = Retail price – Cost

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This mark up is called initial mark up, which could be modified by mark downs, discounts and shrinkages. Mark
downs are reductions in the original retail price.

The initial mark up equation is:

Initial mark up is the mark up placed on merchandise when the store receives it. Maintained mark up is based on
actual prices received for merchandise sold during a period less merchandise cost. Retailers would prefer to have
the initial mark up and maintained mark up to be equal, but this rarely happens. The difference between these two
mark ups is due to mark downs, added mark ups, shortages and discounts.

The maintained mark up or gross margin is the main factor contributing to profitability, since it is actual difference
between the actual selling price and cost of that merchandise.

Gross margin = Net sales – Total cost of goods

4.5 Pricing Approach

Companies can choose many ways to set their prices. Many stores use cost-plus pricing, in which they take cost of
the product and then add a profit to determine a price. Cost-plus pricing is very common. The strategy helps ensure
that a company’s products’ costs are covered and the firm earns a certain amount of profit. When companies add
a mark-up, or an amount added to cost of a product, they are using a form of cost-plus pricing. When products go
on sale, companies mark down prices, but they usually still make a profit. Potential markdowns or price reductions
should be considered while deciding on a starting price.
• Many pricing approaches have a psychological appeal. Odd-even pricing occurs when a company prices a
product a few cents or a few dollars below the next dollar amount. Prestige pricing occurs when a higher price
is utilised to give the product a high-quality image. Some stores have a quality image, and people perceive that
perhaps the products from those stores are of higher quality. Many times, two different stores carry the same
product, but one store prices it higher because of the store’s perceived higher image.
• Knowing that people have certain maximum levels that they are willing to pay for gifts, some companies use
demand backward pricing. They start with price demanded by consumers (what they want to pay) and create
products at that price.
• Leader pricing involves pricing one or more items low to get people into a store. The products with low prices
are often on the front page of store ads and “lead” the promotion. The goal is to get shoppers to buy many more
items in addition to low-priced items. Leader or low prices are legal; loss leaders or items priced below cost in
an effort to get people into stores are illegal in many states.
• Sealed bid pricing is the process of offering to buy or sell products at prices designated in sealed bids. Companies
must submit their bids by a certain time. The bids are later reviewed all at once, and the most apt one is chosen.
Sealed bids can occur on either the supplier or buyer side. For example, via sealed bids, oil companies bid on
tracts of land for potential drilling purposes, and the highest bidder is awarded the right to drill on the land.
Similarly, consumers sometimes bid on lots to build houses. The highest bidder gets the lot. On the supplier
side, contractors often bid on different jobs and lowest bidder is awarded the job. The government often makes
purchases based on sealed bids.

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• Bids are also used online. Online auction sites such as eBay gives customers the chance to bid and negotiate
prices with sellers until an acceptable price is agreed upon. When a buyer lists what they want to buy, sellers
may submit bids. This process is known as a forward auction. If the buyer not only lists what they want to buy
but also states how much they are willing to pay, a reverse auction occurs. The reverse auction is finished when
at least one firm is willing to accept the buyer’s price.
• Going-rate pricing occurs when buyers pay the same price regardless of where they buy the product and from
whom. Going-rate pricing is often used on commodity products such as wheat, gold, or silver and people perceive
individual products in markets such as these to be almost the same. Therefore, there’s a “going” price for the
product that all sellers receive.
• Price bundling occurs when different products are sold together at a price that’s lower than the total price a
customer would pay by buying each product separately. For example, combo meals and value meals sold at
restaurants. Companies such as McDonald’s have promoted value meals for a long time in many different markets.
Other products such as shampoo and conditioner are sometimes bundled together. Automobile companies bundle
product options. For example, power locks and windows are often sold together, regardless of whether customers
want only one or the other. The motive behind bundling is to increase an organisation’s revenues.
• Captive pricing is a strategy firms use where consumers must buy a given product because they are at a certain
event or location or they need a particular product because no substitutes will work. For example, concessions
at a sporting event or a movie shows how captive pricing is used.
• Pricing the products that consumers use together, with different profit margins is also a part of product mix
pricing. For example, if you want to buy an automobile, the base price might seem reasonable, but options such
as floor mats might earn the seller a much higher profit margin.
• Most of the young people including students have cell phones. It portrays an example of two-part pricing. Two-
part pricing means there are two different charges customers pay. In case of a cell phone, a customer might pay
a charge for one service such as a thousand minutes, and then pay a separate charge for each minute over one
thousand.
• Payment pricing or allowing customers to pay for products in instalments, is a strategy which helps customers
to break up their payments into smaller amounts, which can make them more inclined to buy high-priced
products.
• Promotional pricing is a short-term tactic designed to get people into a store or to increase the sales of a product.
Examples of promotional pricing include back-to-school sales, rebates, extended warranties, and going-out-
of-business sales. Rebates work as a great strategy for companies because consumers think they’re getting a
great deal.
• Price discrimination or charging different customers different prices for the same product is legal in some
situations. Price discrimination is used to get more people to use a product or service. Similarly, a company might
lower its prices in order to get more customers to buy a product when business is slow. For example, matinees
are often cheaper than movies at night; bowling might be less expensive during no league times, and so forth.

4.6 Price Adjustments

Organisations should also decide their policies when it comes to making price adjustments or changing the listed
prices of their products. Some common price adjustments include quantity discounts, which involves giving customers
discounts for larger purchases. Discounts for paying cash for large purchases and seasonal discounts to get rid of
inventory and holiday items are other examples of price adjustments.
• A company’s price adjustment policies also need to fix the firm’s shipping charges. Many online merchants
offer free shipping on certain products, orders over a certain amount, or purchases made in a given time frame.
FOB (free on board) origin and FOB delivered are two common pricing adjustments businesses use to show
when the title to a product changes along with who pays the shipping charges. FOB (free on board) means the
title changes at the origin i.e., when the product is purchased and the buyer pays the shipping charges. Whereas,
FOB (free on board) destination means the title changes at destination i.e., after the product is transported and
the seller pays the shipping charges.

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• Uniform-delivered pricing also known as postage-stamp pricing, means buyers pay same shipping charges
regardless of their location. For example, a manufacturer might give a retail store an advertising allowance
to advertise the manufacturer’s products in local newspapers. Similarly, a manufacturer might offer a store a
discount to restock the manufacturer’s products on store shelves rather than having its own representatives
restock the items.
• Reciprocal agreements are agreements in which merchants agree to promote each other to customers. Customers
who patronise a particular retailer might get a discount card to use at a particular restaurant, and customers who
go to a restaurant might get a discount card to use at a specific retailer. For example, when customers make a
purchase at Diesel, Inc., they get a discount coupon good to use at a certain resort. When customers are at the
resort, they get a discount coupon to use at Diesel.
• A promotion that’s popular during weak economic times is called a bounce back. A bounce back is a promotion
in which a seller gives customers discount cards or coupons after purchasing. Consumers can then use these
cards and coupons on their next shopping visits. The idea is to get customers to return to the store or online
outlets later and purchase more items. Some stores set minimum amounts that consumers need to spend to use
the bounce back card.

4.7 Pricing Strategy

A pricing strategy could be:
• Demand-oriented
• Cost-oriented
• Competition-oriented

Demand-oriented pricing
• In this strategy, an assessment is made about consumer demand at various price points. A consumer perceives
that they derive functional and psychological benefits from the merchandise. This is called the value derived.
There is always a psychological price-value equation in the consumers mind. There is a feeling that the higher
the price, the higher the quality and vice-versa. It is more relevant when other attributes of merchandise are
hard to assess and branding plays no signification role in merchandise choice. But when retailer’s image and
branding are carefully introduced, price alone, loses its dominant significance.
• Demand-oriented pricing works when retailer analyses the target market and the value proposition they seek.
Prestige pricing assumes that premium products are patronised by status-conscious elite target audience. Prestige
pricing also leads to selection of a particular retailer.

Cost-oriented pricing
Cost-oriented pricing is the most commonly used pricing strategy.
• Mark up prices factors in the merchandise cost operating expenses and expected profits. The selling price
minus the merchandise cost is the mark up. The percentage of mark up depends upon the trade norm, supplier’s
suggested price, stock turnover, competition, overheads, alteration costs and the selling effort. It may not be
possible to have a single mark up percentage for a product category. Therefore, variable mark up policy is
followed. Variable mark ups allows to factor in variable costs, associated with separate merchandise and even
in same product category.
• Variable mark up allows differences in finance locked up in inventory, for example, just-in-time ordering and
carrying an entire assortment. Variable mark up recognises the differences in selling efforts and merchandising
skills. Certain products carry especially attractive prices to build up traffic. This is possible by adopting variable
mark up method.

Competition-oriented pricing
Instead of demand and cost being the benchmarks for price setting, a retailer benchmarks its prices against a
competitor. A retailer keeps competitive parity while pricing. Competition oriented pricing would be below the
market, at the market or above the market.

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4.7.1 Modern Price Strategy

Retailers must be more attentive and meticulous with their pricing in this highly competitive retail world. More than
ever before, the financial success of companies selling retail goods depends on their price strategy. Consumers demand
fair prices in exchange for their business and constantly make comparison on purchase. With the ever-increasing
pressures from shrinking margins, rising costs, and competition, winning in the retail arena today demands price
strategies that reliably and frequently guide retailers’ decision-making.
• With the new advances in price optimisation science and technology the retailers get an unprecedented opportunity
to align pricing policy with strategic business objectives. Aligning business goals and pricing policy is quite
an elementary thing, but too often retailers lack the insight and technical ability to plan and price strategically.
Instead, retailers too often rely on a basic “cost-plus” strategy to maintain margins, follow their competition,
or adopt wholesale-supplied pricing.
• Competition is an integral part of the modern, optimisation-based price strategy. But modern price strategies
reflect an analytical, big-picture approach. They include a far wider variety of factors such as pricing gaps,
ending number psychology, brand sensitivity, and product movement. These factors enable retailers to manipulate
pricing to align with their broader strategic business objectives. These options were not available earlier, in
traditional pricing systems.
• When competitors introduce a new product or slash prices, retailers who have developed a strategic-level pricing
regime can respond with multiple options. The first and most typical option can be to respond immediately
with similar changes. However, an optimisation-based strategy can introduce additional options for retailers,
providing them a deeper understanding of the long-term financial impacts of reactionary changes. Optimisation
environments can provide alternative actions to make up for those losses caused by fierce competition.
• A modern pricing policy must assure to protect the consumer's perception that they are choosing the best place
to shop for their families. Consumers who are confused by non-palatable prices tend to shop elsewhere. Many
retailers inadvertently confuse customers by setting prices without a comprehensive policy, and just by reacting
to competition or pricing strictly on margin goals.
• A research indicates that consumers typically rely on three reference points when determining what they think
is a fair retail price:
‚‚ How much an item costed in the past?
‚‚ How much competitors charge for the same item?
‚‚ Their perception of the associated costs of selling an item.

4.8 Key Opportunities to Leverage Price Optimisation

Most retailers understand that being competitive on price-sensitive items helps build store traffic. But staying
competitive on price-sensitive items can result in minimising or sacrificing profit on those items. Below are five key
areas of opportunity that can be leveraged to maintain financial stability over long term. A thorough price strategy
incorporates each of these components.

Zone analysis
Many retailers practice grouping stores into zones. These groups were originally set up using a cost-to-serve model
driven by geographies, distribution centres, or critical suppliers. Retailers today sit on both ends of the spectrum
with only one zone and too many as well.

Determining an optimal price strategy through zone configuration requires a deep understanding of many factors,
including cost. Cost serves as an important purpose, but certainly should not be the only factor. Even retailers with
several outlets in one geographic area do not have identical economic, cultural, and demographic identities within
every store. Such store specific insights can empower a retailer to anticipate and react to factors such as job growth,
housing, and other economic trends that can greatly impact consumer price sensitivity and competitive activity.

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Category groupings
Retailers tend to apply a general margin goal to categories of like items when using price management systems.
Mature category management systems, new product innovations, health and wellness attributes, green products,
and convenience foods are creating opportunities with new segments within standard categories. Today, it benefits
retailers to look inside categories for margin opportunities. For example, the rise in popularity of specialty teas has
put those items in a category of their own, capable of performing much better than the general category of coffee
and tea. Retailers who lack insight into these buying trends miss opportunities to reshape a price strategy.

New-era price optimisation systems are designed to consider how categories and product groupings should be priced
and managed much easily than older systems. By breaking up traditional categories and price families, and creating
groups based on product benefit, health and organics, or convenience, retailers create profit opportunities in areas
not typically leveraged in the past.

Creative pricing
Creative pricing pushes consumers into action when they consider making a purchase. For items not promoted
through advertising, retailers can build their pricing strategy to leverage specialised, creative appeals that drive
product movement based on the perception of added value or savings.

Successful retailers in every market use tactics like offering better single price points only if multiple purchases
are made, cash discounts for purchasing a “set of products”, discounts on fuel for purchases made in-store, and
any other strategies to generate larger orders and take customers out of market on key items. Since these prices are
built around large purchases, smaller orders can become more profitable as those offers do not apply. These tactics
must be supported by:
• Clear, simple communication to both employees and customers.
• A great in-store merchandising program.

Private label
Private label brands and strategies are evolving at a very fast pace. Retailers have experienced that a good private
label strategy pays off big dividends in customer loyalty, margin enhancement, and category control over national
brand manufacturers. Retailers should be aware of the emerging best practices underpricing private label.

Supporting private label growth should be top priority in time and management as it adds profit at a much higher
rate than any other category in retail. Establishing an ideal price gap between private label and national brands, and
recognising consumer will evaluate the core suite of items (by size). Support a value-price perception by adopting
both long-term and seasonal pricing practices that capture margin targets. The line pricing organics products with
mainstream items should be avoided. They offer additional benefits and have competitive items of their own to take
into consideration.

Private label also enables retailers to fill a hole in their product mix with the added advantage of not being subjected
to a direct-price comparison by developing new products of a different size, added features, unique flavours, or even
different packaging. This practice has resulted in multiple tiers of private label offerings but has some private label
items taking on the popularity of a national brand with consumers. By having a comprehensive data file that can be
intelligently and systematically analysed, retailers can “reverse engineer” price gaps to identify the right size and
package for their new private label initiatives. They can set a competitive price that generates better-than-average
margins. In terms of managing gaps between multiple private label tiers, a consistent and purposeful price strategy
is critical.

Vendor management
Retailers have been increasing their reliability on manufacturers and distributors for guidance when it comes to
pricing and shelf management. As vendors have traditionally been a great source of information, which has given
many vendors a deep knowledge base of customer behaviours and category trends.

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A sophisticated, analytics-based pricing technology now empowers retailers to take control with good reason. Retailer's
and vendor's motives are often similar, but not the same. A retailer with a well-reasoned pricing strategy and reliable
data is in a position to negotiate effectively towards common goals. The retailer provides reliable pricing leadership
by aligning pricing to longer-term goals and strategies that, by and large, account for manufacturer best interests.

By making item optimisation metrics available, retailers can negotiate meaningfully with vendors and manufacturers.
For example, retailers whose price optimisation systems generate customer demand curves are equipped to talk on-par
with manufacturers or vendors on performance criteria, promotional vehicles, floor placement, item authorisation,
or cost increases. While negotiating with vendors, and understanding the product demand factors based on different
strategies offers a powerful tool.

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Summary
• Price sensitivity is the reaction of consumers to changes in price in terms of the quantities they buy and is known
as price elasticity.
• Some of the common pricing objectives of companies are: earning a targeted return on investment, maximising
profits, maximising sales, maximising market share, and maintaining the status quo.
• Pricing is a part of marketing mix. Marketing mix consists of product, place or distribution, promotion and
price.
• The price range being made available to the consumer depends on merchandise selection.
• The distance between customers and stores also affects the prices.
• A heavily promoted store charging reasonable prices experiences more off-take.
• The term cost of goods indicates the cost of merchandise plus expenses associated with it such as transport of
goods from the supplier to the store.
• Expenses are of two types namely: fixed and variable.
• Fixed expenses are called overheads and remain constant, irrespective of amount of merchandise sold or business
done.
• Variable expenses as the name itself indicates vary with the level of sales directly.
• Leader pricing involves pricing one or more items low to get people into a store.
• Sealed bid pricing is the process of offering to buy or sell products at prices designated in sealed bids.
• Going-rate pricing occurs when buyers pay the same price regardless of where they buy the product or from
whom.
• Price bundling occurs when different offerings are sold together at a price that’s typically lower than the total
price a customer would pay by buying each offering separately.
• Payment pricing is a strategy that helps customers break up their payments into smaller amounts, which can
make them more inclined to buy higher-priced products.
• Promotional pricing is a short-term tactic designed to get people into a store or to purchase more of a
product.
• A few common price adjustments include quantity discounts, which involves giving customers discounts for
larger purchases.
• A pricing strategy could be of three types namely: demand-oriented, cost-oriented, and competition-oriented.
• A thorough price strategy incorporates the components: zone analysis, category groupings, creative pricing, and
private label, and vendor management.

References
• Pricing Strategies [Online] Available at: <http://www.flatworldknowledge.com/pub/1.0/principles-
marketing/105030#web-105031> [Accessed 10 October 2011].
• Other Factors Affecting Pricing Decision Making [Online] Available at: <http://www.entrepreneurshipsecret.
com/other-factors-affecting-pricing-decision-making/> [Accessed 10 October 2011].
• Performance Merchandise Pricing Tips [Video Online] Available at: <http://www.ehow.co.uk/video_4939786_
performance-merchandise-pricing-tips.html> [Accessed 10 October 2011].
• Retail Pricing Strategies with Shari Waters [Video Online] Available at: <http://video.about.com/retail/Retail-
Pricing-Strategies.htm> [Accessed 10 October 2011].
• Chunawalla, S. A., 2009. Contours of Retailing Management. Global Media.
• Coleman, F.C. Retail Pricing Strategy: Insights and Opportunities [pdf] Available at: <http://www.revionics.
com/pdf/Revionics.White.Paper.%5BRetail.Pricing.Strategy.Insights.and.Opportunities%5D.pdf> [Accessed
10 October 2011].

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Recommended Reading
• Lehmann, 2005. Product Management, 4/E, Tata McGraw-Hill Education.
• 2007. Retail Store Management, Volume 13. LaSalle Extension University.
• Bennett, A. G., 2009. The Big Book of Marketing. McGraw-Hill Professional.

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Self Assessment
1. The price range available to consumer depends on the _________selection.
a. vendor
b. merchandise
c. strategy
d. store

2. Which of the following statements is false?

a. Prices can be easily changed and easily matched by the competitors.
b. ROI is a common pricing objective for many firms.
c. Many companies set their prices to decrease their revenues as much as possible relative to their costs.
d. Pricing is a part of marketing mix.

3. Which of the following allows for differences in finance locked up in inventory?

a. Pricing
b. Stock
c. Just-in-time
d. Variable mark up

4. Which of the following is also known as postage-stamp pricing?

a. Uniform-delivered pricing
b. Payment pricing
c. Promotional pricing
d. Going-rate pricing

5. A __________ is a promotion where a seller gives customers discount cards or coupons after purchasing.
a. bounce back
b. cost-plus
c. mark up
d. mark down

6. Which of the following statements is true?

a. Private label brands and strategies are evolving slowly.
b. Prestige pricing pushes consumers into action when they consider making a purchase.
c. Determining a minimum price strategy through zone configuration requires a deep understanding of many
factors.
d. Consumers demand fair prices in exchange for their business and are constantly make comparison while
purchasing.

7. Prestige pricing occurs when a _______ price is utilised to give an offering a high-quality image.
a. competitive
b. lower
c. standard
d. higher

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8. Match the following.

