Retail L0

RETAIL LEVEL 0 FOUNDATION COURSE
Cognizant
Technology
Solutions
1
RETAIL LEVEL 0
FOUNDATION COURSE
Cognizant
Technology
Solutions
2
CHAPTER 1: RETAILING OVERVIEW:
1. All of you have heard of and visited retail outlets. Everyone understands what the term means
?retail? means. This module is the starting point of your journey in understanding the very
basics of retailing and attaining a first level of comfort before you dig deeper in subsequent
discussions.
2. At the end of this chapter, you will be able to: Understand the importance of retailing. Identify
various functions and impact of retailing. Classify retail outlets on the basis of the their format,
the goods sold as well as other strategic considerations. Explain the retail process model.
Understand the challenges faced by retailing. Distinguish between retailing and other
industries. Identify the key retailers.
3. Before you understand retailing, you need to understand the importance of retailing. Retailing
is the largest private industry and it is omnipresent. It is fulfilling our daily to long term needs,
providing employment to people, and contributing to GDP. The transformation that is
happening in the retail industry through the use of IT is significant for us in Cognizant. The
retail sector has a long-standing reputation as being conservative in technology adoption. IT has
been used in retailing for a long time ? mostly as a tool increasing convenience in the past. The
retail market is big. Retailers of all sizes are now realizing that operational efficiency is not
enough to compete. Effective IT solutions, or the lack of them, can now be a survival issue in
the fast-paced but low-margin retail sector. IT is now being used for changing the business
processes in retailing ? and the scale of this change is big enough for the whole of IT industry to
take interest. IT Research firm Gartner informs that in retailing, we are right now seeing the
growth phase of IT spending.
4. The first question, and the obvious one, when we start getting into retail industry, is ?what
exactly is retailing?? The illustration shows the position of a retail outlet in the overall flow
of goods, right from the time they are manufactured to the time they are in the hands of the
customer. In most of the cases, we do not go to the factory to buy a product instead, we go to a
store nearby that stocks the product. The whole exercise of understanding location the retail
industry is to recognize the process behind how the neighborhood store is able to stock goods
we desire. The definition of retailing in terms of the process tries to answer that question. Thus,
?Retailing is the process of aggregating goods and services for sales directly to consumers?.
5. Let us discuss the keywords in the definition of retailing. Roll your mouse over each word to
view the details. Retailers have linkages with a lot of manufactures who produce the goods
and then sell it at a point easily accessible to customers. Hence retailing is basically an
aggregation of diverse goods and services. Some retailers have direct interaction with the end
consumer. A retail outlet is the point where the actual transaction happens at the end of the
value chain of almost all consumer products. The term ?consumers? makes us understand the
importance of retailing in the whole business of providing products and services to the end
users. They are the source of information about the user for whom the product was made and
distributed. Even if manufacturers produce the products, it is the retail outlet which interacts
directly with the consumers, with the people who ultimately pay for the product or service. This
is essentially the role of the retail outlet.
6. The retail outlets make the finished products available in desired quantities there by helping
consumers to buy them. In order to fulfill its role, the retail store typically does the following
functions: Providing Assortment: Retailers collect assortments from various suppliers and
offer them to customers. For example Campbell makes soup, Kellogg makes breakfast cereals,
Kraft makes dairy products. If each of these manufacturers had its own stores that only sold its
own products, consumers would have to go to many different stores to buy groceries to prepare
a single meal. Bulk Breaking: Retailers buy bulk of goods from manufacturers and offer the
product to consumers tailored to individual consumers? and households? consumption patterns.
Inventory Holding: Retailers keep inventory of products to avoid botheration and availability
Cognizant
Technology
Solutions
3
constraints for consumers. Aiding in Consumer Buying: Retailers often provide a helping
hand to consumers in their buying process, providing product visibility on shelf, sales force to
assist in buying, credits etc. By performing all the above functions, retailers increase the value
customers receive from their products and services.
7. The range of products, different manufacturers and different ways to buy them indicates that
the retail outlets would have various different shapes, sizes and looks. There are various
rationale on the basis of which retail stores are classified. These include: Type of goods sold
such as soft goods, durables, services, etc Store formats such as super markets, hypermarkets or
non-store formats like vending machines, direct selling, etc Key strategies like store ownership,
price charged, etc Studying these categorizations is important to understand how these stores
are managed, and the processes that they follow. When we as Cognizant actually go to a retail
organization to provide assistance either functional or technical, an understanding of what kind
of retail store we are working for is essential to have the right perspective of things.
8. The Retail Business model followed by the stores differs based on the kind of products they sell,
namely, Food and Drug, Soft goods, Durables, and Services. The manufacturing process of
consumer electronics and its demand would be different from that of a food product, which
would be different from the way drugs are stored. There are retailers that sell services, which
may have a whole lot of features not found in product retailing.
9. Retail outlets can also decide in what format they would sell the products. Formats are
combination of a number of decisions that retail outlets take as in kind of goods sold, quantities
in which they are sold, way in which they are sold, etc. The retail outlet can be of two formats:
- store formats - non?store formats The basic distinction is between retailers that sell their
stuff through stores, and retailers that do not sell their stuff through stores ? One thing to take
note of here is that most of these formats essentially belong to the worldwide organized retail
industry, specifically the US and may not be found in India.
10. The need to understand about the store formats arises because of the fact that all these have
different business models, and different ways in which they want to sell, sustain themselves, and
be profitable. All these formats would tweak the generic retail process to suit their requirements.
For example: A mom-n-pops is a small neighborhood daily usage store, similar to your own
friendly neighborhood grocery shops. A hypermarket is a huge modern store with more than
300000 sq ft are and huge amount of high variety goods. A supermarket is a huge modern store,
but relatively smaller to hypermarkets and storing less variety of goods. A department store
stocks average variety and average quantity of goods. A category killer stocks huge quantities
and a very high variety of goods of one type and sell them of lower prices. A whole sale club
provides access through membership and provides goods of wholesale prices to members. A
factory outlet stocks goods that are discarded after quality checks are deemed not fit for sale at
retail outlets at MRP. Typical examples of Hypermarkets, Department stores and specialty
stores include Wal-Mart, Sears and Office Depot respectively.
11. This is the picture of Costco warehouse club. Costco is a Warehouse Club offering a limited
assortment of food and general merchandise with little service at low prices to two type of
members: wholesale members who own small businesses and individual members who purchase
for their own use. A point to note is that the membership, fee-driven warehouse club is a US
based phenomenon and is not prevalent worldwide.
12. Non store formats are the relatively newer ways of selling that retailers have adopted. The
following are few examples of non-store formats: Catalogues: catalogues having product
information distributed to households and then sold through various means. Infomercials:
Advertisements having product information and buying mechanism are broadcasted directly on
home TV., a consumer is exposed to a good or service through a non-personal medium and then
orders by mail, phone, fax, or computer. Vending Machines: machines that are installed at
different places that give out goods with a mechanism for money input. E-Tailing: Orders are
placed on store web site and are delivered to home. Door-to-door: salesmen go door-to-door
with products and sell them. Tele-shopping: The products are shown on TV and then purchased
either by making calls or placing orders through Internet.
13. We discussed that store formats are basically a set of strategies that retailers adopt. There can be
innumerable number of strategic options that retailers can have related to each and every aspect
of running a retail business. Thus, classification based on strategies can be endless. The
Cognizant
Technology
Solutions
4
following are few examples of such strategies: Store Ownership Merchandise Sold Price
Charged Store Size There can be many more of such categorizations. Once again,
understanding these categorizations is important from the perspective of understanding the
business processes that these organizations would adopt.
14. We illustrate that a retailer can sell to consumers through multiple retail formats, as for example
J CPenney does it through Web sites and physical stores
15. The objective of a retail store is to sell products or services ? called merchandise in retailing
terminology. The identification and planning for the right product to be sold at the right time at
the right stores in right quantities at right prices is termed merchandise planning. The next step
involves identifying suppliers and setting up contracts with them. This is called sourcing. A
Purchase Order, or a PO, is raised at this stage. One of the most important transactional
instruments in retailing, it specifies the products, the quantity to be ordered. It is used to take
record for payment of dues, tracking of stocks shipped etc. The time taken between placing an
order and receiving the merchandise is called lead time. After the retailer receives the
merchandise, it has to be managed properly so that it sells profitably. This takes place through
merchandise management, and involves allocating the stocks to the right stores at the right time,
setting up and implementing price changes to cater to varying demands, carrying out promotions
etc. Once the stocks reach the stores, there are whole lot of in-store operations ranging from
deciding the stock quantity to helping customers find the product they are looking for, and
various reporting activities. An important aspect in retailing is Supply Chain Management.
Traditionally, it refers to merchandise flow from the manufacturing point to the stores, and in
some instances, reverse flow as well. Supply chain management involves three important
aspects. 1. The first aspect is logistics which involves management of the physical flow of
goods through transportation. 2. The second aspect is inventory management. Goods are
moved from distribution centers to godowns or warehouses. A retail business can have many
possible ways to arrange its distribution network and warehouses for better management of
merchandise. This is what is known as inventory management. 3. The third aspect to supply
chain management is setting up and maintenance of storage points, warehouses, distribution
centers, store inventory storage points etc. The data gathered at the stores, and data gathered on
consumers preferences and various market trends is pretty important to plan for future. Also, the
need to manage the customers is a key to profitability. Accumulation and transfer of consumer
data from the end points right up to the planning stages is the objective of customer relationship
management. Besides this, there are support functions, such as administration, finance, HR etc.
16. Now that you understand retail process at least at an elementary level, you can appreciate some
key features of retailing. In order to succeed in retail industry, we need to take care of certain
key aspects and face certain key challenges. These aspects and challenges are what makes
retailing different from other industries. Let us try to relate which processes do these challenges
impact and in what way.
17.
18. This table shows the biggest players in the Retail industry in terms of sales volume. It is evident
that most of these are from the US. Another key fact is that Wal-Mart is far ahead of its nearest
competitor Carrefour in terms of sales.
19. These charts show the top 200 retailers players in the retail industry. You can see that the US
dominates the retail market.
Cognizant
Technology
Solutions
5
CHAPTER 2 : RETAIL BUSINESS MODEL
Cognizant
Technology
Solutions
6
CHAPTER 3: SOURCING
1. In this chapter, you will understand the concept of Sourcing pertaining to the Retail industry.
We will further explore the different sources of merchandise, the different steps and processes in
a sourcing cycle.
2. At the end of this chapter, you will be able to: Understand the concept of sourcing. Identify
different sources of merchandise. Explain the steps involved in sourcing. Understand the
different vendor selection parameters. Identify the different types of vendors.
3. Sourcing can be defined as procuring the desired products that the retailer decides to sell from
the vendor, abiding by a mutually agreed upon terms and conditions of transactions, thus
establishing a supplier buyer relationship, built around the product. Sourcing involves the
following operations: Identifying the vendor, qualification and vendor selection. Establishing
the terms and conditions of purchase called contract management. Processing order with the
vendor, and payables management Collaborating with the vendor in jointly designing and
developing the product You will learn each of these sourcing steps in details in the subsequent
part of this chapter.
4. This illustrates the relationship between a retailer and a customer.
5. Broadly, the different sources of merchandise are: Distributors and wholesalers Manufacturers
6. Let us now discuss about the distributors and wholesalers. Distributors and wholesalers
consist of middlemen who procure from manufacturers and sell it to retailers on account of the
control they have in supplier relationships and distribution networks. Sometimes retailers want
to procure in specific quantities, for example low volume purchases for which they cannot have
bulk deals with the manufacturer. In that case which is typically in a fragmented retail market to
achieve economies of scale and scope they procure from authorized dealers and distributors.
Advantages of this method is lesser spending in vendor identification, qualification, negotiation,
contract management and other collaboration costs. The only disadvantage in this case is a
higher product cost structure due to the intermediation happening with the distributor adding a
typical markup of 5-10% on the cost of goods from the manufacturer.
7. Other sources of merchandise procurement are the manufacturers. Typically large retailers who
procure registered and national level brands in high volumes enter into purchase agreements
directly with the manufacturer to have a low product cost structure. Advantages of such a
procurement includes manufacture initiated promotional schemes that retailer can leverage in
disposing off merchandise. Disadvantages of this method is typically manufacturers do not hold
the inventory, and hence it?s the retailers cost and responsibility to procure in economic
quantities and hold inventories. Again credit terms and other credit facilities are normally not
offered by the manufacturer (as opposed to wholesalers and distributors). Sometimes retailers
employ third party manufacturers to produce their private label brands, a method called contract
manufacturing. Such outsourcing of manufacturing activities, enables Retailers to focus on their
core competency of retail sales, and still leveraging the advantages of an in-house contract
manufacturing, thus gaining economies of both scale and scope.
8. Now let us look at the different steps involved in sourcing. Sourcing starts with identification
of the materials, merchandise and other products and services that needs to be procured, based
on the retail business model. The next step is to identify potential vendors, who are specialized
in manufacturing or wholesale distribution of the merchandise. Thus there needs to establish
communication channels between the vendor and the retailer which can be either vendor
initiated or retailer initiated. In the first case communications are initiated by the vendor
through store visits (wherein vendor sales reps visit buyer stores and gives a demonstration on
product ranges and their offerings), or through telephone and mail solicitations. Retailer
initiated communication includes central markets where potential vendors are located who can
be contacted. Other channels includes trade shows, for example SAP organizes sapphire, i2
organizes planet every year, where vendors showcase their expertise and offerings. Trade shows
can be organized exclusively by the vendor such as SAP or by an umbrella organization such as
Cognizant
Technology
Solutions
7
universal code council hosting a conference of all GTIN solution vendors and other bar code
hardware and software vendors.
9. Now let us focus on different types of vendors. The following are different types of vendors:
National brand vendors who design, produce and market their own branded lines and
merchandise such as manufacturer of levis brand, marketing and distributing the Levis brand all
by himself. Sometimes retailers promote their private label brands that they manufacture
through contract manufacturers. Such brands are called retailers private label such as staples'
yellow self-stick notes, ink cartridges for laser printers, apparel brands like DJ &C by Pantaloons
in India). Stores like Sears and J CPenney prefer their merchandise mix to comprise
approximately 50% private brand and 50% national brands. With private label, retailers are able
to customize their lines to target specific groups of consumers who shop at their stores.
Retailers' brands are seizing an increasing share of global sales: Private labels exclusively
designed and made by retailers account for one of every five items sold daily in the United
States, representing more than $50 billion in retail sales, according to the Private Label
Manufacturers Association. Sometimes Retailers import goods from lost cost manufacturing
countries like China and India and put their own label (e.g Wal-Mart procures leather goods
from India). c) The third category of vendors are wholesalers and distributors for Licensed
brands. Licensed Bands are giants like Walt Disney, Manchester United club, and MTV.
Hence they come out with merchandise such as apparels, accessories etc. as part of promotional
campaign for the original brand. Retailers enter into licensed contract with these giants and sell
merchandise with logos, designs and other associated symbols for example an MTV T-shirt or
Walt Disney set of Soft Toys.
10. After identifying the potential vendors, the next step is select the vendor. Vendor selection is the
process of identifying and evaluating potential vendors for sourcing the product. Sometimes
instead of single sourcing, multiple vendors may be selected to provide for cover in case
demand is not fulfilled by one, or as a negotiation tool. The following are different criteria on
which a vendor can be evaluated: Merchandise criteria. Distribution criteria - network of
vendors as in how well vendor can efficiently distribute the merchandise. Price criteria.
Promotion criteria given by vendors. Customer service and post purchase service offered by
vendors. Performance and vendor reputation criteria. The vendor selection happens only after
a weighted average calculation of suitability of all vendors on these criteria. The vendor
selection leads to development of the framework of relationship between supplier and retailer.
We will discuss each of these selection criteria in details in the subsequent part of the chapter.
11. Merchandise criteria mainly deals with the following criteria Suitability defines how the vendor
offerings fits into the retailers merchandise requirements and generate sales volumes to fit into
the retailers business model. Say for example if William Sonoma, the leading retailer for home
furnishings and appliances evaluates vendors for procuring their cutlery range of products they
will look for vendors who are steel merchants and wholesalers specializing in utensils and
cutlery. Availability defines whether the retailer has adequate assortment ?width? and ?depth?
in terms of different styles, colours, size, price ranges or categories for example for an apparel
retailer. The variety of offering is an important factor in any request for purchase evaluation of a
retailer. Adaptability mainly refers to the vendor adaptability in changes of distribution, supply
schedule, in-season design changes, specification changes to meet changing market demands. In
addition, if the vendor is willing to manage his own inventory till the Warehouse or Store
delivery that is called VMI or Vendor Managed Inventory. Thus different vendors are
qualified on each of these merchandise parameters, and again a relative importance in terms of
weights are assigned to each of the parameters. The vendors are then evaluated on the basis of a
weighted average calculation and ranked according to this weighted score.
