SCM 400 Exam 3

Maintaining Strategic Relationships

four foundations of successful strategic relationships 1. Mutual Trust -more willing to share relevant ideas, clarify goals/problems, and communicate efficiently -less need constantly monitor and check on each other's actions 2. Open Communication -businesses can be reluctant but key to success/profit Must understand -what is driving each other's business -relationship roles -both firm strategies -any problems that arise 3. Common Goals -incentive to pool strengths and abilities and exploit potential opportunities between them 4. Credible Commitments -tangible investments in relationship (spending money to improve products and services)

6. Buying Merchandise

Ch 13

Tips for Effective Negotiations

-Have as many negotiators as vendor -Choose a good place to negotiate -Be aware of real deadlines -Separate people from problem -Insist on objective Information (know exact numbers) -Suggest options for mutual gain (know how much to give or give up requires quick thinking, decide in advance) -Let them do the talking (those who break the silence first lose) -Know how far to go (line bet. negotiating too hard and walking away without agreement) -Don't burn bridges -Don't assume (orally review, make sure no misunderstandings) -Summarize in writing (both)

1. Forecasting sales

-Understand nature of the product life cycle -Collect data on sales of product and comparable products -Using statistical techniques to project sales -Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand (CPFR) Forecasting Staple Merchandise Categories: -extrapolate historical sales 1. Controllable factors affecting sales forecast: -Opening/closing stores -Price set for merch -Promotions -Store locations -Merchandise placement -Cannibalization 2. Uncontrollable: -Seasonality -Weather -Competitive activity (special promos or introduction) -Product availability -Economic conditions Forecasting Fashion Merchandise Categories: -buying specific quantities 3-6 months ahead of time and can't increase or decrease quantity ordered before season ends Retailers develop fashion forecasts by relying on: -Previous sales data -Market research -Fashion and trend services (ex: company offers forecasting services, describing color trends anticipated for men's, women's, etc. apparel) -Vendors: have proprietary info about their mktg plans, such as new product launches and special promos, they are knowledgeable of market trends since specialize in fewer categories Forecasting for Service Retailers: -Offerings perish, managing demand so it meets, but does not exceed capacity -ex appointments: overbook and make patients wait -ex reservations: indicates staffing levels and reduces wait time -ex sell tickets in advance (concerts)

Collab between Retailers and Vendors in Supply Chain Management

-vendor can plan purchases of raw materials and production processes to match w/ retailer merch needs -merch is available "just in time" without having to stock excessive inv in vendor warehouse or retailer's DCs/stores Bullwhip Effect - The built up inventory in uncoordinated channel P&G Causes 1. Delays in transmitting orders and receiving merchandise -retailers don't know how fast can get merch, thus order more than need to prevent stockouts 2. Over-reacting to shortages 3. Ordering in batches rather than small orders

Merchandise Management Process

1. Forecasting sales 2. Developing an assortment plan 3. Determining the appropriate inventory level & product availability 4. Establishing a control system for managing inventory 5. Allocating Merchandise to Stores 6. Buying Merchandise 7. Analyzing Merchandise Management Performance

Pricing Techniques for Increasing Sales

1. Leader Pricing -Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products -products known as "loss leaders" -Best items: purchased frequently, primarily by price-sensitive shoppers (Ex bread, eggs, milk, disposable diapers) -retailer hopes customer purchase entire grocery list at the same time -Loss leaders attract cherry pickers (go from store to store only buying items on special) 2. Price Lining -A limited number of predetermined price points within a merch category Ex: $59.99 (good), $89.99 (better), and 129.99 (best) -providing products to all customer segments (close gap) -Company close gaps in ability of current assortment to meet customers' needs -Benefits: --Eliminates confusion --Merchandising task is simplified (products within certain line merchandised together) --buyer flexibility --customers "trade up" to more expensive model 3. Odd Pricing -A price that ends in an odd number (.9) -$2.99 -Assumption: --Consumers perceive as $2 without noticing the digits --9 endings signal low prices --Retailers believe the practice increases sales, but probably doesn't -Upscale retailers only break round-number endings to use "9" when communicating about sales

Categories of Store Brands

1. Premium-Comparable, superior to, manufacturer's brand quality, with modest price savings -ex: Safeway has Safeway Select 2. Copycat-Imitate manufacturer's brand in appearance and packaging, lower quality, lower price -mostly in drug and grocery stores -placed next to manufacturer's brands and look like them 3. Exclusive Brands-Developed by a national brand vendor and sold exclusively by the retailer -different model number/exterior features for same basic product, but marketed under manufacturer's brand (hard to compare prices for same product) -OR manufacturer develops exclusive but markets under name exclusive to retailer (ex: Estee Lauder sells American Beauty and Flirt only at Kohls) -Macy's develops store brand unique identity where brand-conscious customers don't realize are purchasing its store brands 4. Generic Brands-target price-sensitive segment, offering no-frills, discount price -labeled with name of the commodity -ex: prescription drugs, milk, eggs

Considerations in Setting Retail Prices

1. Price Sensitivity of consumers (demand curve) -sensitivity determines how many units will be sold at different price levels Price elasticity=measure price sensitivity -The more substitutes=elastic (sensitive) -necessities=price-inelastic -Products expensive relative to customer's income=price elastic Elasticity = percent change in quantity sold/percent change in price 2. Cost of the merch -breakeven analysis 3. Competition -consider competitor prices when setting own -develop private label merch to reduce comp -negotiate for exclusive distribution rights to reduce comp -have vendors make unique products for retailer to reduce comp -offer higher prices if able to offer more benefits -collect price data about competitors 4. Legal Constraints

