Unit 3

Performance Evaluation
Parameter for Banking and
Retailing

3.2 Performance Evaluation Parameters for Banks

3.2 Performance Evaluation Parameters for Retail
Introduction
 Performance evaluation is an important pre-requisite sustained growth and
development of any institution.

 As the case of any institution, the evaluation of the performance of banks and
retail sector has to be undertaken in relation to theirs and objectives.

 Any evaluation framework seeks to evaluate the performance of an entity

essentially in terms of how it uses its scarce resources.

 For a Bank the two key scarce resources generally are Capital and Liquidity.

 The traditional tools used by retailers to assess performance are financial

parameters like Gross Margin Return on Investment (GMROI), multiple attribute
method, ABC analysis, Sell through Analysis ETC.
3.1 Performance Evaluation Parameters for Banks:
Sound financial health of a bank is the guarantee not only to its depositors but is equally
significant for the shareholders, employees and whole economy as well. As a sequel to this
maxim, efforts have been made from time to time, to measure the financial position of each
bank and manage it efficiently and effectively. With the integration of Indian financial sector
with the rest of the world, the concept of banks and banking has undergone a paradigm shift.

A) Customer Base:
Client relationship, getting back to basics, customer centric culture etc., are some of the
buzzwords in the present day banking universe. Banks today are going out of their way to get
closer to the customer and align their product & service offerings to best match the customer
needs.
a) Meaning:
A customer base is a group of customers who could be served by a business. Many people
define this term as only the consumers who already patronize a business, but others include
any consumer with certain purchasing characteristics in this category, even if that customer
has yet to be convinced to enter the store or take advantage of a product. Within the larger
group is a smaller subset of the customer base that is made up of loyal shoppers, also called
repeat customers.
3.1 Performance Evaluation Parameters for Banks:
b) Drivers of Change from ‘Product-Centric’ to Customer-Centric:
The major drivers for this change include the following:
3.1 Performance Evaluation Parameters for Banks:
b) Drivers of Change from ‘Product-Centric’ to Customer-Centric:
1) Key Customer Segments :
Today key customer segments HNI and UHNI increasingly value trusted lasting relationships
over newer and complex product offerings; this has been proven by research as well.

2) Relationships as key for Stable Business :

Banks are now realizing that lasting customer relationships are the key to stable business
relationships and hence strong balance sheets.

3) Expectation of Integrated Offerings :

With the proliferation of social media, communication and collaboration channels, new
investment opportunities in emerging markets, customers now expect integrated offerings
spanning across product, geographies and channels.

4) Customer as an Essence of their Business Processes :

Banks today understand that customer is the essence of their business processes and no
business is possible without the customer.

5) Restructuring of Business Processes :

The transition from 'product-centric' to Customer-centric' banking entails
restructuring the internal business processes of the bank, more specifically the
processes which are directly interfacing with the customer.
3.1 Performance Evaluation Parameters for Banks:
c) Banking Functions Based on the Customer Relationship:
Based on the customer relationship touch points, banking functions can be broadly classified
into two categories; 'core' and ’non-core. Core functions are those that add direct value to the
customer and are a source of a competitive edge. All other functions/processes are non-core.
Figure demonstrates the evolving 'core' functions over the years.

For banks to keep the focus on core' operations mean that they need to realign and reengineer
their key business processes in such a way that they can synergize their efforts toward
customer intimacy.
 3.1 Performance Evaluation Parameters for Banks:
B) Non-Performing Asset (NPAs):
Non-performing asset (NPA) is one of the major concerns for banks in India. NPAs reflect the
performance of banks. A high level of NPAs suggests high probability of a large number of credit
defaults that affect the profitability and net-worth of banks and also erodes the value of the
asset.

a) Meaning:
Assets which generate periodical income are called as performing assets. Assets which do not
generate periodical income are called as non-performing assets. NPAs are further classified
into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI.

b) Gross NPA and Net NPA:

Gross NPA is advance which is considered irrecoverable, for bank has made provisions, and
which is still held in banks' books of account. Net NPA is obtained by deducting items like
interest due but not recovered, part payment received and kept in suspense account from
Gross NPA.
3.1 Performance Evaluation Parameters for Banks:
c) Categories of NPAs:
1) Standard Assets:
Standard assets generate continuous income and repayments as and when they fall due.
So a standard asset is a performing asset. Such assets carry a normal risk and are not NPAs
in the real sense.