12. Vendor distribution criteria mainly includes the following: a) Degree of exclusiveness refers to
whether the vendor can have exclusive manufacturing agreements with the retailer in which case
for that particular merchandise, the vendor do not supply to any other retailer. Such vendors are
called captive vendors. In addition, for better retailer response, reduced order processing and
procurement lead times retailers might need vendors with dedicated distribution network b)
Location of vendor might be evaluated by the retailers to reduce supply chain costs. Retailers
prefer vendors located close to the stores and the distribution centres. c) Effective distribution
and logistics strategies of the vendor, for example cross-docking. In cross-docking, in-bound
Cognizant
Technology
Solutions
8
logistics at a warehouse or distribution centre is directly docked into trucks as outbound
logistics without the need for warehouse processing or stocking. d) Delivery service available
in terms of order processing time, manufacturing lead time and distribution lead time is an
important distribution criteria e) Quality of packaging employed by the vendor in terms of
pallet size, lot sizing, assortment optimization during delivery, full truck load utilization and
damage prevention techniques. In addition, the retailer might have compliance initiatives like
GTIN compliance, which ensures retailers and its trading partners to abide by the mandate. (For
example Wal-Mart mandating its 137 suppliers to be Case or pallet level RFID compliant by
end of 2005).
13. Pricing is one of the most important vendor evaluation criteria. It includes Appropriateness of
the price quoted in terms of ?best-fit? and ?best of the industry? offerings Maintaining the
Pricing standards to ensure consistency across different categories of merchandise Thus the
retailer would ideally want to procure merchandise at a product cost structure, by which he can
set his price in a most competitive manner, and still maintain industry standard markups
Promotion criteria involves the type and amount promotional assistance extended by vendors,
such as a) Cooperative advertising and marketing b) In-store activities such as the vendor
maintaining the presentation stock, vendor promotions like ?exchange offers? and ?price
challenge contests? c) Vendor managing the display stock and next in line offerings at the
retailers stores free of cost The service criteria includes: Financial and credit services offered
by the vendor. Various terms of purchase and credit that the retailer might evaluate are extended
credits, bulk discounts and other volume purchase rebates. Return of stock privileges.
Sometimes a vendor gives the facility to buy-back stocks that do not sell at a discounted rate.
This is typically applicable to perishable grocery items and other fast food items Warranties and
repair of defective products Training of the retailers sales force for product usage Display
assistance at stores by the vendor for better shelf space optimization, and visibility, better
offtake and disposability Whether the Vendor is consistent in terms of quantity, quality and
other purchase agreement terms and conditions
14. Finally the performance criteria includes: Vendor reputation in terms of number of customers it
serves and their feedback and market opinion, past history, Past transaction record and Good
will Quality Assurance from the vendor in terms of quality checks and specification limits
Adherence to norms and standards of contract Whether the vendor is an authorized dealer,
manufacturer or wholesale distributor also guides a retailers decision to select a vendor Thus
we studied the various selection criteria a vendor might be evaluated during the sourcing bid
simulation. Each vendor gets a rating on a scale (example 1-10) on each of these parameters.
Normally retailers have automated solution that determines the weights for each of these
parameters, based on their relative importance and then compute the overall vendor scores based
on a weighted average calculation. Most Retailers go for a group of vendors (called the Vendor
Mix) rather than taking the risk of Supply Uncertainties in single-sourcing. Thus the ?best-fit?
Vendor mix is selected and qualified after which Retailer enters a negotiation round with each
of these Vendors to derive a win-win relationship and move into the next phase of Sourcing
which is ?Contract management?
Cognizant
Technology
Solutions
9
CHAPTER 4: CONTRACT MANAGEMENT
1. In this chapter you will understand the concept of contract management. Further, you will learn
about operational sourcing and steps involved in operational sourcing.
2. At the end of this chapter, you will be able to: Define the contract management and explain the
contract lifecycle management Understand the operational sourcing Explain the steps involved
in operational sourcing Explain the operational process flow
3. Contract management is all about developing a transactional framework, a protocol, and a
business agreement between the retailer and the supplier. Contracts bind both parties legally and
addresses all the parameters that links a supplier with the retailer. As you can see, some of these
parameters includes mutually agreed prices and markups, the payment terms such as credits,
payment cycle, different clauses related to extended credits etc. Contracts also deal with supplier
discounts, volume breaks such as bulk discounts, special discounts etc. and other rebate policies
such as end of season promotions. It also deals with standardized lead times such as the order
processing lead time, manufacturing and distribution lead time, different late delivery clauses,
carrier and hub selection agreements, alternate and multimodal transport agreements, substitute
product clauses, storage requirements and various vendor negotiation outcomes. The main
benefits of contract management includes streamlined contracting cycles and standardized
process of vendor negotiation resulting in reduced costs and risks. Other advantages are stronger
performance and compliance through enforced policies, reduced administrative costs through
automation, and better contract visibility.
4. Contract Lifecycle Management or CLM is the process of systematically and efficiently
managing contract creation, execution, and analysis for maximizing operational and financial
performance and minimizing risk. The following are the four phases of a typical contract
lifecycle: a) Creation includes final negotiations and collaboration with the supplier, document
redlining, supplier signoff, ensuring use of standardized contract templates and clauses and
enforcing business oversight and controls b) Activation includes establishing a central
repository of all contract information. This repository should be searchable and integrate
directly with key transactional systems in order to make contracts ?active.? c) Compliance
includes proactive tracking for internal usage of preferred suppliers and contracted pricing,
tracking of terms, pricing, rebate, and service-level compliance for retailer and supplier
agreements. It also includes monitoring and auditing of contract terms and performance to
ensure regulatory compliance. d) Analysis includes active enforcement of spending against
budgets and balancing orders between preferred suppliers to optimize usage and returns. Also
termed contract analysis this phase also deals with determining future sales, budgeting,
sourcing, supplier management, and risk strategies. Retailers that utilize such standardized
processes and controls across the contract management lifecycle have realized reduced
procurement expenses and operation costs, increased revenues and customer satisfaction,
improved order-to-cash and order-to-pay cycles, and enhanced compliance. Effective contract
management requires effective alignment of business processes, governance, and contract
management automation.
5. Operational Sourcing refers to the determination of gross merchandise requirements by setting
different sourcing triggers, calculating net merchandise requirements, measuring and monitoring
supplier performance and thus reducing order cycle time. The inputs that goes in operational
sourcing are primarily merchandise and location plans. Merchandise plans includes sales
projections and volume estimations for a particular category of merchandise. Store plans deals
with current and previous Inventory and sales data at store level. Operational Sourcing is
triggered as an in-season ongoing activity every fortnight, week or sometimes on a monthly
basis.
6. The Process Steps in Operational sourcing are: a) Set sourcing triggers based on the following:
Sales plan and actual demand profile Sales forecast figures and open customer orders The
ordering policies followed at the store and DC level and the different Ordering parameters like
re-Order point, Re-Order quantity, Lead Time, Safety Stock etc. Other sourcing triggers
Cognizant
Technology
Solutions
10
includes inventory positions such as on-hand, on-order and in-transit inventory determined
through store-checks and cycle counts b) The second step is to calculate gross merchandise
Requirements as calculated in Purchase Orders. These are again constrained by sourcing
policies, vendor lead time, vendor capacity and other contract limitations. c) The next step
involves determining net merchandise requirements, by factoring manual adjustments like need
to pre-build due to unplanned and planned promotions, forthcoming events, demand surges and
drops, and other geographical and political factors. Net merchandise requirements are then
communicated to the vendor through PR (Purchase Requisitions) made by the department,
which is then translated to a PO (Purchase Order) by the Buyer to be send to the Vendor.
7. This illustrates the full blown operational process flow in sourcing. The process starts with
Strategic Sourcing which involves identifying retailers long term sourcing requirements, global
and local purchase mix decisions etc. The next step is vendor identification, evaluation and
qualification to arrive at the ?best-fit? vendor mix. Then the retailer enters into a negotiation
cycle with the vendor on the best possible terms of purchase and frames a legally binding set of
mutual agreements called contract. Finally, the ball sets rolling as the retailer starts procuring
from the vendor, by setting operational sourcing triggers and calculating gross and net
merchandise requirements. Purchase orders are generated by these sourcing triggers, which are
sent to the vendor
Cognizant
Technology
Solutions
11
CHAPTER 5: MERCHANDISE MANAGEMENT DEMAND SIDE
1. In general merchandise is referred to as the goods and services that are sold by the retailer.
Management of this merchandise, and all the operational steps like ordering, setting the price,
designing and implementing promotions, allocating them to different stores, and finally
replenishing these merchandise to the stores constitutes Merchandise Management.
2. At the end of this chapter, you will be able to: Understand merchandise management Define
and explain category management Understand the concept of merchandising List the types of
merchandise Describe merchandise management processes
3. Merchandise management is all about managing the retail product mix such that it generates
maximum returns to the retailer in terms of revenue, profits and customer demand. There are
two operational objectives of merchandise management. They are: Making the goods and
services available to the customer, also called Replenishment. Generating demand and revenue
for the retailer, which is achieved through optimal pricing and promotion schemes. In this
chapter we will focus on the demand side of merchandise management. The key aspect of
merchandise management deals in generating demand for the products and getting revenues.
Pricing and Promotion are the two key ingredients in this aspect.
4. The category is the basic unit of analysis for making merchandising decisions. Category can be
defined as an assortment of items that customers perceive having the same end-usage and hence
reasonable substitutes for each other. Sometimes categories are defined as products with similar
characteristics and end-usage. The different types of merchandise categories include girl?s
apparel, men?s formals, dresses, swimwear, sportswear. Category definition may vary widely
across geographies, Retailers and vendors. For example Tomato Soup could be identified as
belonging to Soup Category in one Geography whereas could be identified as Canned Food
Category. Some retailer stores may define categories in terms of brands. For example Tommy
Hilfiger, Polo and Ralph Lauren can be all categories. Although each retailer has its won system
of categorizing merchandise, NRF or national retail federation in the US has some standard
merchandise classification schemes. Category Management can be defined as the process of
managing a retail business with the objective of maximizing sales and profits of a category. For
example in a grocery store, there can be a category of breakfast cereals with three brands like
Kelloggs, general mills and general Foods in that category. If all these brands are stored in the
same shelf, they would be competing against each other and vying for shelf space. In this case,
the category manager needs to assign shelf space and visibility on the basis of favorable vendor
contracts, profitability and sales velocity of the three brands inside a category. Again retailers
are limited by the merchandise budget and the store space. They must decide whether to carry a
large variety of different categories, for example dresses, cutleries, innerwear, or carry fewer
categories and have large assortment of style, size and color inside a category, like Women?s
jeans. This process of trading off between variety, assortment and backup stock is called
Assortment planning. Hence it is the role of a Category Manager to develop Assortment plans
within his own category, negotiate with vendors in getting the best deal, price the assortments
and coordinate all promotional activities with the advertisement department and the Stores.
5. Sometimes vendors and retailers forms strategic alliance in which vendors help retailers to get
insight into customer buying behavior and improve retailers merchandise buying process, to
procure the right assortment in right quantities, in the right time, and sell them to improve the
overall category performance. Such vendors are called Category Captains. The category role
(or purpose) defines the role that a consumer associates with a Category in a store. For example
routine categories acts as bread-and-butter to consumers' day-to-day life. Seasonal/Occasional
categories are bought by consumer during specific occasions/seasons. Category performance
is measured and monitored using certain KPI?s or Key Performance Indicators like GMROI (or
Gross Margin Return on Investment), Category Profit, Sales, Market share etc.
6. There are four aspects of merchandise management namely, ordering, allocation and
replenishment, pricing and promotions. Merchandise management can also be viewed in terms
of demand supply equations, where it can create and manage demands through pricing and
Cognizant
Technology
Solutions
12
promotions, as well as manage supplies to fulfill that demand (through ordering, allocation and
replenishment). Let us again revisit the description of each of these components of merchandise
management, just to reinforce the concept. Pricing is all about setting prices, for the
merchandise, tweaking around the base and MRP to generate demand and revenues. Customers
are targeted through campaigns in which they become aware of the product and the utility, and
they attach a ?Perceived Value? of the product, for which they are ?willing to pay? a price. So
the primary challenge of all pricing decisions is to find this point of intersection between
customers perceived value and customers willingness to pay for the product. Promotions on
the other hand enhances base demand, and revenues through various promotional schemes,
discounts and advertisements. Thus where pricing creates demand and revenue, promotion
enhances that. On the supply side management, there is ordering which manages all the
transactional steps in procuring the product from the vendor. Allocation is determining the
distribution logic of how much of merchandise should be allocated to different stores, how
much to stock at the stores and the rest at the warehouses. Replenishment is all about setting
safety stock levels, at the stores, distribution centre?s and the warehouses, determining the order
quantities and the ordering time for each purchase orders based on sales velocity, inventory
turns, Target service levels, and hence triggers both ordering followed by allocation. We will
study each of these operational subcomponents in greater detail as we proceed with the course.
7. Merchandise can be of 5 types. Staple merchandise. Fashion merchandise. FAD merchandise.
Seasonal merchandise. Perishable and non-perishable merchandise.
8. Now let us look at the Staple merchandise. The first is Staple merchandise, also known as basic
merchandise. This constitutes items that has a fairly regular and predictable demand for an
extended period of time, and have reached the maturity stage in the Product Life Cycle. Staple
merchandise typically constitutes the Fast moving Consumer Goods and CPG items, Grocery
items, and typical Household utility items (like Home Furnishings, Consumer Durables, Basic
Consumer Electronics)
9. Next is the Fashion Merchandise, whose demand is short-lived compared to a Staple
merchandise, but spans several seasons and depends on various facts like Fashion trends,
Seasonal trends, Geographic and Environmental issues. Typical examples of fashion
Merchandise can be Boot-Cut jeans, Double-breasted suits for Men, anti-crease trousers, sweat-
shirts etc.
10. Fad on the other hand, lives for a very short period of time, typically part of a season and
generates high sales volumes, due to a strong trend For a Retailer, fads are often very
unpredictable and in some cases illogical. Retailers face huge operational and strategic issues
like Inventory holding, Lost Sales, Stock outs, Pricing decisions, Sourcing difficulties and
replenishment. Merchandisers combat such highly volatile Fad demands by using different
tricks like Locking up Distributors and Manufacturers in exclusive agreements, proactively
predict peak fad demands and charge premium prices during the growth and reduced prices
during the phase off to clear Fad inventory. Other tricks includes cutting down the spend on
Advertising as Fad demands are mostly generated by Socio-Economic and Socio-cultural trends
such as a blockbuster movie, or a Mega event. Sometimes retailers try to prolong the fad by
keeping the consumer on hold, and increasing the supply hunger.
11. Now let us look at seasonal merchandise, which are products whose sale depends on seasonal
changes and fluctuations. For example dry fruits are found during a festive season, jackets
during winters etc. Merchandise can also be classified as perishable merchandise and non-
perishable goods. Grocery items are typical examples of perishable merchandise and consumer
durables, home furnishings etc are examples of non-perishable goods.
12. Now let us discuss the most important aspect of merchandise management ? Pricing. Customers
in most cases focus this single most aspect while making purchase decisions. Thus Pricing is a
tool, a technique or a mechanism that determines the Retail Selling Price of a merchandise.
Customers perceive a value of the product, for which they are willing to pay a price. Hence
Pricing determines the point of intersection of these two consumer behaviors. MRP or
Manufacturers Retail Price is the normal price of a merchandise, set by the Manufacturer above
which no retailer can sell his products. Retailers often offers promotion and markdowns on the
MRP, and hence offers price lower than the MRP.