Legal, Ethical, and Social Responsibility Issues for Buying Merchandise

1. Purchase Terms and Conditions -The Robinson-Patman Act (Anti-Chain-Store Act) --Forbids vendors from offering different terms/conditions to different retailers for same merch and quantity -Different prices can be offered if: --costs of manufacturing/selling/delivery different --retailers providing different functions (e.g., distribution, store service, etc.) 2. Commercial Bribery -vendor or its agent offers to give/pay a retail buyer to influence purchasing decisions -Some have zero tolerance policy -Some accept limited entertainment/token gifts 3. Chargebacks -retailers deduct money from the amt owe a vendor w/o getting vendor approval. -Two Reasons: --merchandise not selling --vendor mistakes -Disrupt relationships 4. Buybacks (Stocklifts, Lift-outs) -Used to get products into retail stores -2 scenarios: --Retailer allows vendor to create space its goods by "buying back" a competitors inventory --Retailer forces a vendor to buyback slow-moving merchandise 5. Resale Price Maintenance 6. Counterfeit Merchandise -Goods made/sold w/o the permission of the owner of a trademark, a copyright, or a patented invention that is legally protected in the country where it is marketed 7. Gray Markets and Diverted Merchandise -Gray-Market Merch (parallel imports) possesses valid U.S. registered trademark and is made by a foreign manufacturer but imported without permission of the U.S. trademark owner --legal --ex McGraw Hill charges higher wholesale for textbook in US than other countries, importer could buy and import it and sell for cheaper price -Diverted merchandise is similar to gray-market -not necessarily across international boundaries --ex: Givenchy grants exclusive scent to Saks, Saks buyer has excess inventory and sells (diverts) scent to off price retailer --making available at discount stores may reduce vendor brand image and services normally provided with the brand -A black market occurs when consumer goods are scarce, such as water or gasoline after a natural disaster; heavily taxed, such as cigarettes or alcohol; or illegal, such as drugs or arms 8. Exclusive Dealing Agreements -manufacturer or wholesaler restricts a retailer into carrying only its products and nothing from competing vendors -Illegal when restricts competition 9. Tying Contract -requires retailer to take a product it doesn't necessarily desire (the tied product) to ensure that it can buy a product it does desire (the tying product) -Illegal when they lessen competition -Ok to protect goodwill and quality reputation of vendor -legal for vendor to require buyer to buy all items in product line 10. Refusal to Deal -vendor cannot refuse to sell for sole purpose of benefiting competing retailer

Developing CRM Through Frequent-Shopper Programs

1. Tiered rewards based on customer value -silver, gold, platinum -incentive for customers to consolidate purchases with one retailer to reach the higher tiers -must be percieved attainable 2. Treat frequent shoppers as VIP's -private sale not available to others 3. Incorporate charitable contributions -Target donates 1% of all purch made with REDcard to local schools -shouldn't be focal point of program 4. Offer choices of rewards -Not all customers value the same rewards -American Express letting you use points to choose variety of options 5. Reward all transactions to -ensure the collection of all customer transaction data -encourage repeat purchases 6. Transparent and simple so that customers easily understand when they will receive rewards -easy to keep track of spending and available rewards -convenient to quickly become integral to shoppers' consumption choices

Analyzing Customer Data and Identifying Target Customers

2nd Step Analyze customer database and convert the data into information that will help retailers develop customer loyalty programs Two objectives when analyzing data: 1. Identify the best customers 2. Use analytical methods to improve decisions made by managers

7. Analyzing Merchandise Management Performance

3 types of analyses 1. Sell-through analysis: -compares actual and planned sales -determines whether more merch needed to satisfy demand or whether price reductions are required 2. ABC analysis of assortments: -identifies performance of individual SKUs in the assortment plan, -rank by performance measure to determine which items: --never out --out of stock occasionally --deleted A items: 5% of SKUs, represent 70% of sales --never B items: 10% of SKUs, represent 20% of sales --better selling, contributes to image, occasionally will run out bc doesn't have same backup stock C items: 65% of SKUs, represent 10% of sales --carry some in most popular size, special orders placed due to demand D items: 20% of SKUs, represent 10% of sales --no sales until marked down, eliminate most items 3. Multiattribute analysis of vendors -uses a weighted average score (based on importance of various issues and the vendor's performance on those issues) for each vendor. -can be used to understand how customers eval stores and merch -vendor with highest score is preferred vendor

Implementing CRM Programs—Customer Pyramid

80-20 rule: 80% of profits come from 20% of customers -rather than dividing groups into 80% good and 20% bad, four segments 1. Platinum -top 25% -buy a lot, place more value on customer service than price 2. Gold -buy significant amount -still patronize competitors bc price plays greater role in decision making -goal is to move them to platinum 3. Iron -purchase modest amt of merch -spending levels, loyalty, profitability not substantial enough for special treatment -might not be worth it to try to move them up due to limited income, price sensitivity, shared loyalties w/ other retailers, etc. 4. Lead -negative contribution to firm's income -demand a lot of attention but don't buy much -when they buy, often buy merch on sale or abuse return privileges -might complain about retailer to others -retailers pay NO attention to them

Drop Shipping

AKA Consumer Direct Fulfillment System: -retailers receive orders from customers, relay to vendors -vendors ship merch directly to customer Used by companies that: -sell bulky products -catalog/mail-order companies From retailer perspective -reduces SC costs/investment bc vendor assumes costs/risks -vendor must operate DCs, hire employees, etc. -can LENGTHEN delivery times and increase costs for customers -retailers have no control over how/when orders are delivered

