11 & 12 CRM & Planning Merchandise Assortments

8/3/2019 11 & 12 CRM & Planning Merchandise Assortments

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Prof. Vikram Parekh on Retail Management

Chapter 11

CRM


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CRM

Customer relationship management (CRM) is a businessphilosophy and a set of strategies, programs, and systems that

focuses on identifying andbuilding loyaltywith a retailer's

most value customers.

CRM is based on the philosophy that retailers can increaseprofitabilityby building relationships with their better

customers.

Effectively managing merchandise inventoryand the stores

provides value and supports the primary objective of buildingcustomer loyalty. The goal is to develop a base of loyal

customers who patronize the retailer frequently.


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Content: CRM

The CRM Process Collecting Customer Data

Analyzing customer data & identifying target

customers Developing CRM programs

Implementing CRM programs


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Content: CRM






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The CRM Process

Retailers are now beginning to concentrate on providing morevalue to their customers using targeted promotions and

services to increase theirshare of the walletthe percentage

of the customers' purchases made from the retailers with

these customers. This change in perspective is supported by research indicating

that it nowcosts over six times more to sell products and

services to new customers than existing customers and that

smallincreases in customerretention can lead to dramaticincreases inprofits

What is loyalty?

Overview of CRM Process


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The CRM Process

What is loyalty?

Customer loyalty, the objective of CRM, is more than having customers

make repeat visits to a retailer and being satisfied with their experiences

and merchandise they purchased. Customer loyaltyto a retailer means

that customers are committedto purchasing merchandise and services

from the retailer and willresistthe activities of competitors attempting to

attract their patronage.

Loyal customers have an emotional connection with the retailer. Their

reasons for continuing to patronize a retailer go beyond the convenience of

the retailer's store or the low prices and specific brands offered by the

retailer. They feel such goodwill toward the retailer that they will

encourage their friends and family to buy from it(WOM Publicity).

Emotional connections develop when customer receivepersonal attention.

Unusualpositive experiences also build emotional connections.


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The CRM Process

Overview of CRM Process

CRM is an interactive process that turns customer data into

customer loyalty throughfour activities:

(1) Collecting customer data

(2) Analyzing the customer data andidentifying target

customers

(3) Developing CRM programs

(4) Implementing CRM programs.



The CRM Process



Content: CRM







The CRM ProcessStep 1: Collecting Customer Data

A. Customer database Transactions

Customer contacts

Customer preferences

Descriptive information

Responses to marketing activitiesB. Identifying Information

Asking for identifying information

Offering a frequent shopper card (also called loyalty program)

Linking checking account number and third party credit cards

C. Privacy and CRM Programs Privacy concerns

Protection customer privacy



Content: CRM


Analyzing customer data & identifying

target customers Developing CRM programs




The CRM ProcessStep 2: Analyzing customer data & identifying target customers

The next step in the CRM process is analyzing the customer database andconverting the data into information that will help retailers develop

programsfor building customer loyalty.

Data mining is one approach and is a technique used to identify patterns in

data, typically patterns that the analyst is unaware of prior to searching

through the data.

Market basket analysis is a specific type of data analysis that focuses on

the composition of the basket, or bundle, of products purchased by a

household during a single shopping occasion. This analysis is often used for

suggesting where toplace merchandise in a store.



Market Basket Analysis Taught Wal-Mart to Change!

Product Placed NearBananas cornflakes, produce

Kleenex paper goods, cold medicine

Measuring spoons housewares, Crisco shortening

Flashlights hardware, Halloween costumes

Little Debbie snack cakes coffee

Bug spray hunting gear



The CRM ProcessStep 2: Analyzing customer data & identifying target customers

A. Identifying market segments

B. Identifying best customers

LTVLife Time Value

Customer pyramid (Platinum top 25%, goldnext 25%, iron, & Leadlowest segment)

C. RFM (recency, frequency, monetary)Analysis

often used by catalog and direct marketers



Customer Pyramid

PlatinumBestMost loyalLeast price sensitive

GoldNext bestNot as loyal

IronDoesnt deserve

much attention

LeadDemands attentionMay have

negative value



Content: CRM







The CRM ProcessStep 3: Developing CRM Programs

The next step in the CRM process is to develop programs for thedifferent customer segments. These include:

1. Retaining best customers Frequent shopper programs

Special customer service

Personalization Community

2. Converting good customers into high-LTV customers Customer alchemy

Cross selling

Add-on selling3. Getting rid of unprofitable customers.