13. The retailers achieve the following objectives through optimal pricing strategies: In Margin
Cognizant
Technology
Solutions
13
Objective effective pricing helps retailers to maximize their long term profits and the NPM, or
Net Profit Margin. Again effective pricing generates revenue for the retailer in terms of
increased product demand and market share. Sometimes retailers create the brand equity for
their products and target high aspirational objectives of the customers, and charge a premium to
suit their market positioning and image building strategy. Like premium prices of Fashion
Merchandise, for a Versace collection. Other operational objectives of pricing includes
Inventory reduction, at the end of season. Thus retailers indulge in markdowns, rebates and end
of season clearance sale. Sometimes merchandise fails quality checks or customer specification
limits for large export orders. Hence these items are sold at factory outlets, at reduced and
markdown prices.
14. Now let us discuss the different pricing strategies, Retailers adopt to sustain the growing Retail
competition, and build an image and positioning based on pricing strategy. EDLP, or Everyday
Low Pricing is a strategy in which Retailers maintain stable low prices, which do not fluctuate
based on season, or time of the year. The term EDLP is somewhat as misnomer, as low does
not mean ?lowest?. At any given time, a Sale price at a competing Specialty store, or a mom-n-
pop store or a special purchase at a wholesale club store may be at the lowest price, even lower
than the EDLP price. The essence of EDLP is ?consistent pricing? at a lower than normal rate.
Typically in an EDLP strategy Retailers set prices in between the normal MRP of the product
and the ?deep discount sale price? (normally offered by membership based Wholesale Clubs). In
EDLP, Retailer promises good quality products, at consistent and reasonable prices throughout
the year. Several of the biggest US retailers like Wal-Mart (the pioneer in this strategy), K-Mart,
Home Depot, Staples have adopted EDLP A close competitor in the price oriented market, for
EDLP Retailers are Members only Warehouse Clubs (like Sam?s Warehouse Club and Costco.
Another competition to EDLP Retailers like Wal-Mart are ?Off-Price? retailers (like TJ Maxx,
Marshalls) which purchases close-out and End of season merchandise at lower-than-normal
prices and passes on the savings to Customers. In High/Low pricing strategy, Retailers offer
prices that are higher than their competitors EDLP, but they use advertising and various
promotional campaign to promote frequent sales. Also they promise good value to customers in
providing high-quality merchandise. Prices in High/Low strategy might vary Season-wise or
even Pre-Season to In-Season, based on the on-going promotional campaigns. Thus we see in
today?s retail market, two opposing Pricing strategies prevail, EDLP and High/Low pricing.
Comparing EDLP with High/Low, the former has 3 relative benefits, over the latter. Many
customers become wary of the competitive prices, among the High/Low retailers, and have to
wait for promotional schemes, and thus postpone their purchases, which adds to the confusion.
Thus an EDLP strategy offers a more stable purchase behavior, when customers realize prices
are fair and consistent, and they buy regularly in increasing quantities. Stable prices in EDLP,
reduce the need for weekly advertisement used in High/Low pricing. Thus EDLP Retailers can
focus more on Vendor negotiation and other core activities. Also catalogs don?t become
obsolete since prices don?t fluctuate. All these saves a lot of Operational Costs. Stable prices in
EDLP, reduce variations in demand caused by Frequent sales, markdowns and promotions. Thus
it helps retailers to maintain fewer stockouts and inventory, satisfied customers and increased
sales. Thus a more predictable demand pattern enables retailers to improve inventory turnover
by reducing Average inventory (required normally by High/Low retailers to sustain special
promotions and backup stock). But High/Low strategy also has certain benefits High/Low
strategy allows retailers to charge higher prices in markets that are not price-sensitive, and lower
prices for price sensitive customers. Thus when a Fashion merchandise first hits a store, its
offered at a higher price to the fashion leaders and savvy customers. Finally as the season
progress and markdowns are taken, more price sensitive customers and fashion adopters rush in,
and pay lower prices for the same merchandise. Thus high/low strategy helps retailers to
maximize their revenue, based on market pulse. Also frequent Sales and Promotional
campaigns generates a lot of excitement and ?impulse purchase? to the customers Premium
pricing in High/Low strategy at the beginning of season, gives a signal of high quality to the
market. Finally when prices are reduced through markdowns as the season progress customers
gets a feel of good bargain. In loss-leader pricing, certain items are deliberately priced much
lower than normal to generate customer?s traffic flow and boost sales. Loss-Leader Retailers
typically target the price-sensitive market and offer such pricing for staple and frequently
Cognizant
Technology
Solutions
14
purchased items like Bread, Egg and milk. Retailers also hope to boost sales of complimentary
grocery products (like J am, Butter, Frozen groceries) while customers come to purchase the
loss-leader products on a weekly or daily basis. For example Toys ?R? Us has successfully used
Loss-Leader strategy for disposable diapers. New parents gets the habit of purchasing diapers,
and eventually end up purchasing all the child?s requirements, toys, school products etc.
throughout the parenting period and become loyal customers
15. Price Bundling is the practice of offering two or more different products or services for sale at
one price. For example Toothpaste can be bundled with Talcum Powder and sold at a Sale
price. This strategy is used to move less desirable merchandise, such as Talcum powder in this
case by including it in package with a fast moving, high demand merchandise (like the
Toothpaste). Multiple Unit Pricing is similar to Bundling except that the products or services
are similar instead of being different. For example a departmental store may use the strategy to
Sell 2 soaps, at the price of one. Like Price bundling, this strategy is also used to increase Sales
volume, with customers purchasing substantial amount of the products or services in perception
of cost savings incurred through the process. In Price lining, retailers offer a limited number of
predetermined price points within a classification. For example a tire store may offer tires only
at $29.99, $49.99 and $79.99. Both customers and retailers benefit from such a pricing because
of several reasons Consumers have the choice based on their affordability (like Low, Medium,
High, example the LPE or Low Priced Edition of an International publication) which eliminates
unnecessary confusion of multiple price choices. Again consumers have the tendency to choose
the medium price range, of any merchandise. So retailers can stock these editions more
compared to the High end, or Low end versions. For Retailers merchandising task is simplified,
while planning for Assortments and procuring
16. Odd Pricing refers to the practice of using a Price that ends in an Odd number, typically 9. Odd
Pricing helps Retailers to reduce losses due to Employee theft. Because merchandise has an odd
price, Salespeople typically have to report to the Cash register to give back the change to
customers and record the sale. Otherwise chances are that Salespeople takes the money from the
customer, and never record the sale. Again, typically for low value items, like an item worth
$2.99 customers normally tend to overlook the last digit and perceive the price as $2.90. Hence
this tactic increases Sales value by 3% ($2.99 - $2.90 / $2.99). Again for products which are
believed to be sensitive to price, Retailers round the price to the nearest 9, to create a positive
price image. For example if the price is normally $3.09 retailers would lower the price to $2.99,
thus optimizing the profit and the price image. Another important Pricing technique is
Variable Pricing. It means charging different prices in different Stores, Markets and Zones.
Retailers generally use Variable Pricing to address different competitive situations. For example
food retailers normally have four or five price zones in a single city. They?ll have one zone if
they are next to Walmart and another zone if they are next to a less price-competitive regional
chain. Prices can vary by 10-15% across these zones depending on the competition and the
Retailing Strategy. Variable Pricing is normally followed by the Food and Drug retailers.
Staples for example utilizes Variable Pricing in its Multi-Channel retail strategy, where
customers are asked to enter a zip code before they are quoted a price. Barnes and Noble, for
example have discounted prices for books purchased through Internet than their Brick & Mortar
stores.
17. After selecting an overall Pricing Strategy, retailers still need to set the prices for each item.
Retailers set the item prices to maximize long-term profits. To do this, they need to consider the
cost, because they want to make profit, the demand, because that is why customers will pay for
the merchandise and competition, because customers shop around and compare prices. This
section examines the 3 approaches of setting and managing prices ? cost-oriented, demand-
oriented and competition-oriented. In cost-oriented method, retail price is determined by adding
a fixed percentage to the cost of the merchandise. For example Primrose Fashions, a women?s
specialty store in Dallas, uses the ?Key Stone Method? of setting prices, in which it simply
doubles the cost of merchandise to obtain the Retail selling price. Thus if a dress costs $50, the
original selling price is $100. In demand oriented method, prices are based on Customers
willingness to pay. Thus if a retailers cost of a merchandise is $50 and he perceives that the
customer is willing to pay $110, based on demand patterns, price is set at $110. Retailers
frequently markup (if customers perceived value is high, typically if a Fashion merchandise first
Cognizant
Technology
Solutions
15
hits a Store), or Markdown (if customers perceived value is reduced, like an obsolete phase).
While determining the optimal demand-oriented price, Retailers carry out Pricing Experiments.
In a Pricing experiment, a retailer actually changes the price in a systematic manner to observe
changes in purchase or purchase intentions. Thus a thorough price elastic demand analysis is
done before arriving at the profit maximizing precision price point. Retailers can also purchase
information for individual supermarket chains on price and promotion activity that has been
scanned through sales terminals, and then aggregated by region, chain or market area. Such
information can be purchased from Market research firms like AC Nielsen, Information
resources Inc. (www.infores.com) etc. In competition oriented pricing, prices are based on
competitors prices. Generally Retailers Private label brands, are priced using this method.
Cost oriented method is quick, mechanical and relatively simple to use for pricing thousands of
SKU?s every week by large retailers handling huge volumes of merchandise. Demand oriented
method gives the retailers that extra profit and even maximize that. Competition oriented
method should be considered because it is always important to keep in mind, what competition
is doing ? after all, the customer does that. Generally retailers need to consider all the 3 factors
in determining the price. Cost-oriented method would be the starting point for setting the price.
Competition oriented method gives a quick check on the marketplace. Demand oriented method
is then used for fine tuning the pricing strategy. Thus the methods depends on the Product Life
Cycle stages.
18. An important step in the Retail management decision making process is developing and
implementing a communication program to build appealing brand images, attract customers to
Stores and Internet sites and encourage them to buy the merchandise. The communication
program creates awareness about the retailer, as well as the merchandise or service offered by
the retailer. Promotions is an integral part of Retail communication. Essentially it?s a marketing
tool designed to attract customers, generate Store traffic and induce them to purchase the
merchandise. Thus the primary objective of promotional activities is to maintain a strong and
differentiated image of the retailer and his store brands. It creates awareness about the new
product or services, even sometimes helps in cannibalizing existing products, which retailers
wants to phase off. Hence Promotions enhances demand and sales of merchandise in the short
term, creates new customers and induce other customers to switch from their previous retailers.
Effective promotional campaigns generates tremendous brand recall, and awareness about
superior product features, regains lost customers and creates loyal repeat customers.
19. Sometimes Retailers promote their merchandise for other operational reasons like clearing off
inventory such as volume discounts, price bundling and price lining schemes. Fashion and Fad
merchandise have very short life cycles, which needs fast assortment turnover and quick time to
market. Hence retailers promotes these items to clear off older stocks, phase off designs that are
at the declining phase of Product Life Cycle and create space for introduction of new designs
and items. This strategy is also called Cannibalization
20. This is a pictorial illustration of the effects of Promotion, in expanding markets, creating new
customers and generating repeat loyal customers.
21. Now let us discuss the various types of Retail promotions used by retailers to generate
awareness about their stores and brands. Advertisements can be described as paid
communications to a wide spectrum of audience using impersonal mass media like Newspapers,
Television, Radio, Billboards and even Direct mailers and Infomercials. Ads can be classified as
Featured Advertisements (like the ones having a distinct Ad campaign like that of Pepsi, or
Coke, KFC or Pizza Hut) or Mail and Telephone campaigns to prospects, Road shows (of a
popular radio channel) and even Trade shows. The next type of retail promotions is Sales
Promotions. They offer that extra value and incentives to customers to visit a store, and
purchase in a specific period of a season. The most common sales promotion is a sale (like up to
50% sale). Other types includes Contests, which are games of chance, like lucky draw coupons,
answering questionnaires about products, brands. Only a few customers receives the reward,
determined by luck. Discount coupons offers discounts on specific products, when they?re
purchased at a store. They are the most common tool used by the supermarkets. Retailers
distribute them along with newspapers, or direct mailers. For example, if someone takes a Hutch
post-paid connection, or opens a Savings bank account, he receives coupons of 10% discount
for various restaurants, lifestyle stores, branded apparel outlets etc. Some retailers offer Trading
Cognizant
Technology
Solutions
16
stamps (like Gift cards, Retailers cash cards which are pre-paid cards, thus saving the customer
to carry cash, and promote purchases) Sales promotions are useful to generate demand in the
short term, but in the long run they are not very useful in creating loyal customers, because
during a promotion, customers are mostly interested in the brands, and merchandise that are on
sale, rather than the retail chain who offers it.
22. Price promotions, like TPR?s (or Temporary Price reductions) are an interesting tool to generate
a lot of enthusiasm among customers. They feel products are sold at a lower rate than normal,
and it?s a good bargain to purchase them in bulk quantities. In this context it may be
emphasized that EDLP pricing is an example of sustained Price promotions, offering everyday
low prices and reliable products. Sometimes sales promotions are complimented with Special
events, like a rock concert at the opening of a big music store, or a fashion show organized by a
Fashion house, or an Apparel retailer. Publicity is the most popular method of generating
awareness and brand equity for the retailer and the store brands. It can take the form of paid
impersonal communication (like Store Atmosphere, websites etc.) or paid personal
communications (like engaging Sales force for personal selling, e-mails). In this context it can
be described that Store atmosphere is a combination of a Stores physical characteristics like
Location, lighting, fixtures, layout, signs and displays, colors, temperature, shelf designs and
music which together create an image in the customers mind. The atmosphere communicates
information about the Stores and the retailers service, pricing and assortment strength and
presentation. Unpaid impersonal communication includes WOM (or Word Of Mouth publicity)
which helps to generate maximum awareness, because customers trust their opinion leaders the
most. Other forms of unpaid impersonal publicity includes publishing a cover story about the
retailer or the brand, or its CEO in a popular magazine.
23. Now let us study the various other Promotion elements. Frequent Shoppers Program or Loyalty
programs identify and reward loyal customers. When customers enroll for such programs they
provide some personal information and issued a Shopping card, or a Gift card. Customers can
shop with this card (which often has a pre-paid dollar value) and get incentives on specific
purchases. For example a Supermarket can offer points to frequent shoppers on every dollar
spent, which can be redeemed for items in the gifts catalogue. Thus the main advantages of
Loyalty programs are Building a customer database, based on Purchase behavior and other
Information that customers provide when they sign up for the program. Thus retailers can mine
the data to do various Sales trend analysis and other CRM programs Loyalty programs also
elicit repeat purchase and build customer loyalty, thus enabling a sustained Sales Often
Retailers customer database provides the opportunity of Cross-selling, which is selling
complimentary products and services in a specific transaction. For example while selling a
computer, a customer can be induced to buy a printer. Add-on selling is selling additional new
products and services to existing customers. For example a bank encouraging a savings account
customer o go for a Home Loan or a Personal loan.
24. Now that we have learnt the different promotional techniques we can classify them into four
major groups ? Paid Impersonal like Advertising, Store Atmosphere, Visual Merchandising,
Sales Promotions or Paid Personal like Personal Selling by Sales Representatives and Direct
Marketing. Other classifications includes Unpaid Impersonal like publicity or Unpaid Personal
like Word Of Mouth.
Cognizant
Technology
Solutions
17
CHAPTER 6: MERCHANDISE MANAGEMENT SUPPLY SIDE
1. In this chapter, you will see the Supply side of merchandise management which includes
Ordering and Allocation to be followed by replenishment.
2. At the end of this chapter, you will be able to: Understand merchandise management from
supply side. Explain Ordering process. Explain Allocation process. Explain Replenishment
process. Describe management of stocks.
3. Ordering follows from Sourcing. After setting the Sourcing triggers, and calculating the net
merchandise requirements what follows is ordering. Purchase requisitions are generated by the
Stores, which is then reviewed by the Buyer who in turn generated PO?s (or Purchase Orders) to
the Distribution Centers. DC?s then reviews Store to DC PO?s and in turn generated DC PO?s
to be send to the vendor via EDI (or Electronic Data Interchange). Thus ordering addresses the
question ?How should I buy it?? Where ?It? refers to the Merchandise being transacted and
sold. Various transactional steps in Ordering can be Order Creation (I.e when customer orders
are recorded and taken), Order Promising (when Customers are notified about an Available date
of the delivery) and Order Planning (planning to fulfill the Customer Order). Order
Management is also called Order Fulfillment in a typical Retail Supply Chain. The next step is
Allocation which deals with the various ways and logic by which Merchandise arriving at the
DC?s and the Warehouses are allocated into different Stores. So this answers the question
?Where Should a Retailer Put the merchandise, to ensure the right product at the right place?