A. Occurs when buyers pay the same price regardless of where they buy the
1. Price bundling
product or from whom.
B. Occurs when different offerings are sold together at a price that’s typically
2. Payment pricing lower than the total price a customer would pay by buying each offering
separately.
C. A strategy that helps customers break up their payments into smaller
3. Promotional
amounts, which can make them more inclined to buy higher-priced
pricing
products.
4. Going-rate D. A short-term tactic designed to get people into a store or to purchase more
pricing of a product.
a. 1-C, 2-B, 3-A, 4- D
b. 1-B, 2-C, 3-D, 4- A
c. 1-D, 2-C, 3-B, 4- A
d. 1-A, 2-C, 3-D, 4- B

9. Which of the following expenses are called overheads and remain constant, irrespective of the amount of
merchandise sold or business done?
a. Variable
b. Mark-up
c. Fixed
d. Cost-plus

10. Which of the following strategy is used largely by organisations that are set up to provide social services and
not to make profit?
a. Cost recovery
b. Discount
c. Company pricing
d. Promotional

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Chapter V
Visual Merchandising and Financial Merchandising

Aim
The aim of this chapter is to:

• introduce the concept of visual merchandising

• discuss the organisational chart of visual merchandising

• explain the concept of cross merchandising

Objectives
The objectives of this chapter are to:

• explain different ways of product presentation in visual merchandising

• explicate various planning systems in merchandising management

• describe the role of visual merchandising for a non-retail store

Learning outcome
At the end of this chapter, you will be able to:

• identify the functions of visual merchandising

• discuss financial merchandise management

• comprehend the possibilities in visual merchandising

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5.1 Introduction to Visual Merchandising

Visual merchandising is a common term used for the aspect of product management that is concerned with presenting
a product within a retail outlet to its best advantage. After all the product management work has gone into planning
ranges, the product makes its entrance into customer space. This is done by selecting products, liaising with suppliers,
and getting the physical product through supply chain. Visual merchandising combines commercial approach with
design approach within the store environment. It helps to achieve operational product management objectives;
maximising the efforts of buying teams by giving the product best opportunity to sell. Visual merchandising blends
with store design to create an environment that sends out strategic messages to consumers in order to reinforce
retailer’s brand values.

Visual merchandising: definition and function

Visual merchandising is the art of implementing effective design ideas to increase store traffic and volume of sales.
Creating an attractive product display can draw customers in, for example, sales announce. It is used for displaying
merchandise on the shop floor to enable maximum sale.

Visual merchandising is a tool to:

• achieve sales and targets
• enhance merchandise on the floor
• communicate to a customer and influence his decision to buy

It uses season based displays to introduce new arrivals to customers, and thus increase conversions through a planned
and systematic approach by displaying stocks available.

Visual merchandising helps to:

• Educate the customers about the product in an effective and creative way.
• Establish a creative medium to present merchandise in 3D environment, thereby enabling long lasting impact
and recall value.
• Setting the company apart in an exclusive position.
• Establish linkage among fashion, product design, and marketing by keeping the product in prime focus.
• Combining the creative, technical and operational aspects of a product and the business.

It is everything a customer sees, both in the exterior and the interior of a store, that creates a positive image of the
business and results in getting the attention of the customer, creating interest and desire, convincing the customer
of the value of the products, and finally leads to a sale.

History of visual merchandising

In 18th century, when contemporary methods of visual merchandising were evolving, store owners and managers
paid little attention to the appearance of their stores and the presentation of merchandise. Very little merchandise
was displayed within the store. Rather, a customer would enter the store and speak with the retailer, who would
then present merchandise that was kept in a back room. Sales conversation was more important in convincing a
customer of the quality of a product and making a sale. The evolution in store design brought about a new ‘process’
of shopping.

The first step in the evolution of store design occurred when small stores began to display their merchandise openly
to the public, instead of keeping it stored in backrooms. Gradually, the deliberate displaying of goods became an
important tool for retailers. Unattractive stores, that had little or no visual appeal for customers, slowly became
exciting shopping venues.

Visual merchandising revolution started in early 19th century, as retailers understood that visual displays of goods
were necessary to attract retail customers. Store windows became important venues to attractively display the store’s
merchandise.

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5.2 Scope of Visual Merchandising
Visual merchandising has often been used as a synonym for display in retailing, but in today’s retail industry, the
term ‘visual merchandising’ incorporates a much wider meaning to it. Visual merchandising allows retailers to make
the market place innovative, exciting and stimulating by creating product-led stories supported by merchandising
solutions.

Visual merchandising encompasses a wide range of activities; across all retail sectors. It may include all or some
of the elements as given below:
• Choice of fixtures and fittings to be used
• Method of product presentation
• Construction of ‘off-shelf’ displays
• Choice of store layout (to encourage complementary purchases)
• Use of point of sale material (to encourage impulse purchases)
• Construction of window displays

Visual merchandising plays a much greater part in product management process in some retail sectors than others.
Fashion and home furnishings have always given considerable resources to display, but even in a grocery superstore
elements of visual merchandising can be found. Indeed some grocery retailers have used visual merchandising as
a way of providing interest to the customer and as a way of differentiating themselves from their competitors. The
computerised planning systems allow space management to combine visual display objectives with space productivity
objectives. Some of the most effective in-store visuals are the result of simple creative ideas using everyday objects.
Retail outlets have to be better in display if they are to retain an increasingly style conscious customer base.

5.3 Visual Merchandising Organisational Chart

The nature and visual merchandising can be seen in organisation chart given below:

Vice-President
Sales Promotion

Corporate Director of
Visual
Merchandising

Display Fashion Display Director Administrative Director of branch Display fashion

Coordinator Downtown Store Asst. Secretary store display coordinator (Men’s)
Wonend

Production Window Home furnishing Interior

Display Display
Manager Manager Coordinator Manager
Manager Manager

Fig. 5.1 Visual merchandising organisation chart

(Source: Rudrabasavaraj, M. N., 2010. Dynamic Global Retailing Management, Global media)

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The organisational chart shown in the above figure is a representative of a major department store with branches
in out-laying cities, as well as “home” or “base” area. The visual merchandising department may be a part of sales
promotion division, aligned with store planning division or a division unto itself, depending upon the management
set up of a particular company. The four executives immediately responsible to the corporate usual merchandising
director, represent various talents, skills and managerial capabilities.

The two display fashion coordinators are qualified display trimmers and possess extraordinary good taste and
knowledge of merchandising. On the other hand, the director of brand store display must be knowledgeable in all
phases of visual merchandising with the ability to handle multi-faceted responsibility of scheduling, budgeting, and
poding of props and even personnel when emergencies arise. The director of downtown or parent store has similar
responsibilities to the branch director with additional supervision of production department which must supply
special shop decor, fixturing and backgrounds for windows and fashion shows. The home furnishings coordinator’s
responsibilities are the home fashion areas and model rooms in all stores.

Display trimmers vary greatly. Some display trimmers are mechanically inclined, some are craftsmen in their
trade, and others are fashion conscious or extremely innovative. It takes many kinds of personalities and talents in
a combined effort of a good display department. It is the duty of the director of visual merchandising to cast each
individual in area of position which will more fully utilise his particular and unique capabilities.

There are two types of branch stores. There are the branches of the company which are located in the prime marketing
area of the main store. Also, there are branches which are many miles from the home market. Thus, it complicates
the job of communicating the goals or visual merchandising department. It is essential that more distant branches
be kept informed on a day-to-day basis of thinking about the store in order to maintain a consistent store image.

While the organisation chart shows a large number of people working full time on visual merchandising, the
responsibilities indicated are also found in the smallest of retail operations. The larger the store, the more an
individual may concentrate on a single aspect of visual merchandising task and there can be more division of duties
and specialisation. Although windows are a major part of visual merchandising, it is one of the major selling tools
of the merchant, a selling tool which encompasses a great deal more than just window.

It also includes the total “look” of a store, which should enhance the merchandise and set a mood, and is most
effective when it gives the customer every bit of information which is very important, where in the store the item
can be purchased. Without close cooperation between visual merchandising staff, buyer and divisional merchandise
manager, results will not be entirely satisfactory.

5.4 Visual Merchandising Planning Systems

Similar to most other areas of retail management, information technology applications are helping to improve the
visual merchandising process. Particularly, they are helping to forge stronger links between product range planning,
space allocation and product presentation. A fully integrated visual merchandising system such as Compass Software’s
SmartVM can provide store personnel access to space planning visualisations via a corporate internet. This system
can be used by buyers and merchandisers, as they build ranges for the next season. After that when it is finalised and
ready for delivery photographic quality, visual guidelines can be effectively and quickly communicated throughout the
retail business. The improved quality of output of this type of system will be particularly helpful for fashion buyers
when presenting their ranges within a floor plan context, helping store personnel to understand product linkages.

5.4.1 Responsibility for Visual Merchandising within Retail Structure

Responsibility for visual merchandising of product management varies between retail organisations. In some retail
organisations, a team of brand managers co-ordinates the visual merchandising effort with other promotional activities,
so that it becomes part of marketing activities. In fact, the elements of visual merchandising are sometimes referred
to as ‘in store advertising’. Traditionally, advertising refers to communications that are transmitted via paid media,
such as magazines or television.

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Therefore, a retailer using his imagery within the store cannot strictly be counted as advertising. However, the retail
environment is a place where manufacturers display various types of branded materials, which again appear to be
advertisements. The extent to which a manufacturer will have paid the retailer for this privilege can vary from zero
to a considerable sum.

The term ‘ambient media’ is a useful one in this context and refers to the various ways in which messages about
products and services can appear in a selling environment, but do not fall into the traditional definition of advertising.
The structure beneath the director is sometimes vague. A visual merchandise manager, supported by area teams,
is a format frequently used in multiple retailers. In smaller retail companies, somebody based in the store may
be partly or wholly responsible for visual merchandising. Visual merchandising at the implementation level is a
creative activity and usually attracts people with a design training or background. Specific training for such aspect
of retailing is available.

5.4.2 Visual Merchandising- A Support for Positioning Strategy

In an increasingly saturated retail environment which is competitive and subject to international competition, visual
merchandising is a way of communicating and differentiating the retail offer. It must be an integral part of any
strategy in which a retailer attempts to position or re-position the retail offer in the mind of the consumer. Visual
merchandising is frequently used by multiple retailers to strengthen the retail brand, but a highly centralised and
inflexible approach to visual merchandising may not be appropriate in all circumstances. The table given below
considers local, centralised and decentralised approaches to visual merchandising.

• Can adapt to local market product preferences

Local approach • Can incorporate local themes into displays
• Can adapt to local competition
• Controls retail brand communication
Centralised approach • Promotes a stronger identity, both nationally and
• internationally
• Can integrate corporate communication themes and messages with
Decentralised approach the visual merchandising effort (for example, by using images from
media advertising in displays)

Table 5.1 Visual merchandising: local and centralised approaches

Fixtures and fittings

The way products need to be presented and displayed within the store will largely determine the choice of fixturing.
The principal types of fixtures are explained below:

Gondolas: The term gondola refers to a system of shelving which offers stacked merchandise to customer in a
longitudinal presentation. Gondola is used in the ‘grid format’ where consumers move along aisles between gondolas,
which offer merchandise on both sides. The end of the gondola is particularly effective in attracting customers to
products as they slow down to turn the corner to view merchandise on the other side. Some gondolas are made
up of a number of fixture modules which give flexibility in terms of fixture sizing, and the opportunity to alter the
configuration of shelving.

Round fixtures: The round fixture offers merchandise in a circular presentation. The merchandise might be hung
on a series of prongs (as in the case of belts or bubble packed products) or the fixture may be a more solid structure,
showing the variety available in a merchandise type. Gap uses such type of fixturing to show all the colours available
in basic tops or sweaters. Round fixtures are useful for showing a variety of merchandise within a single category,
but they are not very space efficient because customer access is needed from all sides.

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Four-way: Four-way fixtures offer the retailer flexibility when a degree of co-ordination is needed. The fixture offers
a combination of front facing merchandise presentation, with the space efficiency of side hanging. The four-way
provides opportunity to present a wide variety of merchandise and is more space efficient than a round fixture.

Shelving: Wall space is useful for incorporating the general display of merchandise within the overall interior design
of the store. For example, casual clothing retailers often use wall shelving to house large quantities of merchandise,
stacked from floor to ceiling, whilst offering interest by showing all alternative colours and shades of denim. Gondolas
in various shapes and sizes, incorporate shelving to accommodate different types of product.
Rails: Rails can be mounted onto walls, or incorporated into a free standing fixture. Height flexibility can be
introduced using adjustable rails and modular rail fixtures provide longitudinal variations. Cascading rails improve
the appearance of forward-facing hanging garments, and allow the customer better access to the product.

Bins, baskets and tables: Normally, bins and baskets are used to house large quantities of merchandise. They are
effective for small items and for heaps of promotional merchandise. They may be filled with one type of product,
or the customer may be invited to rummage through a variety of products retailing at a particular price point. In
addition, promotional merchandise can be stacked on tables, which provide flexibility in terms of space allocation
and display area. However, tables can also be used in a more elegant product display.

Increased use of self-service in retailing depicts that use of drawers and cabinets has decreased, but they may still
be used for very functional merchandise that does not really need displaying or in instances where merchandise
needs protection. For example, traditional hardware stores that sell loose items rather than pre-packaged keep this
type of merchandise in drawers. Watches and jewelry are often housed in glass cabinets in order to prevent damage
and theft.

Many retailers have their own customised fixturing and their own customised terminology for it. Fixturing should
have a degree of co-ordination through the store, so that they can be considered in ‘families’, using the same type
of materials (whether chrome, wood, acrylic or glass) and the same set of design features. New designs for fixtures
often incorporate lighting within the structure so that merchandise on display can be highlighted without the need
for spot lighting from walls or ceilings.

In all retail circumstances, fixturing should complement and not compete with the merchandise, although the fixturing
may be used to reinforce a particular retail brand image. Fixturing also needs to be flexible, so that an ever-evolving
product range can be successfully accommodated. Many modern systems are modular enabling a large number of
alternative combinations to be built.

Product presentation
The way of products’ presentation as routine will depend on the type of fixture available but essentially can
include:
• Vertical stacking (for example, for magazines or CDs)
• Horizontal stacking (for example, tinned foods or folded garments)
• Hanging on hangers or hooks
• Hanging mounted on card or bubble packed

Merchandise presentation is largely determined by product category or end use of product, but in some instances,
other product characteristics may bear a relation to the presentation method. For example, colour is often used
effectively and many clothing and home furnishings retailers incorporate a corporate colour palette into the buying
plan so that different product categories can be presented together.

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Retailers may group merchandise together according to price levels or even sizes. Price lining can be used both to
plan merchandise assortments and provide guidelines for display. For example, women’s clothing retailers may use
sizing groups such as petites, regular and ‘plus’, and charity shops generally use product, size and then colour to
provide some logic in their disparate merchandise offer. There may also be a case for grouping products according
to levels of technical involvement, such as PC World houses software and accessories at the front of store and the
full PC systems are positioned at the back. The customer is faced with gradually increasing product complexity as
they move through the store.

Product presentation can instigate a number of issues for other members of the product management team. Fixturing
may determine the size variation a retailer offers. For example, a small convenience store may not find it practical
to stock family-size cereal packets as they require such tall shelves; it would be preferable in this type of retailer
to offer a smaller pack size and another product item in the same available space. The method of presentation may
also determine the packaging or ‘get up’ of product. For example, a folded shirt is likely to need board and pins, or a
paper sash around it to keep it looking neat, but all these add to the cost of the item. Small items (such as stationery
products) are much more manageable when bubble packed or mounted on card and hung on a wall fixture. It may
be necessary to attach an illustration of the product in use if it has little ‘hanger appeal’. For example, a swimsuit
tends to look like a crumpled rag on the hanger and most uncooked pre-prepared meals look unappetising, and rely
on the photograph on the package to encourage purchase.

New approaches to point of purchase presentation methods have been part of the orientation towards category
management in the management of customer demand. Dedicated product fixturing can provide clarity and logic to the
product presentation, whilst incorporating suggested complementary and impulse purchases in the arrangement.

Store layout
Visual merchandising also encompasses the design of a store layout. A store layout will be heavily influenced by
the assortment and variety on offer and will be constrained by the size and structure of the shop itself. The layout
used will also depend on the type of fixturing used. There are a number of different approaches to store layout,
although they are all designed with the intention of moving customers to every area in the store in order to expose
them to the full range of products.

A common store layout has fixtures positioned in the form of a grid. This method maximises the use that can be made
of the available space and provides a logical organisation of the products on offer. However, it is rather mechanical
in its approach, and rows of gondola-type fixtures with aisles between them can lack interest.

An alternative approach is to place fixtures in a more random pattern. This type of layout is appropriate when variety
in fixturing is needed and when shopping process involves browsing rather than a more systematic product selection
process. Referred to as a free form or a free flow layout, this kind of arrangement can successfully incorporate a mix
of small gondolas, hanging rails and shelving units. Although the free-form layout generally offers more opportunity
to create interest than the grid layout, an unending mass of fixtures set out in a random fashion can look chaotic and
for large expanses of retail space, such as in a department store, some attempt must be made to break up the space
and create pockets of interest for the customer.

Where the merchandise range is limited, or in situations where a high level of personal selling is desirable or necessary,
a ‘boutique’ layout could be used. This layout surrounds the customer with merchandise, most of which is displayed
in or on wall fixturing, with one or two other central fixtures offering interest or, perhaps, to house the till. In larger
stores a definite guided walkway or ‘racetrack’ is incorporated into the layout, which guides the customer between
the main classifications of merchandise, which are often set out in free-form or short grid fixturing.

Modern layouts are generally more airy, with voids replacing walls and glass replacing solid partitioning.
‘Decompression zones’ are used to give shoppers time to relax and refocus their attention, for example at the front
of the store, or near escalators. Vertical access and visibility is becoming increasingly important as a means of
encouraging customers to multi-level retail space, as the amount of available ground floor space decreases in prime
shopping centre locations.

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5.5 Visual Merchandising in Non- Store Retailing

The objectives of retail design and visual merchandising are same in both store and non-store retailing, and revolve
around presenting products attractively, but reflecting customer needs. The non-store retailing presents some additional
challenges for visual merchandising, whilst offering some unique opportunities. The fact that non-store retailing
relies on product representations rather than ‘real thing’ means that some visual merchandising techniques, like
tonnage merchandising and classification dominance displays are less effective. The store environment offers more
scope to use the physical presence of the products for impact while restrictions associated with non-store medium
can be significant. Catalogues are only able to show a product in two dimensions, and retailer’s web sites have a
tendency to be very similar in style and operation, negating many of the efforts that are made by store retailers to
achieve differentiation. There are novel ways of presenting products in a lifestyle. The use of corporate colours
and high quality photography combined with creativity has all contributed to the success of strong non-store retail
branding.

5.6 Cross Merchandising

Cross merchandising refers to the display of opposite and unrelated products together to earn additional revenues
for the store. Products from different categories are kept together at one place for the customers to find a relation
among them and pick up all.

According to cross merchandising:

• Unrelated products are displayed together. The retailer makes profits by linking products which are not related
in any sense and belong to different categories.
• Cross merchandising helps the customers to know about the various options which would complement their
product.
• Cross merchandising makes shopping a pleasurable experience as it saves customer’s precious time.

Examples of cross merchandising are:

• Mobile covers displayed next to mobile phones.
• Recharge coupons with new sim cards
• Batteries with electronic appliances
• Neck ties or cuff links displayed with men’ shirt
• Fashion jewellery, rings, anklets, hand bags with female dresses
• Shoe laces, shoe shiners, shoe racks with shoes
• Audio CDs with CD Players

Important guidelines for cross merchandising to be kept in mind:

• The opposite products should be sensibly displayed for the customers to be able to relate them.
• The merchandise should be neatly arranged without giving a cluttered look to the store.
• The merchandise must complement each other to create the desired impact.
• The retailer must make sure the products have some logical connection with each other.
• Use hangers, pegs, mannequins or suitable fixtures to intelligently display the unrelated goods and prompt the
customer to pick all of them.

5.7 Financial Merchandise Management

Financial merchandise management stipulates which products are bought by the retailer, when they are bought, and
what quantity is bought. Rupee control involves planning and monitoring the inventory investment made during a
given period, while unit control relates to quantities of merchandise handled in that period. Financial merchandise
management encompasses methods of accounting, merchandise forecasting and budgeting, unit control systems,
and integrated dollar and unit controls.

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The purpose of financial merchandise management is to stipulate which products are bought by the retailer, when,
and in what quantity. Dollar control monitors inventory investment, while unit control relates to the amount of
merchandise handled.

5.7.1 Use of Financial Merchandising in Organisation

Various uses of financial merchandising in an organisation are explained below:

Helpful in studying the merchandise forecasting and budgeting process

This is a form of currency control with six stages:
• Designating control units
• Sales forecasting
• Inventory-level planning
• Reduction planning
• Planning purchases
• Planning profit margins.