2) Sub-Standard Assets: Sub-

Standard
A sub-standard asset was one, which was considered as Standard
Assets
non-performing for a period of 12 months. Assets

3) Doubtful Assets:
All those assets which are considered as non-performing Doubtful Loss
for period of more than 12 months are called as Doubtful Assets Assets
assets.

4) Loss Assets:
A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection but the amount has not been written off wholly.
3.1 Performance Evaluation Parameters for Banks:
d) Impact of NPAs on Banking Operations:
The NPAs have deleterious impact on the return on assets in the following ways:
1) The interest income of banks will fall and it is to be accounted only on receipt basis.
2) Banks profitability is affected adversely because of the providing of doubtful debts and
consequent to writing it off as bad debts.
3) Return on investments (ROI) is reduced.
4) The capital adequacy ratio is disturbed as NPAs enter into its calculation.
5) The cost of capital will go up.
6) Asset and liability mismatch will widen.
7) It limits recycling of the funds

e) Reporting of NPAs:
Every year on 31st March, Banks must report on NPAs after completion of audit.

The NPAs would relate to banks’ global portfolio, including advances at the foreign branches.

Whenever NPAs are reported to RBI, the amount held in interest suspense account, should be
shown as a deduction from gross NPAs as well as gross advances while arriving at the net
NPAs.
Banks who does not maintain Interest Suspense account for parking interest due
on non- performing advance accounts, May furnishes the amount of interest
receivable on NPAs as a foot note to the report.
3.1 Performance Evaluation Parameters for Banks:
C) Deposits:
Stable funding is vital for banks and the financial system.

This warrants analysis of the significance of a reliable, low-cost way for banks to refinance
their operations deposits.

Deposits play an important role for both consumers and financial services providers.

in India, deposits account for approximately 60% of bank funding.

The chief providers of deposits households hold roughly 30% of their financial wealth in this
form.

As a funding instrument deposits have the advantage of being stable and hardly exposed to
the ups and downs of the capital markets.

Deposits are the most common, and almost always the cheapest, source of loan able funds
for banks.
3.1 Performance Evaluation Parameters for Banks:
a) Significance of Deposits for Banks:
For a commercial bank, deposits are the oldest, most stable and, by volume, most significant
source of funding.

From the bank’s perspective, there are basically three distinct criteria by which deposits can
be differentiated:
Stable Funding
Source

Short-Term
Funds

Significance of
Deposits for
Banks

Helps to Assess
Liquidity
Deposits

Bank's
Origin of the
The Geographic
3.1 Performance Evaluation Parameters for Banks:
a) Significance of Deposits for Banks:
1) Stable Funding Source:
The group of investors who are the source of the deposits these include not only other banks,
financial institutions and the government, but in the narrower sense mainly the private sector,
that is households and businesses.

2) Short-Term Funds:
Generally, deposits tend to be short-term funds that could quickly be withdrawn from an
account again. As a rule, however, in practice they prove to be the most stable form of bank
funding apart from equity capital.

3) The Geographic Origin of the Deposits:

Deposits may be paid in by residents or non-residents, although in some cases a distinction is
also made whether depositors come from particular area or not.

4) Helps to Assess Bank's Liquidity :

The loan/deposit ratio helps assess a bank's liquidity, and by extension, the aggressiveness of
the bank's management. If the loan/deposit ratio is too high, the bank could be vulnerable to
any sudden adverse changes in its deposit base.
3.1 Performance Evaluation Parameters for Banks:
b) Determinants of Deposit Growth:

HousehIncome
olds Interest
Rates
Costs and
Availability
Risk-
Reward
Profile
Compe
tition
Demog
Trust in the
Banking
raphy
Sector
3.1 Performance Evaluation Parameters for Banks:
b) Determinants of Deposit Growth:
1) Income:
One assumption would be that as incomes rise, deposits with banks do so as well.

2) Inflation/Interest Rates:
As inflation accelerates, deposits become less attractive, depending on the interest rate. In
this case, the assumption would be that as deposit interest rates rise, deposits would
increase in principle as well.