5. Allocating Merchandise to Stores

Allocating merchandise to stores involves three decisions: 1. How much to allocate to each store? -Classify based on annual sales A, B & C stores (A has largest sales vol, receives most inv) 2. type of merchandise to allocate? -geodemographics --ex Rustbeld Retirees get low-price/well-known cereal, Laptops and Lattes get high-price, low sugar, organic 3. When to allocate merchandise to different stores? -Seasonality differences and consumer demand differences -ex: shorts sales peak in late July and Midwest and in beg. of Sept in West -ex: paycheck scale: some consumers spend more $ at beg of month than at end

2. Developing an Assortment Plan--Determining Variety and Assortment

Assortment plan- set of SKUs that retailer will offer in a merch category in each of its stores and from its website -reflects breadth and depth of merch offered -breadth/variety: # of merch subcategories -depth/assortment: # of SKUs within sub When determining (editing) the assortment, buyer considers: 1. Retail strategy -breadth/depth can affect brand image --ex: Staples has few candy SKUs but large assortment of paper products 2. Assortments and GMROI -Increasing sales by offering more breadth and depth can potentially reduce GMROI 3. Complementary Merch -consider degree to which categories in a department complent each other 4. Effects of Assortment Size on Buying Behavior -offering large assortment increases chance customer will find what they need, provides more informative/stimulating shopping experience, appealing to customers who like variety -too much can be overwhelming 5. Physical characteristics of the store -stores have limited space for huge assortment -can address space limits by offering greater assortment online and in catalogs

3. Setting Inventory and Product Availability

Buffer stock in model stock plan (# of SKUs that must be available in each store) determines prod availability (% of demand for SKU that's satisfied) -If too low->lose sales and customers -If too high->scare fin resources wasted on needless inventory that could be more profitably invested in more variety/assortment

Buying National Brand Merchandise

Buying decision for fashion apparel/accessories: -5-6 times a year -Many months before delivery -Withhold open-to-buy (OTB) Buying decision for staple merchandise: -Less frequent, continuous replenishment Meeting National Brand Vendors: Wholesale market: concentration of vendors within specific geographic location, perhaps under one roof or over internet 1. Wholesale Market Centers -permanent vendor showrooms -Market weeks- Buyers make appointments to visit the various showrooms -National Markets (New York, London, Milan, Paris, Tokyo) -Regional Markets (Dallas, Atlanta, Miami) 2. Trade Shows -opp for buyers to see latest products/styles and interact with vendors -vendor displays merch in designated areas and have sales reps, execs, and even celebs talk with buyers as they walk through exhibit -convention centers not assoc with wholesale market centers -some store brand, mostly national -Frankfurt Book Fair, Las Vegas Consumer Electronics Show, Atlanta Sporting Goods 3. Internet Exchanges -Worldwide Retail Exchange 4. Retailers interact with vendors at their corporate headquarters

Collaboration between Retailers and Vendors in SCM

By working together, reduce level of inventory in SC and number of stockouts in stores 1) EDI 2) Sharing information -retailer sales data, can improve sales forecasts, production efficiency, and reduce need for excess backup inv 3) Vendor manage inventory (VMI) 4) Collaborative planning, forecasting and replacement (CPFR)

The CRM Process

CRM is an iterative process that turns customer data into customer loyalty through four activities: 1. Collecting customer data 2. Analyzing data and identifying target 3. Developing 4. Implementing

Collecting Customer Data: Identifying Information

Can be difficult to identify in-store customers when they use check, cash, or third party credit card such as Visa or Mastercard Approaches for store-based retailers: 1. Asking for identifying information (Telephone number, email, name and address) 2. Offering frequent shopper card (identify and provide rewards to customers who patronize a retailer) -Private label credit card (that has the store's name on it) 3. Connecting Internet purchasing data with the stores 4. Use Biometrics -ex. fingerprints 5. Place RFID chips on merchandise -acquire customer's personal info from small devices carried by customers and RFID tags on merch they want to purchase

Pricing Strategies Used by Services Retailers

Challenges due to : 1. The need to match supply and demand -Yield management used to maximize sales and profits --practice of adjusting prices up or down in response to demand to control the sales generated --ex: airlines --movie theaters offer lower ticket prices for 5pm than 7pm to shift demand for less popular time 2. The difficulties customers have in determining service quality -if consumers are unfamiliar with service or service provider, may use price to make quality judgments -ex: consumer unaware about lawyers and quality of legal advice base assessment of quality on fees they charge or size and decor of office -dependence on price associated with risk --higher risk situations arise in relation to services like legal, medical services, even hair salons--for which customer needs price to provide surrogate for quality -Creates expectations of quality -Case Study—Will Surge Pricing Become the New Normal? The difference between surge pricing and yield management is that surge pricing never means the price goes down

Converting Good Customers into Best Customers

Customer alchemy: converting iron and gold customers into platinum customers achieved through: Add-on selling -offering and selling more products and services to existing customers -data on histories help suggest products -distribute coupons for kitty litter to customers that buy cat food but not necessarily litter -coupons can be provided when they swipe their freq shopper cards, when they log on to retailer's website, or through messages via mobile phone

Information and Merchandise Flows

Customer demand info captured at the store thanks to UPC->trigger response from buyers/planners, DCs, vendors->info learned helps provide better assortment at better time -Universal product code (UPC) bar code (indicates the manufacturer, description, info for special packaging, and special promotions) -info captured at the point-of-sale (POS), sent to info system