4. The next aspect of Merchandise Management is Ordering or Order Management. It includes all
the transactional processes that are involved in procuring merchandise from the Vendor. Hence
Ordering is the process of initiating and managing the process of ordering and procuring
merchandise from the vendor, matching invoice with receipts and managing payables. Ordering
is triggered from the Stores, move up to warehouses and DC?s and then up to the Vendor. Let
us quickly recapitulate the other processes linked to Ordering. While Merchandise Budget
Planning involves fixing the OTB budget and the disposable money to procure merchandise
categories, Sourcing leads to Vendor identification and selection of Product-vendor mix.
Ordering is the process of managing all Order-receipt-order cycle transactions within the OTB
budget. Ordering combines pre-season planning and sourcing decisions with in-season store
demands and inventory management
5. Now let us study the different buying systems used in retailing. OTB or Open To Buy systems
are those where buyers are allocated Merchandise budgets to plan and procure assortments for
his or her category at the beginning of the month. OTB systems provide buyers with a
disposable investment plan to purchase the merchandise with specific guidelines based on
GMROI requirements, Profitability, Sales Stock ratio, Sales velocity, Beginning Of Month and
End Of month stock. OTB systems are specially applicable for Fashion and Fad merchandise,
which do not have stable demand pattern and sales history. For Staple merchandise that
follows a predictable order-receipt-order cycle and demand pattern an SKU based buying
system is employed. These systems are used for buying most of the merchandise found in food
and discount stores, in addition to some categories in specialty and department stores like
Underwear, socks and housewares. SKU based systems assists buyers with different functions
like monitoring and measuring average current demand at SKU level, forecasting future SKU
demand with allowances for Seasonal and trend variations, and developing ordering decision
rules for optimum restocking. SKU based systems uses various inputs like Stock List, Target
Inventory Turnover, Target Customer Service level, sales Forecast, Order Point and Safety
Stock to determine Order quantities and Order Interval. Thus Staple merchandise is ordered
automatically from Point Of Sales data through CAO, or Computer Assisted Ordering, taking
inputs as mentioned.
6. Now let us see the various Transactional tools used in the Ordering process. Purchase Orders or
PO?s are generated by the Retailer Warehouse, in response to Stock requisitions from the
Stores. In case of vendor managing the Inventory throughout the distribution network called
VMI or Vendor Managed Inventory, it?s the Vendors responsibility to raise PO?s from
warehouse to Factories to replenish stocks. ASN or Advanced Shipment Notice, is an electronic
Cognizant
Technology
Solutions
18
document received by the Retailers system from the supplier, in advance of a shipment. It tells
the retailer exactly what to expect in a Shipment. If accurate, Retailers can dispense with
opening cartons and checking in merchandise. Receipts are statements issued by Retailer
warehouse or DC, in acceptance of actual goods received from the Vendor. This is issued
through a GRN or Goods Receipt Note. Invoices are legal contractual documents between a
Retailer and the vendor. They are issued by the Vendor Finance department, for the Retailer
finance to match with Purchase Orders and issue Payments in lieu. The transactional tools in
ordering manages the flow of merchandise from supplier to Stores and the flow of revenue from
Retailer back to the Supplier. Their content, formats, terms and conditions are set in the
Contract Management Process.
7. Now let us study the Ordering Process Flow in a retail environment. When On-hand stock in
the Warehouse falls below the Buffer limit, a Purchase Requisition is triggered automatically.
Buyers study the requirement and issues PO to the Supplier. Suppliers sends an ASN or
Advanced Shipment Notice to the retailer warehouse informing of the goods that can be
expected to be shipped. ASN?s can be generated to partially fulfill the PO. After a certain lead
time, goods are shipped from the Vendors premises to the Retailers warehouse. Goods can be
shipped in lots and intervals. Warehouse on receiving the goods, does a physical verification
and issues a Receipt or partial receipts (the transactional tool is called GRN or Goods Receipt
Note). Copies of this receipt is sent to supplier Finance and also Retailer Finance. Supplier
Finance at this point issues an Invoice declaring the goods shipped and claiming the payment
from the retailer. Retailer Finance on receiving the Invoice does an Invoice Matching. Invoice
Matching is a compare and reconciliation process in which Invoices, Receipts, PO?s and ASN?s
are compared and reconciled before payments are made to Suppliers. If Retailer Finance notices
any anomaly in the Invoice Matching it generated Credit or Debit notes to match Invoice with
receipts to the Supplier. Finally after Invoice matching and reconciliation Payment is made to
the Supplier finance.
8. Now let us understand purchase orders in greater details. PO?s are standard ordering formats to
order merchandise from vendors. While determining a PO quantity various ordering parameters
are taken into account like forecasted sales, on-hand, in-transit and on-order inventories,
procurement lead times, safety stock, periodic stock and ordering policies. Purchase orders can
be of various types Blanket Purchase Orders are time phased recurring receipts from a single
standing master Blanket PO. The buyer has the approval to raise it, on the pre-approved basis of
a contract. Release PO?s are orders referring to a master Blanket PO. Auto PO?s are those
where the PO is generated by the system, based on certain pre-determined triggers that are set.
Auto PO?s can be generated either at the Stores or Head Office. Manual Purchase Orders are
those where the order quantity is manually calculated and there is no automatic suggestion by
the system.
9. P O?s from different locations like Stores, DC?s and Warehouses are consolidated and sent as a
single order to the vendor. Drop Ship P O?s originate from the Central warehouse but are
instructed to be shipped directly to the Stores by the Vendor. The picture here illustrates the
point. Another variation of Drop-Ship P O?s are Ship-To-Customer P O?s where PO ?s do not
originate from Central warehouse but are instructed to be shipped directly to customers by the
vendor.
10. Now let us focus on Allocation, the next aspect of Merchandise Management. Allocation is the
process of determining the distribution of merchandise to various stores from the warehouse or
DC. Hence it deals with various stocking strategies and allocation techniques of Stock
disbursement to the final point of the Supply Chain. Unlike Replenishment, Allocation is used
in Push logistics strategy, where merchandise is allocated to different Stores before it reaches
the Warehouse, sometimes at the Vendor site. In allocation, items are either ordered from the
DC and Warehouse to the Vendor and shipped by the Vendor to these locations, or shipped
directly to stores. The latter case is also called DSD or Direct Store delivery. Hence allocation
requires a plan and logic to be created, following some trigger points and parameters to
distribute the merchandise to different Stores.
11. Replenishment deals with managing the stock positions at the different stock points in the
Supply network, like Warehouses, DC?s and Stores. Hence this process tracks stock levels and
its movement at all the touch points or Stock points in the Supply Chain. If Store stock level
Cognizant
Technology
Solutions
19
falls below a specified limit (called Order Point), a Replenishment Order is triggered. On the
other hand if Warehouse stock levels falls below the Order point, a PO is triggered and
generated. Thus Replenishment triggers both Ordering and allocation and is closely linked to
Inventory Management.
12. Now let us see the two types of Stocks in a Retail Inventory System. Periodic Stock, also called
Base or Cycle stock is Inventory that is required to fulfill the expected demand during the
procurement lead time. Buffer Stock or Safety Stock on the other hand acts as a cushion for
Periodic stock to satisfy any Unforeseen and unexpected variations in demand. Management
of Stock at Stores involves managing Store Periodic and Buffer stock, and placing demand to
the DC?s and Warehouses through replenishment requests as and when required. This triggers
an RO or a Replenishment Order from the DC?s or Warehouses to the stores. Management of
stock at the Warehouses also involves managing Periodic and Buffer stock at the warehouses
and placing Purchase Orders to Vendors whenever Stock position falls below the Order point.
Various ordering parameters that are considered in triggering PO?s and Replenishment Orders
are Re-Order point which is the point below which if the stock level falls triggers an Order.
Ordering Interval is the ordering frequency and the stock check frequency at which stock levels
are checked and orders are placed. ROQ or re-Order Quantity is the amount of Stock that gets
replenished to the Stores or warehouses each time an Order is raised.
Cognizant
Technology
Solutions
20
CHAPTER 7: LOGISTICS
1. In this chapter, you will see how retailers gain strategic advantage through better Supply Chain
Management, and the various supply chain workflows in a Retail Distribution and Logistics
network. You will also look at the various advanced Information technology developments
that are helping Vendor-Retailer communications like EDI, an overview of Quick Response
Delivery systems and different Stock points like Warehouses and Distribution Centers.
Distribution is the flow of goods from the Suppliers Manufacturing Unit to the Retailers Stores
and the various logistics involved in the process. You will see the entire distribution process in
greater details as we move along with the chapter.
2. At the end of this chapter, you will be able to: Illustrate examples of logistics & information
flow across the supply chain. Understand the concept of retail supply chain management and
logistics. Define supply chain management. Explain how the information flow takes place in
retail environment. Describe retail supply chain ? logistics.
3. Now let us consider a simple example of Logistics and Information flow in target, which is a
premier retailer in the US. When you walk into a target store, to buy a Black & Decker toaster,
your transaction triggers a series of information flows that results in merchandise replenishment.
Your toaster is scanned at the point of sales such as a cash counter terminal, using Bar Code
scanners. The information on the black & white bar code which is also called the UPC or
Universal Product Code goes directly to a computer at target?s regional distribution center or
RDC. From there the sales information is transmitted to the vendor (that is Black & Decker?s
computer as well, through Electronic Data Interchange, or EDI network). When a specified
number of toasters are sold, and store stock falls below a pre-set limit (or safety Stock limit) a
replenishment order is automatically generated from the POS data at Stores and sent
electronically (through EDI) to Target?s RDC, followed by a Purchase Order from Target RDC
to Black & Decker Vendor DC. There is a loading dock assigned at a specified time waiting for
the truck from Black & Decker to arrive. There the merchandise is unloaded, combined with
merchandise from other vendors, and immediately loaded to a target truck going to Stores, that
are running out of Toasters. As a result of this immediate access to Information, both Target and
Black & Decker know where exactly and when a merchandise is sold, and can plan their
production, distribution and inventory accordingly.
4. The Retail Supply Chain Management and Logistics manages the flow of goods and information
from the vendor to the Retailers Stores and back. The process starts right from the receipt of an
order from a customer until the merchandise is delivered to him. SCM is the integration of
business processes from end user to original suppliers that adds value to the customers.
Logistics and Distribution deals with the Logistics aspects of transporting the goods across the
Supply Chain as and when required, by other processes like Allocation, Replenishment and
Ordering. Inbound Logistics, Outbound Logistics and Warehouse Management are the three
aspects of Logistics, which we will study in greater details later in the presentation.
5. The Supply Chain Management is the Planning, design, and control of the flow of information
and materials along the supply chain in order to meet customer requirements in an efficient
manner, now and in the future
6. The picture shows a typical Supply Chain with Primary Suppliers, Secondary Suppliers,
Factories, Warehouses, Retail Distribution Centers and finally the Stores to the end customers.
The arrows indicate the flow of goods through the Supply Chain.
7. Here we see the entire footprint of Retail Supply Chain Management operations, from the
Logistics perspective. Physical Flow Of Merchandise, or Logistics plans, implements and
controls the flow and storage of goods and services from the point of origin (that is the Vendors)
to the point of consumption (that is the customers), in order to meet customers expectations. It
has two aspects, Transportation and warehouse management. Transportation manages the
movement of goods between the different Stock points in the Supply Chain across the Vendor to
Customer. It consists of Inbound and Outbound logistics management. Inbound logistics
manages movement of products from the Supplier to the Retailer Warehouse, whereas
Outbound logistics manages movement of products from the Retailer Warehouse to the Retailer
Cognizant
Technology
Solutions
21
Stores. Thus they differ, in the two sides (upstream and downstream) of the Supply chain they
manage. Warehouse management on the other hand deals with managing the intermediate
stocking points (like the Warehouses and the DC?s) and the different functions and processes
involved in these Stocking areas. Inventory Management deals in tracking stocks throughout
the Supply chain, and improving efficiencies in the entire Distribution process to decrease
Inventory levels. The third aspect of Retail SCM deals with the flow of various types of
information, in a Retail environment from the point of sale at the Stores to the point of origin
(that is the retailers). This provides visibility in real time across the supply chain.
8. The illustration above describes a typical Information flow, that happens in a Retail
Environment. Suppose a customer visits an apparel superstore to purchase a pair of jeans. This
purchase triggers a series of information messages throughout the system. First the Sales
associate scans the UPC, or Bard Code tag on the jeans. A Sales receipt is created for the
customer. The purchase information is recorded in the POS terminal and sent to the buyer or
planner (depicted by phase 2 in the diagram). The buyer uses this information to plan for
Replenishment inventory and markdowns. The purchase requisition is typically aggregated by
the retailer, and an order is created (called Purchase Order) and sent to the Vendor using a
system called EDI (or Electronic Data Interface) as depicted in Phase 3 of the diagram. EDI
in broad term is a computer-to-computer exchange of business documents from Retailer to
vendor, and back. EDI is discussed in details later. Sometimes in case of Fixed Time period
based replenishment, where merchandise is ordered frequently, the ordering process can be
automated (through CAAO ? or Computer assisted Automated Ordering). In other cases, such as
newer items and fashion merchandise, buyer input is required prior to sending the order. In
phase 4, the buyer or planner, communicates with the vendor regarding the Purchase Order of
the merchandise. At this point purchase agreements, contracts, shipping dates and other terms of
purchase are negotiated and fixed. In phase 5, the buyer communicates with the Distribution
Center to coordinate deliverables from the Vendor and to the stores, check inventory status and
so on. Finally in Phase 6, Store Managers coordinate with the Distribution Center to
coordinate deliverables and Inventory Status. Thus we see the flow of various types of
information, in a Retail environment from the point of sale at the Stores to the Vendor that
provides visibility in real time across the supply chain.
9. Now let us see an important concept in retail information flow, EDI or Electronic Data
Interchange. EDI is a computer-to-computer exchange of business documents between Retailer
and Vendor. Business documents can be Sales Information from the retailer to the Vendor. Or It
can be Purchase Orders, Invoices, returns Information, Advanced Shipment Notice, Changes in
PO?s, Order and Shipping status of merchandise, Retail Prices and Transportation routings.
Other EDI exchanges can be Purchase Agreements, Invoice Matching data, Vendor Analysis
Information and Shipping guidelines and schedules. Thus EDI is used primarily to exchange
Order and Shipping Information.
10. Proprietary EDI systems are data exchange systems developed by large retailers for the purpose
of exchanging data with their Vendors. Wal-Mart for example, has spent millions of dollars and
several years developing one of the most Advanced EDI systems in retailing, that eliminates
manual intervention and paper work. Wal-Mart mandates the use of EDI to their Supplier
community and all Trading partners. On the other hand, Web-based EDI?s can be developed
using both Intranets and Extranets. Thus all Buyer to DC, Store to DC, and Store to Buyer
communication and exchanges can happen through Intranet. Extranets on the other hand are
used to link business with Suppliers, Distributors, Logistics Providers, Customers and other
Trading partners. With increasing Globalization and Global Sourcing needs, Extranets, Vendor
Portals and Consumer portals are gaining increasing significance. EDI?s especially those
through Extranets have gone beyond the mere communication of Order and Shipping
Information. It enables Suppliers to describe and show pictures of their products. Buyers can
issue Request For Proposals, Vendors can send Proposals which can be evaluated electronically
and the two parties can negotiate through Extranet portals, and even engage in J oint Product
Development. Popular in the Grocery and Drug industries, CPFR or Collaborative Planning,
Forecasting and Replenishment is an Inventory management system using EDI, in which a
Retailer sends Sales information to a Manufacturer and the Manufacturer will use the data to
construct a computer generated replenishment forecast that will be shared with the Retailer
Cognizant
Technology
Solutions
22
before execution. Thus using CPFR, manufacturer and Retailer jointly decide on the
Replenishment Issues. Extranet EDI has heightened security problems, like hijacking of
customers personal information, credit and debit card information. Some of the potential
implications of these security failures are loss of business data, disputes with trading partners,
loss of public confidence and bad publicity. Hence Retailers should enforce on a tight Network
and Systems security policy and effective Business Continuity Planning.
