RM Assignment

Submitted By – Diksha Yadav

Roll Number – 03512303918

Question1. How Sales Forecasting happen in Merchandising Management.

Sales Forecasting is the process of using a company’s sales records over the past years to predict the
short-term or long-term sales performance of that company in the future. This is one of the pillars of
proper financial planning. As with any prediction-related process, risk and uncertainty are unavoidable in
Sales Forecasting too.

The success of a retail store largely depends on how accurately the sales forecasts has been done because
the retail supply chain as well as the value chain management depends on the demand patterns for the
category as well as for the demand in the market. A retailer is always interested to know the demands for
the categories he is offerings so that merchandise procurement can be channelized as per the market
demand and budget available/issued for purchase.

Sales forecasting helps a retailer to estimate its expected future revenues for sales made in a particular
period of time. These forecasts may be at departmental level, company level and for individual
merchandise classifications. As sales forecasting has always been a critical step for retailers. With the
advancement of information technology and technological advancement, large retailers have startedusing
statistical techniques (like Index numbers, time series and multiple regression analysis) or software
packages for the purpose of sales forecasting.

The forecasting technique or the software package to be implied, depends upon the store’s size,
employees’ skills, availability of funds and retailers own experience.

The Sales Forecasting Process:

The sales forecasting process is defined as the series of actions taken by a retailer to estimate the future
revenues for a particular time period by considering the past information and current forecasting
objectives into account. Sales forecasting for merchandise classifications within the departments usually
depends on more qualitative techniques, even for large stores.

The easiest way of forecasting sales for narrower categories is to first forecast store’s sales on a firm wide
basis and by department and then to breakdown these projections into various merchandise
classifications.

The different methods are being employed by different retailers to develop sales forecasts but most of the
retailers follow this process where a series of steps are used (figure 9.7):
Question 2.What is Category Management? Explain the Category Management Process in depth.

Category management can be defined as a strategic approach to procurement, where the organization
segments its spending on bought-in goods and services. The segmentation arranges goods and services in
discrete groups depending on the functions of these goods and services.

Some of the categories on which organizations typically spend include:

• Office management
• Human resources
• Professional services
• Security
• IT
• Transport
• Travel and entertainment
• Medical
• Industrial products/services

There are certain pre-requisites for successful category management: 

• An analysis of organizational strategic goals, and tying sourcing to these goals.

 • Updated pricing analysis on local and international markets, and the prevailing trends.
• An updated analysis of organizational spend vs market data as well as benchmarking
KPIs to identify areas for improvement.

The Category Management Process:

 Category Management process is a repetitive, strategic and long-term business philosophy that promotes
cross functional working between companies with the involvement of professionals from very diverse
areas such as procurement, finance, supply chain, marketing, store operations, sales and space planning.

1. Category Definition:

Defining a category is the first step in a typical category management process. In this step retailer
classifies the store’s products into different categories depending on the usage of the product by the
consumers and its packaging. What should be the best way to define a particular category are always
debatable issues amongst retailers.

The definition of category varies from situation to situation and one store to another. In one circumstance,
category may be narrowly defined or very broadly defined, depending upon several factors. For instance,
the category of sandwich may be narrowly defined so as to comprise only vegetarian sandwich, or it may
be broadly defined to include all types of varieties such as vegetarian, non-vegetarian, chocolate, fried,
baked, grilled, cheese spicy/mutton spicy etc.

2. Category Role:

Under this step, retailers usually determine the priority level and then assign a role for the category based
on a cross category comparison considering liking and disliking of consumers, and market trends.
Basically here retailers develop the base for allocating resources for the entire business.

While assessing the role played by a category, retailers should thoroughly consider the nature and size of
product category. For instance, some categories may represent luxury brands, whilst others might be
denominated by low priced brands. It signifies that if a particular category is denominated by luxury
brands, then most of the underlying brands are or will be, lucrative.

3. Category Assessment:

Under category assessment step, the retailer conduct an analysis of the category’s sub categories,
segments with respect to sales, turnover, profits, return on assets by reviewing consumer, market, retailer
and supplier information. Category assessment requires a variety of analytical measures designed to
determine the strengths, weaknesses, opportunities and threats of a particular category. It provides the
retailer an opportunity to identify future prospects in the category.
The retailer’s objective to assess categories is to know (a) whether to continue with the present category
categorization, (b) Which categories require additional effort to generate profits, (c) What are the areas of
highest turnover, profit, and return on asset improvement opportunities, and lastly to know the gaps
existed between the chosen
category and the present performance level of the category. Besides analytical tools, retailer sometimes
assesses the categories with the help of data on the customers, suppliers or competitors.