Distribution Center Activities

DCs perform the following activities: 1. Managing inbound transportation -Dispatcher: coordinates deliveries to the DC 2. Receiving and checking merchandise -Receiving: process of recording the receipt of merch as it arrives at a DC -Checking: process of verifying merch listed on the ASN is the same on the merch received -very labor-intensive/time-consuming. future, automatically check contents from RFID chips) 3. Storing or Cross-Docking -once merch is received and checked, either stored or cross-docked -Storing: moves merch from floor to ceiling until needed -Cross-Docking: cartons are prepackaged for a specific store w/ UPC label. -unloaded, placed on conveyer system, routes it to automatically by reading the UPC label. -only in DC for a few hours before being shipped. --cartons go to Break Area if too many items in one carton for one store. --reluctant to cross dock with unreliable vendors since boxes aren't opened/checked 4. Getting merchandise floor ready -Ticketing and marking: price/identification labels -Putting on hangers -more effective for DC to perform than stores bc area can be set aside and process implemented to efficiently perform this 5. Preparing to ship merchandise to a store -list of items to be shipped to each store that day -Pick ticket: indicates # cartons to get from specific storage areas. --forklift driver gets cartons, places UPC labels on cartons. pick ticket also generated for break area. Note: conveyer system feeds cartons from three sources to truck: 1) cross-docked cartons, 2) cartons stored, 3) cartons from break area 6. Managing outbound transportation -DCs use routing/scheduling software considers: -store location, road conditions, etc --> provides stores w/ accurate ETA and vehicle utilization maximized

Protecting Customer Privacy

Degree consumers feel privacy has been violated depends on: -their control over their personal info when in marketplace -knowledge about collection/use of personal info Three principles Congress is considering: 1. Privacy by design -Shift responsibility for privacy from consumers to retailers -delete info -collection consistent with context -implement guidelines on how/when data eliminated 2. Simplified consumer choice -Allow customers to track online activities -turning off ability of firm to install cookie (Do Not Track (DNT)) 3. Greater transparency -Improve customer understanding of how customer data are collected through better education and info

Developing and Sourcing Private Label (Store Brand) Merchandise

Developing store brands: -In-House: large retailers (e.g., Macy's) have specialized divisions: --Identify trends, design, specify products --Selecting manufacturers --Monitoring/managing manufacturing conditions and product quality -Most retailers don't own/operate or have ownership stakes in manufacturing facilities -Smaller retail chains can offer store brands without making significant investment in supporting infrastructure --ask national or store brand suppliers to make minor changes to products, provide merch with store's brand name or special label copyrighted by national brand --or store brand manufacturers can sell to them from predetermined stock selection Sourcing Merch: 1. Costs associated with global sourcing decisions -Currency fluctuations --short-term: buy contracts that lock retailer into set price --longer term: foreign currencies strong influence on cost of imported merch -Tariffs/duties --taxes on imports -Longer lead times --inventory turnover lower, must maintain larger inventories to ensure merch available -Increased transportation costs 2. Managerial issues associated with global sourcing decisions -Quality control --harder to maintain -Time to Market --delays in shipment affects retailer image -Social/political risks --human rights, child labor, other abuses in factories in countries where goods are made --ensure payment of min wage and benefits, limit overtime, don't use prisoners, forced labor, child labor, healthy and safe environment 3. Resident buying offices -Orgs in major market centers provide services to help retailers buy merchandise -less need for large/sophisticated retailers (have buying offices in other countries) Ex: -accompanies, translates, negotiates, accountant, informs of costs -once order placed writes contract and follows up on delivery and quality control 4. Reverse auctions -common buying retail op products rather than resale -not popular with vendors (don't want to be anonymous) where price is sole basis for winning -no strategic relationships with vendors (primarily through electronic auctions)

Advantages of Direct-Store-Delivery

Direct Store Delivery (DSD): bypasses DC -vendors offer more services -lower inv levels -get merch faster -for perishable goods -image being first to sell latest product -vendors do it to ensure their products appropriately displayed

Pricing Strategies: High/Low Pricing

Discount initial prices through frequent (often weekly) sales promotions Advantages: -Inc sales & profits -excitement Disadvantages -buy on deal and wait

Case study: Wal-Mart to Its Suppliers: Cut Your Prices

Discussion questions: Wal-Mart is asking its suppliers to put all of its "marketing" money into pricing...why does this hurt the vendors in the long run? Will Wal-Mart's new demands with pricing strain vendor relationships? Should Wal-Mart consider a different strategies besides low-cost?

Buying Organization

Each retailer has own system for grouping categories of merch 1. Merchandise Group-highest classification level (e.g., women's apparel, men's apparel, cosmetics/shoes/accessories etc.). -managed by general merchandise manager (GMM), senior VP -ex GMM responsible for departments: men's apparel, men's sportswear, young men's apparel, children's apparel, and intimate apparel 2. Department-Departments are managed by a divisional merchandise manager (DMM) -ex manage buyers responsible for 6 children's apparel merch departments 3. Classification-A group of items targeting the same customer type, such as girls' sizes 4-6 4. Category-Each buyer manages several merchandise categories (e.g., sportswear, dresses, swimwear, outerwear categories for girls' sizes 4-6) 5. SKU-The smallest unit available for inventory control Represents particular brand, size, color, style.