3) Risk-Reward Profile of Investment Alternatives:

The assumption would be that the relative attractiveness of deposits falls if investment
alternatives offer more favorable risk-reward profiles. In comparison with deposits, the risk-
reward profiles of alternatives display not only structural but also inter-temporal
differences.

4) Demography:
The life-cycle hypothesis assumes that deposits increase in the course of a person’s
lifetime, only to decrease as the person reaches old age. So with a population generally
ageing, one would have to expect an overall decline in deposits.
3.1 Performance Evaluation Parameters for Banks:
b) Determinants of Deposit Growth:
5) Trust in the Banking Sector and its Stability:
The assumption would be that given pronounced trust in the banking sector the volume of
deposits would tend to increase. Credible guarantee systems (deposit guarantees, bank
bail-out funds) could be helpful in this case.

6) Competition:
Strong competition in the banking sector could necessitate higher interest rates being
offered to attract deposits. From the banks’ point of view, this could reduce the
attractiveness of deposits as a funding instrument.

7) Costs and Availability of Alternative Funding Instruments:

Their availability and costs hinge on national legislation, collateral, competition, the bank’s
rating and the rating of the country in which it is domiciled.

8) Households:
It is the greater risk aversion among non-banks. Over the past ten years, households
boosted their investments in insurance policies, deposits and cash.
3.1 Performance Evaluation Parameters for Banks:
c) Alternatives to the Current Funding Structure :
Given difficult funding conditions in the capital market, new regulatory requirements and the
heightened awareness of the need for more stable funding, banks are basically left with the
choice of two complementary alternatives:

1) An increase in the equity share of funding

2) An increase in the deposit share

Besides interbank loans, bonds and deposits (debt capital), equity capital is also one potential
alternative funding instrument. In principle, equity capital can be increased by issuing new
shares and retaining profits. Both possibilities are subject to restrictions.
3.1 Performance Evaluation Parameters for Banks:
d) Measures to Check Falling in Bank Deposits:
1) Higher Interest Rates :
Banks will offer incentives to depositors in the form of higher interest rates and other
attractive conditions in order to retain depositors on their books.

2) Interbank Funding : Higher

Many banks will look for other funding sources and Interbank
Interest
will compete more directly for market based funds. Funding
Rates
In this respect interbank funding becomes an option.

3) Creating New Funding Sources :

The banks also look at ways of creating new funding Creating Lend on a
New more
sources and better ways to manage banking assets.
Funding Selective
Sources Basis
4) Lend on a more Selective Basis :
An option that banks can adopt is to lend on a more
selective basis whenever funds are tight either by
raising credit standards or increasing loan rates and fees.
3.1 Performance Evaluation Parameters for Banks:
D) ROI:
Return on investment, also known as "ROI," is an important measure in investing. The main
objective of any firm is to achieve satisfactory returns on investment. Variables such as Cost,
Revenue, Quality and investment are assigned to a responsibility center in appropriate
amount, and these variables are used to calculate ROI.

1) The design of performance measurement systems and financial performance of a firm is

based on the principle of ROI.

2) To calculate ROI of an investment center, it is important to define the revenue, expense and
investment allocated to the center.

3) When a firm functions within the goals of the organization in mind, and attains a certain level
of return on the total book value of the investment, then the managers of the investment
centers can be made responsible for ROI as computed in the divisional income statement
and the balance sheet.

4) Return on investment can be used to measure the value of an entire company or of a specific
investment that a company might make.
3.1 Performance Evaluation Parameters for Banks:
E) Financial Inclusion:
India has, for a long time, recognized the social and economic imperatives for broader
financial inclusion and has made an enormous contribution to economic development by
finding innovative ways to empower the poor.
a) Meaning:
Financial inclusion is the process of ensuring access to appropriate financial products and
services needed by vulnerable groups such as weaker sections and low-income groups at
an affordable cost in a fair and transparent manner by mainstream institutional players.
Financial inclusion has become one of the most critical aspects in the context of inclusive
growth and development.

b) Definition:
1) According to CFI:
It is 'the process of ensuring access to financial services and timely and adequate
credit where needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost’.
3.1 Performance Evaluation Parameters for Banks:
c) Importance of Financial Inclusion:

Viable Business Means of Comprehensive

Proposition Growth
1) Viable Business Proposition :
Contrary to common perception, financial inclusion is a potentially viable business proposition
because of the huge untapped market that it seeks to bring into the fold of banking services.
Financial inclusion, prima facie, needs to be viewed as “money at the bottom of the pyramid”
and business models should be so designed to be at least self-supporting in the initial phase
and profit-making in the long run.
2) Means of Comprehensive Growth :
The importance of an inclusive financial system is widely recognized in the policy circles, not
only in India, but has become a policy priority in many countries. Several countries across the
globe now look at financial inclusion as the means of a more comprehensive growth, wherein
each citizen of the country is able to use their earning as a financial resource that they can put
to work to improve their future financial status, adding to the nation’s progress. In advanced
markets, it is mostly a demand side issue.
3.1 Performance Evaluation Parameters for Banks:
d) Measure taken to Promote Financial Inclusion:
Opening of No-frills Accounts

Relaxation on Know-Your-Customer (KYC) Norms

Engaging Business Correspondents

Use of Technology

Adoption of EBT

GCC

Simplified Branch Authorisation

Opening of Branches in Unbanked Rural Centres

Road map for providing Banking Services in Unbanked Villages

Financial Inclusion Plans of Banks for Three Years

3.1 Performance Evaluation Parameters for Banks:
d) Measure taken to Promote Financial Inclusion:
1) Opening of No-frills Accounts:
Basic banking no-frills accounts with nil or very low minimum balance as well as charges
that make such accounts accessible to vast sections of the population.

2) Relaxation on Know-Your-Customer (KYC) Norms:

KYC requirements for opening bank accounts were relaxed for small accounts in August
2005; thereby simplifying procedures by stipulating that introduction by an account holder
who has been subjected to the full KYC drill would suffice for opening such accounts.

3) Engaging Business Correspondents (BCs):

In January 2006, RBI permitted banks to engage business facilitators (BFs) and BCs as
intermediaries for providing financial and banking services. The BC model allows banks to
provide doorstep delivery of services, especially cash in-cash out transactions, thus
addressing the last-mile problem.

4) Use of Technology:
Recognizing that technology has the potential to address the issues of outreach and
credit delivery in rural and remote areas in a viable manner, banks have been
advised to make effective use of information and communications technology (ICT),
to provide doorstep banking services.
3.1 Performance Evaluation Parameters for Banks:
d) Measure taken to Promote Financial Inclusion:
5) Adoption of EBT:
Banks have been advised to implement EBT by leveraging ICT-based banking through BCs to
transfer social benefits electronically to the bank account of the beneficiary and deliver
government benefits to the doorstep of the beneficiary.

6) GCC:
With a view to helping the poor and the disadvantaged with access to easy credit, banks
have been asked to consider introduction of a general purpose credit card facility up to
`25,000 at their rural and semi-urban branches.

7) Simplified Branch Authorisation:

To address the issue of uneven spread of bank branches, in December 2009, domestic
scheduled commercial banks were permitted to freely open branches in tier III to tier VI
centres with a population of less than 50,000 under general permission, subject to
reporting.

8) Opening of Branches in Unbanked Rural Centres:

Accordingly, banks have been mandated in the April monetary policy statement to
allocate at least 25% of the total number of branches to be opened during a year to
unbanked rural centres.
3.1 Performance Evaluation Parameters for Banks:
d) Measure taken to Promote Financial Inclusion:
9) Road map for providing Banking Services in Unbanked Villages with a Population of more
than 2,000:
Banks were advised to draw up a road map to provide banking services in every unbanked
village having a population of over 2,000 by March 2012. RBI advised banks that such
banking services need not necessarily be extended through a bricks and mortar branch.