Offering less costly approaches for satisfying the needs of lead

customers

Charging the customers for the services they are abusing.



Content: CRM







The CRM ProcessStep 3: Implementing CRM Programs

Increasing sales and profits from the CRM program is a challenge. Theeffective implementation of CRM programs requires the close coordination

of activities by different functions in a retailer's organization.

The MIS departmentneeds to collect, analyze, and make the relevant

information readily accessible for employees implementing the programs

thefront-line service providers andsales associates and the marketersresponsible forcommunicating with customers through impersonal

channels (mass advertising, direct mail, and e-mail).

Store operations andhuman resource managementneeds to hire, train,

and motivate the employees who will be using the information to deliver

personalized services.



RECAP: CRM

The CRM Process What is loyalty

Overview of CRM process

Collecting Customer Data

Customer database

Identifying information

Privacy and CRM processes

Analyzing customer data & identifying target customers

Developing CRM programs

Customer retention Converting good customers into best customers

Dealing with unprofitable customers




Chapter 12

Planning

Merchandise

Assortments


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Content: Planning Merchandise Assortments

Intro to Merchandise Management Organizing the planning process by categories

Setting objectives and merchandise plan

Sales forecasting

Assortment planning process

Assortment plan


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Sales forecasting


Assortment plan


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Introduction

Merchandise managementis the process by which a retailerattempts to offer the right quantity of the right merchandise in

the right place at the right time while meeting the companys

financial goals.

Small and large retailers are required to make decisions aboutthousands of individual itemsfrom hundreds of vendors. If

the buying process is not organized in a systematic, orderly

way, chaos will result.

As in any business, a retailer's ultimate objective is to achievean adequate return on the investmentto the owners. This

chapter shows how financial objectives trickle down the

merchandising organization, and how these objectives are

used to make buying decisions.


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Introduction

Once the financial objectives are set, the retailer starts thetask of determining what to buy. Retailers are limitedby the

amount ofmoneyavailable for merchandise and the space in

the store. They must decide whether to carry a large variety

of different types of categories or carryfewer categories but a

larger assortmentwithin each category. The process of

trading off variety, assortment, and backup stock is called

assortment planning.

An assortment plan is a list of merchandise that indicates invery general terms what should be carried in a particular

merchandise category.


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Sales forecasting


Assortment plan


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Organizing the Buying Process by Categories

The category is the basic unit of analysis for making merchandising decisions.

In general, acategoryis an assortment of items that the customer sees asreasonable substitutes for each other, such as girls' apparel, boys' apparel,and infants' apparel. Each of these categories has similar characteristics.

Category managementis the process of managing a retail business withthe objective of maximizing the sales and profits of a category.

Some retailers turn to one favored vendor to help them manage a particularcategory. Known as theCategory Captain, this supplier forms an alliancewith a retailer to help gain consumer insight, satisfy consumer needs, andimprove the performance and profit potential across the entire category.

A stock keeping unit (SKU)is the smallest unit available for keepinginventory control.


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Sales forecasting


Assortment plan


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Retailers cannot hope to financially successful unless theypreplan the

financial implications of theirmerchandising activities. Financial plans

startat the top of the retail organization and are broken down into

categories, while buyers andmerchandise planners develop their own

plans & negotiate up the organization.

Top management looks at the overall merchandising strategy. Buyers and merchandise planners, on the other hand, take a more micro

approach.

Thefinancial planning process start with the firms overall financial goals

and break them down into categories.

The resulting merchandise plan is afinancial buying blueprintfor each

category.

Once the merchandise plan is set, the category managers andplanners

develop the assortment plan


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Putting Profits, Sales, and Turnover Together: GMROI. At the corporate level, return on assets is used to plan and evaluate

performance of overall retail operations.

Return on assets = Net profit margin X Asset turnover

Also, Return on assets = Net profit / Total assets

GMROI (gross margin return on inventory investment) is a similar concept

to return on assets, only its components are under the control of the buyer

rather than other managers.

GMROI= Gross margin percentage X Sales-to-stock ratio Also, GMROI= Gross Margin

Average Inventory


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Measuring Inventory Turnover

Inventory turnover= Net Sales / Average Inventory at Retail

Inventory turnover= Cost of goods sold / Average Inventory at cost

Sales-to-stock ratio = Net Sales / Average Cost Inventory

Retailers normally express inventory turnover rates on an annual basis rather thanfor parts of a year.