Strategic Importance of Supply Chain Management in Retail

Efficient SCM fewer stockouts better assortment more sales, less costs, higher inv turnover, less inv holding costs better ROA

Pricing Strategies: Everyday Low Pricing

Emphasizes continuity of retail prices bet. regular non-sale price and deep-discount sale price of high/low retailers. low price guarantee policy to reinforce their EDLP strategy. -guarantees customers that retailer will have lowest price in market for products it sells Advantages: -Assures customers low prices -Reduces advertising & operating expenses -Reduces stock outs and improves inventory management

4. Establishing a Control System for Managing Inventory

Establishing control system for how orders, deliveries, inv levels, and merch sales will evolve over time -objective: manage flow of merch so that amt of inv in category is minimized but merch will still be avail when customers want it Staple Merchandise Planning: -automated continuous replenishment control system (bc if sales are below forecast this month, can be sold in following month) Buyer Determines: -Basic Stock: desired inventory level for each SKU -Cycle (base) stock: Inventory goes up and down due to the replenishment process --retailer hoes to reduce cycle stock inv to keep inv investment low, but more freq orders are costly to admin/transp -Level of backup (buffer, safety) stock: Inv needed to avoid stockout since sales and on-time deliveries can't be predicted System: -Monitors Inv levels -Automatically reorders when inventory gets below specified level Determining the Level of Backup Stock: 1. depends on product availability (service level) retailer wishes to provide to customers 2. the greater the fluctuation in demand, the more needed to avoid stockout 3. Lead time: the shorter the lead time, the lower level of backup stock needed 4. fluctuations in lead time 5. Lower vendor's fill rate (% of complete orders received from a vendor) possible that vendor could only ship 75% of what was ordered Control System for fashion merch: -merch budget plan specifies amount of merch in dollars that needs to be delivered during each month -open-to-buy system keeps track of actual merch flows--what present inv is, when purchase merch is scheduled for delivery, and how much has been sold to customers

Issues with Effective Frequent Shopper Programs

Expensive Difficulty in Making Changes Impact on Loyalty Questionable Easily Duplicated - Difficult to Gain Competitive Advantage -Need to offer "invisible" benefits

(CH 10) Supply Chain Management

Firms use set of activities to: -efficiently/effectively manage flow of merchandise from the vendors to the retailer's customers. Integration of suppliers, manufacturers, warehouses, stores, and transportation intermediaries into a seamless value chain Merchandise is produced/distributed in right quantities, to right locations, at the right time correct: -quantity -location -time Minimization of system wide costs, while satisfying the service levels their customers require

Evaluating Merchandise Management Performance

GMROI (gross margin return on inventory investment) -buyer's contribution to ROA -tells how well handling inventory and how much money it is making for you Buyers have control over: -GM affected by the prices set and prices negotiated with vendors when buying merch -Sales-to-stock ratio affected by the popularity of the merch they buy. High s-to-s ratio means: buying merch customers want, so it sells quickly = Gross margin percent x Sales-to-stock ratio = Gross margin x Net sales Net sales Avg inventory at cost = Gross margin Avg inventory at cost Sales-to-Stock Ratio: -Relationship between how much stock you have and how much you are selling -Retailers report on an annual basis -If the sales-to-stock ratio for a three-month season is 2.3, the annual sales-to-stock ratio will be 9.2 -Similar calculation to Inventory Turnover except Sales-to-stock uses sales and Inventory Turnover uses COGS Common scenarios while analyzing GMORI -High-margin-low-turnover -Low-margin-high-turnover --ex: gourmet canned food has high gm but low turnover, bakery bread has low gm but high turnover. Both achieve same GMROI -GMROI > 1.00: selling merch for more than costs to acquire it -GMROI < 1.00: firm selling for less than cost Increasing GMROI: 1. Improve Inventory turnover/Sales-to-stock ratio -reduce SKUS within category -reduce backup stock -buy merch more often in smaller quantities -reduce prices 2. Increase Gross Margin -increase prices -reduce COGS -reduce customer discounts

(CH 14) Why is Pricing Important?

If price higher than benefits offered->sales/profits decrease If price too low-> sales increase, but profits decrease due to lower margin Customers are in a position to seek good value -today's customers have more alternatives to choose from -better informed about the alternatives available in the marketplace -showrooming and mobile apps increasing price sensitivity Value = perceived benefits/price -ratio of what customers receive (perceived benefit offered by retailer) and what they have to pay for it Retailers increase value and stimulate sales by increasing benefits or reducing price

The Physical Flow of Merchandise: Logistics

Logistics: -planning, implementation, control of flow/storage of goods -relate info from origin to consumption to meet customers' requirements. -involves activities in DC (inbound/outbound)

Merchandise Category - The Planning Unit

Merchandise category is assortment of items that customers see as substitutes for each other -ex dept store can offer wide variety of dresses for size 4-6, lowering price of one dress inc sales of that dress, but dec sales of others in category -pricing/promoting specific SKUs in category will affect sales of other SKUs in category 1. Category Management: -ensure store has best combo of sizes/vendors maximizing the sales/profits of entire category not specific brand -ex: Breakfast cereal category vs. Kellogg Corn Flakes 2. Category Captain: -vendor -Help understand consumer behavior -Creates satisfying assortments -Improve profitability Problems -Vendor category captain may have different goals than retailer

Advantages of Using a Distribution Center

More accurate sales forecasts (retailers combine forecasts for many stores serviced by one distributor) Enable retailers to carry less merchandise in the store Easier to avoid running out of stock Retail store space is more expensive than space at the distribution center