11. Here you can see a pictorial illustration of a Retail Supply Chain from the perspective of
physical flow of merchandise. From the Suppliers factory goods are transported to the
Distributors warehouses by carriers. Carriers are fleet, ship or truck operators who carries goods
to a destination. Many large retailers outsource the entire Distribution process to the third party
logistics providers (3PL?s) who maintain their own Distribution Network (as shown in the
diagram). From the distributors warehouses, carriers transport the goods further downstream to
Retailers Distribution Centers, after which it?s the retailers responsibility to allocate and
replenish merchandise to different Stores. Thus Logistics is that part of the supply Chain
Process that plans, implements and controls the flow and storage of goods, services and related
information from the point of origin (that is the Vendors) to the point of consumption (that is the
customers).
12. Let us now look at the two aspects in Logistics, Transportation and Warehouse Management.
The transportation management manages the movement of goods between the different Stock
points in the Supply Chain across the Vendor to Customer, Warehouse management deals with
managing the intermediate stocking points, such as the Warehouses and the distribution centres,
and the different functions and processes involved in these Stocking areas.
13. Transportation Management is all about managing the modes of transport, such as rail, road, air,
shipping, pipelines and different mix-mode arrangements. It also includes different shipment
operations like loading, unloading, stock handling, bulk breaking and stock disbursements to
stores from the warehouses. The transportation management can be done by any one of the
following. In-house logistics department. Freight forwarders. Third Party logistics providers.
Integrated 3PL services.
14. As we have seen earlier, Retailers can choose to have an In-house logistics department or
outsource to 3rd party logistics providers. Advantages of In-house logistics is better control,
timely information and better visibility. Disadvantages includes huge investments in setting up
and managing Distribution networks and dilution of focus in core business activities. Freight
Forwarders are companies that sell transport services. They consolidate small shipments from a
number of shippers into large shipments that move at a lower freight rate. These companies
offer shippers and retailers lower rates than retailers could obtain from Transportation
companies because small shipments generally cost more than large shipments. This concept is
called Economy Of Scope. International Freight Forwarders not only sell Transport Services but
also prepare and expedite all documentation, such as government required export declarations
and other consular and shipping documents. Advantages in 3PL?s includes lesser hassles,
sometimes a lower Total Cost Of Ownership in outsourcing to focused and dedicated trading
partners, and more distribution efficiency. Disadvantages of 3PL?s includes lesser control and
lack of visibility in the material flow. Integrated 3PL Service combine Transportation with
Warehousing and Freight Forwarding. Retailers are finding this one-stop shopping in
Transportation Management quite useful.
15. Now let us focus on some best practices related to Transportation. Shipment Consolidation ?
This is a technique in which Distributors try to consolidate different Shipments and packages
collected from different locations into a single carrier truck, or fleet of trucks so as to distribute
them in the most efficient manner to different stock points, and reduce the Total route length,
loading and unloading requirements. Minimizing Total mileage is again an optimal routing
technique to reduce the Total route length, and save time and cost. Transportation Space
Utilization is utilizing Truck space by 100% and ensuring Full Truck Loads every time a
consignment is shipped. Cross Docking is a transportation technique in which inbound
logistics at a warehouse is unloaded and immediately loaded at the outbound trucks, without any
need for processing the goods or storing them at the Warehouse. Cross docking is very useful to
reduce Inventory buildups and generates savings in processing and storing. Optimal routing
and transportation scheduling techniques make use of routing algorithms in which truck routes
Cognizant
Technology
Solutions
23
are dynamically selected and destinations allocated, on a Least Cost, and Least Time objective.
Other best practices includes the right carrier selection (for example for procuring Overseas
where lead time is not a Critical factor shipping is employed to reduce the Total cost. Again for
Fashion merchandise with short fad cycles and high margins, its more efficient to fly the goods
than shipping or trucking them). Backhauling is a Technique of utilizing return fleet space to
ensure the highest distribution efficiency For example a Truck carries fans manufactured in
Kolkata, India to Warehouse in Chennai, India Chennai Warehouse has a supplier located
nearby that manufactures copper wires used to manufacture these fans in kolkata Thus the
Return truck will be loaded with copper wires to kolkata, thus utilizing truck space on return
journey
16. Now let us look at the two aspects of Transportation Management Inbound logistics
management develops all the inbound transportation plans for delivery to the DC?s and
Warehouses from the Suppliers Factory. It involves preparing the routing and shipping
guidelines, agreements with 3PL?s, carrier selection, transport space utilization, and creating
and managing the delivery schedules. Delivery trucks must arrive at the DC?s at a specified
time because the Distribution Center has all the receiving docks allocated throughout the day,
for specified inbound trucks and fleets. Dispatcher is the person who coordinates delivery to
the DC. Outbound logistics on the other hand manages all the outbound distribution functions
from the DC?s and the Warehouses to different Stores. Outbound logistics movement to the
Stores can be triggered by either Replenishment Orders from the Stores or Allocation plans for
Push based items. It also takes into consideration inbound order quantities and arrival times of
the goods from the Inbound logistics process. Outbound logistics also creates and manages
delivery schedules to the stores to optimally meet Store requirements, and is usually constrained
by Store capacity, processing limitations, Sales Velocity at Stores, Road conditions and other
Transportation operating constraints. Sometimes delivery schedules needs to be adjusted for
return handling from the Stores and move goods upstream the Supply chain if necessary. Hence
merchandise has to flow back through the distribution channel. This is called Reverse Logistics.
Reverse Logistics is always complex and expensive, as items are damaged, without original
shipping cartons, thus causing special handling needs. Transportation costs are higher because
items are shipped back in small quantities. Sometimes Retailers sell these returned and rejected
merchandise through auction sites like e-Bay.
17. Now let us discuss the two Logistics strategies, or Distribution tactics. ?Pull Logistics Strategy?
is one in which orders for merchandise are generated at the Store level on the basis of Demand
data captured by Point-Of Sales terminals. This is also called Post Distribution, in which
merchandise arrives at the different Warehouses in Bulk quantities Un-allocated. Replenishment
systems at the Stores triggers Purchase requisitions based on most recent Point Of Sales
Information and Sales history. After this, Buyers and Merchandise Planners at the Stores are
notified about Bulk Shipments available at the Warehouses and DC?s. They then raises
Replenishment Orders to ship merchandise in required quantities from the different warehouses
and DC?s to the stores. Post Distribution strategy is more meaningful, requires less inventory
balancing between stores, saves high Inventory carrying costs at the Stores and more
manageable by the Supply System. Disadvantages of this system is that it requires processing
and Storing at the Warehouses, to meet intermittent Replenishment Orders and does not allow
J ust In Time flow of Inventory through the Supply Chain. An alternative and less sophisticated
strategy is known as Push Logistics Strategy, in which Merchandise is allocated to Stores on the
basis of historical demand, Inventory position at the DC?s and the Stores need. This is also
called Pre Distribution, which essentially is a Push based system in which merchandise is
already allocated to the different Stores before it reaches the Warehouse (sometimes at the
Vendor sites). Vendors ensure that the Merchandise is ?floor-ready? with the correct packaging
and labeling. This kind of distribution strategy requires frequent load balancing, between Stores
on the basis of changing Store demands and involves high re-distribution costs, inventory pileup
and high material handling costs. pick ticket is printed in a warehouse listing the line items to
be picked as well as the quantity of each line item to pick. A picker uses this pick ticket to pick
the items from the shelves in the warehouse.
18. Quick Response delivery systems (QR) are Inventory Management systems designed to reduce
the retailer's lead time for receiving merchandise, thereby lowering Inventory Investments,
Cognizant
Technology
Solutions
24
improving Customer service levels and reducing Logistics expenses. QR is all about integrating
link between the information and merchandise flow. The origin of the present QR system were
derived from J ust-In-Time (J IT) initiatives undertaken by Manufacturers adapted for retailing.
QR is part of the ECR or Efficient Consumer Response initiatives undertaken by Consumer
Packaged Goods manufacturers and food and drug retailers. The aim of QR system has been to
cut inventory levels and improve the speed of product flow. This has involved reducing order
lead-time and moving to a more frequent delivery of smaller consignments both internally
(between DC and shop) and externally (between supplier and DC). This has greatly increased
both the rate of stock-turn and the amount of product being ?cross-docked?, rather than stored at
Warehouses. Thus QR systems uses a mix of the following Logistics best practices like CPFR
(Collaborative planning Forecasting and Replenishment), EDI Exchanges with vendors and
Trading Partners and Electronic POS, driving sales Based Ordering (from the Stores). In SBO
an item is sold and scanned in a shop, this data is used to inform replenishment and re-ordering
systems and thus react quickly to demand. Sharing such data with key suppliers further
integrates production with the demand function.Other techniques involves negotiating with
Vendors to directly Ship merchandise to the Stores (called DSD or Direct To Store Delivery)
and Cross-Docking. QR systems also involves more frequent delivery of small consignments
both from DC to Stores, and from Supplier to DC to further reduce the Lead time. The
famous Fashion retailer from Spain, ZARA has demonstrated QR delivery systems with a 22
days lead time from Order Receipt, design cycle to final store delivery of fashion apparels.
19. Some of the benefits of a QR system are Reduced Lead Time ? By eliminating the need for
Paper transactions using mail, overnight deliveries, Fax etc. QR system reduces Lead time. Lead
time is the amount of time in between recognition that an order needs to be placed for a
merchandise to the arrival of the merchandise in Stores for sale. This is also called Procurement
Lead Time. Use of EDI can cut down lead time in a QR system even more. Shorter lead time
again reduces Inventory requirements because Shorter the lead time, easier it is to forecast
demand and hence lesser Inventory requirements. QR system also has the potential to
significantly reduce logistics expenses through Cross Docking in Warehouses and negotiating
with Vendors to do a DSD (or Direct Store Delivery). A DSD ensures merchandise is ?Floor-
Ready? and there is no need to devote expensive Warehouse space for Receiving and Processing
merchandise, Sorting, Labeling, Tagging etc.
20. From Transportation let us focus on Warehouse Management, which refers to the entire gamut
of processes, functions and operations that are carried out in both Warehouses and Distribution
centers, which are stocking points to Store products in the Supply Chain. The essential functions
on a broad level includes Stock Storage, Disbursement and Stock handling. The difference
between a Warehouse and a DC is that, Warehouses stocks goods and merchandise, whereas
DC?s normally are just points of receipts and disbursement in a distribution network and not a
Storage point. Sometimes DC?s can also have a back-end warehouse attached to them for
storage purposes. A Traditional DC is also called a Warehouse in which Merchandise is
unloaded from trucks and placed on racks or shelves for storage. The second type of DC also
called Cross Dock DC?s is one in which vendors ship merchandise pre-packaged in quantities
required for each store (also called Push Logistics Strategy). The merchandise already contains
Price Tags, theft detection tags, and in case of apparel, even in hangars. Since the merchandise
is thus ?floor-ready? for Sale, it goes to the Staging area rather than the Storage area. Here again
they are consolidated and shipped to Stores. Floor ready merchandise are ones that are ready
to be placed on the selling floors. It entails Ticketing, marking, tagging and placing garment
merchandise in Hangars. Ticketing and Marking refers to making Price and Identification labels
(Bar Codes) and placing them on the merchandise. Tagging often refers to putting EAS tags (or
Electronic Article Surveillance) tags that prevents shoplifting and enables retailers to monitor
their movement in Stores. Getting merchandise Floor ready in Stores can be time consuming
and messy, as it clogs the Aisles and diverts Salesman attention from their customers. Hence
they are normally done in DC?s. A better approach is to get the Vendors ship the merchandise
Floor ready. Sometimes vendors and Retailers instead of owning warehouses themselves,
typically use Public Warehouses that are owned and operated by a 3rd party. By using Public
Warehouses, Vendors and retailers can get the desired level of Service without investing in
Warehouse facilities
Cognizant
Technology
Solutions
25
21. Let us discuss the different functions of a Warehouse and DC Stock Receiving ? receipt of
stocks from Warehouses and other upstream stock points, unloading of inbound trucks,
assembling and sorting the goods in the receiving areas and flow bays, Stock check, Quality
checks, Inventory handling and issuing receipts against information on Advanced Shipment
Notice 2) Storage functions of a Warehouse includes stock handling and maintaining safety
measures to preserve stock (like Anti-rodent measures, Air-conditioning, Frosting and Freezing
for perishables etc.). Inventory reporting and cycle counting is another important storage
function of a Warehouse. 3) The next process is Put-Away, which involves all the activities
related to moving the inbound goods from the receiving area to the shipping area for processing
and immediate delivery. Put-Away handles all Stock processing activities like identification,
Sorting, Assembling, Un-packing, Re-packing, Truck loading, Ticketing, Marking etc. In case
of Warehouse Put-Away involves all activities related to moving the goods away from the
Receipt area to the Storage locations inside the warehouse. Stocks are then shipped to the DC?s
and Stores after some processing activities like Assembling, Sorting, Packing and Loading to
trucks and outbound fleet. Sometimes stocks needs to be pre-processed for direct Store delivery
and delivery at the customers premises (For example ARGOS, the catalogue retailer in the UK,
directly delivers Home furniture's and heavy Consumer Durables to the consumers premises
called ADDO ? Argos Direct Delivery Only).
22. The next warehouse function is order picking. It involves capturing Store orders and allocation
outputs, and selecting the right goods based on the order from the DC Receiving areas or
Warehouse Storage areas, and processing them for delivery. It involves selecting the
merchandise through Pick-Tickets and Order Filling. Now let us take an example, of how a store
delivery is triggered, by continuing with the J eans purchase example. Point Of Sales at the Store
record the purchase. Data for several such purchases are collected and transmitted to Buyers so
that they can formulate Replenishment Orders from DC?s and Warehouses to stores. After
dispatching the Replenishment Order, the computer at the DC creates a pick-ticket, a document
that tells the order filler how much of each item to get from the storage area. The Pick ticket is
printed in merchandise location sequence, so that Order fillers don?t waste time searching for
the items. Items which are Out of stock are not printed in Pick Tickets. Order fillers put the
merchandise in conveyors, that takes them to the staging area where an electronic Sorter routes
the merchandise to the Bay, where outbound trucks are waiting to ship them to the Store. This is
also called PickTicket management. Shipping involves all the outbound logistics activities
from the shipping area in terms of planning, consolidating, loading and dispatching the goods to
the next destination for further delivery. Inventory Reporting is another important
functionality of a Warehouse and DC, which involves maintaining Stock ledgers, and
calculating Stock availability on a real time basis, to feed these Information downstream and
upstream for better supply chain visibility.
23. Now let us study the entire Warehouse Management Process Flow, from the logistics
perspective. Receiving as we have already seen, deals with handling receipts from vendors and
stock checking. Advance Shipment Notification (ASN) or material in-transit information is
validated against actual receipt of goods. Labels are then printed and pasted on cartons, based on
Vendor, PO?s and Other product information. A counterfoil is retained for printing the Pick-
Tickets. After that, goods are Sorted. Similar SKU cartons are putaway to pre-defined location.
Priority goods are sorted for Cross-docking and some sample goods are opened for Spot-
checking. For cross-docked goods they are sent directly to the forward pick locations bypassing
the locating & quality verification processes. Verifying the quality of received merchandise
assures that stock is always in ?ready to ship? stage. The next in the warehouse Process is
Putaway. Putaway provides for picking up pallets and cartons from the receiving areas of the
warehouse and moving them to the appropriate putaway locations. Warehouses provides for
optimum space utilization with RF based stock putaway. The operator scans the location id,
carton id and pallet id before locating the carton. This ensures real time inventory accuracy and
tracking. The goods are then Stored in the Warehouse Storage area. The next step is Order
Processing. Orders are processed and picked in groups that usually share some common
characteristics. Daily orders are received in a download file from the Host accounting system.
The next step is Picking. When Merchandise is needed to fill orders, Pickers gets a Pick-Ticket
which is a ticket printed from the Warehouse Product catalogue to locate the item in the
Cognizant
Technology
Solutions
26
Warehouse Storage area. Now the Order filler or Picker goes to the rack, follows the Pick-
Ticket instruction, picks up the item and places them in a bin. There are sophisticated Pick
Ticket Management Systems to automate the Picking process in an efficient manner. The next
step is Fulfillment in which the merchandise is transported from Stock reserve area via a
conveyor system to a staging area where it is consolidated. Validation is done to ensure that
each carton moving to the dock has been processed complete and is ready to ship. The fixed
scan is performed on the conveyor with an inline scanner as it comes from the weighing station.
System generates distinct audible tones as each carton passes or fails. The merchandise is then
send to Forward pick locations for shipment to Stores. Apart from all these functions, other
processes in a Warehouse are Cycle counting for Physical Inventory, preparing Reports and
maintaining Ledger balance of Inventory.