4. Category Performance:

Measuring category performance is the fourth step in the category management process in which the
retailer develops bottom-line and benchmark to measure the performance of the categories. It involves
setting measurable targets in terms of sales, volume, margins, and gross margin return on investment
(GMROI).

5. Category Strategy:

Under this stage of category management business process, retailers develop marketing and product
supply strategies that determine the category role and performance objectives. The basic purpose behind
developing strategies is the retailer’s intention to capitalize on category opportunities through creative and
optimum utilization of available resources assigned to a category.

The sub objectives are:

I. How to horizontally position a store’s own brand relative to the incumbent national brand and
II. How to price the store and national brands for retail category profit maximization.

6. Category Tactics:

Categories tactics are used to determine the optimal category assortment, pricing promotions, and shelf
penetration, essential to ensure that strategies put are on right track. Category tactics determine and
authenticate the specific actions that are required to implement the category strategies developed earlier.

7. Category Implementation:
This step is used to implement the category business plan through a systematic schedule and list of
responsibilities. Implementing category plan as per the objectives laid down, is the path to the success of
category management.

A typical category plan under implementation stage includes:

I. What specific tasks need to be done?
II. When to do,
III. Where to do, and
IV. Who will do it

Therefore, in a short, implementing category plan on the part of a retailer requires to decide what, where,
when a task to accomplish and by whom.
8. Category Revision:

This is the final step in a typical category management business plan. Category review enables a retailer
and concerned supplier to gauge the performance of a category and identify key areas of opportunity and
threats to overcome by adopting alternate plans.

Question 3. Explain various Pricing strategies used in retail sector with suitable examples

The price at which the product is sold to the end customer is called the retail price of the product. Retail
price is the summation of the manufacturing cost and all the costs that retailers incur at the time of
charging the customer.

Factors Influencing Retail Prices :

Retail prices are affected by internal and external factors.

Internal Factors -

Internal factors that influence retail prices include the following −

 Manufacturing Cost− The retail company considers both, fixed and variable costs of manufacturing
the product. The fixed costs does not vary depending upon the production volume. For example,
property tax. The variable costs include varying costs of raw material and costs depending upon
volume of production. For example, labor.
 The Predetermined Objectives− The objective of the retail company varies with time and market
situations. If the objective is to increase return on investment, then the company may charge a higher
price. If the objective is to increase market share, then it may charge a lower price.
 Image of the Firm− The retail company may consider its own image in the market. For example,
companies with large goodwill such as Procter & Gamble can demand a higher price for their
products.
 Product Status− The stage at which the product is in its product life cycle determines its price. At
the time of introducing the product in the market, the company may charge lower price for it to attract
new customers. When the product is accepted and established in the market, the company increases
the price.
 Promotional Activity− If the company is spending high cost on advertising and sales promotion,
then it keeps product price high in order to recover the cost of investments.

External Factors -

External prices that influence retail prices include the following −

 Competition− In case of high competition, the prices may be set low to face the competition
effectively, and if there is less competition, the prices may be kept high.
 Buying Power of Consumers− The sensitivity of the customer towards price variation and
purchasing power of the customer contribute to setting price.
 Government Policies− Government rules and regulation about manufacturing and announcement of
administered prices can increase the price of product.
Demand-Oriented Pricing Strategy

The price charged is high if there is high demand for the product and low if the demand is low. The
methods employed while pricing the product on the basis of demand are −

 Price Skimming− Initially the product is charged at a high price that the customer is willing to pay
and then it decreases gradually with time.
 Odd Even Pricing− The customers perceive prices like 99.99, 11.49 to be cheaper than 100.
 Penetration Pricing− Price is reduced to compete with other similar products to allow more
customer penetration.
 Prestige Pricing− Pricing is done to convey quality of the product.
 Price Bundling− The offer of additional product or service is combined with the main product,
together with special price.