Adjustments require all later stages to be modified. Control units-merchandise categories for which data gathered
must be narrow enough to isolate problems and opportunities with specific product lines. Sales forecasting may be
the key stage in merchandising and budgeting process. Through inventory-level planning, a firm sets merchandise
quantities for specified periods through the basic stock, percentage variation, weeks’ supply, and stock-to-sales
methods. Reduction planning estimates expected markdowns, discounts, and stock shortages. Planned purchases
are linked to planned sales, reductions, ending inventory, and beginning inventory. Profit margins are related to a
retailer’s planned net sales, operating expenses, profit, and reductions.

Helpful in integrating currency and unit merchandising control concepts

Three aspects of financial inventory control integrate the currency and unit control concepts:
• Stock turnover
• Gross margin return on investment,
• When to reorder, and how much to reorder

Stock turnover is the number of times during a period that the average inventory on hand is sold. Gross margin
return on investment shows the relationship between gross margin in currency and average inventory investment
(at cost). A reorder point calculation-when to reorder-includes the retailer’s usage rate, order lead time, and safety
stock. The economic order quantity (how much to order) aids a retailer in choosing how big an order to place, based
on both ordering and inventory costs.

Helpful in explaining the cost and retail methods of accounting

Two accounting techniques for retailers are the cost and retail methods of inventory valuation. Physical and book
(perpetual) procedures are possible with each of the techniques. Physical inventory valuation requires counting
merchandise at prescribed times. Book inventory valuation relies on accurate book keeping and a smooth flow of
data.

The cost method obligates a retailer to have careful records for each item bought or code costs on packages. This
must be done to find the exact value of ending inventory at cost. Many firms use LIFO accounting to project that
value, which let them reduce taxes by having a low ending inventory value. In the retail method, closing inventory
value is tied to average relationship between the cost and retail value of merchandise. This more accurately reflects
market conditions, but is more complex.

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Helpful alterative method of inventory unit control

A unit control system involves physical units of merchandise. It monitors best-sellers and poor sellers, the quantity
of goods in hand, inventory age, reorder time, and so on. A physical inventory unit control system may use visual
inspection or a stock counting procedure. A perpetual inventory unit control system keeps a running total of the units
handled through record keeping entries that adjust for sales, returns, transfers, and so on. A perpetual system can
be applied manually, by merchandise tags processed by computers, or by point-of-sale devices. Virtually all large
retailers conduct regular physical inventories; two-thirds use a perpetual inventory system.

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Summary
• Visual merchandising is the art of implementing effective design ideas to increase store traffic and volume of
sales.
• The first step in the evolution of store design occurred when small stores began to display their merchandise
openly to public, instead of keeping it stored in backrooms.
• Visual merchandising revolution started in early 19th century, as retailers understood that visual displays of
goods were necessary to attract retail customers.
• Visual merchandising allows retailers to ‘make the market place innovative, exciting and stimulating by creating
product-led stories supported by merchandising solutions’.
• Visual merchandising at the implementation level is a creative activity and usually attracts people with a design
training or background, although specific training for this aspect of retailing is available.
• Visual merchandising is frequently used by multiple retailers to strengthen the retail brand, but a highly centralised
and inflexible approach to visual merchandising may not be appropriate in all circumstances.
• Merchandise presentation is largely determined by product category or end use of product.
• Price lining can be used both to plan merchandise assortments and provide guidelines for display.
• Product presentation can instigate a number of issues for other members of the product management team.
• A store layout is heavily influenced by assortment and variety on offer and will be constrained by the size and
structure of the shop itself.
• Non-store retailing relies on product representations rather than the ‘real thing’.
• Cross merchandising refers to the display of opposite and unrelated products together to earn additional revenues
for the store.
• Financial merchandise management stipulates which products are bought by the retailer, when they are bought,
and what quantity is bought.

References
• Bhalla, S., Visual Merchandising [Online] Available at: <http://books.google.co.in/books?id=YQofM2t82HIC
&pg=PA22&dq=visual+merchandising+in+retail&hl=en&ei=EI2STu3WHMG8rAez8OG6AQ&sa=X&oi=bo
ok_result&ct=result&resnum=1&ved=0CD4Q6AEwAA#v=onepage&q=visual%20merchandising%20in%20
retail&f=false > [Accessed 10 October 2011].
• Financial Merchandise Planning and Management [Online] Available at: <http://www.prenhall.com/rm_student/
html/overviews/ov15.html> [Accessed 10 October 2011].
• Clifton, M., Visual Merchandising Tips [Video Online] Available at: <http://www.ehow.com/video_4766305_
visual-merchandising-tips.html> [Accessed 10 October 2011].
• The Qualities of Effective Visual Merchandising Displays [Video Online] Available at: <http://www.in.com/
videos/watchvideo-the-qualities-of-effective-visual-merchandising-displays-9781026.html> [Accessed 10
October 2011].
• Rudrabasavaraj, M. N., 2010. Dynamic Global Retailing Management, Global media.
• Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge.

Recommended Reading
• Colborne, R. Visual Merchandising: The Business of Merchandise Presentation, Colborne Cengage Learning.
• Sharma, M., 2009. Product Management: Product Lifecycle and Competitive Marketing Strategy, Global India
Publications.
• Morgan, T., 2008. Visual Merchandising: Window and In-Store Displays for Retail, Laurence King.

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Self Assessment
1. Visual merchandising combines commercial approach with _______ approach within the store environment.
a. product
b. design
c. planning
d. visual

2. Which of the following statements is false?

a. Visual merchandising plays a much greater part in product management process in some retail sectors than
others.
b. Responsibility for visual merchandising of product management varies between retail organisations.
c. The way products need to be presented and displayed within the store will largely determine the choice of
space.
d. Wall space is useful for incorporating the general display of merchandise within the overall interior design
of the store.

3. Which of the following refers to the display of opposite and unrelated products together to earn additional
revenues for the store?
a. Cross merchandising
b. Product merchandising
c. Service merchandising
d. Visual merchandising

4. The ________ offers a combination of front facing merchandise presentation, with the space efficiency of side
hanging.
a. fixture
b. Walls
c. store layout
d. shelves

5. Which of the following statements is true?

a. The accounting method obligates a retailer to have careful records for each item bought or code costs on
packages.
b. Book inventory valuation requires counting merchandise at prescribed times.
c. A unit control system involves book units of merchandise.
d. Book inventory valuation relies on accurate bookkeeping and a smooth flow of data.

6. Which approach of visual merchandising controls retail brand communication?

a. Local approach
b. Decentralised approach
c. Centralised approach
d. Strategic approach

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7. Which of the following form of product presentation is used by gondolas?
a. Free flow
b. Grid
c. Modern
d. Boutique

8. __________can be used both to plan merchandise assortments and provide guidelines for display.
a. Price lining
b. Fixtures
c. Store layout
d. Product presentation

9. Which of the following layout method maximises the use that can be made of the available space and provides
a logical organisation of the products on offer?
a. Modern
b. Grid
c. Race track
d. Boutique

10. A _________inventory unit control system keeps a running total of the units handled through recordkeeping
entries.
a. physical
b. book
c. prescribed
d. perpetual

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Chapter VI
Category Management

Aim
The aim of this chapter is to:

• explain the concept of category management

• discuss the philosophy of category management

• describe the role of stock keeping units (SKU) in product category

Objectives
The objectives of this chapter are to:

• explicate the evolution of category management

• explain the concept of category captain

• highlight the steps in category management

Learning outcome
At the end of this chapter, you will be able to:

• recognise the way of formulating the strategy for a category

• identify the limitations of category management

• categorise the benefits of behavioural category management

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6.1 Introduction to Category Management
Category management is a retailing and supply management concept in which the range of products purchased by a
business organisation or sold by a retailer is broken down into discrete groups of similar or related products. These
groups are known as product categories, for example, grocery categories might be tinned fish, washing detergent,
toothpaste etc. It is a systematic, disciplined approach to manage a product category as a strategic business unit.

Definition
Category management has been defined as ‘the strategic management of product groups through trade partnerships,
which aims to maximise sales and profits by satisfying consumer needs'. The key words within this definition, points
to the difference between category management and other buying approaches.
• A category is a strategically managed product group: Rather than products being grouped by departments,
into which they are placed according to operational convenience, products are put into groups that are carefully
defined according to consumer shopping behaviour. All products within a category can be managed using a
strategy that is specifically formulated for that group of products.
• Category management relies on trade partnerships: In category management, suppliers play a very active
role in management of the product group. Suppliers become partners of the retailer that is using category
management, and the two parties work together in pursuit of mutual goals.
• Category management aims to maximise sales and profits: The definition highlights the importance of
performance of product group (sales and profits), but by linking this performance to consumer satisfaction.
The definition indicates that long-term performance objectives can only be reached if consumer needs, both
for products and in shopping process, are met. Additionally, the definition indicates that performance refers
to the product group, as opposed to each single product item. A category may include a number of leading
manufacturers’ brands, retailers’ own brands and some speciality products, all of which have their own specific
sales values and profit margins. However, from the point of view of the retailer, important is the performance
of the whole category and its contribution to the company’s overall profitability.
• Category management satisfies consumer needs: The definition for category management highlights that it
is a consumer-led process, and that only by having a deep understanding of consumer needs and providing a
product assortment that fully satisfies each shopper as they interact with a product category, can performance
be maximised in the long term. Category management relies on having an understanding of a consumer’s
relationship with a product type, for example, the level of interest they have in a product category, how they
prefer to shop, and how different shopping occasions may influence the decisions they make about buying
products within a category.

Category management as a philosophy

As an approach to thinking about how products are managed within a retail business, category management requires
a broader vision. Rather than being primarily concerned about products from a features and procurement viewpoint,
and then forecasting sales for those products, category managers have first and foremost to consider the performance
of the category in relation to consumer demand and then strive for the most profitable way to supply that demand.
Consideration of features and procurement therefore become a part of, but not the focus of, the category manager’s
remit, while forecasting is replaced by responding.

Fundamental to the adoption of a category management philosophy is the way in which suppliers are viewed. Whether
they are termed partners or allies, the key to the philosophy is supplier integration. Traditional lines defining functions
that a supplier performs are broken down, as competencies are shared as well as information. If a supplier is able
to perform an aspect of product management more efficiently, then it should contribute that part of the process. If
a retailer is more efficient, then it should perform the function. The resulting efficiency gains result in a low-cost
product, and cost savings can be negotiated between the parties.

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6.2 Evolution of Category Management

The evolution of category management started when the retailers operated their businesses. Most of the retailers built
their businesses around the principles of category management through the 1990s. Eventually, the process proved to
be too complicated for many retailers to adhere to. There were too many details and variables. It was cumbersome
and unwieldy. Too much coordination was needed from too many departments such as logistics and finance.

Problems also developed on the manufacturer’s front when sales people were asked to learn the intricacies of
category management. Their primary job was developing relationships, moving products, and building the top line.
They weren’t analysts. As a result, many manufacturers created category management departments staffed with
analysts to support the salespeople. Even after creating all this, training somebody capable with the entire category
management process remained a daunting task.

Few of the large manufacturers came up with ideas regarding category management. They restricted category
management to large retailers by investing their time and effort on full-time account teams of their largest customers.
Smaller chains received less interest and support.

6.3 Category Captain

Manufacturers and retailers have different profit objectives. A manufacturer wants to maximise the profits of its own
brands. The retailer, on the other hand, wants to maximise the profit of the entire product category.

In spite of these divergent profit objectives, both manufacturers and retailers are increasingly realising that profit
margins of both can be increased through cooperation rather than confrontation. The category captain is not always
the supplier with the largest turnover, although that is quite common. However, sometimes there are more than one
players who can demonstrate strong expertise in category management.

And also, while the job has traditionally been given to brand suppliers, it is now common-place to have switched-on
private label suppliers taking the category captaincy job. Despite the improved status, the category captain should
not abuse, or be made to abuse the status by blatantly uncompetitive practices such as price fixing or blocking a
competitor.

For example, Wal-Mart experimented with Proctor & Gamble (P&G), a leading FMCG company, where P&G
was considered by Wal-Mart as its partner in progress and not just another vendor in the FMCG category. P&G
was allowed to manage the shelf space in all the Wal-Mart Stores and add or reduce inventory based on customer
demand. P&G emerged the category captain among FMCG products within a short period contributing over 50%
in sales volume its categories through online inventory management system and better shelf-monitoring. Category
management is one such cooperative strategy that often involves the appointment of a leading manufacturer as the
category captain.

A category captain advises the retailer on the best way to price, display, and promote products in a category including
those of competitors. This arrangement, therefore, ensures retail efficiency but raises doubt about possible misuse
of power by the category captain to circumvent fair competition. Therefore, a perfect understanding and trust can
only make this work for the retailer as well as the supplier and vendor.

Category management is a retailer-supplier process of managing categories as a strategic business unit (SBU),
producing enhanced results by focussing on delivering consumer value. The aim of category management is:
• to satisfy the consumer
• to grow the category

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This way, the category captain will add value to the retail space and the retailer. In India, Madura garments, a division
of Aditya Birla Nuvo is a leading apparel manufacturer and a retail company owning brands such as Van Heusen,
Louis Philippe, Allen Solly, Allen Solly Women’s wear, Peter England, Byford, and so on, which are leading apparel
among its categories. Madura also retail their brands through its own outlets named Planet Fashion and Trouser
Town. Madura has strategic partnership with several multi brands retailers such as Shoppers Stop, Lifestyle, and so
on, and are considered category captain in the brands it manufactures and retails throughout the country.

6.4 Category Management Process

Category management is viewed as a step-by-step planning and implementation process that helps retailers and
suppliers achieve both performance-based objectives and longer-term strategic aims. This process is outlined in the
table given below.

Define the category Determine the products that

make up the category from
a consumer’s perspective.
Consider the role of sub-
categories or individual SKU’s
Category definition taken in the category.

Establish the strategic role of Develop a strategic plan for the

the category within the total category, considering long-term
product assortment of the trends.
retailer

Establish the measures upon Determine the way in which

which category performance the performance of a category
will be assessed. will be evaluated. Consider
various costing and profitability
approaches and include both
quantitative and qualitative
assessments.

Category planning Formulate a strategy for the Develop a marketing and supply
category. development plan to achieve
both short-term and long-term
category objectives.

Establish the category Determine the various tactics

marketing mix to be used within the marketing
and supply plan, for example,
space allocation, promotions.

Establish category management Assign responsibilities

roles for category management
implementation within both
Category management retailer and supply partner
implementation organisations.

Category review Measure, monitor and modify

the category.

Table 6.1 Category management process

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6.4.1 Category Definition

The way in which a category of merchandise should be defined has yet to be fully established but there is a general
agreement that it should be established by the way consumers buy the product in question. Generally, products
within a category should be reasonable substitutes for one another, although products within some categories
might have an element of being complementary to one another. For example, some grocers might consider ‘exotic
foods’ as a category, into which products such as refried beans, taco shells and salsa sauce might all fall; these are
complementary rather than substitute products, but in the purchase of such products it is more logical for consumers
if they are displayed together.

The definition of a category is likely to change between retailers, according to the size and degree of specialisation
in the format used. Some categories may have recognisable sub-categories, which may become categories in their
own right within a specialist retailer; for example, a ‘hair-care’ category might be broken down into sub-categories
of shampoo, conditioner, two-in-one conditioners, and styling products.

Product management is increasingly providing ‘solutions’ to lifestyles or personal process domains, and so
complementary goods that work together to provide those solutions are more likely to define a retail category. The
term super-category is used to describe product ranges that provide a high level of customer focus, for example,
premium product ranges like Tesco’s Finest or Sainsbury’s Blue Parrot which are geared to the specific needs of
certain customer groups.

Role of SKU within product category

When a retail product manager is reviewing the choice within a product category, the individual roles that are
played by the different brands or product variations will be acknowledged. Some products within a category are
‘traffic builders’, generating high sales and have a large market share: they draw customers into the store, and their
absence would risk customer loss. Other products, such as own-label goods, have roles that are clearly concerned
with achieving sales or profit objectives.

Some stock keeping units (SKUs) play a key role in the reinforcement of the retail brand image and some products
play roles that are directly confrontational with other members of the category, for example, an own-branded product
that fights for market share with a brand leader, or a low price own-label variant of a frequently purchased item,
that defends retail market share and promotes store loyalty.

Each (SKU) member of the category should be making an individual contribution to the performance of the category.
If a brand or variation does not have a clear role, then a product management decision may need to be taken. For
example, could one brand be deleted and the sales successfully transferred to another, more profitable brand.

The strategic role of the category

Product categories have different characteristics, which mean that they have to be managed in different ways in order
to achieve optimum profitability. Some categories may be dominated by premium brands, whilst others might be
more value driven. The following table shows five different roles that categories might play within a total product
assortment.

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 Roles Categories
New categories
High fashion and symbolic categories
Retail brand reinforcer High technology product categories
Includes strong (retailer or manufacturer) brands
Create excitement and theatre in store
Established categories
Cash-flow contributor Non-symbolic categories
Consistent value provision
Growing categories
Fashion categories
Profit generator
Symbolic categories
High profit margins
Stagnant or declining categories
Staple product categories
Service provider Well established market leading brands
Competitive with other category providers – low
profit margins
Growing or well established category
Contains leading brands
Destination
Deep and wide assortment
Considered the best retail offer by target customer

Table 6.2 The role of product category

If a category is composed largely of premium brands, then most of the brands in the category are, quite profitable. On
the other hand, the category is comprised mostly of value and own-label brands, and then the opportunity to obtain
higher profit margins will be lower, for both the retailer and the supplier. There may be opportunities for retailers
and suppliers to work together to improve the profitability of certain product categories, via product innovation or
brand repositioning. For example, ice-cream product category has been upgraded in UK market by the introduction
of premium luxury ice-cream, ice-cream confectionery, is the example of other category that have shifted from
value to premium.

Product category lifecycles

While selecting products, retail buyers need to be aware of the cyclical sales pattern that both individual products
and product categories tend to follow. The product lifecycle theory has been a great source of debate over the years,
but is generally accepted as having some value when it comes to understanding the sales and profit implications of
products over time. The product lifecycle relates to a specific product item, or brand, may be of some value to the
buyer of branded fast moving consumer goods. The category lifecycle is perhaps a more useful concept for many
buying decisions, and has implications for the way a category is managed (refer to the figure given below). The
position of a product or category within its lifecycle can guide a buyer while making decisions about the depth of
their product assortment, as shown below.

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Total
retail
sales

Maturity

Decline
Growth

Introduction

Time
Fig. 6.1 The category lifecycle

• Introduction: If a category is in the introduction stage, a retailer will offer limited assortment; for example,
one product variation or one brand. It will be keen to minimise risk and investment in terms of space allocated
and monetary value, but a new product can create excitement and could be the start of an important product
category.
• Growth: When a category is in the growth stage a retailer has the opportunity to increase assortment, introducing
more brand alternatives, and more product variations.
• Maturity: A large assortment is offered in the maturity phase, including many brands and many product variations
(including own-label in most product categories). The category becomes established and more competitive
between retailers.
• Decline: Here, the product category loses appeal, to be replaced by another growth category. Retailers should
cut the assortment back to leading brands, and the best-selling variations.

Role of the category within the retailer’s total assortment

Category management not only looks at the detail of the product SKU ‘members’ within the category, but is also
concerned with the role of the whole product category within the retail outlet, and the contribution which the
category makes to strategic positioning of retail brand identity. Retailers are using category management in pursuit
of product differentiation to gain a competitive advantage over their rivals; they need suppliers who understand their
retail market positioning and who can help them to improve the performance of their strategic product categories,
not only from the point of view of short to medium term profitability, but also to enhance an image of creativity,
innovation and excitement. Category orientated point of sale display materials can reinforce a strategic product
category positioning. The table given above explores various roles that categories might play within the retailer’s
total product assortment.

6.4.2 Category Planning

Category planning includes the following steps:

Establish the performance measures for the category

An integral part of a management approach that looks towards efficiency in demand management as well as supply
management, category management has profitability as its key performance indicator. The activity-based costing
is recommended for evaluating category performance because it not only considers the costs of supply but it also

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takes account of the costs associated with demand management, such as costs of product introductions and costs of
promotional activity. More recent approaches to performance measurement have included the concept of scorecard,
which allows success to be measured across a number of indicators, according to their relevance to the retailer
concerned.

Formulate a strategy for the category

Having defined the category and its role within the retail business, and established optimum profitability as the
success indicator, the next step in category management process is to draw up a strategy for that particular group of
products. It is at this stage that issues such as promotional activity, product assortment planning, own-brand strategy
and proprietary brand support need to be blended together in order to maximise category profit performance. The
position of the category within its own lifecycle will impact upon the viability of the strategy.