24. Now let us study at the distribution process of one of the worlds largest retailer as a small case
study.A broad high level blueprint of the Distribution network, is shown in the diagram.
Step1 ? Orders are received at the Stores and transmitted via EDI (Electronic Data Interchange)
to the Vendor system. Vendors manufactures the product and packs, and labels them according
to the Retailers specification (like the number of units per carton, cases per pallet, carton
labeling requirements, shipping labels to the correct DC and Stores). After the goods are packed
and made ?floor ready? they are transported through the Retailers 3 tier Distribution Network.
First goods are shipped to the NDC (National Distribution Centre, or Tier 1 DC). From the
NDC, they are further shipped to Regional Primary Distribution Centres (or RPDC?s,Tier 2 in
the network). Each geographical region has a RPDC and several RSDC?s (or Regional
Secondary Distribution Centers which are Tier 3 DC?s). RSDC?s are closer to the Sales Hubs,
or Store groups and each of them service a group of stores based on proximity and cluster
relationships. This constitutes the Distribution Network. Outbound logistics from the RSDC?s
finally carries the merchandise to the Stores based on Replenishment Orders and Intervals.
25. Now after studying the Distribution network, let us see the 3 aspects of the Distribution process,
also called the Merchandise Product Flow. ?Flow path? of a typical Distribution process, for
the Retailer determines which tier of the network (like the National or which level primary, or
Secondary of the Regional DC) is best suitable to move the goods from the Suppliers to the
Stores. Thus Flow path deals with the Network route selection. Flow configuration
determines the most efficient and economic packaging configurations to be send to Stores.
Flow Type on the other hand determines the type of flow a particular merchandise will take on
the Flow path to ultimately reach the destination, Stores. Thus grocery items can be DC flow, or
J ust In Time for better perishables management, Apparels and Footwear which are non-seasonal
can be DC stocked etc. You will learn each of these 3 components in greater details.
26. Let us consider Flow path in a greater detail. For items which do not require rapid
replenishment, like Home Furnishings, Gardening equipments etc. and can be stocked for a
substantial time, can take the NDC ->RSDC ->Store flow path. Softlines (like Apparels,
Footwear and other seasonal merchandise) needs to be stocked at RPDC?s to maintain the
Periodic Stock for Seasonal Sales. Hence they take the RPDC->RSDC->Store flow path. On the
other hand Fad Items, Fashion Merchandise, Promotional Items, and Hardlines (like Home
equipments, Consumer Durables) which carries high inventory costs, needs to be stocked closest
to the Sales Hubs and Stores Groups for fast replenishment, and quick demand response. Hence
they take the RSDC->Store flow path. The different flow diagrams for different categories of
merchandise is shown in the figure above.
27. From Flow path let us move on to Flow configuration which determines the optimal packaging
and labeling requirements for efficient distribution. Here we consider 3 flow configurations,
Case pack, Re-Pack and Split pack. In Case pack, no alterations are done in the packages
shipped by the Vendor to the DC?s. Products are shipped to the Stores in the same cartons as
send by the Vendor, without breaking and re-packing. For example, if the Vendor carton has 20
units of the product, Store packages also contains 20 units and stocked in the same cartons. In
re-pack, Vendor cartons are broken down into smallest package units for the stores. Hence it
requires re-packing. For example if the same Vendor carton contains 20 units, they are broken
down into single packs while distributing to the Stores. In split pack, Vendor cartons are broken
down into smaller inner cartons, of sub-multiple packages to be distributed as Split case packs.
Thus in the above example, if the Vendor ships in cartons with 20 units inside it, the Carton of
Cognizant
Technology
Solutions
27
20 is broken down into 5 smaller Case pack cartons, each with 4 units inside it. Thus the
objective of different flow configurations, that we had seen is to balance out DC operating
expenses (as large Case pack cartons requires lesser transportation costs, than individual Re-
packs and Split packs) versus Inventory carrying costs at the DC?s (as smaller cartons and units
incur less Inventory holding cost, than large Vendor cartons). Thus it?s an optimization between
DC to DC and DC to Store transportation costs, versus Warehouse and DC Inventory carrying
costs.
28. Now let us move on to the 3rd and final aspect of the Distribution process, Flow Types. Flow
Types determine the various operational steps in distribution that are involved in final delivery
of the merchandise to the customer from the Vendor. DC Flow, also called Flow Through is a
best practice, in which goods are shipped directly to the DC from the Vendors premises, using
carriers. The DC receives the goods at the Receipt area, and goods are put-away to the flow bay,
from where Orders are filled for different Stores. Goods are then loaded to Outbound trucks and
shipped to Stores. This is also called Cross-docking. In DC Stock flow type, goods are received
at the Receipt area of the DC, and put-away to DC Stock Slots. Here the entire Vendor Case
packs (without breaking) are processed to Store Case packs and orders filled and shipped by
Outbound Trucks. In DC Stock ? Re Pack flow type, goods are received in the receipt area of
the DC, put-away to DC Stock Slots. From there it is taken to the Re Pack area, where Vendor
cartons are broken down into smallest package units, re-packed and shipped to Stores by
Outbound Trucks.
29. Sometimes Retailers ship the products directly to the Stores, using 3rd party logistics providers
and other carriers (like FedEx). This is called the Vendor Direct mechanism or Direct To Store
Delivery (DSD). Vendor direct is usually possible only if sourcing is done from Suppliers in the
same region, or even country. When Trading partner and the Vendor is location in a different
country, cross border logistics providers (like Decon) ship the goods from the Vendor to the
retailers regional DC, from where local carriers transport them to the Stores. Part of the goods
can also be directly shipped to the Stores from the Vendor DC?s (also called DSD or Direct
Store Delivery).
Cognizant
Technology
Solutions
28
CHAPTER 8: STORE OPERATIONS
1. A Store is the forefront of a Retail Business Process channel and the end point in the Retail
Supply Chain, where the actual sale happens and revenue is generated and realized. Store
Operations is the final operational step in the Retail Business Model, which attracts customers
and generates Sales and Revenue.
2. At the end of this chapter, you will be able to: Define a store. Understand the various store
operations. Describe the activities at stores to facilitate sales. List the types of store layouts.
Explain the concepts on upcoming store trends.
3. A Store is the forefront of a Retail Business Process channel. This is the end point in the Retail
Supply Chain, where the actual sales happen and revenue is generated and realized. This is the
place where Customers happen to interact with the Retailer and the products, and is the sole
point of contact for all Purchase behavior.
4. Let us now discuss the various store operations. Store personnel managing store sales, and
helping customers to make a purchase decision are great sources of information to the buyers, to
procure the right merchandise, in correct quantities to meet the target customer service level.
Hence stores needs to be coordinate with the merchandise department in coming out with the
most profitable and value added purchases from the supplier, based on customer demand
patterns and market trends. This process of mutual coordination and information sharing is also
called indenting, which is an important store operation. Store managers also need to recruit,
motivate and retain store employees, into developing a long-standing and mutually beneficial
relationship, fuelled with a conducive career opportunity and a satisfactory work environment.
Stores also needs to display the merchandise in shelves to attract and induce customers into
buying them, and improve shelf disposability. Hence all activities related to Shelf design, shelf
spacing, store layout, store design and visual merchandising are absolutely important to the
success of any store operation. Shelf replenishment through First In First Out principle is an
important criteria in Product Shelf Life Management at Stores. In a store a customer picks up
merchandise normally from the front of a shelf. Hence in First In First Out principle shelves are
replenished from the back, such that no merchandise is left hidden and unattended to cross the
expiry and ?best before? dates. Thus a continuous merchandise flow happens, outflow from the
front, and inflow from the rear. Stores also needs to ensure that a conducive buying
environment is created to facilitate the purchase process such as air-conditioning, proper
passages, rest rooms, shopping aisles etc. What brings customers back, is not only the
assortment, the price, or the promotional schemes, but the ?ultimate shopping environment? and
?experience?.
5. Stores are also responsible for handling all the Administrative and Back-Office functions (like
Staff Management, Returns handling, Vendor rejections, Customer Service, Procurement
functions, Purchase requisitions etc.). Labor scheduling deals with determining the number of
employees assigned to each area of the store. It also includes managing Part-time and multi-
Shifts to staff the store adequately 12 hours a day, 7 days a week. Energy Management is the
management of expenses on lighting, heating, cooling and refrigeration. For example the Wal-
Mart store located in Commerce, California uses energy-efficient systems that results in annual
energy savings of $75,000 using daylight conservation and skydomes. Inventory Evaluation,
reporting and analysis is an important Store functionality. Physical Stock count (as in Cycle
Counts), Inventory ledger maintenance and tracking Inventory turns is an absolute necessity in
any Store operation. Store performance needs to be evaluated on a regular basis, and actuals
needs to be compared with Targets and plans to judge the overall performance of the Store.
Various Key Performance Indicators at Store level includes Sales per square feet, Staff per
Sales, Customer Footfall per square feet, Profits and Sales by Store department, product
category etc. Shoplifting poses a big threat to the performance of any Store. It has been
observed that more than the customers, it?s the Store Staff who are more involved in such
activities. In these cases, it becomes a Soft issue to deal with such corrupt Store officials, and
poses great difficulty in Retaining and motivating such personnel. This phenomenon of
Shoplifting is also called ?Shrink? in retail parlance. Retailers devise lot of checks and balances
Cognizant
Technology
Solutions
29
to prevent such activities through proper Store designs. This is called CPTED (Crime
Prevention Through Environmental Design).
6. Following are some of the principles of CPTED: Arrange the shelves and aisles so that they are
perpendicular to the cash register, not parallel. This way, you can keep a better eye on people.
Keep shelves low enough (about five feet high) so that you can see most people if they are
behind the shelves. Remove signs from your windows. If you must display posters, make sure
they are high enough that people walking by can see all the action in your store. Put the cash
register close to the door and windows. Elevate the cash register area to increase visibility
inside the store. Install convex mirrors in the parts of your store that you can't see directly from
the cash register. Eliminate hidden corners of the store, either through redesign, lights, or
mirrors Install Electronic Article Surveillance systems (EAS systems detect tags in the
merchandise if they are carried out of store without bar code scanning or deactivation and
sounds an alarm to the security)
7. The scope of store operations can be grouped in three distinct focus areas, store setup, store
layout, and point of sales. Store setup involves setting up the store shopping area and utilizing
the store floor space to optimally shelf products and other visual aids. It also involves setting up
the back office, the storage areas, parking space attached to stores and other amenity centers like
children's play-zone, rest rooms etc. Store layout and visual merchandizing involves all the
aspects of designing a store and inducing customers to purchase the products. It includes the
store arrangement and fixture layout, for example, whether it will be a grid, or free flow layout.
It also involves grouping similar merchandise in various sections, allocation of floor space to
different departments and designing audio-visual aids to attract customers evaluate the products.
Point of sales involves all the operations of managing sales transactions, providing customer
service such as product information, customer demos, handling customer queries, returns and
queues. It also involves gathering consumer data, and providing feed back to CRM systems to
analyze demand patterns and sales trends.
8. Let us now focus on store set up. A store real-estate is typically used to set up the following
facilities: The store shopping area includes the merchandise display areas such as shelves,
gondolas etc., customer passages and shopping aisles, and the point of sale areas such as cash
counters, self check out areas, customer queuing passages etc. The back office includes the
space segregated for all back office and administrative operations such as store managers office,
administrative clerks office etc. The storage area includes the area where merchandise is
received from the distribution centres and stocked before being put on shelves. The parking
area is an important facility that needs to be setup for convenient shopping. It includes the area
in front of stores where space is provided for customer car parking. They are found in
hypermarkets and supermarkets. Other facilities in store setup can include trial rooms for
apparel retailers, child care facilities in shopping malls, supermarkets and hypermarkets, rest
rooms, baggage counters to prevent shoplifting, shopping carts, self-check weighing machines
for jewellery retailers, free gift wrapping counters, eat-out joints and even wheel chairs for aged
persons. A new concept called ?Store within a Store? is being increasingly used by retailers for
add-on selling or up-selling. For example Radioshack has put around 5000 kiosks across Sam?s
Wholesale Club outlets to promote its latest consumer electronics offerings.
9. Here you can learn the different aspects of visual merchandising. A critical factor in successful
retailing is making optimum use of available shop space. To achieve this it requires balancing
the effects of the overall store design and atmosphere with the more direct impact of product
layout and merchandising. Good merchandising encourages customers to enjoy shopping and
come back again. The customers will go elsewhere if the shelves look empty or untidy or goods
are not well presented and generally look damaged and nearing the expiry dates. A number of
basic principles should be considered when determining store layout and store designs. Internal
and External Store design, decoration and communication needs to be consistent and integrated
to suit target customer needs. For example customers associate a wal-mart store, which promises
every day low pricing to be designed in a simple easy to access manner, without too much of
Fashionable decorations and glitzy and shiny interiors. On the other hand Fashion Boutiques
and Lifestyle stores needs to adequately designed to generate the ?status? feeling. Stores needs
to be designed, to influence ?impulse buying? by customers and deliver the ?ultimate shopping
experience? Wherever possible, POS service like cash counters should be decentralized for
Cognizant
Technology
Solutions
30
departments to balance sales transaction loads and improve Customer service by eliminating
customer queues. Group associated products together, in line with logical customer expectation
for example for a product breadth, hair gels can be placed close to party wear informals, in
terms of product depth, shampoos can be placed with Conditioners.
10. The following are some of the other fundamentals of store design. Set-up barriers to control
store traffic and generate strong customer flows to ?Hot-Spot? areas. Additional illumination,
security and convex mirrors needs to be setup in remote and hidden corners to prevent
shoplifting and also improve merchandise focus in these areas Small and expensive items, such
as batteries and films should be located where they can be easily supervised say for example
beside checkout or kiosk. Again some small and ?impulse buy? items such as key rings, children
play-ball, fancy items, small soft toys, new products can be located close to cash counters and
front desks to get customer attention while they are in queues, during billing Many retailers
prefer to generate alternate store designs in line with themes and trends, in which case it is
absolutely essential to have modular store designs, such that store fixtures and furniture can be
dismantled and re-assembled to get new look and feel of the store atmosphere at regular
seasonal intervals. Floor space optimization is an important aspect of store design. Floor space
should be allocated to different categories of merchandise like men?s, women?s, children such
that profitability is maximized and inventory kept at a minimum. The different factors to
consider while devoting space to any one department or category of merchandise are: The type
of merchandise. How much inventory needs to be displayed The best way to display it. The
profitability of the merchandise In order to be successful in today's competitive marketplace, a
retailer must make profitable use of every square foot of selling space in a store. Since space is
costly, retailers have to take a strategic approach to its use.
11. Now let us look at the different types of store layout. The type of layout depends on the retail
format and the merchandise category. Grid layout is used to display merchandise in a repetitive
manner following a logical sequence. Grid layouts are especially suited to serving regular
customers who are aware of the location of different product categories, and have specific
shopping requirements. Typically grocery retailers, drug stores and huge discount stores are
designed in grid layout. Race track or loop layout guides customers through circular and spiral
loops, as they pass through various departments of merchandise categories such as men?s
formals, men?s t-shirt, women?s lingerie, children sports wear etc. Race track layouts are
designed to facilitate impulse purchase, and lay a great stress on shelf designs, lightings and
fixtures to attract the customers to have a look and feel of the product. Generally department
stores and large apparel stores are designed with this layout. Free flow layout, on the other hand
allows the customer traffic to flow in an irregular pattern, in an asymmetrically laid out
arrangement. This kind of layout puts great stress on Aesthetics and a relaxed shopping
environment. It appeals to aspiration values of customers such as fashion boutiques, specialty
stores and is suitable for high value, low volume purchases.
12. Here you can see a grid layout for a typical grocery store. If you notice carefully the different
grocery categories such as cheese, frozen foods, chips and snacks, cooking oils etc. are arranged
in a logical sequential grid pattern for better visibility and ease of locating.
13. Apparel stores on the other hand requires a race track layout, as you see from the given picture.
Different merchandise categories such as Women?s Sportswear, Men?s Sportswear, Infant,
J unior Women, Lingerie, Men?s Polo etc., are arranged in a loop to ensure customers footfall in
each category and facilitate ?impulse buying?