Cost-Oriented Pricing Strategy

A method of determining prices that takes a retail company’s profit objectives and production costs into
account. These methods include the following −

 Cost plus Pricing − The company sets prices little above the manufacturing cost. For example, if
the cost of a product is Rs. 600 per unit and the marketer expects 10 per cent profit, then the
selling price is set to Rs. 660.
 Mark-up Pricing − The mark-ups are calculated as a percentage of the selling price and not as a
percentage of the cost price.

The formula used to determine the selling price is −

Selling Price = Average unit cost/Selling price

 Break-even Pricing − The retail company determines the level of sales needed to cover all the
relevant fixed and variable costs. They break-even when there is neither profit nor loss.

For example, Fixed cost = Rs. 2, 00,000, Variable cost per unit = Rs. 15, and Selling price = Rs. 20.

In this case, the company needs to sell (2,00, 000 / (20-15)) = 40,000 units to break even the fixed cost.
Hence, the company may plan to sell at least 40,000 units to be profitable. If it is not possible, then it has
to increase the selling price.

The following formula is used to calculate the break-even point −

Contribution = Selling price – Variable cost per unit

 Target Return Pricing − The retail company sets prices in order to achieve a particular Return
On Investment (ROI).

This can be calculated using the following formula −

Target return price = Total costs + (Desired % ROI investment)/Total sales in units

For example, Total investment = Rs. 10,000,

Desired ROI = 20 per cent,

Total cost = Rs.5000, and

Total expected sales = 1,000 units

Then the target return price will be Rs. 7 per unit as shown below −

Target Return Price = (5000 + (20% * 10,000))/ 1000 = Rs. 7

This method ensures that the price exceeds all costs and contributes to profit.

 Early Cash Recovery Pricing − When market forecasts depict short life, it is essential for the
price sensitive product segments such as fashion and technology to recover the investment.
Sometimes the company anticipates the entry of a larger company in the market. In these cases,
the companies price their products to shorten the risks and maximize short-term profit.

Competition-Oriented Pricing Strategy

When a retail company sets the prices for its product depending on how much the competitor is charging
for a similar product, it is competition-oriented pricing.

 Competitor’s Parity− The retail company may set the price as close as the giant competitor in the
market.
 Discount Pricing− A product is priced at low cost if it is lacking some feature than the competitor’s
product.

Differential Pricing Strategy

The company may charge different prices for the same product or service.

 Customer Segment Pricing− The price is charged differently for customers from different customer
segments. For example, customers who purchase online may be charged less as the cost of service is
low for the segment of online customers.
 Time Pricing− The retailer charges price depending upon time, season, occasions, etc. For example,
many resorts charge more for their vacation packages depending on the time of year.
 Location Pricing− The retailer charges the price depending on where the customer is located. For
example, front-row seats of a drama theater are charged high price than rear-row seats.

Question 4. How Merchandising Budget is determined? Discuss the methods used.

A merchandise Budgeting in a Retail is plan covering all phase of Retail operation for definite period in
the future. It is a formal expression of policies, plan, objectives and goal laid down in advance by the top
management for the concern as a whole and for each for it sub-divisions.” Every business works within
the confines of a budget, which indicates how much it can spend on various things. One key budget
element for a retailer is merchandise. Retailers must analyze data to create merchandise budgets that are
affordable and put the business in the best position to make a profit.

Objectives of Budgeting Merchandise –

 To compel planning, this is a most important feature of merchandise budgeting, because the
retail merchandiser is forced to look ahead, set target, anticipated problem and give the
organization purpose and direction.
 To communicate idea and plans to everyone affected by them. It necessary to have a formal
system to make sure that each respective Manager is aware of what he is supported to be doing.

A merchandise budget plan, as the very name implies, is a forecast of particular merchandise related
activities designed for a particular period of time, say, one year or six months. Under this plan, rather than
physical control of items, stress is given towards their financial planning.

Merchandise Budget Plans usually are made for one season and then broken down into shorter periods
like monthly & weekly plans.

In an effective merchandise Budget Plan, a retailer forecasts and plans about five fundamental variables,
namely, sales level, stock levels, purchases, reductions (markdowns) and gross margin.

Positive Impact –

Example: ITC Wills Lifestyle has set static budget for the year 2012 is Rs.5 crores for camac street store,
and after complete the fiscal year they achieve the total target and company earned good revenue, this is
the example of positive impact of budget.