The category mix

The set of tactics used to achieve optimum range assortment and obtain efficiency in promotions, product innovation
and replenishment, will be determined by the strategy formulated for the category. In essence the category receives its
own marketing mix, within the parameters of retail branded identity. For example, by conducting efficient promotions,
a retailer does not waste resources by promoting brands whose performance does not pay. Taking a more analytical
approach to promotional activity can vastly improve the profitability of a product category, by removing costs
associated with promotional activities that are not in the best interests of the retailer’s product range performance.

Many promotions require time and effort to set up data input amendments, production of special communications
and packaging, and may result in deflecting sales to a product with a lower product profit. Unless promotional
activity is going to result in overall better performance of the category, or bring some other long-term benefit to the
retailer, it may be better to resist the promotion. Point of sale displays can also be viewed with the same analytical
judgement; for example, changes to shelf allocations, or use of point of sale materials should only be undertaken if
they have the potential to improve performance of the whole category for the retailer.

Prices can also be manipulated in order to maximise category performance. The use of ‘known-value’ items is
important in value-driven categories such as packaged bread, where there is considerable price competition, whereas
in premium-product driven categories, such as wine, retailers have more opportunity to increase margins and benefit
from impulse based promotional offers.

Category management as an organisational concept

Category management requires an understanding of how customers shop; this has traditionally been the concern
of marketers rather than buyers within a retail business. Category management, therefore, brings a much stronger
marketing orientation to product management process. Category management has the effect of reducing the role
of the buyer, and augmenting the role of the merchandiser, but essentially a category management role is a cross-
functional one. Promotional activity in store is geared towards improving category performance and is included in
a category manager’s remit.

The implementation of category management relies on collaborative and cooperative supply partnerships. Category
management requires a focussed team organisation that spans across both supplier and retailer’s organisational
boundaries. Essentially, retailers and suppliers pool their resources to manage various aspects of their partnership
with the view of improving category performance.

Category management and efficient consumer response (ECR)

Category management is a way of organising buying and merchandising activities to make product ranges work
hard for both the retailer and the customer. Purpose behind the philosophy of category management is that the
product range should be responsive to customer demand. Being truly responsive to the consumer requires not only
the retailer’s buying organisation to become responsive, but also the whole of the retailer’s supply chain. Category
managers may be observant of performances of their product ranges, but if they are not able to rely on suppliers of
goods within those categories to respond quickly, then the contributions of the category to organisational success
will diminish.

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Category management therefore is usually part of a broader consumer-led approach within a retailer’s supply chain,
which encompasses buying activities, promotional activities and product development; replenishment systems;
logistics operations; suppliers and their manufacturing facilities. Efficient consumer response (ECR) is a term that
describes this type of all-encompassing supply chain management system. It is a managerial approach that starts
with consumer demand, and then gears the whole of supply chain to responding to that demand. It is a customer
driven, demand-pull product management system; it is different to a supply-push, or buying-led approach, based
on the principles of sales forecasting, with products supplied in preparation for estimated demand. However,
ECR encompasses much more than a stock control system; it not only involves all the operational areas of retail
management, but also involves the way in which retailers, suppliers and third-party service suppliers work together
to achieve two fundamental objectives simultaneously:
• maximising customer satisfaction
• minimising total costs

6.4.3 Category Implementation

Category implementation deals with establishing category management roles that is done by assigning responsibilities
for both retailer and supply partner organisations. Each category is reviewed by measuring, monitoring and modifying
the category.

Plan Implementation

Category Tactics

Category Strategy

CATEGORY REVIEW Category Scorecard

Category Assessment

Category Role

Category Definition

Fig. 6.2 Category review

(Source: http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf)

Developing a category management methodology

Category management is a powerful tool. However, it has traditionally been very expensive to develop, implement and
maintain. Full-blown category reviews can require hundreds of hours of work. A retailer could have 200 categories
and a consumer goods firm could have thousands of retailers, thus multiplying the overall number of categories
that could involve a manufacturer. To streamline the process, reduce investment costs and help companies realise
benefits faster, a four-step process supported by a required infrastructure can be a powerful tool which includes:

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• Organise
• Develop
• Monitor
• Model

Organise

Monitor

Model

Develop
Fig. 6.3 Category management methodology
(Source: http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf)

Organise
The first step involves development of a category management strategy and organisation of resources such as people,
assets, information, and so on. Companies need to take stock of needs, resources, priorities and overall business
strategy:
• Talk to sales and marketing: what are customer needs, what are consumer needs and what are the
roadblocks?
• Communicate with senior management: understand the business strategy, goals, key initiatives, growth plans,
strengths, threats, opportunities and weaknesses.
• Examine current organisation resources: look for information in existing areas of the organisation (R&D,
operations, store operations, supply chain, fulfilment, manufacturing, and so on).
• Begin initial training: develop training materials in a modular format to introduce the company to category
management and then build upon initial education with more rigorous analytical training.
• Develop the core category management team: select or acquire key team members – who will eventually
become category managers, data warehousing managers, and so on – to manage the initial category management
program.
• Develop a communications program: develop communications vehicles (meetings, newsletters, status reports,
and so on) to communicate at all levels from senior management to analyst.

Develop
The second step begins with the core category management process after plans and organisation are in place. This
step will become the foundation for ongoing category management.
• Build a consumer attributes map: develop and seek answers to the fundamental questions associated with
how consumers make buying decisions in categories:

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‚‚ What is the current shelf configuration/planogram?

‚‚ Are category sub-segments shelved properly?
‚‚ Is a better response to promotions achievable by promoting with other categories?
‚‚ Does the assortment scheme meet consumer needs?
‚‚ Do local neighbourhoods or regional factors affect categories and products?
‚‚ What are the dynamics of price points and merchandising in categories?
‚‚ What are the purchasing patterns of products and categories?
‚‚ What other items are purchased along with specific categories?
‚‚ What are the demographics of the customer base?
• Develop an analysis capability: large amounts of data will need to be analysed, categorised and synthesised:
‚‚ Sales/POS data
‚‚ Item assortments
‚‚ Shelf placements
‚‚ Pricing
‚‚ Promotions
• Perform key analyses: analysis will need to be done at various levels (category, market, store cluster, individual
store and SKU) to develop the base data for category development.
• Develop categories: by performing the analysis, consulting external industry data and comparing competitor's
categories:
‚‚ Staples: high penetration/high frequency
‚‚ Niches: low penetration/high frequency
‚‚ Varieties: high penetration/low frequency
‚‚ Fill-ins: low penetration/low frequency

Monitor
Monitoring can be thought as “filling in the scorecard.” This step is critical to maintaining category management,
identifying trends, measuring results, making modifications, reporting to senior management and ensuring long-
term success. In order to monitor effectively, quantifiable implementation goals and metrics need to be established.
Companies must continually monitor and measure results against these predetermined metrics. Clear goals and
metrics also enable the administration of incentive programs and mid-course adjustments throughout the category
management product cycle.

Implementation and financial goals for each individual category must be analysed to measure category manager
performance and ensure category business plans are being met at all levels:
• Category
• Chain
• Region
• Store

Model
This last step enhances the category review step from the original eight-step process. This step needs to be backed
by decision support and modelling capabilities. Category managers need to be able to simulate category performance
results from changes in various inputs – category strategies, definitions, roles and tactics.

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6.5 Category Management Limitations
Category management as a central concept of the ECR movement which has provided benefits to participating
retail–supplier collaborations. It has been suggested that ECR has remained an impenetrable concept, relying too
much on theory and jargon, with the costs of achieving efficiencies outweighing the resulting benefits. In addition,
many of the initiatives have reflected what many well-run retailers were already doing. However, the far-reaching
facets of ECR and the new philosophy of category management certainly support more analytical approach to product
management. The full-scale adoption of category management requires a considerable amount of reorganisation
within the retailer and has met with a number of inhibiting factors such as:
• skills shortages
• difficulties associated with accepting suppliers as allies or partners with whom information should be shared
• reluctance to change inappropriate organizational structures
• lack of clear strategic plans for product ranges

Another concern with the implementation of category management is the resulting lack of variety being offered
to customers. Concentrating on efficiency in logistics and merchandising may result in highly efficient retailing.
However, there is a risk that the consumer experience is being given lower priority. This could be a dangerous
strategy when store-based retailing is becoming increasingly threatened by much more efficient home based retailing
formats.

Category-managed product ranges are safe and offer majority of customers in the majority of purchase decisions,
‘efficient’ selections of market-leading products; however, these selections may start to appear boring and over-
managed.

A further drawback of category management is the threat to smaller suppliers. The practice of establishing category
captains to improve the performance of the entire product category runs the risk of putting larger suppliers in a
position where they can abuse their power by improving their own market share at the expense of the other suppliers
within the category. It has been suggested that retailers benefit from leading suppliers fighting to contribute the most
to the category management process, whilst the second and third tier brands are squeezed off the shelf.

Category management has been most successfully adopted in large product categories that include dominant and
organised suppliers. Smaller retailers often do not have structure or resources to implement category management
and a fragmented supply base is generally not suitable either. The integrated ECR systems that are available today
are generally complex and expensive to implement, incorporating a wide range of business activities. Category
management may fail to bring anticipated rewards if retailers and suppliers are too focused on their own problems
and fail to properly assess customer needs.

6.6 Behavioural Category Management Benefits

Behavioural merchandising means to observe and understand the behaviour of each individual shopper as they click
through online store, compare it with similar data on all other shoppers, and draw conclusions to deliver relevant,
personalised product recommendations. Relevant examples in category management include recommendations
based on the current product or cart contents. By adding business rules based on gross profit, or price, the retailer
can ensure that only profit drivers are shown as recommendations.

This way, the objective of traffic generation can be achieved by putting traffic drivers on sale, while the retailer
boosts the sales of profit drivers to maximise profit contribution, more than compensating for the discounts on the
traffic drivers. In other words, by excelling at behavioural merchandising, online retailers will also excel at category
management by allowing them to beat the competition when it comes to customer acquisition, without sacrificing
profit.

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Summary
• Category management is defined as ‘the strategic management of product groups through trade partnerships,
which aims to maximise sales and profits by satisfying consumer needs”.
• The evolution of category management started when retailers operated their businesses.
• A category captain advises the retailer on the best way to price, display, and promote products in a category
including those of the competitors.
• Category management is a retailer-supplier process of managing categories as a strategic business unit (SBU),
producing enhanced results by focussing on delivering consumer value.
• The aim of the category management is for two purposes: satisfy the consumer, and grow the category.
• Category management is viewed as a step-by-step planning and implementation process that helps retailers and
suppliers achieve both performance-based objectives and longer-term strategic aims.
• The term super-category is used to describe product ranges that provide a high level of customer focus.
• Some products within a category are ‘traffic builders’, generating high sales and have a large market share: they
draw customers into the store, and their absence would risk customer loss.
• Stock keeping units (SKUs) play a key role in the reinforcement of retail brand image and some products play
roles that are directly confrontational with other members of the category.
• Retailers use category management in the pursuit of product differentiation to gain a competitive advantage
over their rivals.
• The activity-based costing is recommended for evaluating category performance because it not only considers
the costs of supply but it also takes account of the costs associated with demand management.
• Category management has the effect of reducing the role of the buyer, and augmenting the role of the merchandiser,
but essentially a category management role is a cross-functional one.
• Category management have few limitations like variety being offered to customers, threat to small suppliers
and so on.
• Behavioural merchandising means to observe and understand the behaviour of each individual shopper as they
click through the online store.

References
• Building a Category Management Capability [pdf] Available at: <http://www.ups-scs.com/solutions/white_
papers/wp_category_mgt.pdf> [Accessed 10 October 2011].
• O’Brien, J., Category Management in Purchasing: A Strategic Approach to Maximize Business [Online] Available
at: <http://books.google.co.in/books?id=s--c3RLdYpwC&printsec=frontcover&dq=category+management&hl
=en&ei=19mTTuW1FMTYrQf1nIScBg&sa=X&oi=book_result&ct=result&resnum=5&ved=0CE4Q6AEwB
A#v=onepage&q&f=false> [Accessed 10 October 2011].
• Webesomar, 2007. S. Needel - What’s the future of category management? part 1. [Video Online] Available at: <http://
www.youtube.com/watch?v=Ss8Dn8_BZu0> [Accessed 10 October 2011].
• 2011 . Basics of Category Management [Video Online] Available at : <http://www.youtube.com/
watch?v=Lxfi3hnLZv4> [Accessed 10 October 2011].
• Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge
• Behavioural Category Management: A next-generation retail strategy [pdf] Available at: <http://www.avail.
net/wp-content/uploads/WhitePaper_BehavioralCatMgt.pdf>. [Accessed 10 October 2011].

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Recommended Reading
• Nielsen, A. C., Karolefski, J., & John, A. H., 2006. Consumer-Centric Category Management: How to Increase
Profits by Managing, Wiley and Sons.
• Category Management: Positioning Your Organization to Win, NTC Business Books.
• Chiplunkar, Product Category Management, Tata McGraw-Hill Education.

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Buying and Merchandising

Self Assessment
1. The use of ‘known-value’ items is important in ___________categories.
a. product-driven
b. value-driven
c. competition-driven
d. retail-driven

2. Which of the following statements is false?

a. Prices can also be manipulated in order to minimise category performance.
b. Each (SKU) member of the category should make an individual contribution to the performance of the
category.
c. Category management is a retailer-supplier process of managing categories as a strategic business unit.
d. Manufacturers and retailers have different profit objectives.

3. Category management is a cooperative strategy that often involves appointment of a leading manufacturer as
_________.
a. category captain
b. leading supplier
c. SKU member
d. profit generator

4. Which of the following category is used to describe product ranges that provide a high level of customer
focus?
a. Luxury-category
b. Refined-category
c. Super-category
d. Traffic builder-category

5. Which of the following statements is true?

a. Category management relies on having an understanding of a supplier’s relationship with a product type.
b. In category management, suppliers play a very active role in the management of the stores group.
c. The evolution of product management started the way the retailers operated their businesses.
d. The category captain is not always the supplier with the largest turnover, although that is quite common.

6. ___________ plays a key role in the reinforcement of the retail brand image.
a. Category captain
b. Traffic builders
c. Service providers
d. Stock keeping unit

7. In which of the following stage of the product life cycle, a large assortment of products is offered?
a. Introduction
b. Decline
c. Maturity
d. Growth

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8. Retailers use category management in the pursuit of product differentiation to gain a ____________ over their
rivals.
a. competitive advantage
b. growth
c. value
d. market share

9. Which of the following term is used to describe the all-encompassing supply chain management system?
a. Stock keeping unit (SKU)
b. Strategic business unit (SBU)
c. Efficient consumer response (ECR)
d. Product life cycle (PLC)

10. Which of the following statements is false?

a. Category implementation deals with establishing category management roles that is done by assigning
responsibilities for both retailer and supply partner organisations.
b. If a brand or variation has a clear role, then a product management decision may need to be taken.
c. Product categories have different characteristics, which mean that they have to be managed in different ways
in order to achieve optimum profitability.
d. The position of a product or category within its lifecycle can guide a buyer while making decisions about
the depth of their product assortment.

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Chapter VII
Product Management

Aim
The aim of this chapter is to:

• explain the concept of product management

• discuss the product classification

• identify the role and tasks of a product manager

Objectives
The objectives of this chapter are to:

• explicate the traditional and present approaches used for product planning

• highlight the issues in product management

• comprehend the types of decisions taken in product management

Learning outcome
At the end of this chapter, you will be able to:

• recognise the responsibilities of product management functions

• understand the concept of product line and product mix

• discuss the role of product management in retailing

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7.1 Introduction to Product Management
A marketer’s definition of a product is ‘a physical good, service, idea, person or place that is capable of offering
tangible and intangible attributes that individuals or organisations regard as so necessary, worthwhile or satisfying
that they are prepared to exchange money, patronage or some other unit of value in order to acquire it’.

Along with products, retailers might offer services that help a customer during the purchase decision, for example,
a changing room in a clothing retailer. The actual location, layout and design of a retailer might be considered as
a service, especially if those elements make the shopping process easier. Where a retailer’s combined product and
service offer lies on the product to service continuum depends on the nature of the product range and the type of
retail outlet.

Some tangible goods are extremely durable, offer a great deal of choice in terms of specific features and benefits,
and generally the purchase of them becomes complex, with a high level of involvement on the part of the consumer.
Purchases such as household furnishings, cars or large electrical appliances would fit this category. Other tangible
goods are consumable and convenience orientated products such as food and toiletries. These products are generally
less complex, frequently purchased and being of lower value, involve less risk. Other products are information based
at the purchasing stage and are consumed as they are used, such as a travel ticket or a holiday.

Some service products are experienced as they are purchased and consumed, like a restaurant meal or a haircut. Service
products generally have a very high proportion of intangibility and the product is not ‘distributed’ in the same way;
the quality of a service product depends extensively on how the exchange is actually delivered with the ‘product’
experience being immediate and perishable. What is important to appreciate at this stage is that retailing covers all
of these ‘products’ and that different types of products require unique sets of product management approaches in
order to achieve consumer satisfaction.

Meaning of product management

Among the four elements of marketing mix, i.e., product, price, place and promotion, all business activities commences
and revolves around the first element namely the product. Thus product forms the core to any business enterprise.
However the other three elements, their linkage and support is essential in designing the firms business strategy and
making the product a success in the market place.

Product management is an integral part of marketing function and includes a whole range of activities pertaining to
product planning and development and extends itself to brand building and management.

Every professionally managed and proactive manufacturing and marketing firms which respond to market needs
resort to product planning exercise in relation to its customers, relevant markets, competition and other market
forces prevalent. Product planning does include basic corporate plan and marketing plan from which the product
plan emerges. Generally in product plan we consider product strategies like product line its length and breadth, line
stretching, bet upwards and downwards. The idea of introducing new products does also come under the purview
of product planning.

7.2 Historical Overview of Product Management in Retailing

It was the abolition of resale price maintenance legislation in 1964 that accelerated changes within the retail
distribution industry. Retailers were allowed to determine their own pricing strategy for their product ranges, rather
than having to adhere to prices set by the manufacturers. The transfer of power allowed retailers to discount prices in
order to increase volume, and thereby profits, and to reinvest the profits in more outlets, resulting in greater buying
power. Manufacturers had little choice but to co-operate with the growing multiple retailers, who then wielded their
power in many other areas of their business, such as developing their own brands, and improving store formats.

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The more recent advances in information technology have given the retailers even more power, as a result of the sales
analysis afforded by EPOS systems, and the database information that can be generated by electronic trading, customer
loyalty schemes and other direct communications. The result is a high level of retail concentration: an industry that
is dominated by a relatively small number of extremely powerful, marketing orientated organisations.

The retailer’s role has always been geared towards customer convenience. Their role in the distribution channel is to
provide outlets that are readily accessible to consumers, to store a sufficient quantity of a product, so that consumers
can buy products as and when they need, and revisit the outlet when the need arises again. For this service to the
customer, the retailer adds a profit margin. The profit that a retailer makes contributes towards the costs of running
the outlet(s), such as the costs of staffing, paying rent, rates and other maintenance costs and the costs of financing
the stock. It also has to cover the costs incurred by the support activities of the retail organisation, such as sourcing,
marketing, distribution and systems. Any profit left can then be distributed to the owners or shareholders of the
business.

7.3 Role of Product Management in Retailing

Traditionally, the retailer’s role within the distribution channel was to provide suitable selection of products in small
quantities, via outlets located close to viable groups of consumers.

The most fundamental role that a retailer plays then is to ‘break bulk’. Until about half way through the twentieth
century retailers were typically seen as ‘stockists’ of a particular range of manufacturer’s products. However, the
role of the retailer has changed significantly, from being a passive distributor to an active intermediary who controls
the product range offering by carefully selecting products from manufacturers.

7.3.1 Strategic Role of Product Management in Retailing

In order to carry out their traditional role in the distribution channel effectively, retailers need to offer a range of
goods that satisfy the requirements of customers who visit their outlet at the time they enter. A retailer is in the best
position to know what their customers require because they have direct contact with them, either in the store or via
home shopping channels. Whether knowledge is gained informally, for example in the case of a small independent
owner retail concern, based on EPOS (electronic point of sale) data generation, retailers may need to adapt part, or
all of their product range in line with their customers’ changing requirements. Retailers, therefore, need to have a
good level of understanding of who their customers are, what their product preferences are and how their consumer
needs and desires change over time.