14. Now let us learn the different fixtures used in stores. Bulk of stock is referred to the store
display area, where bulk of the merchandise is stored. Stores use various types of fixtures,
furniture's, racks, shelves, lighting and other equipments to make the merchandise more
presentable and attractive, while on display. Some of the rack types used in stores are: Gondola
is specially designed with multiple tiers of racks, shelves, bins and pegs to display a variety of
merchandise in a single fixture. Gondolas can be used to display items, which can be presented
without unfolding, or opening them. Customers can gauge the entire product attributes even if
they are folded, or packaged. Hence grocery items, apparels like uni-color towels, uni-color
formal shirts etc. can be stacked in Gondolas End-caps on the other hand, are tall racks with
multiple shelves displaying beverages, canned drinks, potato chips or any other promotional
items. As the name suggests end-caps are placed at the end of aisle for better visibility.
Cognizant
Technology
Solutions
31
Different types of racks used in stores can be straight rack, for displaying shirts, tops etc., and
rounder racks typically T-Shirts etc, which is fully unfolded and put on hangars, so that
customers can revolve the rack and view the entire collection in one ?shot and do not have to
move round the rack. Four-way racks are again a modification of the rounder racks.
15. This illustrates an end-cap display of fruit juices and a gondola, storing books and magazines.
16. Visual merchandising is a store design concept which deals with various techniques by which
merchandise can be arranged in Stores to attract customers, to have a look and feel of the
product and buy it. Visual Merchandising triggers brand recall, positions a Retailer and boosts
Sales. Let us now discuss some of the visual merchandising techniques. Vertical merchandising
is a concept, in which products with high margins and net worth, are displayed strategically
either towards the right, or the bottom of a shelf, to register a lasting impression in the
customers mind. This is because, according to consumer behavior, customers have a tendency to
look and explore a shelf from left to right and from top to bottom. Shelf replenishment through
first in first out principle is an important criteria in product shelf life management at stores. In a
store a customer picks up merchandise normally from the front of a shelf. Hence in FIFO
shelves are replenished from the back, such that no merchandise is left hidden and unattended to
cross the expiry and ?Best Before? dates. Thus a continuous merchandise flow happens, outflow
from the front, and Inflow from the rear. Merchandise in virtual merchandising is presented in
a category wise fashion, for better customer visibility and brand comparison Tonnage
merchandising is a display technique in which large quantities of the same product are displayed
together to create an impression of a bargain typically a big container full of socks and
handkerchiefs, and low value purchase items. In visual merchandising, high margin items like
watches, jewelry etc. are placed behind manned counters for better customer service and
focused cross-selling. It also prevents shoplifting.
17. The low value and high profitability, casual and ?impulse merchandise? such as Key Rings,
Stickers, Children Soft Toys, Batteries, Newspapers, Magazines, Chocolates, Tobacco and other
Fancy items are normally kept near check-out areas, cash counters and Store Front ends to
trigger ?impulse purchase? by customers waiting in the billing queue. It also prevents
shoplifting by keeping these small items close to Point Of sales inspection areas. Thus visual
merchandising techniques aids in revenue generation and creating ?impulse demand? for some
items. In live setting presentations, a statue or a model, is displayed wearing a combination of
clothes, thus enticing the customer to purchase the full product-set such as a Top, J eans and
some jewelry accessories. Similarly bed room simulation and drawing simulation cross-sells the
entire range of home furnishings and furniture's. Point of purchase (or POP) is the last ?3-feet?
stage where customers actually decides the brand, or the pack and size of the merchandise after
making his or her mind to purchase that category of product. With respect to POP it may be
emphasized that the 3rd and 4th shelves from the bottom in any display stack, has maximum
visibility to the customer, as it falls in the eye-level. Hence Retailers needs to ensure displaying
the most profitable merchandise, in these racks.
18. The new breed of retail marketers must embed the expectations of the next generation of
consumers through digital technology. Dynamic digital merchandising is now the most modern
way of presenting promotional information to consumers at the point-of-purchase. This provides
a higher consumer capture rate, better recall and retention, and when executed correctly, it sells
more products. Digital in-store merchandising refers the use of digital audio/visual equipment
in retail environments to help compete for consumer attention. Increasingly, flat panel display
devices, such as plasma screens, liquid crystal display (LCDs), and LED (light emitting diodes)
signs are being used to fill all available merchandising "real estate". The picture shows a
Digital Signage Plasma screen to highlight an In-Store promotion
19. A significant new trend in point-of-purchase is the use of large screen digital displays as
interactive touch screens. Until now, many retailers have offered freestanding interactive stalls
with standard-size monitors to give customers access to product information. The stalls is
designed for use by one customer at a time. In contrast, the new interactive digital displays, with
their 40-in screens, add high visual impact to the experience and allow more than one consumer
to view the media. Lower hardware costs, more powerful computers, better store connectivity
and new software platforms are enabling retailers to embrace the use of digital signage more
than ever. Early statistics show tremendous potential for reaching customers in-store. Now, the
Cognizant
Technology
Solutions
32
applications are starting to go beyond digital signage. Applications that tie into POS systems,
inventory systems or live newswire feeds bring a whole new dimension to dynamic signage.
Customer surfing, scanning and valuation patterns are studied and fed to CRM systems to
analyze consumer behavior and Buying patterns. This provides valuable inputs to the assortment
process.
20. After Store Layout and Visual Merchandising let us now learn the final aspect of store
operations ? Point Of Sales (or POS). POS involves all the activities through which a sales
transaction happens, and retail revenue is realized and recognized. Hence POS is also called the
?Moment Of Truth?. Different activities performed at the POS includes Sales transactions and
capturing customer orders Tracking customer orders, promising availability dates and
registering payments (cash, credit sales, or loyalty cards etc.) Maintaining inventory counts and
ledgers Providing customer service, queue handling, returns handling, vendor rejections,
refunds and repairs, alterations etc. Finally gathering consumer data and providing feed back to
customer relationship management systems to analyze demand patterns over time, sales trends
etc. Thus you can see that POS is that end-point in a retail value chain where all efforts made
in the entire retail business gets converted to revenues.
21. POS applies to all store retailing business models and industries like food and beverages,
convenience stores, pharma outlets, apparels, accessories, book stores, discount stores,
supermarkets and even service retailing and gas stations. An efficient POS operation ensures
faster sales processes through reduced customer queues. It helps in better inventory
management, increased employee productivity, effective utilization of counter space, studying
sales patterns and making better informed purchase decisions. Other advantages includes
reduced time spent on administrative work, Sales reports, Invoices, Purchase Orders and
Requisitions and Superior Customer service.
22. Here you can see some of the POS components like Cash counter or Cash Wrap Computer
Systems, Remote Post Displays for Product and price Information, Bar Code Scanners, Price
Verifier for Customers and several self-Checkout devices and Interactive stalls. Thus through
these POS devices Customers can make self payments, and checkout from the Stores without
any manual intervention.
Cognizant
Technology
Solutions
33
CHAPTER 9: RETAIL OPERTION DEPARTMENT VIEW
1. The retail operations can be categorized into three four types from the department view. This
chapter takes you through the key departments in the retail environment.
2. At the end of this chapter, you will be able to: List and explain the key departments in retail
enterprise.
3. The key departments in a retail business are: The finance and purchase department that involves
purchasing goods from suppliers. The sales department handles all the in-store activities. The
merchandising department takes care of all the planning and promotions. The logistics
department undertakes maintenance of inventory at Distribution centers and transfer of goods to
stores. As you move further, you will learn about the basic functions of each of these
departments in order to have a better understanding of the functioning of a retail establishment.
4. The purchase department is mainly involved with the sourcing of good from vendors. It is their
responsibility to try and obtain the best goods at the cheapest price from reliable vendors. Once
a vendor has been selected and a price agreed upon, they generate the purchase orders. The
payments for these procurements as well as the other financial functions are also handled by this
department.
5. The merchandising department decides which goods to buy and what should be the quantity of
these goods. Through their market surveys and business intelligence, they also decide when and
where to stock these goods for sale. The promotional offers are also planned by the
merchandising department. Primarily they aim to stock goods within the strategically planned
budgets by way of pricing, promotions and volumes.
6. The logistics department deals with the operational issues of maintaining inventory at the
distribution centers, transportation of these goods as and when required to the specified stores
and handling the third party logistics providers who provide the logistics services between the
supplier and the retailer. They are also part of the planning exercise which is jointly undertaken
by the sales and merchandising departments.
7. All the in-store operations are handled by the sales department. It is this department which
handles the selling to end customers as well as billing. They manage the store layout and plan
which items should be displayed in which locations. The sales department also manages the in
store inventory and reports the Point of Sale data to the main enterprise.
8. This illustrates how the retail cycle takes place. Let us start with the purchase department. The
purchase department generates a purchase order to the supplier, which dispatches the goods
using a logistics solutions provider to the distribution centre. At the same time the supplier
raises an invoice to the purchasing department, which inturn makes the payment. Once the
goods reach the distribution centre, the logistics department takes care of the inventory
management and transports the goods to the required stores as and when required. The sale
occurs at the store, and then passed on to the finance department. The Point Of Sale data from
the transaction is passed onto the merchandising department. The merchandising departments,
based on data from Point Of Sale and other sources decides which items in what quantities to
purchase. This requirement is passed onto the purchase department and the cycle is repeated.
Cognizant
Technology
Solutions
34
CHAPTER 10: RETAILING TRENDS
1. Retail is change. This maxim fittingly describes the developments seen in the retail sector over
the last decade. Worldwide retail industry is experiencing challenging times and major
transformations today.
2. Learning Objectives At the end of this chapter, you will be able to: List and explain the forces
impacting the retail industry Explain the global mega trends in the retail industry Understand
and analyze the IT Applications Maturity Profile
3. The retail industry is witnessing a change in trends. There are various forces governing and
shaping the trends. The key forces may be classified under four heads, namely Competitive
Rivalry, Economic and Demographic Shift, Threat of Substitutes and Threat of New Entrants.
Observing the market for Competitive Rivalry, There is barely any difference between the
established players and new entrants. New entrants are equally making a mark through the
online mode. This has led to a pressure to source the goods globally and to have better
coordination between the supply chain partners. This in turn has led to increased supply chain
complexities. Look closer at the Economic and Demographic Shift. The fluctuating economic
conditions, slow population growth and lack of price inflation has led to the consumers being
more value conscious. This coupled with the fierce competition between retailers has led to
increased customer expectations. Shift your focus to the Threat of substitutes. The increasing
demand for convenience and the number of substitutes available in the market have resulted in
overcapacity. This trend saturates the current market, putting a huge pressure on the already
wafer thin operating profit margins. In order to combat the substitues with the changing
demographic and economic conditions, the retailers have been forced to resort to multi channel
retailing. Retailer have been exploring all possible avenues, such as the Internet and catalogue
sales, to sell their products, at net operating profits as meager as between 1 and 4 percent.
4. The retail industry faces business challenges from all sides. As you saw in the last page, the
market forces have created a sense of increased customer expectations, multi channel retailing,
supply chain complexities and overcapacity. They have led the retailers to face new business
challenges of expanding consumer base and ensuring superior customer satisfaction at a reduced
cost.
5. The retail industry globally is changing at an alarming rate. It is witnessing four major trends
namely, ?The Changing Retail Model?, ?Globalization?, ?Consolidation? and ?Format
Migration?. You will see more on these trends in the following pages.
6. Looking closer at the first mega trend, the changing Retail Model, The focus of the retailers is
now shifting from selling products to creating an image for the product sold. Apart fromthe
physical product, what the retailers sell today is a complete experience of buying the product.
From mere providers of goods and services, retailers today, are concentrating more on customer
relationships, customer loyalty and thereby customer retention through various programs to
connect with the customers. An example here is ?the shopper?s stop first citizen membership?
which includes special discounts and invitations to special events hosted by the retailer. The
shift is from offering products at low prices to value added services. In their relationship with
the suppliers, retailers have graduated to collaborative mode for mutual benefit. This ensures
cost reduction and greater efficiencies. For example the wal-mart mandates its suppliers to be
RFID compliant. Some retailers were once synonymous with a single sales channel. For
example, Amazon.com for Internet, Wal-Mart for Superstores, Marks and Spencer for Speciality
Stores. Now the trend is for each retailer is to use multiple sales channels. Tiffany for example,
sells its merchandise from its stores by sending catalogues through mail or taking orders over
the telephone and on their Website.
7. The next major trend is Globalization. Major retailers world wide are increasingly becoming
global. They are exploring markets outside their home country and are rapidly expanding into
newer territories. As we can see from the example, Ahold, a Dutch retailer commenced
operations in as many as 20 new countries during the period from 1996 to 2001.
8. Consolidation is the third major trend. In order to achieve economies of scale, retailers in a bid
to strengthen their position are on an acquiring spree through corporate takeovers and mergers.
Cognizant
Technology
Solutions
35
Thus we can see that an increasing market share is being held by smaller number of retailers.
A resurgent Kmart, home of the blue light special, is buying the once-dominant Sears
department store chain in a surprising $11 billion gamble it is counting on to help both better
compete with Wal-Mart and other big-box retailers. Both chains would survive, but several
hundred stand-alone Kmarts throughout the country are expected to be transformed into Sears
stores. The goal: A quick kick-start to sales away from Sears traditional base of shopping malls.
Lampert and Sears chairman and CEO Alan Lacy, in announcing the deal, promised up to $500
million a year in savings within three years from store conversions, back-office job cuts, more
efficient buying of goods and possible store closings.
9. Finally we see the last major trend in retail today, namely, Format Migration. A large number of
the retailers are migration to other formats of retailing from their traditional ones. For example
Wal-Mart which primarily started as a discount chain has moved into other formats such as
Warehouse Clubs, Hypermarkets and Convenience Stores.
10. Are you wondering where IT applications fit into the Retail context? This graph, known as the
Gartner Hype Cycle, shows the various Information Technology process management solutions
and their present state of maturity. The curve is divided into five parts as seen in the figure. Here
the technologies such as RFID, Integrated Demand and Planning and store-level business
intelligence are on the rise; In-store Wireless, Markdown Optimization and Electronic Shelf
Labels are at the Peak ; CRM and Self-Checkout are sliding into the trough ;Private e-
marketplaces is climbing the slope and Merchandising is entering the plateau.
Cognizant
Technology
Solutions
36
CHAPTER 11: OPTIMISATION
1. Planning is an important step in organizational decision making. It leads to setting up of
objectives and targets. However, these targets can be divergent resulting in mutually
incompatible goals. This is where, optimization takes precedence. Optimization as an I T
solution is emerging recently, with advancements in data processing and business modeling
capabilities of I T systems. In retailing, setting up of optimal levels, begin, right at the
fundamental level.
2. Learning Objectives: At the end of this chapter, you will be able to: Understand retail vis-?is
the various key processes Describe the logical flow of processes Explain planning and
optimization in retail perspective
3. By now, you must be familiar with the retail business model and retail processes. The
illustration gives a quick overview of the retail process model and major processes, that go into
managing a retail outlet.
4. By now, you might also be familiar with the fact, that retail entails various kinds of planning.
Here is a quick overview of what happens, where. and when.
5. With our basic understanding on retail business model and planning we will now proceed to
know how decisions are taken and how processes are fine tuned for better results. Before this
however, we focus on two fundamental aspects of retail decision making ? planning and
optimization. Planning pertains to the process through which processes and targets are set, and
optimization pertains to the process by which a best possible solution is attained to achieve
conflicting goals and targets. In this context, we have strategic optimization and process
optimization. Strategic optimization acts as the high level starting umbrella for each of the
chunk involved in the retail process model. It identifies which processes need optimization.
Process Optimization deals with concrete issues and explores various algorithms and
remodeling involved in each of the processes. Thus, if Strategic optimization answers the
?which? , then Process optimization answers the ?how?. For example the Sourcing process
would have a ?Strategic Sourcing? element associated with it which would identify Lead Time
Optimization as a focus area for optimization. Subsequently the Lead Time Optimization
element would seek to dig deep into reengineering or building systems that reduce the time
taken between ordering of goods and receiving them. Similarly the Merchandising process
would have Inventory Optimization as a strategic optimization measure and this in turn would
involve price optimization, promotions optimization and markdown optimization. The
Distribution element would have Distribution Network optimization which would involve
Transportation Optimization algorithms and processes. Finally the Store operations could
identify Store Location Optimization as a probable candidate which could further probe into
Shelf space optimization.