Average inventory= Month1 + Month2 + Month3 + . . .

--------------------------------------------

Number of months

Most retailers no longer need to use physical "counts" to determine averageinventory. Point-of-sale (POS) terminals capture daily sales and automatically

subtract them from on-hand inventory.

Retailers with POS systems can getaccurate average inventoryestimates by

averaging the inventory on hand for each day in the year.


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Measuring Inventory Turnover

Advantages of High Inventory Turnover

Increased sales volume

Less risk of obsolescence and markdowns

Improved salesperson morale

More money for market opportunities

Decreased operating expenses

Increased asset turnover

Dis-advantages of High Inventory Turnover

Lowered sales volume

Increased cost of goods sold

Increased operating expenses


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Sales forecasting


Assortment plan


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Sales Forecasting

An integral component of any merchandising plan is the sales forecast. A

retailer needs to forecast sales to determine how much to buy.

Product categories typically follow apredictable sales pattern--sales start

off low, increase, plateau and then ultimately decline. Yet the shape of that

pattern varies considerably from category to category.

The category life cycle describes a merchandise category's sales patternover time, and is divided into four stages; introduction, growth, maturity,

and decline.

Knowing where a category is in its life cycle is useful for predicting sales.

However, the shape of the life cycle can be affected by the activities

undertaken by retailers and vendors.


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Sales Forecasting

An integral component of any merchandising plan is the sales forecast. A

retailer needs to forecast sales to determine how much to buy.

Category Life Cycles

Product categories typically follow apredictable sales pattern--sales start

off low, increase, plateau and then ultimately decline. Yet the shape of that

pattern varies considerably from category to category.

The category life cycle describes a merchandise category's sales pattern

over time, and is divided into four stages; introduction, growth, maturity,

and decline.

Knowing where a category is in its life cycle is useful for predicting sales.However, the shape of the life cycle can be affected by the activities

undertaken by retailers and vendors.


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Sales Forecasting

Variations on the Category Life Cycle

Fad Fashion Staple Seasonal

Sales over many seasons No Yes Yes Yes

Sales of a specific style No No Yes Yesover many seasons

Sales vary dramatically No Yes No Yesfrom one season to the

next

Illustration

(Sales against Time)SALES

SALES

SALES

SALES

TIMETIMETIME TIME


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Sales Forecasting

Developing a Sales Forecast A simple way to develop a sales forecast for a merchandise category is to

adjust thepast sales to make projections into the future.

This type of sales forecasting is done at the category, rather than SKU level,

and is used primarily forfashion merchandise. Forecasting sales ofstaple

merchandise is typically done at the SKU level.Sources of Category-Level Forecasts

Previous sales volume

Published sources

Customer information Shop competition

Vendors and resident buying office

Store-level forecasting

CPFR


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Sales Forecasting

CPFR collaboration, planning, forecasting, and replenishmentis a

natural outgrowth of the EDI technology. CPFR is a collaborative inventory

management system in which a retailer shares information with vendors.

Since the forecast is more accurate, thefill rate (the percentage of an order

that is shipped by the vendor) increases. A higher fill rate means that in-

store merchandise availability increases, resulting in fewer out-of-stocks.Thus, the goal of CPFR is to increase on-shelf availability while lowering

inventory throughout the supply chain.

The CPFR methodologycomprises of a nine-step process designed for

planning, forecasting, and replenishment of retail inventory by enhancing

coordination of all trading parties in a supply chain. It centers on sharingof: business plans, promotion plans, new-product plans, inventory data,

POS data, production and capacity plans, and lead-time information.


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Sales forecasting


Assortment plan


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Assortment Planning Process

Merchandise decisions are constrained by the amount of money available

to invest on inventory and the amount of space available in the store.

Retailers need to make strategic trade-offs between variety, assortment,

and product availability. There also additional special issues that must be

considered by e-tailers.

Varietyis the number of different merchandising categories within a storeor department. Stores with a large variety are said to have goodbreadth.

Assortmentis the number of SKUs within a category. Stores with large

assortments are said to have gooddepth.

Product availability, also referred to as the level of supportorservice

level, defines the percentage of demand for a particular SKU that is

satisfied.