Retailers also need to adapt to long-term changes in customer shopping habits, such as the deflection of shoppers
from stores to home shopping. Marketing-led organisations should not only give customers what they need, but
should also identify and anticipate customer requirements. The product assortment that a retailer offers and the
environment in which it is presented gives the retailer a powerful advantage over the producers of those goods, who
now rely on the retailers as masters of this craft.

Most successful retailers work in collaboration with their producers and suppliers, pooling resources to make a better
job of the identification and anticipation of needs and wants, and then formulating a response to them. Retailers
have seized the opportunity to establish close relationships with customers and gain a deep understanding of their
purchasing habits, manifesting their authority in the development of strong retail brand identities. The internet and
other forms of direct marketing have offered opportunities for producers to fight back, by establishing a channel to take
products directly from the producer to the consumer, but it is the retailers who have the greater opportunity to build
on their existing knowledge and experience with consumers and use new marketing channels to their advantage.

7.4 Product Management Function

Similar to products being offered based on consumer needs and wants the emergence of product management as a
function too was an outcome based on the need as determined by the prevalent market forces and changing market
dynamics.

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The concept of selling has predominantly ruled in the pre and post independent era with limited number of
manufactures offering products to a considerably large number of customers, this resulted in selling whatever goods
were produced enabled the sales task to be simple and easy.

With the passage of time and industrial polices in order, conscious attempts were made to increase the industrial
output and accelerate economic growth which paved way for the onset of the concept of marketing.

The concept of marketing was characterised by increased number of manufactures producing similar products, growing
markets, change in life styles and fierce competitive environment. As similar products are made by more number of
manufactures, consumers had a wide option for adoption. Selling activity thus became a tough and challenging task
to the marketer. These factors lead to the need for trained and skilled personnel to understand consumer tastes and
preference and accordingly conceive, design, and develop products and offer to the target consumers for adoption
and their subsequent repeat purchases. These newly identified taskforce is expected to possess and equip with all the
tools and techniques for creating awareness, educating the target consumers and nurture the company’s product. This
group of work force in thus designated as product executive or manager depending on the nature and size of the firm,
its products and product line and so on. Thus the birth of a well defined and distinct product management department
was inevitable, focussing and utilising all the resources of the department towards managing its products.

In the current scenario every enterprise does have a separate product management department monitored and
controlled by the marketing department. However the viability of a separate department for product management
should be weighed on various parameters such as cost benefit analysis, need based in view of the firm’s products
in relation to consumer, markets, Vis-à-vis- its competitors.

7.4.1 Responsibilities of Product Management Function

The size of the firm, nature of the products, industry, consumers, relevant markets, competition and top management
decisions and vision all collectively determine the responsibilities of the product management department in a
business organisation. Following are the major areas of responsibilities:
• All activities (both minor and major) related to product and its linkages with other three elements of the
marketing mix
• All related activities and tasks of STP strategies (segmenting, targeting and positioning)
• Short term and long term production planning in consultation with manufacturing
• Meticulous planning for promotional activities with communication and advertising department
• Planning and forecasting sales and market potential with sale department
• Coordinating marketing research activities with in house and external agencies
• Co-ordinating with advertising agencies and other external agencies like Government for seeking statutory
license and so on

7.4.2 Product Management Decision

The product management decisions includes:

Product mix decisions

The product mix concept refers to the total products offered by an organisation while a product line is a group of
products within the product mix that can be classified together on account of criteria like customer needs markets
served, channel used or technology employed. In order to decide upon the product mix the product manager also has
to take decision regarding width, length, depth and consistency of the product line. Deciding upon the optimality of
product mix requires in depth analysis of the profitability, marketability, market share, long term prospects of the
product, among other things. Several approaches, including the product portfolio approach have been developed to
decide upon optimum product mix.

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Product innovation and modernisation decision

Innovation and modernisation of the existing product line is another key concern of the product managers. In some
cases the product line length may be adequate but some of the products may have lost competitive edge because of
technological obsolescence which will reflect in the overall product returns. The product line would then need to be
modernised or substantially innovated. One important concern regarding this is whether to overhaul the complete
line all at once or go product by product. The latter approach provides for gauging the consumer and dealer reactions
before the entire modernisation programme is put into operation. The disadvantage on the other hand is competitor
reaction who may retaliate by copying the modification or coming out with better features and improvements.

Product line pruning, product elimination, and product phasing decisions

In many organisations weak products are allowed to be continued in product line simply because of emotional or
sentimental reasons. A number of costs hidden in continuance of these products are never fully estimated. These costs
may include costs associated with varying inventory levels, frequent price reductions, uneconomic production runs
and the opportunity cost of investing in new products because of resources being tied up in the retention of weak
products. Product line pruning or product elimination decisions therefore have to be taken to prevent unproductive
use of resources.

New product decision and diversification decisions

One of the most common product policy problems relates to addition of new products to existing product line.
A rationale for the diversification introduction of new products may emerge out of marketing needs, company’s
resources and competences, marketing, production or financial considerations, and the contribution that the new
product can make to the corporate objective. Even though the development of new products is a decision fraught
with very high risks, continuous innovations are the most reliable key to sustained growth. The addition of new
products to the firm’s product line can be done either by internal development or external acquisition.

Branding and packaging decision

Branding is one of the ways of imparting product distinctiveness and helping the product to attain a specific identity
in the consumer’s mind. It increases consumer awareness, improves chances of repeat purchases, facilitates the
inculcation of a product image and helps adoption of new products. The issues in branding are whether to use a
family brand or individual brand manufacturers brands or distributors brand or separate family names for the different
product lines in case of a highly diversified firm.

Packaging is defined as the activity of designing and producing the container or the wrapper for a product, can play
a minor or a major role in product policy depending upon the product nature and market requirements. In recent
times packaging has become an effective marketing tool. Developing an effective package for product requires a
number of steps like deciding upon the packaging concept, developing the package designs and package testing.

7.5 Product Classification

Product of all categories can be categorised into two types:
• Tangible products
• Intangible products

Tangible products are those products which are visible to naked eye and include products of all categories from safety
pin to aeroplanes. On the contrary, intangibles are characterised as being invisible to the naked eye, has no entity of
its own and devoid of physical attributes, for example, consultancy, medical assistance, car servicing and so on.

Various parameters for product classification are:

• Based on tangibility and intangibility into durable and non-durable services respectively, for example, soap,
milk, newspaper, washing machine, plumbing services and so on.
• Based on ultimate users and their buying behaviour and attitudes, we come across:

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Consumer products
Such products are purchased by households and ultimate users, these products are brought for personal consumption.
Traditionally all consumer products based on their nature, durability, utility and involvement of the consumer are
further segmented into:
• Convenience product: This is the category of products bought regularly with ease and without any time
consumption, for example, milk, vegetables, newspaper and so on.
• Shopping products: Products in this category are purchased irregularly only after considering factors like price
quality, style performance and so on. The prices of these products are generally high along with the consumer
involvement, for example, clothing, furniture, household appliance, and so on.
• Speciality product: These products are purchased irregularly may be once in life time. Majority of these
products have no substitutes and they are characterised by high buyer’s involvement, for example, premium
cars, audio and video systems, five star restaurants and so on, fall under this category. The brand loyalty is high
and consumers are willing to pay a high price for exclusive products as an expression of their attitude, life style
and status symbol.

Characteristics Type of Product

Convenience Shopping Speciality

Example Grocery items Clothing, fashion items Fancy goods, appliances

Spend effort to choose the Making the final

Major motive Easy availability
item of personal taste selection of brand

Knowledge prior to
High Medium Low
purchase

Effort spent to acquire

Minimal Moderate As mush as necessary
product

Frequency of purchase Regular Season/occasion Varies

Willingness to accept
High Moderate None
substitutes

Low information Comparing options to Intensive consultation

Buyer behaviour
search acquire best within budget before actual purchase

Table 7.1 Classification of consumer product

Industrial products
These products are purchased either by an individual or a group on behalf of an organisation for the production of
other product. Thus, industrial products are characterised as those which go into the manufacturing of other products.
All engineering goods, machine tools, auto components, manufacturers fall under this category.

7.6 Product Line and Product Mix

Product line includes all closely related or similar products offered by the firm, for example, audio system offered
by Philips is a product line, while televisions offered by the same company (Philips) is another product line. While
product mix, encompasses and includes all individual products available offered by the firm. Thus, the above example
of Philips Audio systems and televisions collectively form the product mix of Philips India Ltd.

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From the above we can conclude that product mix includes all the product lines offered by the firm and further each
product line has a range of models, sizes, styles and so on. Product mix is the set of all products lines and items
that a particular company offers to buyers. The width of the product mix refers to the number of different product
lines a company carries. For example, Philips India Ltd., product mix consists the following product lines namely
music systems and video system (television), lighting system and medical electronics catering to different markets
across various segment.

The depth of product mix refers to the number of variants of each product offered in the line for example; Halo
shampoo from Colgate-Palmolive comes in three formulations and three sizes and hence has a product mix depth
of nine. Similarly Rasna soft drink concentrate from Pioma industries has seven flavours which also form the depth
of the product mix.

The consistency of a product mix refers to how closely various product lines are related in end use. Hence, Philips’s
product lines are consistent in the sense that they are all electronic products while Wipro has an unrelated product
mix.

Merits of product mix

The product mix:
• Helps in defining firm’s product portfolio based on width, depth and consistency.
• Appeals to diverse consumer needs across various segments, thus helps in maximising shelf space and sustain
dealer support.

The two examples cited above namely, Philips India offering products which are closely related and has consistency
in its mix while in case of Wipro, it offers different products (unrelated) product lines like, consumer electronics,
information technology products, and FMCG products making it a diversify mix of product offered to the market.
By and large consistent mix is easy to manage than diversified mix. It allows the marketer to concentrate on its core
competencies; helps build and create a strong image among consumers and trade channels.

However, excessive consistency may be risky with limited scope leaving the marketer to a narrow range of business.
Agro based companies are good examples in view of their vulnerable to environmental threats and vagaries of business.
On the other hand, companies like Wipro, Videocon and so on, enjoy the benefit of diversified product mix.

Line refers to the decisions pertaining to adding or dropping items from the product line as and when it is profitable
to do so. Line stretching could be upwards, downwards or both ways.

Downward stretch is apt when the company finds its offerings are at a high price end of the market and then stretch
their line downwards for example, Daewoo motors, small car “Matiz” was originally introduced as a premium high
end car with one single variant catering to the top end or the elite segment. Subsequently the feedback from market
and research findings made the company to offer a low end variant to tap the low end market segment. This decision
made the company a turnaround resulting in increased sales manifolds.

On the other hand, upward stretch is possible when the company enters the upper end through a line extension. The
reason could be a higher growth rate, increased market share tapping new market segment, better margins and so
on. A good example would be that of lifebuoy soap, which was initially positioned as a hygienic soap focussing the
semi urban and rural mass markets: currently lifebuoy is also into the high end premium liquid hand wash market
catering to the higher strata of the society.

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Line fillings
Adding more items within the existing product range results in, lengthening the line. The reasons for line filling
include:
• aiming for incremental profit
• optimal utilisation of excess and under utilised capacities
• an attempt to offer a full line of the product
• in response to dealer complain about lost sales because of missing items on the line

The addition of double tonned milk is an example of line filling. Mother dairy has added the said item to its existing
range of full cream, and single tonned milk thereby catering to the health conscious milk consumers. All the categories
of milk mentioned above are easily identifiable by their packaging making the exchange process simple and easy.

7.7 Product Manager’s Management System

Product is central to the success of a firm. With rapid changes taking place in technology nature of competition
and consumer perceptions, product life cycles are becoming shorter in duration. It has therefore become necessary
for firms to review their product mix on a continuous basis in order to achieve their growth objectives. Product
management satisfies a genuine need in large multi-product companies, divisions or other business where it is
otherwise impossible for marketing managers to plan and control closely the profitability of individual major
products on a continuing basis.

Job of a product manager

The job of a product manager will vary with respect to the number and type of distribution channels used, the
extent to which each manager influences his products marketing budget, the number of product managers in the
organisation and other such factors. In addition, product management variations occur from industry to industry
with respect to the responsibility and authority in major decision making areas. Product managers are involved in
three major types of activities:
• Significant management tasks performed to some degree by all product managers: These are associated
with the administrative process - beginning with the establishment of objectives and ending with the year-end
report to management and a re-evaluation of the effective news of the marketing plan employed during the
previous year.
• Marketing decisions: Product managers are not the real decision makers for strategic marketing decisions. It
is the job of the marketing directors. The greatest participation of the product manager is with respect to the
number of timing of promotions. In a growing company, however, the product manager takes over most of the
functions.
• Budget and marketing plans: Almost in all types and size of organisation, the product manager has a definite
say in the annual marketing budget for the product that he manages. This is because probably he is more involved
with the day-to-day implementation of the marketing plan set out.

Need for product management system

• The product management concept of organisation is indispensable and apt when a multi-product company has
different products whose individual annual volumes are neither so small as to be insignificant nor so large that
they begin to take on life or death importance. Companies with only one or two major products usually find the
functional form of organisation more suited to their needs.
• For example, a large soft drink manufacturer abandoned its product management system when it realised that
it was basically an organisation with one high volume and a few low volume products. Since lesser products
were related to the major one, all of them could be handled by a single product manager.
• The product manager’s responsibility and authority depends on a number of management levels involved in
decision-making and plan approval process.

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Changing role of product manager

The product management system should be flexible and the role and scope of a product manager should allow
manoeuvring although it should be well-defined.

Flexibility in the task assigned to product manager is required under developments like:
• Changes in the number and type of elements employed in the marketing mix.
• Changes in the number of product managers employed within the same organisational unit.
• When changes occur in the resources or support services required for the marketing elements located internally
or externally. Let us consider each of these separately.
‚‚ When the number and combination of elements employed in the marketing mix change, the product manager’s
job also changes. If a company starts de-emphasising advertising in favour of a combination strategy of
better margins for the trade and more consumer promotion as in case of consumer durables, the kind of
people the product manager will be working with and the skills required for negotiation will differ.
‚‚ When a company expands its product-line some support service used by different products will be the same.
However, all product managers may not possess the technical skills to use the support services requiring
thereby a team of in-house specialists. Market research and advertising are two examples of in-house staff
developments which can grow as the company becomes more marketing oriented.
‚‚ A product manager’s role is also shaped by the support groups controlled by them. If he/she uses an internal
resource group it will be shared by other product managers also reducing their overall influences on it. For
example, a sales force is an internal resource and no product manager can directly influence it as its time
must be apportioned between individual products in accordance with the overall strategy of the company.
‚‚ Lastly, the product manager’s job profile also changes as their product moves through various stages of its
life cycle or as shifts occur in the environment in which the product is marketed. The new product requires
heavy emphasis a developing trade channel support simultaneously with consumer awareness and acceptance
whereas an established product would require more of maintenance and monitoring effort on the part of
the product manager.

The role of a product manager is thus very versatile and subject to changes with the growth in size of the organisation
or changes in environment or even changes in the overall marketing strategy.

7.8 Product Planning System

Development of a strategic product planning system is one of the most critical elements of a company’s product
management function. In designing such plans, the management requires adequate information on the current
and anticipated performance of its existing products. This information can again be broadly classified into two
dimensions:
• The perceptual dimension consisting of the consumer’s perception about the product per se as well as in relation
to the products of the competitors.
• The `objective’ dimension consisting of actual raw information about actual and anticipated performance on
relevant criteria such as sales, profits and market share.

Traditional approaches to product planning

The product portfolio approach is one of the earlier tools used for product planning and the concept of positioning
the product vis-à-vis its competitors. Both these systems show little concern for the measures like sales, market
share and profitability taken together comprehensively.

Matrix approach to product planning

The matrix approach consists of the following phases:

Phase A: This requires definition of the relevant universe in terms of the relevant strategic product and market area.
It essentially means that:

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• The definition of the product should be clear and unambiguous inclusive of sub categories of the product.
• The strategic market should be a well focussed segment to lend specificity to the analysis.
• The relevant measurement instruments in terms of units of sale and the time period of sales whether monthly
or quarterly must be specified.

Phase B: This entails examination of the sales position for the given product in the strategic market area. A graph
of industry sales and company sales for a given period is plotted. Thereafter the product is assigned to the stage in
the product life cycle on the basis of certain criteria:

If the annual sales trend over the past years is:

• Negative, assign to the decline category
• 0%-10% increase, assign to the stable category
• Over 10% increase, assign to the growth category

Phase C: The market share of the company’s given product in the strategic product market area is then determined
using certain criteria to assign into categories.

The illustration given below for two products A and B explains the process of assignment to categories and
determination of the product’s strategic position.

Illustration: Assign product to one of the following categories:

Sales Industry Company

Decline ………… …………

Stable ………… …………

Growth ………… …………

Market Share

Marginal market position ………… …………

Average market position ………… …………

Leading market position ………… …………

Profitability

Below target ………… …………

Target ………… …………

Above target ………… …………

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A past trend of the product is also plotted to facilitate the assignment process described above:

Company Sales Decline Stable Growth

Profitability
Industry Below Above Below Above Below Above
Target Target Target
Sales Market target target target target target target
Share

Dominant
Growth Average A74 A75
A73
Marginal

Dominant
Stable Average
Marginal

Dominant
Decline Average B74
B73
Marginal B75

Table 7.2 A product-evaluation matrix having two hypothetical products A and B over three years

On the basis of the assignment done above a product evaluation matrix for two hypothetical products would look
somewhat as:

Current position (C) Unconditional projection Conditional forecast (CF)

Industry Company Market Profit- Industry Company Market Profit- Industry Company Market Profit-
Sales Sales Share ability Sales Sales Share ability Sales Sales Share ability
1
Decline Target
Marg.
Decline Av. Below Decline Av. Below Decline Stable
2 Decline Decline Av.
Decline Target Decline Target Decline Below
Stable Stable
Av. Target Av. Target Stable Stable Target
Av.
Target

Table 7.3 Incorporating sales, market share and profit forecasts into the product evaluation matrix

Here, two products A and B have been traced for three years. Product A which showed a marginal market share in
a growth industry had stable but below target profitability in the first year. This improved the growing profits and
average market share in the next year to achieve targets. This was followed by an above target profits coupled with
an average market share in a growing industry. The performance of product A has thus steadily improved.

The product B on the other hand is in a declining industry with an average market share and stable profits on target
in the first year but in the next year a decline in profitability is seen. In the third year the decline in profits continues
with a drop in the market share as well.

Suggested marketing strategy on the basis of the product evaluation matrix: The best course available for product
A will be to move from average market share to the leading position maintaining above target profits or sacrificing
some profits for the leading position to have targeted or even below target profits.

For product B the course of action available would be to improve market share position from marginal to average
and also achieve stability in profits although they may be below target.

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From the above illustration it can be seen that a product evaluation matrix enables a company to take into account
four parameters:
• Industry sales
• Company sales
• Market share
• Profits simultaneously

The following inferences regarding a firm’s product planning exercise include:

Inferences: A firm’s major strategic product and market decision alternatives for its existing product line and the
component products of that time in a given strategic product market area are:
• Do not change the product or its marketing strategy.
• Do not change the product but do change its marketing strategy. This may involve a change in the type and
level of advertising, distribution and pricing strategies associated with a given positioning and given product
attributes.
• Change the product. This may involve product modifications either within the parameters of the product’s
current market positioning or within a new positioning. In either case, a change in the associated marketing
strategy is required.
• Discontinue the product or the product line. This strategy may involve an interim product or product line “run
out” strategy, gradual chopping of the product line, or the immediate phasing out of the product or the complete
line.
• Introduce new products into the line of add new product lanes.

In keeping with the varying degree of changes required in the five alternatives suggested above, we can identify
different levels of analysis and specificity of guidance provided by the product evaluation matrix.

Product evaluation matrix

This approach requires five levels of analysis each with an increasing specificity of guidance, for the firm’s strategic
marketing decisions. The first level is based upon the evaluation of the product’s current position with regard to
industry and company sales, market share -and profitability thus providing limited guidance. The fifth level on the
other hand, provides detailed and specific guidance based on projected product performance with regard to sales,
market share and profitability under alternative marketing strategies, anticipated competitive actions and alternative
environmental conditions. The five levels are summarised in the following table given below.

Specificity of guidance Nature of operation

Lowest Current product position on industry sales, company sales, market share,
and profitability.
Project product position on sales, market share and profitability assuming
no major changes in the firm’s marketing activities, competitive action and
environmental conditions
Projected product position on sales, market share and profitability under
alternative marketing strategies, assuming no changes in competitive action
and environmental conditions.
The diagnostic insights into competitive structure and effectiveness of the
firm’s marketing activities.
Highest Projected product position on sales, market share, and profitability under
marketing strategies, anticipated competitive action and alternative
environmental conditions.