10) Financial Inclusion Plans of Banks for Three Years:

RBI advised all public and private sector banks to submit a board-approved, three-year
financial inclusion plan (FIP) starting April 2010. These plans broadly include self-set targets
in respect of rural bricks and mortar branches opened; BCs employed; coverage of
unbanked villages with a population above 2,000 as also other unbanked villages with
population below 2,000 through branches; BCs and other modes; no-frills accounts opened,
including through BC-ICT; KCCs and GCCs issued; and other specific products designed by
them to cater to the financially excluded segments.
3.1 Performance Evaluation Parameters for Banks:
F) Spread:
Spread or Interest rate spread is the interest rate charged by banks on loans to private sector
customers minus the interest rate paid by commercial or similar banks for demand, time, or
savings deposits.
a) Meaning:
Spread is the difference between the average lending rate and the average borrowing rate
for a bank or other financial institution. It is: (interest income ÷interest earning assets) -
(interest expense ÷interest bearing liabilities). This is very similar to interest margin.

b) Basic Concept in Spread:

Margin Spreads
Intermediation

Banking
Quality
Spreads

Basic Concept

Spread Between a
Rate and a Public
Long Term Credit
Bond Rate
Curve Spreads:
Banking Yield
3.1 Performance Evaluation Parameters for Banks:
b) Basic Concept in Spread:
1) Intermediation Margin Spreads:
These are spreads between the prime rate or credit average rates and the call money rate,
which is considered here as the marginal cost of finance for banks. An increase in
intermediation margin may stimulate the supply of credit by banks.

2) Banking Quality Spreads:

They involve banking credit of same maturity and of different quality, typically the short term
credit average rate minus the prime rate.

3) Banking Yield Curve Spreads:

They are defined as the difference between two banking rates of different maturities: the long
term credit rate minus the prime rate or the mortgage rate minus prime rate.

4) Spread Between a Long Term Credit Rate and a Public Bond Rate :
Their purpose was to promote an IS-LM model where banking credit and public bonds are
imperfect substitutes. According to their model this spread, that we name here the Bernanke-
Blinder spread, can carry information on the cycle.
3.1 Performance Evaluation Parameters for Banks:
c) Spread as Parameter of Performance Evaluation:
Spread is the gap between interest rate a bank charges on loans and rate pays on deposits.
The amount of total interest earned divided by the total interest paid to depositors as
mentioned in the income statement. This ratio is useful for Banks and DFIs.

Net Interest Margin Ratio= Total Interest Income-Total Interest Expense x 100
Total Asset

This ratio indicates the earning capacity through core banking business by utilizing all
assets. Banks normally borrow from savers and lend to investors. It is the ratio between the
difference of interest income and interest expense to total assets. It is also useful for Banks
and DFIs.
3.1 Performance Evaluation Parameters for Banks:
d) Spreads Linked with Future Growth:

Large amount
Customers of Banking Spread
Dependant on Banking Variations
Credits Despite
1) Large amount Customers of Dependant on Banking Credits Despite :
First, a vast majority of non-financial agents are still dependant on banking credits despite of
the deregulation financial markets. The behaviour of banks, regarding not only interest rates,
but also spreads, is an important channel of transmission of monetary policy.

2) Banking Spread Variations :

Second, the banking spread variations may depend upon the imperfect substitutability
between financial instruments as suggested in the theoretical explanations of the predictive
power of the commercial paper-Treasury bill spread.
3.1 Performance Evaluation Parameters for Banks:
G) Investments :
The banking system is the fuel injection system which spurs economic efficiency by mobilizing
savings and allocating them to high return investment. When evaluating a bank's investments,
examiners look not only at a bank's assessment area but also at a broader statewide or
regional area surrounding it. Examiners want to know:
1) How much money the bank has invested
2) How innovative or complex the investments are
3) How well the investments respond to credit and community development needs, and
4) Whether the investments are a different type from those provided by most other
investors.

a) Risk Involved in a Bank’s Investment:

It is calculated by dividing the amount invested in government securities by total investment.
Government securities are considered one of the most safe and risk-free debt instruments.

b) Total Investments to Total Assets Ratio:

Total investments to total assets reflect the extent of deployment of assets of a bank in
investment as against advances. This ratio measures the proportion of total assets locked
up in investments.
3.1 Performance Evaluation Parameters for Banks:
H) Credit Appraisal:
The recent economic crisis has seen a spate of defaults on loans across banks and one of the key
reasons behind this seems to be inadequate credit appraisal processes.
a) Meaning:
Credit appraisal means an investigation/assessment done by the bank prior before
providing any loans & advances/project finance & also checks the commercial, financial &
technical viability of the project proposed its funding pattern & further checks the primary
& collateral security cover available for recovery of such funds.

b) Criteria for Credit Appraisal:

1) The credit requirement must be assessed by all Indian Financial Institutions or
specialised institution set up for this purpose.
2) Wherever financing of infrastructure project is taken up under a consortium /
syndication arrangement – bank’s exposure shall not exceed 25%
3) Bank may also take up financing infrastructure project independently / exclusively in
respect of borrowers /promoters of repute with excellent past record in project
implementation.
4) In such cases due diligence on the inability of the projects are well defined and
assessed. State government guarantee may not be taken as a substitute for satisfactory
credit appraisal.
3.1 Performance Evaluation Parameters for Banks:
c) Basic Types of Credit :
1) Service Credit :
Service credit is monthly payments for utilities such as
telephone, gas, electricity, and water. One often has to Service
Loans
pay a deposit, and may pay a late charge if payment is Credit
not on time.
2) Loans:
Loans can be for small or large amounts and for a few Installm
days or several years. Money can be repaid in one lump Credit
ent
sum or in several regular payments until the amount Cards
Credit
borrowed and the finance charges are paid in full.
3) Installment Credit :
Installment credit may be described as buying on time, financing through the store or the
easy payment plan. The borrower takes the goods home in exchange for a promise to pay it
later.
4) Credit Cards :
Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card
can be the equivalent of an interest-free loan--if someone pay for the use of it in full at the
end of each month.
3.1 Performance Evaluation Parameters for Banks:
d) Risks:
The operating paradigms of the banking industry in general and credit dispensation in
particular have gone through a major upheaval.
1) Lending rates have fallen sharply.
2) Traditional growth and earning such as corporate credit has been either slow or not
profitable as before.
3) Banks moving into retail finance, interest rate on the once attractive retail loans also
started coming down.
4) Credit risks has went up and new types risks are surfaced
3.2 Performance Evaluation Parameters for Retail
Measuring the performance of Retail is necessary in order to gain an understanding of the
products which have performed well and which have not performed as per the target. The
performance can be as per plan, below the plan or above the plan.

A) Types of analyses:
1) ABC Analysis:
ABC analysis rank orders merchandise by some performance measure to determine which items
should never be out of stock, which items should occasionally be allowed to be out of stock
and which items should be deleted from the stock selection.
a) Concept:
ABC analysis is a type of analysis of material dividing in three groups called A-group items, B-
Group items and C-group items For the purpose of exercising control over materials.
Manufacturing concerns find it useful to divide materials into three categories.

b) Classification of items into A, B and C Categories:

Group A Group B
3.2 Performance Evaluation Parameters for Retail
b) Classification of items into A, B and C Categories:
1) Group A:
10% of total number of items carries 70% of value- "A" group of items. Similarly, a large
number bottom items (over 70 per cent of the total number of items) account for only
about 10 percent of the consumption value.

2) Group B
20% of total number of items account for only about 20% consumption value - "B" group
items.

3) Group C:
70% of total number of items accounts for only about 10% of consumption value - "C"-
group items.
3.2 Performance Evaluation Parameters for Retail
c) Performance Measure of ABC Analysis:
An ABC analysis can be done at any level of merchandise classification from SKU to department.
ABC analysis utilizes the 80:20 principles, which implies that 80% of the sales come from 20% of
the products.

Contribution Margin = Net sales - Cost of goods sold- Other variable expenses

Fig. : Performance Measure of ABC Analysis

3.2 Performance Evaluation Parameters for Retail
2) Sell Through Analysis:
Sell through (or sell-thru) is a very useful metric for vendors to use in evaluating item
performance, because it provides a composite measure of sales and inventory. But like many
business measures, there is more than one method of calculating sell through.
a) Concept:
A sell through analysis is a comparison between actual and planned sales to determine
whether early markdowns are required or whether more merchandise is needed to satisfy
demand. There is no rule, which can determine when a mark down is necessary.

b) Calculation Formula:
The most common calculation formula is:

Sell Thru % = Units Sold / (Units On-Hand + Units Sold)

c) Sell Through Percent :