(CH 13) Buying Merchandise: Brand Alternatives

NATIONAL (Manufacturer) Brands -Designed, produced, and marketed by a vendor and sold by many retailers -vendor responsible for developing merch, producing it with consistent quality, undertaking marketing program to establish appealing brand image -ex of national: Tide detergent, Ralph Lauren polo shirts, HP printers -can use "umbrella" or family brand assoc. with company and subbrand assoc. with the product (ex: Kellogs=family, Frosted Flakes=subbrand) -or might not assoc. product (ex: P&G makes Crest toothpaste, Vick's Nyquil) -retailers can organize buying activities by vendor over category bc gives more clout when dealing w/ vendors (ex: buyer in charge of all of Estee Lauder brands such as Clinique and Origins rather than by category such as skin care or eye makeup) remember inefficiencies from ch 12 Adv & Disadv: Advantages -retailers build image and traffic -Reduces selling/promo expenses -More desired by customers -Customers patronize retailers selling branded merchandise -fin risk on vendor Disadvantages -Lower margins -Vulnerable to competition -Limit retailer's flexibility (Ralph Lauren) STORE/Private-Label Brands -Developed by retailer, only sold in retailer's outlets -Similar to national, retailers use name to create a private label for merch --ex: Victoria's Secret use a family brand approach (All of private label merchandise associated with their name) In some cases: -retailer develop design/specifications, but manufacturer produces -national-brand vendor works w/ retailer to develop special version of standard merch, sold exclusively (national brand produces) -Macy's uses a portfolio approach (of private label brands w/ diff merch types) Adv & Disadv: Advantages -Unique merch not available at competitive -Exclusivity boosts loyalty -Difficult to compare price with competitors -Higher margins Disadvantages -Require investments in design, global manufacturing sourcing -Need to develop expertise in developing/promoting -can't sell excess -less desirable for customers

Can Offering Price Discounts Achieve Customer Loyalty?

NO! Price discounts can be copied by competitors -encourages customers to always look for the best deal rather than developing a relationship with a retailer

Legal and Ethical Pricing Issues

Predatory pricing -dominant retailer set price below cost to drive out comp and then raise when comp gone Resale price maintenance -vendors encourage retailers to sell merch at MSRP --to reduce competition among retailers and stimulate retailers to provide complementary services -Supreme Court suggests ability of vendors to require be on case-by-case basis Horizontal price fixing -agreements bet direct competitors to set the same prices -reduces competition -illegal Bait and switch tactics -having inadequate inventory for the advertised product or push salespeople to disparage the quality of the advertised model and emphasize superior higher-priced model -have sufficient inv levels -offer rain checks if stockouts occur Scanned vs. posted prices -studies find high level of accuracy -in general, retailers lose money from scanning errors because scanned price is below posted Deceptive reference prices -when customers view sale price and compare with ref, perceptions of value likely increase

Data Warehousing

Purchase data collected at POS goes into data warehouse -info stored accessible on various dimensions and levels -Data used to target promotions -group products together in stores

Markdowns

Reasons to take Markdowns: -Clearance: get rid of slow-moving/obsolete merch -Promotional Markdowns --To increase sales and promote merchandise --To increase traffic flow and sale of complementary products generate excitement through a sale --increase sale of regular merch while in store -To generate cash to buy additional merchandise Optimizing Markdown Decisions: -Traditional Approach- Use a set of arbitrary rules --Sell-Through: Identifies markdown items when weekly sell-through below a certain level -Rule-based: Cuts prices on basis of how long the merch been in the store (ex: markdown 20% after 8 weeks, 30% after 12, and so on) --doesn't consider demand for merch at different price points or in different locations Markdown Optimization Software -Determine when/how much of markdown taken -update pricing forecasts on the basis of actual sales -Considers price sensitivities --ex: software recognizing in early November that a winter item's sales are better than expected in Colorado, so delays markdown panned but takes markdown in New England Liquidating Markdown Merchandise: 1. Sell the merchandise to another retailer 2. Consolidate the unsold merchandise -consol into another retail chain or outlet under same ownership, ship to DC or rented space for final sale, but expensive due to transportation costs 3. Place merchandise on Internet auction site 4. Return to vendor 5. Donate merchandise to charity 6. Carry the merchandise over to the next season -usually for high-priced nonfashion merch, such as traditional men's clothing an furniture

Strategic Relationships

Retailer and vendor -committed to maintaining long-term relationships -invest in mutually beneficial opportunities

Higher Return on Assets

Return on assets = Net profit margin x Asset turnover ROA improved by efficient SC: -inc sales (better stock assortment) -inc net profit margin (inc gm and less exp) -w/o increasing inventory (lowered inv from less backup higher turnover)

Pull and Push Supply Chain

SC retailers determe whether push or pull from DC to stores Pull -demand for item (basis of POS data) pulls it through SC -Less overstocked/out of sock -higher inv turnover -Responsive to changes in customer demand -Efficient when demand is uncertain, hard to forecast Push -allocated on basis of forecasted demand -Less costly, sophisticated information system not needed -Efficient for merch w/ steady, predictable demand

**Price Optimization Software

Setting prices by simply marking up merchandise cost neglects price sensitivity, competition, sales of complementary products Merchandising Optimization Software: -Utilizes set of algorithms that analyzes past and current merchandise sales prices, as well as competitors' prices -Estimates relationship between prices and sales generated -determines price-sales relationship of complementary items that have similar sales pattern -Determines the optimal (most profitable) initial price for the merchandise and size and timing for markdowns -Cost > $1 million accomplished at store level and even individual customer level

CPFR (Collaborative Planning, Forecasting, and Replenishment)

Sharing forecasts and related business info and collaborative planning to improve SC efficiency and product replenishment -more advanced than VMI