Table 7.4 Five levels of project evolution matrix

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Summary
• Product is ‘a physical good, service, idea, person or place that is capable of offering tangible and intangible
attributes that individuals or organisations regard as so necessary, worthwhile or satisfying that they are prepared
to exchange money, patronage or some other unit of value in order to acquire it’.
• Product management is an integral part of marketing function and includes a whole range of activities pertaining
to product planning and development and extends itself to brand building and management.
• Product planning includes basic corporate plan and marketing plan from which the product plan emerges.
• Retailer’s role in the distribution channel is to provide outlets that are readily accessible to consumers, to store
a sufficient quantity of a product, so that consumers can buy products as and when they need, and revisit the
outlet when the need arises again
• The product assortment that a retailer offers and the environment in which it is presented gives the retailer a
powerful advantage over the producers of those goods, who now rely on the retailers as masters of this craft.
• Most successful retailers work in collaboration with their producers and suppliers, pooling resources to make a
better job of the identification and anticipation of needs and wants, and then formulating a response to them.
• The product mix concept refers to the total products offered by an organisation.
• A product line is a group of products within the product mix that can be classified together on account of criteria
like customer needs markets served, channel used or technology employed.
• Packaging is defined as the activity of designing and producing the container or the wrapper for a product, can
play a minor or a major role in product policy depending upon the product nature and market requirements.
• Consumer products are purchased by the households and ultimate users, these products are brought for personal
consumption
• Industrial products are purchased either by an individual or a group on behalf of an organisation for the production
of other product.
• Product line includes all closely related or similar products offered by the firm
• Product mix is the set of all products lines and items that a particular company offers to buyers. The width of
the product mix refers to the number of different product lines a company carries.
• The role of a product manager is very versatile and subject to changes with the growth in size of the organisation
or changes in environment or even changes in the overall marketing strategy.

References
• The Product Management [pdf] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/7530/1/Unit-2.
pdf > [Accessed 10 October 2011].
• Varley, R., 2010. Retail Product Management Buying and Merchandising, Routledge
• 2010. Getting to the Top in Product Marketing and Product Management [Video Online] Available at: <http://www.
youtube.com/watch?v=pMG-VnsSwKs > [Accessed 10 October 2011].
• What Defines Product Management [Video Online] Available at: <http://www.5min.com/Video/What-Defines-Product-
Management-397078038> [Accessed 10 October 2011].
• Product Management as CEO Trainer [Video Online] Available at: <http://ecorner.stanford.edu/authorMaterialInfo.
html?mid=2311> [Accessed 10 October 2011].
• Product Planning System [pdf] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/7531/1/Unit-3.
pdf > [Accessed 10 October 2011].
• Product Management Basic [pdf] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/7529/1/
Unit-1.pdf > [Accessed 10 October 2011].

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Recommended Reading
• Gorchels, 2004. The Product Manager S Field Guide. Tata McGraw-Hill Education.
• Lehmann, 2005. Product Management, 4/E .Tata McGraw-Hill Education, 2005.
• Morse, K., Successful Product Management: A Guide to Strategy, Planning and Development, Page
Publishers.

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Self Assessment
1. Which of the following is one of the most critical elements of a company’s product management function?
a. Market share and profitability
b. Strategic product planning system
c. Product mix
d. Product line

2. ___________is a set of all product lines and items that a particular company offers to buyers.
a. Product mix
b. Line stretching
c. Line fillings
d. Product planning

3. Which of the following statements is true?

a. The addition of new products to the firm’s product line can be done either by internal development or
external acquisition.
b. Product-led organisations should not only give customers what they need, but should also identify and
anticipate customer requirements.
c. A retailer is in the best position to know what their customers require because they have direct contact with
them, either in the store or via home shopping channels.
d. The retailer’s role has always been geared towards customer convenience.

4. Which of the following product category is purchased irregularly only after considering factors like price quality,
style performance?
a. Industrial products
b. Convenience product
c. Shopping products
d. Speciality product

5. Match the following.

A. These products are purchased irregularly may be once in life
1. Industrial products time. Majority of these products have no substitutes and they are
characterised by high buyer’s involvement.

B. These products are purchased either by an individual or a group on

2. Speciality product
behalf of an organisation for the production of other product.
C. This is the category of products bought regularly with ease and
3. Shopping products
without any time consumption.
D. Products in this category are purchased irregularly only after
4. Convenience product
considering factors like price quality, style performance and so on.
a. 1-C, 2-B, 3-A, 4-D
b. 1-C, 2-A, 3-D, 4-B
c. 1-A, 2-B, 3-D, 4-C
d. 1-B, 2-A, 3-D, 4-C

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6. The width of the product mix refers to the number of different ________ a company carries.
a. product
b. brands
c. product lines
d. shopping channels

7. Which of the following statements is true?

a. Product management variations occur from industry to industry with respect to the responsibility and authority
in major decision making areas.
b. Product managers are the real decision makers for strategic marketing decisions.
c. The greatest participation of the product manager is with respect to the number products in the product
line.
d. Companies with only many products usually find the functional form of organisation more suited to their
needs.

8. Which of the following is the element in the marketing mix around which all business activities commences
and revolve?
a. Price
b. Promotion
c. Place
d. Product

9. ________ is one of the ways of imparting product distinctiveness and helping the product to attain a specific
identity in consumer’s mind.
a. Branding
b. Diversification
c. Planning
d. Management

10. The consistency of a _________ refers to how closely various product lines are related in end use.
a. product mix
b. line stretching
c. line fillings
d. product portfolio

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Chapter VIII
Vendor Management

Aim
The aim of this chapter is to:

• introduce the concept of vendor management system

• identify the strategies to strengthen vendor relations

• discuss the vendor management services

Objectives
The objectives of this chapter are to:

• explain the concept of vendor managed inventory

• explain the vendor selection process

• highlight the limitations and challenges of vendor managed inventory

Learning outcome
At the end of this chapter, you will be able to:

• describe the concept of vendor finance

• explicate request for proposal and request for quotation

• recognise contract negotiation strategies

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8.1 Introduction to Vendor Management
Vendor management has far-reaching value across all industries, including retail, construction, financial, healthcare
and government. Verifying that the vendors meet the high standards, as well as regulatory guidelines specific to the
industry is essential in running an efficient and profitable business.

Vendor management is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and
managing third party companies to consistently meet the goals described below.

Establishing goals: Just as employees need clearly established goals, operations needs clearly defined performance
parameters. While selecting or managing vendors, vendor managers must optimise their opportunity to achieve these
goals by using third parties companies.

Selecting vendors: The fine art of vendor management is essential in optimising operational results. Different
vendors have different strengths and weaknesses, and it is the vendor manager’s responsibility to match the right
company with the desired performance characteristics. Failure to consider this comprehensively could lead to
complete failure.

Managing vendors: On a daily basis, vendor managers must monitor performance, provide feedback, champion
new projects, define or approve change control processes, and develop vendors.

Consistently meet goals: Operations must perform within statistically acceptable upper and lower control bounds.
Everything the vendor manager does should focus on meeting goals, from providing forecasts to defining requirements,
from ensuring vendors have adequate staff to ensuring the staff have completed all required training.

Vendor management is not the same as operations management, although it is remarkably similar. In an outsourcing
relationship, vendor managers must understand the drivers of the relationship in order to ensure the vendor is
successful. Vendor managers are not empowered to perform all aspects of the outsourced operation. Rather, they
must influence the vendor to perform. This level of influence is different from managing employees because of the
economic differences in the relationship: a company typically represents 100% of an employee’s income, but rarely
represents even 5% of a company’s revenues. Most of the outsourcing contracts are priced by vendors in a way that
even if the vendor pay the maximum non-performance penalties they are likely to still be profitable.

8.2 Vendor Selection Process

Vendor selection process consists of several steps described below:

8.2.1 Analyse Business Requirements

Analysis of the business requirements is the toughest part of the vendor selection process. The correct analysis will
put the entire process on the right track for selecting the right vendor at the right price. Lack of effort, poor planning
or taking shortcuts will jeopardise the success of the vendor selection process. This component of the process is
shorter and less complex for basic part and commodity vendors, and fundamental services, for example, office
machine service contracts. It will take longer time for more complex parts and multifaceted services, for example,
software outsourcing, call centre services, and so on. Regardless of the size and scope of the material or service we
will select a vendor, following these steps will help insure the success of rest of the vendor selection process.

Assemble an evaluation team

The evaluation team should be composed of decision makers and knowledgeable employees from every area those
who have a stake in the successful outcome of selecting a vendor for the product, material or service that is going to
be sourced outside of the company. For parts and services that only affect a few areas, a small team of three to five
people are sufficient. For larger products and services that affect several areas five to ten people will be required.
Examples of large projects include complex subassemblies, computer information services and large customer
service call centres.

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Define product, material or service

Writing and publishing of the definition of product, material and services, will make stakeholders aware of what the
team is trying to accomplish. Secondly, as the project progresses, people may try to add specifications or additional
features. This definition can be referred to throughout the project to help keep the team on track and on target.

Define technical and business requirements

If the vendor selection process is for a part or subassembly, the specifications can be obtained from the bill of
materials, engineering drawings or manufacturing procedures. If it is a service or software, then specific business
requirements should be defined. The bigger the scope of a project, the more requirements should be. The business
requirements for a software package include:
• Integrated inventory, order processing, shipping and accounting system
• Optional payroll and costing system
• Inventory part number must be a minimum of 18 characters
• Customer notes must be available for the order level and for individual order lines
• Price overrides must be approved by a supervisor
• Ability to print barcodes for detailed inventory tracking
• Inventory transaction history must be available online for a minimum of five years

Define vendor requirements

The vendor selection process would not be complete without listing the criteria that the vendor himself/ herself must
meet in order to be considered and evaluated for the job. The quality of the vendor is as important as the quality of
goods or services that they will be delivering. This criteria should be based upon the type of product or service that
we seek to outsource and the price that we are willing to pay. Some of the vendor requirements are as follows:
• Have a local delivery service for same-day orders
• Have a market capitalisation of at least $250 million
• All employees must be bonded and insured
• Provide at least five references that can be talked to directly
• Provide electronic ordering processes
• At least 50% of the raw material must originate from within the country
• Technical service must be available from 8:00am to 8:00pm

Publish a requirements document for approval

Once all of the above steps are complete, aggregate the findings and requirements into a comprehensive document.
The team members will share this document with key employees in their areas and seek feedback. After the team
members accomplish this, and the document is updated with appropriate feedback, the leader of the vendor selection
team will present the updated requirements document to upper management to seek their feedback and approval.
This document will be the basis for generating a Request for Proposal (RFP) or Request for Quote (RFQ).

8.2.2 Vendor Search

The second step in the vendor selection process is to execute a vendor search in order to compile a comprehensive
list of vendors that may be able to meet the requirements as defined in the business analysis phase. Once completed,
we need to narrow the list of vendors down to only those which we want to request more information from.

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Compile a list of possible vendors
Use a spreadsheet or database program to start entering the contact information for the list of possible vendors.
Depending on the service or product that we are completing the vendor selection process for, we will define the
scope of the vendor search in terms of local, regional, national or international. Some searches will be limited to
the local area; for example, searching for a janitorial service would not be practical on the international level. On
the other hand, a simple mass produced part (in sufficient quantities) would yield itself very well to an international
search. Vendor search can be done through internet, business associates, registers and directories.

Select vendors to request more information from

Depending upon the effort that we put into searching for vendors, the list created may be too long. Assess the
number of vendors found, taking into account that we will have to send each one a Request for Information (RFI)
and evaluate it upon its return. A targeted “rifle” approach will serve better than a widespread “shotgun” approach.
Depending upon the size and scope of the project, anywhere from three to twelve vendors would be an appropriate
number to send an RFI to.

Write a request for information (RFI)

Write a document that will be delivered to each vendor, those we have decided to investigate. For smaller parts and
basic services this should be short and simple. For more complex parts and complicated services, a more detail and
longer request should be developed. This document should include the following sections:
• Cover letter introducing yourself and your company.
• A contact person(s) for the vendor to contact with questions and clarifications.
• Short description of the part or service.
• Request for product or service and company brochures.
• Vendor screening criteria questions.
• Deadline for the vendor to respond.

Evaluate responses and create a “short list” of vendors

When the Request for Information (RFI) packages are retuned, review the responses. If there are any ambiguities,
contact the vendor for clarification. Gather the vendor evaluation team and decide on the vendors to be short listed.
If the vendor does not meet the set criteria, eliminate that vendor and move on to the next one. The short listed
vendors should be between two and seven depending upon the size and scope of the project.

8.2.3 Request for Proposal ( RFP) and Request for Quotation (RFQ)
A well written Request for Proposal (RFP) or Request for Quotation (RFQ) is the key for writing a RFP or RFQ is
not difficult if you understand the objectives and function of the document.

Request for Proposal (RFP) is used for services or complex products where quality, service or the engineered final
product will be different from each vendor that is responding. Request for Quotation (RFQ) is used for commodities,
simple services or uncomplicated parts with little or no room for product or service differentiation between responding
vendors. Negotiation points could include: delivery schedules, packaging options, and so on.

Objectives of a RFP and RFQ

• Obtain detailed proposals in order to evaluate each vendor’s response so that the best interests of the company
are met on all fronts.
• Leverage the competitive nature of the vendor selection process to negotiate the best possible deal.
• Insure that the interests of all stakeholders within the company will be met and a consensus reached.
• Puts the company in control of the entire vendor selection process and sets the selection rules up front.
• Starts building the partnership between you and the vendor right from the start.

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Sections of the Request for Proposal (RFP) or Request for Quotation (RFQ)
The RFP and RFQ should contain the following sections. Keep in mind, that each document will be different
depending upon the type of company and product we are searching for. Modify each section on the basis of individual
needs:

Submission details
Deadlines, mailing address of the company, contact person for questions and clarifications.

Introduction and executive summary

This section should be written after the entire document is finished. This is used to provide prospective vendors
with a brief overview of the company and the requirements for the product or service.

Business overview and background

Give a brief overview of the business, products and market sector that we cater to. This will help the prospective
vendors understand what business needs we are trying to fill with the vendor selection process. Also provide important
background information that will benefit the vendor while responding.

Detailed specifications
This should be the longest section of the document. For an RFP, it will contain the qualitative measures and
requirements that will drive the vendor selection decision. For an RFQ this section should provide the quantitative
measures that we will be looking for in the vendor’s response. Example criterion includes:
• Product drawings
• Engineering tolerances
• Service levels
• Milestones
• Deliverables and timelines
• Technical or business requirements
• Software functionality
• Hardware requirements

Assumptions and constraints

Any assumptions and constraints that the prospective vendors need to be made aware of should be listed here. Failure
to be forthright and upfront with the vendor will open the door to renegotiation of the agreement at a later date and
runs the possibility of straining the relationship that we have with the vendor.

Terms and conditions

Any terms and conditions of the contract must be listed in order for the vendor to make a fair and honest response.
These may include financing options, contract length, renewal options, warrantees, delivery penalties, service levels,
and so on.

Selection criteria
The final section should be an overview of the selection criteria that we will be using to make the decision. Some
companies prefer to keep this information totally confidential; while other companies believe this will help prospective
vendors focus on what is important to the company.

Distribute the RFP and RFQ to selected vendors

Finally, compose a cover letter and send two copies of the RFP or RFQ to each of the vendors that we selected
from the search process. Make sure that appropriate contact information is included in order to provide assistance
to any vendor that needs it.

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8.2.4 Proposal Evaluation and Vendor Selection
The proposal evaluation for the vendor selection process for smaller projects and commodities will be relatively
straight forward. For bigger projects, complex parts or multifaceted services, evaluating proposals and coming to
a consensus will be more involved. The main objective of this phase is to minimise human emotion and political
positioning in order to arrive at a decision that is in the best interest of the company. Be thorough in the investigation,
seek input from all stakeholders and use the following methodology which will lead the team to a unified vendor
selection decision:

Preliminary review of all vendor proposals

Before the vendor selection team starts its evaluation and selection process, all proposals must be reviewed for
completeness and clarity. Any obvious omissions and ambiguities should be clarified by the submitting vendor. This
will insure that the evaluation and selection process, once begun, will be through and efficient.

Record business requirements and vendor requirements

On a spreadsheet list the business requirements and then vendor requirements that were compiled in the first step,
that is analyse business requirements. A thorough and detailed listing of all requirements is essential in order to
arrive at a fair and equitable decision.

Assign importance value for each requirement

For each of the requirements assign an “importance value” using a scale from one to ten; where 1 is extremely
unimportant and 10 is extremely important. If the vendor selection team cannot agree upon an important value, then
accumulate everyone’s individual value and calculate an “average” across all members. If a team member feels they
are not qualified to render an opinion on a certain requirement, they may abstain from submitting a value. Use the
average score of all submitted values from the team as the important value for that requirement.

If a requirement is dichotomous to the point where we would want to eliminate the vendor immediately if they cannot
meet the requirement, then mark that requirement as “Pass/Fail”. For example, if our insurance carrier requires all
external contractors that perform work in secured areas to be “bonded and insured,” then any vendor that does not
meet this requirement will be immediately eliminated from further consideration.

Assign a performance value for each requirement

This step can be the longest and most drawn out process of the entire vendor selection process. The team will need
to assign a “performance value” that they believe that each vendor performs on each of the requirements. For larger
projects we may have to give each team member time to evaluate each proposal in order to arrive at a performance
score for each objective.

Once again, if the team cannot agree upon a performance value, then accumulate everyone’s individual value and
calculate an “average” across all members. If a team member feels they are not qualified to render an opinion on a
certain requirement, they may abstain from submitting a value. Use the average score of all submitted values from
the team as the performance value for that requirement for that individual vendor.

If a requirement is indicated to be “Pass/Fail” and the team agrees that the individual vendor has not met the
requirement, that vendor can be immediately removed from further consideration.

Calculate a total performance score

After calculating the “importance value” for each requirement and a “performance score” for each vendor on each
requirement, we can calculate a total performance score for each vendor. Calculate the total performance score by
multiplying the individual importance value by the vendor’s performance value. Total the sum of all an individual
vendor’s performance score to arrive at a total performance score for the vendor.

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Select the winning vendor

The total performance score is not meant to be an absolute value of determination of a vendor’s proposal. It is to be
used as a guide to highlight differences between vendors and spark meaningful discussion between team members.
Proposals that fall orders-of-magnitude below the front runners can be eliminated if the team agrees.

8.2.5 Contract Negotiation Strategies

The final stage in vendor selection process is developing a contract negotiation strategy. Successful contract
negotiation means that both sides look for positives that benefit both parties in every area while achieving a fair
and equitable deal. A signed contract that benefits both parties will provide a firm foundation to build a long lasting
relationship with the vendor. The following contract negotiation objectives can be use to evaluate the contract on
each of the following items:
• Explain clearly all essential prerequisites, terms and conditions
• Goods or services to be provided are unquestionably defined
• Compensation is clearly stated: Total cost, payment schedule, financing terms
• Acknowledgement of effective dates, completion or termination dates and renewal dates
• Identify and address potential risks and liabilities
• Define and set reasonable expectations for this relationship currently and into the future

Strategies for planning contract negotiations

The strategies for planning contract negotiation are described below.

List rank the priorities along with alternatives

As we develop the contract negotiation strategy, we may keep returning to this area to add additional items. We will
not be able to negotiate effectively all areas of the contract at once. We need to be sure what is most important and
that is discussed and agreed upon before moving on to less important items.

Know the difference between what you need and what you want
Review the priorities frequently throughout the contract negotiations planning process and one final time at the end.
Be sure to ask the hard questions, for example, “Is this really a priority for our company, or is it a ‘nice to have’?”
“Was this priority a result of some internal political jockeying, or is it for real?”

Know your bottom line so you know when to walk away

Is there a cost or hourly fee that the company cannot exceed? Have you come to realise that one or two of the top
priorities are truly non-negotiable and you will be better to walk-away from this contract if the vendor does not
agree to it? List these along with the rationale so they are not forgotten.

Define any time constraints and benchmarks

In any substantial project we will want to set performance measurement standards that we will expect from our
vendor. If these are essential to the business, then we will want to negotiate a fair and equitable penalty when they
are not met. For example: project completion dates, delivery date for first batch of parts, start date for the service,
lead times, and so on.