Sell Through percent is the percentage of sales to the inventory investment that was available
for sale. The formula measures how much or what percentage of total available inventory was
sold during a given period.
3.2 Performance Evaluation Parameters for Retail
3) Multiple Attribute Method:
A key and perhaps the most important process of the purchasing function is the efficient
selection of suppliers, because it brings significant savings for the organization. In general, the
supplier selection criteria most commonly used by the industries are quality, delivery and price.
a) Meaning:
Multiple Attribute method involves “making preference decisions (such as evaluation,
prioritization, selection) over the available alternatives that are characterized by multiple,
usually conflicting, attributes.

b) Steps in Multiple Attribute Method:

The following steps are followed:
1) Develop a list of issues to consider for decision-making—vendor reputation, service,
merchandise quality, selling history, etc.
2) Give important weights to each attribute.
3) Make judgments about each individual brand`s performance on each issue.
4) Combine the importance and performance scores
5) Add all to arrive at the brand scores.
3.2 Performance Evaluation Parameters for Retail
4) Gross Margin Returns on Investment (GMROI):
Many retailers use the performance indicators of gross margin % (after mark-down) and weeks
cover to measure performance. While the Gross margin % is a measure of relative profitability
without taking into account the costs of stockholding investment, Week's cover tells us how
effectively stock was turned, without informing us about relative profitability. What is needed is
a measure that combines these two indicators into an indicator of real profitability.

a) The Concept of GMROI:

Ratio measuring inventory profitability as it relates to the gross profit margin earn on sales. An
important tool in analyzing inventory, sales and profitability is GMROI (also known as GMROI)
which stands for Gross Margin Return on Inventory Investment. The GMROI calculations assist
buyers in evaluating whether a sufficient gross margin is being earned by the products
purchased, compared to the investment in inventory required to generate those gross margin
dollars.
3.2 Performance Evaluation Parameters for Retail
Operati
b) Major Forces : ng
1) Gross Margin : Costs
The first is gross margin. Gross margin determines what
have left to pay for all business operating costs. And after
all operating costs are covered, what remains is net income. 
That net income is the first line under starting cash on
cash flow statement. Profit is NOT optional.
Inven
2) Inventory : tory
The second is inventory. Inventory is the biggest current a
sset on many companies’ balance sheets. When it goes up, Gross
GMROI goes down and so does cash, if it is increasing gross Margin
margin.

3) Operating Costs :
The third is operating costs. Most of the operating costs of inventory burdened businesses are
due to carrying inventory. These are called inventory carrying costs.
3.2 Performance Evaluation Parameters for Retail
c) Importance of GMROI:
1) Effective Planning Tool:
GMROI recognizes the limitations of looking at sales, profit margins, and inventory turns
individually and captures them in one inclusive measurement.

2) Applicable to both Macro and Micro Levels Firm’s:

GMROI can be applied at macro or micro levels in Effective Planning Tool
any size organisation. Analysis based on GMROI
can lead to sales increases through product
rationalisation or opportunities for cost reductions t
hroughout the supply chain.
Applicable to both Macro
3) Assist Buyers: and Micro Levels Firm’s
The GMROI calculations assist buyers in evaluating
whether a sufficient gross margin is being earned by
the products purchased, compared to the investment
in inventory required to generate those gross margin.

Assist Buyers
3.2 Performance Evaluation Parameters for Retail
5) Economic Order Quantity (EOQ):
Another method of managing inventory investments is to predetermine the stock levels at which
merchandise should be reordered. This is known as the reorder point. Various factors like the
lead-time required, the safety stock and the speed at which the products sell have to be taken
into consideration.

a) Formula:
The EOQ is calculated by using the following formula:
EOQ = 2DS/ IC,

Where,
D = annual demand,
S = costs to place the order,
1 = percentage of annual carrying cost to unit cost and C = unit cost of an item.
3.2 Performance Evaluation Parameters for Retail
6) Direct Product Profit (DPP):
Many a times the retailer may also use the concept of Direct Product Profit (DPP) to measure the
performance of a product. DPP focuses on the contribution profit of individual retail items in
individual stores.

By expressing DPP against a common unit of measure (floor space), retailers can compare the
performance of products of different physical proportions. Since retail space is usually limited,
DPP can be used for:

1) Item selection (high DPP items should generally be added, low ones reviewed with an eye
toward pruning).
2) Store/Shelf location (high DPP items should be given prime location), and
3) Promotion (total DPP can be improved by increasing the sales of high DPP products).