Building Strategic Relationships

Stages of the Retailer-vendor Relationship 1. Awareness -No transaction taken place -reputation/image of vendor role in buyer moving to next stage 2. Exploration -explore potential benefits/costs of partnership -may make small purchase/test demand -info about ease of working with vendor 3. Expansion -buyer collected enough info to consider developing a longer-term -determine if potential for win-win relationship -work on joint promo programs -amt of merch sold increases 4. Commitment -where it becomes strategic relationship

Internet and Price Competition

The Internet offers unlimited shopping experience Shopzilla helps seek lowest price Geofencing: offer localized promos based on geographical location (phone location or locational coding via certain sites) Retailers reduce price emphasis by providing services and better info

The Future of Retail Supply Chains

Today's supply chains are not set up to respond -Most stores don't have enough DCs -Supply chains optimized for the stores (set up to get products to the stores, not necessarily to your home) -Proliferation (rapid increase in numbers) of SKUs (becoming hard to manage) The need for a supply chain revolution: -"Services back" design -One supply chain (get a product to the end consumer?) -Agility and many-to-many flows -The retailer as the conductor

Customer Retention

Two approaches to retain customer and increase share of wallet 1. Personalization -(1-to-1 retailing) --ex Zegna contact freq customer directly to tell them of a new shipment of nice suits -asking best customers to participate in focus group 2. Community -Retail brand community: group of customers who are bound together by their loyalty to retailer and the activities the retailer sponsors and undertakes -ex Nike: hosting running groups that meet weekly at store for refreshments. runners who have logged >100 miles earn special recognition.

Types of Merchandise Management

Two types of merchandise management systems Staple (Basic) Merchandise Categories -in continuous demand over an extended time period -easy to forecast demand bc sales are steady from week to week -Continuous replenishment Fashion Merchandise Categories -In demand for a relatively short period of time -Continuous introductions of new products, making existing products obsolete -Athletic shoes, laptop computers, women's apparel -in some cases, basic product doesn't change, but color, style, etc. changes to reflect what's hot that season Seasonal merch: sales fluctuate dramatically depending on time of the year

Vendor Managed Inventory (VMI)

VMI: -vendor sells on consignment (owns merch until sold by retailer) -determine reorder point, with help of retailer shared sale/inv data -retailer trusts more due to incentive to pick right levels to generate sales, min. inv

Pricing Techniques for Increasing Sales and Profits

Variable Pricing and Price Discrimination: -techniques to maximize profits by charging different prices to different customers 1st Degree of price discrimination: Individualized Variable Pricing -price = willingness to pay (ex: automobiles, antiques) Dynamic pricing: charge different prices on: -type of customer, time of day, week or season and the level of demand (ex: airlines, cruise ships) --may also charge based on loyalty status 2nd Degree: Self-Selected Variable Pricing - same price schedule to all customers -encourage price-sensitive take advantage of lower price -promotional markdowns -Clearance markdowns for fashion merchandise -Price bundling --offer two products for sale @ one price --McDonald's Value Meal -Multiple-unit pricing or quantity discounts --offer two or more similar products or services for sale at one lower total price --selling 3 liter bottles price when single liter not equivalent to 1/3 --used to increase sales volume -Coupons --try new products, convert first-timer to regular, encourage large purchases, etc. 3rd Degree: Variable pricing by market segments - Charge different groups different prices -Seniors discounts -Kids menu -Zone pricing

***CRM Article Notes: A lesson on loyalty: Where Starbucks went wrong

Went from requiring a total of 12 purchases of any dollar amount to requiring customers spend more than $60 to receive a free treat -effort to improve operational efficiency by eliminating "transaction splitting" Customers mad, took to social media -experienced technical issues from update such as loss of earned "stars" to win them back, Starbucks offered "Gold" status to any loyalty member who makes one single purchase over next few weeks Lessons to be learned -look at massive amounts of data from both POS and loyalty program members. --re-engage unhappy customers by offering targeted, customized deals and promotions 1. Establishing a framework for collecting and analyzing data 2. Test before you launch -ex focus groups to avoid neg feedback, test for tech glitches 3. Design more complex program with targeted offers

Strategic Advantage : ZARA

ZARA: fast fashion strategy offers inexpensive fashionable merch early in the fashion life cycle. -motivate shoppers to buy new apparel every few weeks -timely info from store managers on handheld devices linked directly to the company's corp office enables daily reports on what customers are asking for but not finding Zara offers inexpensive fashion merch that encourages purchases every few weeks rather than month -timely info from store managers to corporate from handheld devices (what customers want) -reduces lead time -have their own production of merch -smaller quant production due to rapidly changing trends -efficient logistics -good tranpsortation -frequent delivery -no need for discounts

Customer Loyalty

committed to purchasing from the retailer will resist efforts of competitors to attract their patronage Emotional attachment to retailer -Personal connection -Memorable positive experiences -Encourage family and friends to shop with retailer

Negotiating with Vendors

communication to reach agreement when have shared and conflicting interests Buyer will be more effective if knows personal situation and market trends well markdown money-funds vendors give retailers to cover lost GM dollars due to markdowns needed to sell unpopular merch Vendors are excellent sources of market information -buyers spend meeting talking about market trends Negotiation Issues: Price and gross margin -Buyer wants low price for higher gm, vendor wants high price for high margins -Margin guarantees via markdown money: buyer seeks commitment from vendor to guarentee that buyer will realize gm goal on marked-down merch by providing buyer with markdown money to make up lost margin -Slotting fees/allowances: supermarket buyers negotiate fee (charge imposed by retailer to stock a new item) --retailer will stock product for period of time, assess its sales/margin, and if successful continue to offer product Additional markup opportunities -vendor offer discounted prices to take excess merch (from order cancellations, returned merch from retailer, overly optimistic forecast) -can realize higher than normal gms or can put merch on sale for customers, BUT can affect brand image Terms of purchase -buyer wants longer period payment --improves cash flow, lowers liabilities (accts payable), can reduce int exp if borrowing $ -vendor wants shorter because has own fin objectives to accomplish Exclusivity -exclusive arrangement so no other retailer can sell same item or brand -retailer can differentiate itself from competitors, realize higher margins due to reduce price competition -in fashion, being first retailer in market to carry certain products helps retailer hold fashion leader image Advertising allowances -Co-op advertising: retailers share cost of advertising with vendors -vendor undertakes, pay for all or part of pricing promo Transportation -question of who pays to ship merch from vendor to retailer