Negative Impact -

Example: Titan industries limited has set the static budget Rs.10 crores for the year 2012 for Tanisqe
store at Bow bazaar. And end of the fiscal year they achieve only Rs. 7.5 core which has not been fulfilled
the set budget and create a loss for company so, it is a example of negative impact of budget.

Method for Budgeting Merchandise

Basically two type of Budget are uses in Retail: Static Budget  Flexible Budget

One technique that a retail business uses to create an accurate merchandise budget is demand forecasting.
Understanding what consumer demand for merchandise is likely to be in the future allows a retailer to
devote adequate resources to buying stock and managing inventory so as not to miss sales opportunities.

 Set margin and inventory turn goals

 Seasonal sales forecast for category
 Breakdown sales forecast by month
 Plan reductions – markdowns, inventory loss
  Determine stock needed to support forecasted sales
 Determine “open to buy” for each month

Example - ITC Wills Lifestyle uses technique to compute the Merchandise Budgeting that is given
below:

Sales * 2.5 times * Cost Price

Area

Advantage :

 Define the objectives as whole.

 Define result department has to achieve.
 It helps to measure the actual performance along with the variance.
 It provides a system whereby resource of the organzation is used in the most efficient way
possible.
 It indicates efficiency with which various activities of the org. have been co-ordinate.
 It establishes a basis for internal audit by means of regular examination of departmental result.
 It provides a basis for measuring productivity efficiency with a view to paying a bonus to
employee.

Disadvantage:

 Wrong demand forecasting during make the budget makes huge loss.
 Sometime budget increase heavy workload in between the employee which resulting of low
performance.

Question5. Highlight the importance of merchandise planning and provide an overview of critical
steps involved in merchandise planning by fashion retailer?

Merchandising is defined as offering right kind of product at right place and in right price. A retailer has
to plan to have in his store the product that is desired by the customer. Success of any retail organisation
depends on its merchandise planning.
Strategy of a firm may be profit maximization growth and expansion of its market. Expectation of
customers is always a product that is desired by him and that satisfies his need. There is interlink between
them, i.e., a firm can meet its target of profit or market share, when it is in a position to stock and sell the
product that is liked by the customer. This call for merchandise planning.

Importance of merchandise planning

Buying merchandise and placing them in store for selling is one of the biggest expenses a retailer makes.
There are several additional expenses that come with merchandise are delivery costs, shipping costs,
storing costs, etc. in case you order wrong merchandise, your expenses will be doubled easily.

Process of Merchandise Planning:

Success of any retail organisation depends on presenting the merchandise that is needed by the customer.
Firms have to make meticulous planning regarding type of merchandise to be bought, its presentation,
pricing etc., planning process has to be detailed and elaborate. It must cover every angle of merchandise
management.
Success of organisation depends on buying what the customers wants and selling it to him in the manner
desired by him.

Merchandise planning has to be:

a. Time Based:
It must make annual budget of merchandise required. Budget has to be further broken into quarterly,
weekly and daily on requirements.

b. Location Based:
Merchandise for entire organisation covering each store under the company’s umbrella. It should be
broken into demand for each individual store.

c. Store Based:
Demand of store or each department, category wise, product wise etc.
Micro and macro estimation of merchandise needed that has to be acquired in right time, right quantity so
that it can be sold in right time when demanded by customer. Planning should ensure optimum stock of
each product, because shortage of stock is lost opportunity of sale. Excess stock is a burden on finance
and cost.

Process of merchandise planning is as follows:

1. Forecast of Sales:
Merchandise plan or budget is dependent on estimated sales. Forecast of sales for entire organisation,
department and product wise is to be made. Further new products to be added, or deletion of product is to
be considered. Estimate is made based on past records, present scenario, impact of fashion economic
trend etc., Firm also has to determine pricing strategy in the sale of product.

2. Merchandise Budget:
Estimate of merchandise required is made based on expected sales. Estimate is made at head office level
that determines merchandise required for each store or department. Merchandise required for each
department and likewise for each store and for entire organisation.

3. Merchandise Control:
Retailer has to balance between purchase and sale of merchandise. It is necessary to avoid either over or
under stocking of merchandise. Daily and weekly stock reports are taken to monitor the movement of
stock. Fresh order of purchase is made before the stock reaches danger level.

4. Assortment Planning:
Assortment is arrangement of products category wise. It is presentation of entire products range classified
under categories, department or section. E.g. – Food section, cosmetics.