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Determining Product availability

Product availability defines the percentage of demand for a particular SKU

that is satisfied. The higher the product availability, the higher the amount

of back-up stock necessary to ensure that the retailer won't be out of stock

on a particular SKU when the customer demands it.

Cycle stock, also known as base stock, is inventory that results from thereplenishment process and is required to meet demand when the retailer

can predict demand and replenishment times (lead times) perfectly.

Unfortunately, most retailers are unable to predict demand and

replenishment times without error, so, they carryback-up stock, also

known as safety stockorbuffer stock, as a safety cushion for the cycle

stock so they won't run out before the next order arrives.


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Determining Product availability

Several issues determine the level of required back-up stock. First, since every SKU shows a

unique demand and lead-time pattern, inventory management systems should calculate

safety stock requirements for each SKU.

Second, backup stock and therefore, overall inventory investment depend on the product

availability the retailer wishes to provide.

Third, the higher the fluctuations in demand, the greater the need for backup stock.

Fourth, the amount of backup stock also depends on lead time from the vendor. Lead time is

the amount of time between recognition that an order needs to be placed and the point at

which the merchandise arrives in the store and is ready for sale.

Fifth, the fluctuations in lead time also affect the amount of backup stock. Many retailers

using quick response inventory systems are forcing their vendors to deliver the merchandise

within a very narrow window to reduce the fluctuations in lead time and thus the amount of

required backup stock.

Finally, the vendor's product availability also affects the retailer's backup stock requirements.


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Sales forecasting


Assortment plan

A Pl


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Assortment Plan

An assortment plan describes in very general terms what should be

carried in a particular merchandise category.

The more fashion-orientedthe category, the less detailwill be

found in the assortment plan because the merchandise planner

requires more flexibility to adjust to fashion changes.

The merchandise planneruses the sales, GMROI, andturnover

forecastalong with the assortment plan from the previous season to

develop the plan for the current season. Adjustments are then made

based on the merchandise planners expectations for what items or

fashions will be important in the coming season.

A good assortment plan requires a good forecastfor sales, GMROI,

and inventory turnover along with a mix of subjective and

experienced judgment.

D th & B dth f h di


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Depth & Breadth of merchandise

DEPARTMENT

PRODUCT LINE

BREADTH

DEPTHSTYLES COLOURS SIZES

ZODIAC VAN HEUSENLOUIS

PHILLIPPEARROW

SHIRTS TROUSERS ACCESSORIES

MENSWEAR

M d l St k Pl


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Model Stock Plan

The model stock plan gives the precise items and quantitiesthat should be on hand for each merchandise line. A model

stock plan needs to be compiled for each line of

merchandise.

Steps for Model Stock Plan

Identify the attributes that the customer would consider in

buying the product.

Decide on the levels under each attribute.

Allocate the total money or the units to the respective item

categories.

C ti d l t k l


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Creating a model stock plan

A retailer has allocatedRs. 1 lakh to buyingshirts. Assuming that the purchase price for

the shirts is Rs.100, he will be able to stock

1,000 shirts.

Create a model stock plan?


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Identify the number of levels under eachattribute.

Type of shirtDress, Casual, Formal, Sport

Size Small, Medium, Large, Extra Large

Sleeve Length Full Sleeves, Short Sleeves

Collar Type Saville, Button Down

ColorWhite, Blue, Cream, Grey FabricCotton, Cotton Blend


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Type Dress Casual Formal Sport

% of Sales 10 40 20 30

Sizes Small Medium Large Extra Large

% of Sales 25 40 25 10

Sleeve

LengthFull Sleeves Half Sleeves

% of Sales 30 70

Allocate the total units to the respective item categories

Mens Shirts


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Prof. Vikram Parekh on Retail Management @ 2009

Men s Shirts

100% (1,000)

Dress

10% (100)

Casual

40% (400)

Formal

(20%) 200

Sport

30% (300)

Small

25% (100)

Medium

40% (160)

Large

25% (100)

Extra Large

10% (40)

Full Sleeves30% (48)

Half Sleeves70% (112)

Button Down

40% (45)

Saville

60% (67)

White

40% (18)

Blue

30% (14)

Cream

20% (9)

Grey

10% (4)

Cotton

25% (4)

Cotton Blend

75% (14)

RECAP Pl i M h di A


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RECAP: Planning Merchandise Assortments



Sales forecasting


Assortment plan

Documents

11 & 12 CRM & Planning Merchandise Assortments