Assess potential liabilities and risks

What are the possibilities that something might go wrong? What if unforeseen costs are encountered? Who will be
responsible if government regulations are violated? Whose insurance will cover contract workers? These are just a
few of the more common questions that must be addressed in any contract.

Confidentiality, non-compete, dispute resolution, changes in requirements

These are other items that could be a potential negotiation stumbling block or deal closer. For example, if the vendor
or an employee has the possibility of being exposed to confidential information than, you should be sure to put a
confidentiality clause into the contract with the liability, assumed by the vendor.

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Do the same for your vendor
Now that we have completed the contract negotiations planning process for our business, repeat the same process as
if you were the vendor. What area do you think is most important for them? What risks or liabilities will they want
you to assume? Your list won’t be perfect, but it will succeed in putting you into a frame of mind to look at things
from their perspective. This is how great partnerships between client and vendors are built.

Preparation
Before the actual contract negotiations begin, make sure the following items are reviewed and confirmed:

Determine if you will need legal counsel

Negotiating a contract for one year of janitorial services in a small office is vastly different than negotiating a contract
to outsource a fairly large call centre. If you feel the least bit uncomfortable reviewing contract “legalese”, do not
hesitate to retain a lawyer specialising in contract negotiations.

On-site or teleconference
Agree upon where the negotiation sessions will take place. If you think you have the upper-hand by negotiating at
the vendor’s site, then propose up front that you will travel to them. If the distance is too far to travel cost effectively,
set up a teleconference to accomplish the negotiation session. Make sure it is a video conference because body
language speaks louder than words.

Make sure the person representing the vendor has authority to negotiate
Before your people travel to the vendor’s site or the vendor travels to your site, make sure the person representing
the vendor have the authority to negotiate on behalf of the vendor’s company. It would be a huge waste of time to
hear at the end of a long negation session.

8.2.6 Contract Negotiation Mistakes

The smallest mistake can kill an otherwise productive contract negotiation process. Avoid these contract negotiation
mistakes so that you and your vendor will come to an agreement that will benefit both parties. Some of the common
mistakes are listed below:

Thinking the yard is fenced in: Don’t assume that only a certain subset of resources or conditions can be negotiated.
Finding creative and original alternatives that can benefit both parties will result in a better negotiated contract. Do
not propose unreasonable alternatives that will destroy your sincerity and integrity.

Failure to study your opponent: Too many people fail to research the vendor that they will be negotiating with.
They don’t understand the vendor’s market and what other influences control their environment. The larger the
contract, the more time should be spend on this.

Too aggressive: We need to be certain that the company’s interests are at the forefront of our priorities but at the
same time we need to be mindful and sensitive regarding the person representing the vendor.

It’s all about price: Look for alternatives that are high on your priority list and low on the vendors.

Jumping too quick: No matter how low the opening price is, offer lower or ask for something more.
Don’t gloat: When you do end up striking a fantastic deal in your favour, don’t do something unprofessional, as
the vendor may then look for loop-holes in the contract to regain some money and pride.

Terminology not defined or understood: Every area of the contract that has the possibility of being misunderstood
is should be clearly defined along with the technicalities.

Inconsistencies within the contract: Look for inconsistencies within the contract and if necessary, have a third
party review the contract in order to uncover any inconsistencies.

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Concern in one area will be overridden by another area: Do not assume that a perceived weakness or apprehension
in one area of the contract can be compensated by strength in another area. Be specific and direct in all areas. Once
the contract is contested in a court of law, then you are left with no control.

Avoid redundancies: Stating the same thing twice in different section of the contract will not reinforce their value.
In most instances lawyers and the courts will come up with a reason to differentiate and justify both areas; usually
with an interpretation that neither party anticipated.

8.3 Strategies to Strengthen Vendor Relations

Vendor management helps building a relationship with the suppliers and service providers that will strengthen both
businesses. Vendor management is not negotiating the lowest price possible. Vendor management is constantly
working with the vendors to come to agreements that will mutually benefit both companies. Some of the strategies
to strengthen this relationship are:

Share information and priorities: The most important success factor of vendor management is to share information
and priorities with the vendors. Appropriate vendor management practices provide only the necessary information at
the right time that will allow a vendor to better service your needs. This may include limited forecast information,
new product launches, changes in design and expansion or relocation changes, just to name a few.

Balance commitment and competition: One of the goals in vendor management is to gain the commitment of the
vendors to assist and support the operations of your business. On-the-other-hand, the vendor is expecting a certain
level of commitment from you as well.

Allow key vendors to help you strategise: If a vendor supplies a key part or service to your operation, invite that
vendor to strategic meetings that involve the product they work with. They are the experts in that area and you can
tap into that expertise in order to have a competitive advantage.

Build partnerships for the long term: Vendor management seeks long term relationships over short term gains and
marginal cost savings. Constantly changing vendors in order to save a penny here or there will cost more money in
the long run and will impact quality. Other benefits of a long term relationship include trust, preferential treatment
and access to insider or expert knowledge.

Seek to understand your vendor’s business too: We should not constantly lean on vendors to cut costs because
either the quality will suffer or they will go out of business. Part of vendor management is to contribute knowledge
or resources that may help the vendor better serve you.

Negotiate to a win-win agreement: Good vendor management dictates that negotiations are completed in good
faith. Look for negotiation points that can help both sides accomplish their goals. A strong-arm negotiation tactic
will only work for so long before one party walks away from the deal.

Come together on value: Vendor management is more than getting the lowest price. Most often the lowest price
also brings the lowest quality. Vendor management will focus quality for the money that is paid. If the vendor is
serious about the quality they deliver, they won’t have a problem specifying the quality details in the contract.

8.4 Vendor Evaluation

As a consumer, when we want to purchase an item, whether it is a new car or a flat screen television, we will most
likely do some research on the prices of the local stores or from vendors on the internet. When we have narrowed
our search we then look at other criteria like, warranty or availability. Lastly, we will look at other less tangible
criteria such as the previous experiences with the vendor and how their customer service was. This behaviour is
exactly the same for companies when they want to evaluate the vendors in their supply chain.

Unless the company only uses one vendor for each item they purchase, there will enviably be occasion when a decision
has to be made as to which vendor gets the business. There are a number of different scenarios when this will occur,
for example when the item is purchased for the first time and when an item is no longer single sourced.

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Purchasing an item for the first time
When a decision has to be made between vendors, the purchasing department will use some vendor evaluation
methods to be their tool in the decision. If the item is to be bought for the first time, the purchasing department may
have contacted a number of vendors and sent them a Request for Quotation (RFQ). Each vendor would then complete
the RFQ with the information that was required, normally price and terms. The purchasing department would then
use these completed quotations, in conjunction with other information they have collected on the vendors, to make
short list for further evaluation or make a final selection. The purchasing department would evaluate the vendors
based on a number of criteria they had decided upon which may include objective criteria such as price and warranty
and subjective data which would include past experience with the vendor. Based on the weighting given to these
criteria the purchasing department would be able to fairly evaluate each vendor.

Choosing between vendors

If the sourcing of an item has been from a single vendor but another vendor has been approved to supply the same
item, a decision would need to be made on vendor selection when a requisition has been received by the purchasing
department. Many companies use a vendor evaluation tool that allows transaction data to be analysed to give a
comparison between vendors. The vendor evaluation uses criteria that have been determined by the purchasing
department to compare vendors such as price, delivery reliability, delivery date adherence and quality of the item.
There are few criteria’s that can be used in a comparison and these are usually weighted so that important criteria
are given more credence. For example, a company may decide that quality of the items it receives from vendors is
more important than price, which in turn is more important that delivery reliability. The company would then weight
these criteria so that the overall score reflects that requirement.

Vendor evaluation is important as it can reduce supply chain costs and improve the quality and timeliness of the
delivery of items to your company. The skill in evaluating vendors is to determine which criterion is important and
the weighting that these criteria are given. It is important to remember that these criteria may be different for each
item we are sourcing and possibly different between regions or countries. Objective data is useful to compare the
information that we can obtain from each purchase order and goods receipt, but sometimes the subjective data that
our purchasing agents can provide such as customer service and the willingness of the vendor to accommodate our
requirements is quite important in a vendor evaluation.

Implement Vendor Evaluation

A good purchasing strategy should include a method by which vendors are measured. The evaluation process should
include not only delivery performance, but track less obvious metrics such as under or over delivery, quality of items
delivered and the performance of the vendor’s customer service. These metrics may not always be a measurable
value, but sometimes the metric is subjective. If policy guidelines are implemented for subjective evaluation, then
all vendors can be measured equally.

8.5 Vendor Managed Inventory

Vendor Managed Inventory or VMI is a process where the vendor creates orders for their customers based on
demand information that they receive from the customer. The vendor and customer are bound by an agreement
which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance
but reducing inventories and eliminating stock-out situations.

8.5.1 VMI and EDI

With VMI, the vendor specifies delivery quantities sent to customers through the distribution channel using data
obtained from Electronic Data Interchange (EDI).

Many vendors use a VMI software package to assist them in determining order requirements. VMI software
can be part of an ERP suite such as SAP or be a standalone options, for example, products from Blue Habanero,
LevelMonitor, NetVMI and so on.

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The software will verify if the data as accurate and meaningful. It will calculate a reorder point for each item based
on the data and any customer information such as promotions, seasonality or new items. The quantity of each item
available at the customer is compared with the reorder point for each item at each location. This will determine if
an order is needed and the quantities required.

One of the benefits of VMI is that the vendor is responsible for supplying the customer when the items are needed.
This removes the need for the customer to have significant safety stock. Lower inventories for the customer can
lead to significant cost savings.

The customer can also be benefited from reduced purchasing costs. Because the vendor receives data and not purchase
orders, the purchasing department has to spend less time on calculating and producing purchase orders. In addition,
the need for purchase order corrections and reconciliation is removed which further reduces purchasing costs. Cost
saving can also be found in reduced warehouse costs. Lower inventories can reduce the need for warehouse space
and warehouse resources.

The manufacturer can gain some benefits from vendor managed inventory as they can gain access to a customer’s
point of sale (POS) data makes their forecasting somewhat easier. Manufacturers can also work their customer’s
promotional plans into forecasting models, which means enough stock will be available when their promotions are
running. As a manufacturer has more visibility to their customer’s inventory levels, it is easier to ensure that stock-
outs will not occur as they can see when items need to be produced.

8.5.2 Benefits of VMI

The VMI process brings benefits for both retailers and suppliers. Some of those benefits are listed below:

Retailer Benefits
The benefits to retailers are:
• Reduced inventory: This is the most obvious benefit of VMI. Using the VMI process, the supplier is able to
control the lead-time component of order point better than a customer with thousands of suppliers they have to
deal with. Additionally, the supplier takes on a greater responsibility to have the product available when needed,
thereby lowering the need for safety stock. Also, the supplier reviews the information on a more frequent basis,
lowering the safety stock component. These factors contribute to significantly lower inventories.
• Reduced stock-outs: The supplier keeps track of inventory movement and takes over responsibility of product
availability resulting in a reduction of stock outs, there-by increasing end-customer satisfaction.
• Reduced forecasting and purchasing activities: As the supplier does the forecasting and creating orders based
on the demand information sent by the retailer, the retailer can reduce the costs on forecasting and purchasing
activities.
• Increase in sales: Due to less stock out situations, customers will find the right product at right time. Customers
will come to the store again and again, there-by reflecting an increase in sales.

Supplier benefits
The benefits to suppliers are:
• Improved visibility results in better forecasting: Without the VMI process, suppliers do not exactly know
how their customers are going to place orders. To satisfy the demand, suppliers usually have to maintain large
amounts of safety stocks. With the VMI process, the retailer sends the POS data directly to the vendor, which
improves the visibility and results in better forecasting.
• Reduces PO errors and potential returns: As the supplier forecasts and creates the orders, mistakes, which
could otherwise lead to a return, will come down.
• Improvement in SLA: Vendor can see the potential need for the item before it is actually ordered and right
product is supplied to retailer at right time improving service level agreements (SLA) between retailer and
supplier.

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• Encourages supply chain cooperation: Partnerships and collaborations are formed that smooth the supply
chain pipeline.

8.5.3 Challenges and Limitations of VMI

The VMI approach has its own set of challenges and limitations:
• Some companies continue to manufacture to stock without leveraging customer specific data effectively for
production planning
• In order to provide priority service to VMI partners, some vendors reserve inventory resulting in shortages to
other customers
• Insufficient level of system integration results in incomplete visibility
• High expectations from retailers
• Resistance from sales forces due to concerns of losing control, effecting sales based incentive programs
• Lack of trust and scepticism from employees

8.5.4 Overcoming the Limitations

Effective implementation of VMI depends on smoothly overcoming the limitations and addressing the concerns of
various stake holders. Some of the concerns can be addressed as explained below:
• Redefine incentive programs based on partnership building instead of sales volume build strong partnerships
with management commitment to effective communication, active sharing of information, commitments to
problem solving and continued support
• Conduct simulations and pilots before actual implementation
• Organise training sessions before launching VMI program
• Set reasonable targets for benefits of VMI
• Establish agreements on service levels and process to handle exceptions

8.6 Vendor Finance

Vendor finance is the provision of a loan from one company to another so that goods can be purchased from the
company providing the loan. Vendor finance has a number of advantages which include:
• The vendor sales increases.
• The vendor earns interest on the loan which is usually higher than that available from other financial
institutions.
• The vendor has a firm business relationship with the borrowing company.
• Sometimes the purchasing company also provides share in their company as security, thus the vendor gains a
hold of the purchasing company.
• Vendors often imbed the financing within the total solution as opposed to add on packages.
• Price sensitivity is reduced so the purchase becomes more attractive.
• The purchaser is able to buy goods that they would otherwise be unlikely to afford.
• The procurement process is sped up as the purchaser does not need to search for financing.
• The purchaser’s cash flow is eased as they have a fixed payment to make over the next three to five years.
• During the underwriting and funding process the lending company receives an approximation of the credit
worthiness of the borrowing company.
• Some vendor finance arranges for the lease of products as opposed to full payment. This is tax effective for the
purchasers. They can also hand back the product at the end of the contract.

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There is one big disadvantage of vendor finance as any company requiring a loan to purchase their much needed
products could well have financial problems. This means that there is a risk that the loan would be written off and
the accompanying shares worth reduces.

There are financial institutes who specialise in providing vendor finance facilities to blue chip companies, working
as a third party. Other financial consultancies specialise in arranging and negotiating vendor finance schemes for
small and medium sized businesses. This involves seeking potential purchasers, matching them with vendors and
arranging the finance for the pair of them. They obviously receive a commission for this activity.

8.7 Vendor Management Services

Vendor Management Services (VMS) are a group of services that are designed to reduce costs, improve vendor
performance and also identify and manage risk. These services include:
• Sourcing of vendors, many VMS consultancies have market knowledge.
• Negotiating with vendors and completing the Master Agreement contract.
• Identifying the opportunities to cut costs and enhance vendor terms. Enhanced management information feeds
the purchaser with considerable information on costs, inventory and lapses between demand and delivery.
• Identifying vendors that are more appropriate. Sometimes there are suppliers that will provide better terms and
price levels. VMS consultancies often have this market knowledge.
• Identifying opportunities to consolidate vendors. Providing vendors with larger or more frequent orders, often
results in better pricing and terms.
• Evaluation of current vendors with respect to their performance, quality and pricing structures.
• Evaluation of vendor catalogues in order to find products that are more appropriate.
• Managing the transition from one vendor to another, which can often result in a break of supplies and loss of
income.
• Monitoring and evaluation of vendor activities including quality, and contractual and Service Level Agreement
(SLA) compliance so that the vendors comply with agreed delivery times, invoicing procedures and pricing
levels.
• Identifying and monitoring risk, which is particularly important when being supplied from third world
countries.

Many companies expect that vendor management services will accrue the following benefits:
• Total cost of procurement will be reduced by identifying areas to save money and fine-tuning the procurement
process.
• Vendor performance will be enhanced by the regular reviews and improvement in processes, communications
and purchaser/vendor interaction.
• Improved information flow between the purchaser and the vendor will increase management information to both
companies. It will also allow the purchasing company to cut inventory costs by optimal purchasing.
• Efficient purchasing will enhance profit levels and provide more fruitful customer supplies.
• Experienced staffs are released from problem solving to concentrate on core purchasing processes.
• Vendor management services keep the vendor relationship balanced and both companies goals aligned.
• Continual review of the vendor will lessen service problems and service failures. If problems do occur, alerts
as to the any penalty costs will be activated.
• VMS will lessen misunderstandings and miss communications.
• Where there are legal obligations with any purchase – such as in staffing, a VMS will ensure that these obligations
are met.
• Vendor management services are prevalent in the staffing environment, particularly when a company employs
many temporary staff. Many vendor management services consultancies will provide the above services using
a combination of staff and computer systems.

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8.8 Vendor Management System
A Vendor Management System (VMS) is an internet based software application that enables a business to procure
and manage temporary and permanent staff as well as contract and contingent staff. The vendor management system
usually includes:
• Staff ordering processes or job requisition
• Automated billing
• Management reporting
• Business Intelligent (BI) functionality
• Workflow engines
• Service catalogue that includes standardised positions and skills
• Tracking facilities
• Approval processes

The installed Vendor Management System will create a centralised internet based environment that will allow a
purchaser to enter their staff resource requirements to numerous staffing vendors.

Vendors will be able to reply in real time in a standardised method, proposing their particular staffing solutions. The
advantages with the use of a VMS include:
• Only approved staffs are hired.
• All the vendors can bid for their staff to be hired so there is competitive bidding.
• The purchaser can set up standardised job descriptions.
• All submitted staff details are available in one place and many systems can rank the proposals according to the
purchaser’s requirements.
• There is a central work flow engine that manages the process end to end.
• Questions, interviews and rejections are notated and tracked.
• Staff rates are kept low by the competitive environment as opposed to individual negotiations.
• The entire process is much quicker and smoother.
• No time is spent on reviewing staff that are too expensive.

The management of staff on site is also greatly simplified by a vendor management system:
• The same time cards are used by all staff.
• All staff is hired on uniform rates and expenses.
• Time can be reported against multiple projects.
• All consultants will be on identical time reporting schedules.
• There is accurate data about staff utilisation removing overlaps and loss of staff.
• All timesheets can be seen in one place.
• Overtime can be capped or approved automatically.

The vendors benefit from:

• Quick approval for their staff
• Invoices are more accurate and presented far quicker and in a uniform manner.
• Reporting errors are minimised.
• They have far quicker access to staffing requirements.

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Summary
• Vendor management is the discipline of establishing service, quality, cost, and satisfaction goals and selecting
and managing third party companies to consistently meet the goals
• Vendor selection process consists of analysing the business requirements, vendor search, request for proposal
(RFP) and request for quotation (RFQ), proposal evaluation and vendor selection, contract negotiation strategies,
and contract negotiation mistakes
• An RFQ is used for commodities, simple services or uncomplicated parts with little or no room for product or
service differentiation between responding vendors.
• An RFP is used for services or complex products where quality, service or the engineered final product will be
different from each vendor that is responding.
• Vendor management helps building a relationship with the suppliers and service providers that will strengthen
both businesses.
• Some of the strategies to strengthen the vendor relationship are: share information and priorities, balance
commitment and competition, allow key vendors to help you strategise, build partnerships for the long term,
seek to understand your vendor’s Business, negotiate to a win-win agreement, and come together on value
• The vendor evaluation uses criteria that have been determined by the purchasing department to compare vendors
such as price, delivery reliability, delivery date adherence and quality of the item
• Vendor evaluation is important as it can reduce supply chain costs and improve the quality and timeliness of
the delivery of items to your company.
• A good purchasing strategy should include a method by which vendors are measured
• Vendor managed inventory is a process where the vendor creates orders for their customers based on demand
information that they receive from the customer.
• Vendor finance is the provision of a loan from one company to another so that goods can be purchased from
the company providing the loan.
• Vendor management services (VMS) are a group of services that are designed to reduce costs, improve vendor
performance and also identify and manage risk.
• A vendor management system (VMS) is an internet based software application that enables a business to procure
and manage temporary and permanent staff as well as contract and contingent staff.