Electronic Data Interchange

computer-to-computer exchange of business docs bet. retailers and vendors -reduces delay in transmitting/receiving orders security policy objectives: -Authentication - is who it claims to be -Authorization - permission to carry out request -Integrity - info arriving same that was sent

Analytics: Market Basket Analysis

data mining tools determine which products appear in the market basket that a customer purchases during a single shopping trip. -suggest where stores should place merch -which merch to promote together based on merch that tends to show up in the same market basket Uses: Revising product location (Beer with baby diapers) Target Promotions (complements) Assortment Planning (most valued always available)

Outsourcing Logistics

if those functions can be performed better or less expensively by third-party logistics companies Transportation: many companies can transport merch from vendor to DC Warehousing: retailers can use public warehouses owned/operated by independent company Freight Forwarders: provide services such as -tracking/transportation routes -preparing export/shipment documentation -booking cargo space (or warehousing items until space needed) -negotiating charges for and consolidating freight -insuring cargo or filing insurance claims as necessary

Collecting Customer Data: Customer Database

in data warehouse: all data firm has collected about customers and is foundation for CRM activities Customer database should contain following info: 1. Transactions - a complete history of purchases -Purchase date, price paid, SKUs bought, whether or not the purchase was stimulated by a promotion 2. Customer contacts -record of interactions customer had (touch points) including visits to web site, inquiries through in-store kiosks, comments made on blogs/FB pages, merch returns, phone calls to call center, emails and direct mail sent to customer 3. Customer preferences -what customer likes, favorite colors, brands, fabrics, flavors, apparel sizes 4. Descriptive information about customers -Demographic and psychographic data that can be used in developing market segments 5? Customer's responses to marketing activities

Setting Retail Prices

maximize profits by setting prices on basis of: -price sensitivity of customers -cost of merch -make adjustments to markup price based on customer price sensitivity and competition Start with: retail price = cost of merch + markup Markup: -Appropriate=amt that covers all of retailers op expenses (labor costs, rent, utilities, advertising etc) -markup % = (retail price - cost of merch)/retail price -Keystoning: using a 50% markup aka retail price is double the cost Reductions: factors that reduce actual selling price from initial sales price -freq reduce for special promos to get rid of excess -discounts given to employees -inventory shrinkage: some merch lost to theft/acct errors Initial markup: -Retail selling price initially set for the merchandise minus the cost of the merchandise Maintained markup: -actual sales realized -amount of profit realized from merch decisions -slightly different from gross margin --workroom costs reduce maintained compared with gross --cash discounts receive from vendors for paying invoices early --not under buyer's control so accounted for separately GM % = (maintained markup-workroom costs+cash discounts) / net sales markup % = (retail price - cost of merch)/retail price Keystoning: using a 50% markup aka retail price is double the cost In reality, retailers need to set price for over 50,000 SKUs many times during year.

Reverse Logistics

moving returned goods from customer to -capture value -proper disposal returned because... -damaged -recalled -out of season, discont. -incorrectly sent -excessive inv in stores or DC Might involve returns from all points of SC (customer to retail store, DC to vendor) PPT: Reverse challenging -Items may be damaged or require special handling -Transport costs high

(CH 12) Merchandise Management

retailer attempts to offer appropriate quantity of the right merchandise, right place, right time, so that it can meet the company's financial goals Skills needed to manage merch inv effectively: 1. Sense Market Trends 2. Analyze sales data continually 3. Make appropriate adjustments in prices and inventory levels Merchandise Management and Investment Portfolio Management -Dollars to invest in inventory -Invest in "hot" merch -Save a little for opportunities (open to buy) -Monitor portfolio of merchandise -Sell losers (markdowns)

(CH 11) Customer Relationship Management (CRM)

set of strategies, programs, and systems that focus on: -identifying/building loyalty with retailer's most valuable customers. -concentrating on developing loyalty, increasing their share of wallet -using: targeted, personalized merchandise, services, and promotions. Share of wallet - the percentage of customers' purchases made from the retailer "it would take 10 new customers to replace one 'best' customer"

Analytics: RFM Analysis

to determine customer segments that a retailer should target for a promotion or catalog mailing Method uses 3 factors to evaluate potential contribution of each customer segment: Recency: how recently customers made a purchase Frequency: how frequently they make purchases Monetary: how much bought

Dealing with Unprofitable Customers

two approaches to dealing with them: 1. Offer less costly approaches for dealing with these customers -flagged and automated services rather than a costly call to an agent 2. Charge customers for extra services demanded Delicate business, be careful when dealing w/ this

Identifying the Best Customers

use info in database to determine how valuable each customer is to firm Customer Lifetime Value (CLV) -The expected contribution from the customer to the retailer's profits over his or her entire relationship with the retailer -use past behaviors to forecast future purchases, the gross margin from these purchases, and the costs assoc. with serving the customers Assumes all future purchases will be the same as in the past