References
• Introduction to Buying And Merchandising [pdf] Available at: <http://www.egyankosh.ac.in/ bitstream/
123456789/39079/1/UNIT%201.pdf > [Accessed 10 October 2011].
• Vendor Management System – Staff at the Click of a Mouse [Online] Available at: <http://www.purchasing-
procurement-center.com/vendor-management-system.html> [Accessed 10 October 2011].
• 2009. Merchandise Planner [Video Online] Available at: <http://www.youtube.com/watch?v=Qvh-CDdB2bM>
[Accessed 10 October 2011].
• ArcherTechnologies., 2010. Vendor Management [Video Online] Available at: <http://www.youtube.com/
watch?v=dtaRf2Fx_2U> [Accessed 10 October 2011].
• Kumar, P. & Kumar, M., 2003. Vendor Managed Inventory in Retail Industry [pdf] Available at: <http://www.
tcs.com/SiteCollectionDocuments/White%20Papers/Vendor%20Managed%20Inventory%20in%20Retail%20
Industry.pdf> [Accessed 10 October 2011].
• Analyse Business  Requirements [pdf] Available at: <http://operationstech.about.com/od/vendorselection/a/
VendorSelectBusinessReq.htm> [Accessed 10 October 2011].

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Recommended Reading
• Chiplunkar, Product Category Management, Tata McGraw-Hill Education.
• Mathur, U. C., 2010. Retail Management: Text and Cases, International Pvt Ltd.
• Baschab, J., 2007. The Executive’s Guide to Information Technology, 2nd ed., John Wiley and Sons.

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Buying and Merchandising

Self Assessment
1. Which of the following is the toughest part of vendor selection process?
a. Vendor search
b. Proposal evaluation
c. Vendor selection
d. Analysis of the business requirements

2. Which of the following statements is false?

a. A good purchasing strategy should include a method by which vendors are measured.
b. Vendor management is more than getting the lowest price.
c. Good vendor management dictates that negotiations are completed in good faith.
d. Vendor management seeks short term relationships over long term gains and marginal cost savings.

3. With vendor managed inventory, the vendor specifies delivery quantities sent to customers through distribution
channel using data obtained from __________________.
a. Electrical Data Interchange
b. Electronic Data Interchange
c. Electronic Data Exchange
d. Electronic Dealer Interchange

4. Which of the following document is used for commodities, simple services or uncomplicated parts with little
or no room for product or service differentiation between responding vendors?
a. RFQ
b. RFI
c. RPF
d. RIQ

5. Which of the following statements is true?

a. One of the goals in vendor management is to gain the commitment of the manufacturers to assist and support
the operations of your business.
b. The most important success factor of vendor management is to share information and priorities with the
customers.
c. Vendor management helps building a relationship with the suppliers and service providers that will strengthen
both businesses.
d. Customer management is constantly working with the vendors to come to agreements that will mutually
benefit both companies.

6. A good ___________ strategy should include a method by which vendors are measured.
a. purchasing
b. planning
c. management
d. evaluation

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7. _____________ is a group of services that are designed to reduce costs, improve vendor performance and also
identify and manage risk.
a. Vendor finance
b. Vendor management services
c. Vendor evaluation
d. Service level agreement

8. Match the following.

A. A process where the vendor creates orders for their custom-
1. Vendor management system ers based on demand information that they receive from the
customer.
B. The provision of a loan from one company to another so that
2. Vendor managed inventory
goods can be purchased from the company providing the loan.
C. A group of services that are designed to reduce costs, improve
3. Vendor finance
vendor performance and also identify and manage risk.
D. An internet based software application that enables a business
4. Vendor management ser-
to procure and manage temporary and permanent staff as well
vices
as contract and contingent staff.
a. 1-D, 2-A, 3-B, 4-C
b. 1-B, 2-A, 3-D, 4-C
c. 1-A, 2-D, 3-B, 4-C
d. 1-C, 2-A, 3-B, 4-D

9. __________ is the key for selecting the best vendor at the best value for your company.
a. VMI
b. RFI
c. RFP
d. VMS

10. The installed vendor management system creates a centralised ________based environment that will allow a
purchaser to enter their staff resource requirements to numerous staffing vendors.
a. internet
b. customer
c. vendor
d. value

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Case Study I
Maruti Udyog Limited - The Pricing Dilemma

The case highlights the pricing strategy of Maruti Udyog Limited (MUL), the market leader in the Indian passenger
car industry. MUL has launched various models catering to all market segments at various price points.

The case provides a brief note on the various models of MUL, their prices and their features. It specifically focuses on
the competition between two of MUL’s best selling models - the M800 and Alto. MUL reduced the price difference
between these two models positioning them on an almost equal platform, which resulted in confusion in the minds
of consumers and industry analysts. M800 had ruled the passenger car market as the only car in the entry-level
segment in the Indian automobile industry and was now facing the danger of cannibalisation from one of its own
family members, Alto. The case highlights the pricing dilemma faced by MUL and leads to a debate on the right
pricing strategy for the company and the future of its flagship product M800.

“There is absolutely no question of phasing out the Maruti 800. Why would anybody want to stop producing the car
that is selling so well? As long as the customer demands it, we will continue to produce the 800.”
- Jagdish Khattar, Managing Director, Maruti Udyog Limited.

“There is no fault in what Khattar is doing. Upgrading people from two-wheelers is a great idea. But there is
one problem. This is the high-volume-low-margin game. If volumes don’t come through, the company could be in
trouble.”
- Rama Bijapurkar, Strategic Marketing Consultan

The Competition
Since 1985, Maruti Udyog Limited (MUL) has been the market leader in the passenger car industry in India.
Its flagship product - M800 had the distinction of being the largest selling car model in India since its launch in
December 1983.

Positioned as people’s car, M800 ruled the Indian passenger car market and remained unchallenged ever since it
occupied the top slot, five months after its introduction.

In March 2003, MUL sold 20,687 units of M800, the highest ever sales by any single model in a month. It was also
the highest sales since M800 debuted, surpassing its previous monthly high of 18,735 units in August 1999.

For the first few months of 2004, M800 performed well, selling 15,301 units in January, 13,518 units in February
and 15,540 in March. But gradually Alto, another MUL product, began eating into M800’s share. Alto reported sales
of 8,399 units, 8,324 and 9,011 units in January, February and March respectively.

In April, its sales increased to 9,350 units and in May 2004, Alto took over M800’s position as the largest selling
car with sale of 10,373 units, slightly over M800’s sales of 10,016 units. Analysts felt that Alto had taken the top
spot because of its price reduction in September 2003 by Rs. 23,000 followed by the launch of the non-AC Alto for
Rs. 0.23 mn in the first week of April 2004. On reducing the gap between its bread and butter model M800 and its
compact car Alto, MUL said it had “long term” plans for M800. Commenting on Alto’s pricing strategy, Jagdish
Khattar (Khattar), managing director of MUL, said, “The new price positioning of the Alto would cannibalise
existing A1 segment product the M800 which is also considered an old model.”

But, the cannibalisation will remain within the Maruti family and the bigger numbers will help Maruti depreciate
Alto faster. Net M800 sales may be less but we would be pushing more Alto and the more we sell the Alto the
faster it will depreciate.”3 Though industry analysts said this move would boost MUL’s profits, they also expressed
their views that MUL’s long-term plan might be to discontinue M800 and replace the entry segment with Alto.
However, Khattar clarified that MUL’s pricing strategy was not meant to replace M800 with Alto. He said, “Now,
we have two cars in entry-level. Maruti 800 is still a dream of Indians, how can I replace it?

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Background
In its efforts to fulfill the growing demand for personal transport vehicles, the Government of India (GoI) established
MUL in February 1981 through an Act of Parliament. It was incorporated to take over the assets of the erstwhile
Maruti Limited set up in June 1971 and wound up by High Court order in 1978. In October 1982, the GoI signed a
joint venture agreement with Suzuki Motor Corporation (SMC) of Japan.

MUL received technology support from SMC. On the other hand, SMC got support from the Indian
government, which helped it get import clearances for manufacturing equipment and obtain land for its factory.

At the time of its establishment, the objectives of MUL were:

• Modernisation of the Indian automobile industry
• Production of fuel-efficient vehicles to conserve scarce resources
• Production of large number of motor vehicles, which was necessary for growth

In an era when owning a car was a distant dream for a vast majority of Indians, MUL rolled out its first car, the
M800. The company labelled it a people’s car, with a 796cc 3-cylinder engine that delivered 39.5bhp at an affordable
price of Rs. 65,000. The first vehicle was released for sale in December 1983. Initially, the car was criticised for its
diminutive size, but it proved to be spacious enough to carry four adults.

Product Line
The Indian passenger car market was divided into various segments and sub-segments on the basis of price, size
(i.e., length of the model and its weight) and other factors (including engine capacity). MUL had a presence in all
the segments and sub-segments..

Pricing Strategies
Due to the fierce competition in the Indian passenger car industry, price emerged as an important factor affecting
the purchasing decisions of customers. Since it had been in the industry for more than two decades, and as a market
leader, MUL adopted aggressive pricing strategies.

The company had products at various price points In the early 2000s, when the passenger car industry was witnessing
stagnation, MUL slashed the prices of its various models, to revive the industry...

Promotion and Distribution

In the early 2000s, MUL also focused on promotion and distribution to face intense competition. The company devised
various innovative promotional strategies. With interest rates declining from 12% to as low as 8% in automobile
finance, MUL used financing as a major tool to drive up its car sales. The overall percentage of cars being financed
through automobile loans increased from 65% in 1998 to over 85% in 2003...

Result
By 2004, the competition in the Indian passenger car industry had further intensified. However, MUL retained
its leadership position mainly due to its aggressive pricing strategy. In December 2004, MUL reported an
18% rise in vehicle sales helped by a sharp increase in exports and rising demand in the domestic market.

Domestic sales increased by 11.4 percent amounting to 37,153 units, while exports jumped 78 percent to 6,675 units.
After the price reductions and aggressive promotion, M800 and Alto sold in huge volumes in India...

(Source: http://www.icmrindia.org/casestudies/catalogue/Marketing/Maruti%20Udyog%20Limited-The%20
Pricing%20Dilemma-Marketing%20Case.htm)

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Questions
1. What problem was faced by MUL for its product M800?
Answer
The case highlights the pricing dilemma faced by MUL and leads to a debate on the right pricing strategy for
the company and the future of its flagship product M800.

2. Why Maruti 800 is facing danger of cannibalisation from one of its own family members?
Answer
It is because of the Price reduction by Rs. 23000/- in month of September 2007. The new price positioning of
the Alto has cannibalise existing A1 segment product the M800 which is also considered an old model.

3. Which promotional strategy was used as a major tool to drive up its car sales by MUL?
Answer
The company devised various innovative promotional strategies. With interest rates declining from 12% to as
low as 8% in automobile finance, MUL used financing as a major tool to drive up its car sales.

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Case Study II
Toyota Prius: A Case in New Product Development

Abstract
The case focuses on the world’s first mass produced hybrid passenger car - Prius - manufactured by the world’s
second largest automaker Toyota Motors. The case explains the new hybrid technology used in the car. It also
looks for the reasons for the success of the original Prius in the Japanese market and of the subsequent models
of the Prius launched in the US and other markets.

The strategies for marketing the product in the US are also analysed.

The Prius is solid evidence that the ponderous development process that produces new automobiles is finally on the
brink of a genuine technological breakthrough.”1
- Popular Science Magazine, July 1997

“We believe that clearing environmental hurdles and offering an attractive driving experience are critical for cars
to thrive in the 21st century.”
- Hiroyuki Watanabe, Senior Managing Director, Toyota in 2003

Introduction
In December 1997, Toyota Motor Corporation (Toyota) of Japan launched its hybrid vehicle Prius in the
Japanese market. This was one of the first mass-produced hybrid vehicles in the world. It used the Toyota Hybrid
System (THS), which combined an internal combustion engine fuelled by gasoline with an electric motor.

Prius achieved a balance between high mileage and low emissions and was the upshot of the company’s initiative
to produce environment-friendly automobiles and its goal of manufacturing the ‘Ultimate Eco Car’. The Prius
generated a lot of enthusiasm in the industry as it was both efficient and stylish.

It was also a safe car. The car conformed to Japanese regulations and standards pertaining to environmental pollution.
Having sold more than 100,000 units worldwide by 2002, it was the best selling hybrid car model in the world.
The company introduced further refined models in 2000 and 2003. Toyota introduced Prius in
the US market in 2000. Before entering, Toyota conducted a research study of the US market and
consumer preferences there. It developed various strategies specifically for this market based on its
research findings. The price of the new improved Prius was unchanged from that of the original Prius.

These initiatives helped Prius to break successfully into the tough US market even though it was based on a new
concept of a hybrid car. In 2001, the Automotive Engineering International recognised Prius as the ‘world’s best
engineered passenger car.’

By 2002, it was being sold in North America, Japan, Europe, Hong Kong, Australia and Singapore. Analysts opined
that the demand for hybrid cars would rise because of the unstable oil prices and the growing need for environment
friendly products.

Commenting on the future of green technologies and on Prius in particular, Chris Giller of Grist.org said, “In the
marketplace, green technologies and industries are among the fastest growing and most innovative developments.

The Toyota Prius has defied every prediction to become the must-have car. The organic food business doubles
every time you blink. Green architecture is taking off. Renewable energy, emissions trading, environmentally
conscious investing: many of the most exciting advances in environmental thinking are happening in the private
sector.”

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Buying and Merchandising

Background
Toyota’s history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into the textile machinery business from
his traditional family business of carpentry. He invented a power loom in 1902 and founded the parent organisation
of Toyota, the Toyoda Group, in the same year. In 1926, Sakichi invented an automatic loom that stopped operating
when a thread broke.

This prevented the manufacture of imperfect cloth. (Calling attention to problems and rectifying them
at the earliest later became an important part of the Toyota Production System (TPS)). The same
year, Sakichi formed the Toyoda Automatic Loom Works (TALW) to manufacture automatic looms.

Sakichi’s son Kiichiro, an engineer from Tokyo University, was more interested in automobiles and engines than
the family’s textile business. In 1929, he travelled to the US and Europe to study the manufacturing processes in
car factories there. After returning to Japan, he spent his time studying car engines and experimenting with better
ways to manufacture them.

In the early 1930s, Kiichiro convinced his father to launch an automobile business and in 1933, Sakichi established
an automobile department within TALW. The first passenger car prototype was developed in 1935. In 1936, Sakichi
sold the patent rights of his automatic loom to a company in England to raise money to set up a new automobile
business.

Hybrid Car
Ferdinand Porsche manufactured the first hybrid-electric car in 1898. In the 1960s a few attempts were made to
manufacture hybrid cars by applying turbine engines to the production of the vehicles. A turbine-powered race
car was introduced in 1967 with the turbine engines powering the wheels through a mechanical transmission. The
need for cleaner and more efficient vehicles led to the development of hybrid vehicles in the 1970s. In 1970, a
program called the Federal Clean Car Incentive (FCCI) was started by the US government. This program led to the
development of a hybrid prototype in 1972.

The program was scrapped in 1976 by the Environmental Protection Agency (EPA) of the US. In 1993, another
program called the Partnership for a New Generation of Vehicles (PNGV) was launched in the US. The partners
in the program: Chrysler, Ford, GM, and a few governmental agencies, developed hybrid prototypes but never
commercialized them.

Knowledge Management at Toyota

According to analysts, Toyota’s success in both the local and global markets was based on its gaining a
competitive advantage through implementation of innovative and path-breaking ideas on its production
floors. Toyota had focused on learning from the very beginning.

At Toyota, knowledge sharing was intertwined with its people-based enterprise culture, referred to as the Toyota
Way. The five key principles that summed up the Toyota Way were: challenge, Kaizen (improvement), Genchi
Genbutsu (go and see), respect and teamwork.

The Toyota Way recognised employees as the company’s strength and attached great importance to developing
human abilities through training, coaching and mentoring. The principles of “Respect for People” and “Continuous
Improvement” were at the core of the Toyota Way. Most experts agree that the TPS system at Toyota worked by
combining its explicit, implicit and tacit knowledge.

The Original Pirus

The original Prius was powered by the THS. The THS was an advanced version of the EMS. THS is a power train
that combined an internal combustion engine and an electric motor. It was based on the series/parallel hybrid system.
It contained a power split mechanism that divided and sent power through two passages.

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The First Generation Pirus
In 2000, Toyota introduced its first generation model of the Prius in the US, Europe and other markets. This model was
also called Prius NHW11 or Prius Classic. A few modifications were made to the vehicle to meet vehicle standards
for California, USA. Modifications were made to the engine by increasing the horsepower from 58 to 72...

Marketing the First Generation Prius in the US

For Toyota, marketing the first generation Prius in the US was a challenge. Commenting on the launch of Prius in
the US market, Senior Vice President and General Manager of Toyota Motor Sales, Don Edmond (Edmond) said,
“Frankly, it was one of the biggest crapshoots I’ve ever been involved in. Not because we lacked confidence in the
quality of the product or the logic of the concept or the significance of this breakthrough technology. The key was
to convince consumers in the U.S. that hybrid technology was more than a science project.

The Second Generation Pirus

Toyota began evaluating the popularity of its first generation. Prius in the market soon after it was launched. The
evaluation was based on the price, performance and social aspects of the product as seen by buyers and potential
customers.

The Testing
The most important feature of the new Prius was its enhanced safety. The company had worked toward child safety
and reducing the impact of collisions to a remarkable degree.

Toyota expected higher demand for the new Prius than the earlier versions. Edmond said, “We are targeting a sales
volume of 36,000 for the first full year. That’s three times our sales target for Prius (original) when it launched in
the U.S.”.

(Source: http://www.scribd.com/doc/37181255/Toyota-Prius-a-Case-in-New-Product-Development)

Questions
1. Why did a need for Hybrid Cars in Foreign Market emerge?
2. What are the reasons for Prius to be a successful car?
3. According to you which five key principles made Toyota World famous in automobile industry, explain?

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Buying and Merchandising

Case Study III

Apple’s Pricing Strategy for iPhone in US

In 2007, Apple Inc. raised many eyebrows by reducing the price of its much hyped iPhone by one-third within 10
weeks of the launch. While some analysts felt that adoption of such market skimming strategies and subsequent
price cuts by companies selling technological devices was nothing new, others felt that Apple’s decision to reduce
the price so drastically just a few weeks after the launch was a public relations fiasco. As a section of the early
adopters of iPhone voiced their resentment, Apple went into damage-control mode.

Issues:
• Pricing (pricing decisions, market skimming, etc)
• Public relations
• Product adoption and diffusion

On September 5, 2007, Steve Jobs (Jobs), CEO of Apple Inc. (Apple), announced a steep price cut for its much
hyped iPhone. The price cut which came within 10 weeks of the launch of the product angered the early adopters
who had bought their handsets at a premium price. Some of these customers had waited in queues before Apple
stores for days to buy the phone as soon as it was launched.

(Source: http://www.icmrindia.org/Short%20Case%20Studies/Marketing%20Management/CLMM036.htm)

Questions
1. Critically analyse the pricing decisions that Apple took for its iPhone. What led the company to reduce the price
so drastically?
2. What, according to you, could be the possible ramifications of the iPhone price cut? Do you agree with critics
that Apple’s decision was nothing short of a PR fiasco? Give reasons for your answer.
3. Discuss how the Apple’s pricing decisions regarding iPhone was expected to impact the early adopters of the
phone. 

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Buying and Merchandising

• Pradhan, 2009. Retailing Management 3E, Tata McGraw-Hill Education.

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Recommended Reading
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• 2007. Retail Store Management, Volume 13. LaSalle Extension University.
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• Lehmann, 2005. Product Management, 4/E,Tata McGraw-Hill Education.
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• Varley, R., 2006. Retail product management: buying and merchandising, 2nd ed., Routledge.
• Zapata, A. L., 2005. Buy From The Poor Sell To The Rich. Author House.

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Buying and Merchandising

Self Assessment Answers

Chapter I
1. a
2. c
3. d
4. a
5. c
6. b
7. a
8. a
9. d
10. c

Chapter II
1. b
2. c
3. c
4. a
5. a
6. d
7. b
8. b
9. a
10. c

Chapter III
1. b
2. a
3. d
4. a
5. c
6. d
7. b
8. a
9. b
10. c

Chapter IV
1. b
2. c
3. d
4. a
5. a
6. d
7. d
8. b
9. c
10. a

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Chapter V
1. b
2. c
3. a
4. a
5. d
6. c
7. b
8. a
9. b
10. d

Chapter VI
1. b
2. a
3. a
4. c
5. d
6. d
7. c
8. a
9. c
10. b

Chapter VII
1. b
2. a
3. b
4. c
5. d
6. c
7. a
8. d
9. a
10. a

Chapter VIII
1. d
2. d
3. b
4. a
5. c
6. a
7. b
8. a
9. c
10. a

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