6. Having understood strategic optimization and Process optimization, let us now turn our attention
to The Logical Process View. The Logical Process View provides a framework for decision
making process. It puts into perspective various processes and elements into a more refined
structure. It can be understood in terms of five blocks and their interaction therein. The five
blocks are demand planning, Merchandise optimization, Order Management, Replenishment,
and Transportation. Let us now understand each of them in detail. Demand planning. This deals
with identifying, managing and fulfilling demand for a particular product variety. This is
essentially about creating and positioning a product that can fulfill the demand. This involves
demand forecasting, merchandise planning, as well as assortment planning. Merchandise
optimization. This deals with fine tuning the demand planning outputs and managing the pricing
over the product life cycle through price, promotion and markdown optimization. Order
Management. This interacts with the first two processes and deals with Purchase order
management, buying from suppliers and optimizing the lead time. This is the block that links
demand to supply. Replenishment. This deals with planning and holding the inventory,
optimizing the shelf space as well as the allocation of merchandise to the stores or other
channels. This block looks after meeting the consumer demand by making the product available
in right quantity at the right place at the right time; when there is a demand for it.
Cognizant
Technology
Solutions
37
Transportation. This is that part of the logistics operation which deals with flow of goods,
services and related information from the point if origin to the point of consumption in order to
meet customer?s requirements. This ensures that the replenishment objectives are met through
movement of products across the supply chain. Quite significantly, the blocks are not islands,
but rather interconnected and that goods, services or information flows through various
processes which many a times lend themselves to optimization for efficient functioning.
Cognizant
Technology
Solutions
38
CHAPTER 12: DEMAND PLANNING
1. Demand planning is one of the foremost process in Retail. This chapter will help us understand
the process of demand, the dynamics behind it, how to forecast demand, lay the groundwork for
the preparation of various types of demand plans.
2. At the end of this chapter, you will be able to: List the Key Aspects in Demand Planning
Illustrate the use of the Retail cube concept to explain planning dimensions, levels, hierarchies
Explain various types of Plans in Demand Planning Point out the factors involved in forecasting
and the various time-based forecasting algorithms Discuss Merchandise Planning and how
Assortment Planning is arrived from that Lay down the Final Deliverables of Demand Planning
3. Let us recall the logical process view. The first process here is the demand planning. Essentially,
demand planning involves determining the demand for a particular merchandise and developing
strategies to fulfill the demand through planning for the product. Demand Planning can be
viewed as the whole exercise which may be assumed to spawn the other processes like ordering,
transportation, merchandise optimization etc. It can be decomposed into demand forecasting and
product planning.
4. There exists a relationship between requirement for a product or service and its fulfillment by
the market players. Marketers or retailers for that matter sense a need for a product or service in
their market and try their best to gauge the extent of this demand and hence satisfy it. Demand
planning spans the entire operation right from trying to estimate this demand through heuristics
or scientific means to identifying the diverse product categories that can fulfill this demand. For
example there can be an estimate for meat of about 500 tons per week. The retailers can satisfy
this demand through varieties of meat like pork meat, venison, turkey etc. The goal of demand
planning is to facilitate fulfillment of customer demand by forecasting what products customers
will want, how many of those products they will want, and when they will expect to have them.
This leads to planning for the supply of products / services and fulfillment of the demand
through the supply chain. Furthermore, measuring the effectiveness of demand planning is key
to continuously improving the demand plan. The retailers would definitely not want to be taken
by surprise when there is a surge or dip in demand. Hence this activity is done before the
demand cycle starts.
5. Before we get into planning, we need to understand what we are planning for. Planning is not a
flat decision. There are various levels at which planning needs to be taken care of. And any plan
that is developed needs to set its horizons along the fundamental dimensions of product, time
and location. The planner needs to be specific about whether he is planning for a single product,
or a group of products, or the whole product range of the business. similarly, he needs to be
specific on whether it is for a week or for an year or many years, as well as whether it is for a
single store or a group of stores or for all stores. Since planning is all about setting targets, we
need to specify what the target is. The Retail cube concept will help explain the concept of
planning dimensions, levels, hierarchies and members. Retail is a multi-dimensional business
and the cube analogy helps us to dice and slice the data that we collect according to time,
location and product. Imagine a three dimensional cube having TIME, PRODUCT and
LOCATION as its three dimensions. Again any of these parameters could have various level of
aggregation. For example One should be able to plan for a given SKU for a given store for a
period of say 2 months.
6. As discussed in the retail cube analogy, time could be of one month or quarterly horizon. The
location in question could be a store or a district consisting of various type of store formats. The
aim is to be able to plan for any chosen set of coordinates. The classic approach to providing
information relies on either a sort of lowest common denominator method of providing
something that might please some of the people for some of the time, or the shotgun method of
peppering you with everything you could possibly want. The cube approach which we have
dealt with is commonly called the multidimensional approach and allows one to interact with
the retail system to select parameters at any level of aggregation.
7. Planning can also be classified in terms of types. We can have the Strategic Plans which are
used mostly by Corporate, Business Owners and Senior Directors. Different Strategic plans
Cognizant
Technology
Solutions
39
includes setting the guiding principles for the business, the mission, setting up the Business
Processes, the Procurement Framework, Distribution Framework, Store decisions, setting the
Overall Financial targets for the season, year, Integrating the Business functions within the
organization, Competitor Analysis, Decisions on Target Market, Retail Format, Decisions on
Branding, and techniques to deal with Competition. This encompasses Long Term Financial
Objectives and is essentially a Top down approach from the CEO/Corporate down to the Lowest
levels. Then we can Merchandise Plans which are done by Merchandise Planners, to arrive at
the Merchandise mix of Products, Pre-Season Financial targets, Promotional Plans, Pricing
decisions (Pre-Season and In-Season), Location Plans, Stock Plans etc. This is again a Top-
down, Bottom-Up or a reconciled (Middle-Out) planning activity. Demand Planning involves
Demand Forecasting for Products, Forecasting Algorithms, Forecast Horizon, Time Buckets,
exception resolution, Product Life Cycle management, New product Forecasting etc.
8. Continuing with our discussion about various type of plans, we can have the Allocation
Planning and Order Planning which tell how to allocate Budgets to different Stores and Product
Groups, resource allocation to different Business Units, planning to fulfill orders.
Replenishment Plans include planning for Replenishment of Products at the Stores for
consumption by the End-Users. This is a constraint driven optimization, with the objective of
maximizing Customer service Levels and Revenue while Minimizing Lost Sales and Inventory
level. Constraints includes product Availability at Vendor side, Lead Times, Order Processing,
Shipping constraints, Inventory, warehouse capacity etc. Output of replenishment planning is set
of Purchase Orders from the Vendor, Distribution Orders within the Buyers Supply Chain and
other Transportation Orders.
9. Demand forecasting is the process of determining what products are needed where, when, and in
what quantities. It can be a significant source of competitive advantage by improving cost
structure and customer service levels, and decreasing backorders and lost sales. The goal of
forecasting is to minimize the error between the forecast and the actual demand. Demand
forecasting is done for pre decided set of levels along the retail cube; for example forecast for a
regular pair of denim jeans for Columbia District for the upcoming month of march. The
prediction can be in terms of volume or value and more often that not, dollar sales or value
prediction is what the retailers target at.
10. Before a discussion of popular forecasting methods, it is important to be familiar with the five
major characteristics of demand. These give rise to the factors influencing demand forecast. 1.
Average which means that Demand tends to cluster around a specific level. 2. Trend which
means that Demand consistently increases or decreases over time. 3. Seasonality means that
Demand shows peaks and valleys at consistent intervals. These intervals can be hours, days,
weeks, months, years, or seasons. 4. Cyclical means that Demand gradually increases and
decreases over an extended period of time, such as years. Business cycles (recession and
expansion) and product life cycles influence this component of demand. 5. Random Error are
Variations that cannot be explained or predicted. Based on these, factors such as trends,
seasonality, sales velocity (which is the speed with which sales happen at the POS), internal
causality and external causality affect demand forecast. Causality is the determination of
forecast based upon rationale. It uses the basic cause and effect concepts and tries to figure out
reasons and rationale which are supposed to influence a demand pattern. If the cause is a part of
any internal strategy of the business, such as decision to withdraw a product, the factor is termed
internal causality. On the other hand, if the factor is an external cause, created by market or
competition, then it is called external cause. Previous sales data are just that. They are data
and not information. In order to extract relevant information one must do some amount of
mathematical tweaking and smoothening to gain insights. Another simple fact about forecasting
is that they are usually wrong. What is important is the direction and amount the forecast
deviates from that which actually occurs. Because forecasts are looking into the unknown
future, some level of error between demand forecasts and actual demand is expected. The
magnitude of the error, referred to as forecast accuracy, is what determines whether your
forecasts are good or bad. The challenge thus in demand forecasting is essentially to reduce
the forecast error as much as possible. This can happen only when a pattern is derived out of
humongous data, the qualitative strategic elements are quantified in terms of numbers, and
finally any human bias is eliminated. All these are thus the challenges in forecasting.
Cognizant
Technology
Solutions
40
11. We look at some key Time series forecasting methods, also known as intrinsic methods. They
use prior demand history to generate a forecast. The techniques that make up this category
assume that the past patterns of demand will continue into the future. In the short?term, they
perform very well; in the long?term, they generally perform poorly. A commonly used
analogy is that using time series analysis techniques is like driving a car by looking at the
rear?view mirror. On a straight road this is an acceptable approach, but on windy roads, this
would lead to disastrous results. As a result, these techniques are best used for mature products
with a large amount of historical data and with smooth demand variations. The Moving
Average Methods both simple and weighted are key algorithms. While the simple moving
average method is used to determine the average amount of demand over a given time period.
The weighted moving average technique allows each period in the calculation to carry it?s own
weight. The user can specify that recent demand will be weighted more heavily in the
calculation than older data. Moving average techniques are most appropriate for stable demand
patterns, when demand does exhibit trend or seasonality components. Unfortunately, if trend or
seasonality exists in the demand, the forecasts will lag in their ability to predict future demand.
Single, double, triple Exponential Smoothing comes to the rescue here. Exponential smoothing
methods require user?specified factors to calculate the forecast. These factors are smoothing,
trend and seasonality. Single exponential smoothing uses the smoothing factor only in the
forecast calculation. Double exponential smoothing uses the smoothing and trend factors in the
forecast calculation. Triple exponential smoothing uses the smoothing, trend, and seasonality
factors in the forecast calculation. These exponential techniques are popular and are easily
calculated with demand planning software. Unfortunately, a great deal of effort may be required
to estimate the three factors used in forecast calculations. Also, while they perform well in
short?term forecasts, they do not perform as well on products with low demand.
12. Merchandise planning encompasses the activities involved in acquiring particular goods and/or
services and making them available at the right places, at the right times, right prices and in the
right quantity that enable a retailer to reach its goals. It is performed pre season start and post
demand forecasting.
13. Having forecasted the demand for a product or service, Merchandise planning takes over and
mixes the decision to satisfy the demand in the background of many other factors. This plan is
basically a financial plan showing the value of the goods to be planned at various levels along
the retail cube. The product mix is chosen based on critical factors like the price strategies, sub-
strategies along the various levels in the retail cube dimensions. The objective is to take
demand forecast as a raw measure of requirement, enrich this forecast with market trends to
make best use of the opportunities available in various ways to serve the market and hence to
increase the bottom-line.
14. Retailers cannot hope to be financially successful unless they preplan the financial implications
of their merchandising activities. Various metrics can be used to evaluate the output of
Merchandise planning. Key information areas are sales and inventory figures in dollars for a
particular combination of levels across the retail cube. Inventory Turnover is one such
measure and can be visualized as ?merchandise in motion?. We can think inventory turnover as
how many times, on average, a category cycles through the store during a specifies period of
time. It is defined as the value of net sales divided by the value of the average inventory at cost.
This value is a measure of inventory productivity for example a Inventory Turnover of 3 would
man that 3 sales dollars can be generated from a dollar invested in that category. GMROI
utilizes the Inventory turns measure by multiplying it with Gross Margin Percentage and is used
as a return on investment profitability measure to evaluate departments, merchandise
classifications and items. Typically the apparel category and the Furniture category will have
GMROIs of 230 and 90 respectively. Its no wonder then that many discount stores are placing
so much emphasis on apparel and that some have discontinued furniture. A GMROI value of
100 would mean that this category earns 100 gross margin dollars on every dollar of inventory
investment.
15. The importance of Merchandise planning solution is that the whole process considers so many
inputs, does variety of analysis and calculations and finally arrives at a host of output measures.
Merchandisers look at the key quantitative measures like categories? past performance, trends in
the market, competitor?s figures and some qualitative measures like the company?s goals,
Cognizant
Technology
Solutions
41
history and strategies. The analysis is also roughly a treatment of the inputs in the same order.
Past figures are analyzed, feedback is incorporated for adjustment, key consumer behavior
trends are assimilated in this and finally the resultant is brought more clearly in tune with the
company?s goals and strategies. The resulting merchandise plan is a financial buying blueprint
for each category. It considers the form?s financial objectives along with sales projections and
merchandise flows. The merchandise plan will tell the buyer and planner how much money to
spend on a particular category of merchandise in each month so that the sales forecast and other
financial objectives are met. It also lays down the various performance evaluation metrics like
the GMROI and the inventory turns etc.
16. Once the merchandise plan is set, the buyers and planners develop the assortment plan. This
may seem easy. But retailers are limited by the amount of money available for merchandise and
the store space. They must decide whether to carry a large variety of different type of clothing(
categories) for example dresses or jeans ? or carry fewer categories but a larger assortment of
more styles and colors within each category. This process of trading off variety, assortment and
backup stock is called assortment planning and is the culmination of planning the financial and
merchandising objectives for a particular merchandise category. The buyers work with
vendors choosing merchandise, negotiating prices and developing promotions. The merchandise
planners break down the overall financial plan into how many of each item to purchase and how
they should be allocated to stores. A good assortment plan requires a good forecast for sales,
GMROI, and inventory turnover along with a mix of subjective and experienced judgment.
17. Demand planning cannot be a static process. There has to be a scope for fine tuning the
decisions made pre season based on what is actually the demand pattern. The Assortment
Plan Paves way for calculation of OPEN TO BUY for all SKU-Store Combinations over time
horizons. Open-to-buy" refers to merchandise budgeted for purchase during a certain time
period that has not yet been ordered . As we can see from the equation, Open to Buy component
links the End and Beginning of month stock to the sales, markdowns and receipts. Diverse plans
contains budget figures for beginning-of-month inventory levels, projected sales, receipts,
markdowns, adjustments, and end-of-month inventory levels The significance of Open to Buy is
that all the above components originate from diverse plans and hence there could be a
discrepancy in the actual figures which is dynamically bridged by Open to Buy.
18. Variety is the number of different merchandising categories within a store or department.
Assortment is the number of SKUs within a category. Based on the financial objectives that
have been set at the top and have trickled through the retail organization, decisions regarding
variety , assortment and product availability are made. Trade offs are made between them and
the final result is an assortment plan. The assortment plan describes in general what should be
carried in a particular merchandise category. Historical precedence is the starting point for
developing the assortment plan. The Gross Margin return on Investment, the previous sales data
then help to form the current sales data. The overall merchandise plan then with the help of the
past data and the forecast data result in the assortment plan. Adjustments are then made based
on the merchandise planner?s expectations for what items or fashions will be important in the
coming season. For example , an abbreviated assortment plan for girls? jeans will contain the
following: General styles like 5 ?pocket, straight cut jeans etc General price levels like $ 20,
$25 for traditional and $ 35, $40 for boot legged jeans Composition of fabric like regular or
stonewashed Colors like light blue or indigo. For each combination of the above, for example
a traditional regular $20 blue ? there could exist a size distribution. This is in turn is done for
each store and the output is what we can see in the form of a tabular chart.
19. To conclude the major planning outputs in Retail Demand planning used to facilitate and
execute the Business processes includes the following: The Merchandise Hierarchy which
comes out with the Retail cube and the Retail planning structure The Merchandise Mix which
comes out with the Optimum Assortment of goods and services and the Merchandise Variety to
ensure maximum Contribution/Revenue and Profitability The Financial targets for
Products/Stores, the Sales targets, the Inventory Turns, GMROI (Gross Margin return On
Inventory) The Replenishment schedules, Purchase Orders, Safety Stock, Ordering Policies
etc. The Pricing Information, Promotional planning parameters The Allocation and Order
Management information.
Cognizant
Technology
Solutions
42
CHAPTER 13: MERCHANDISE OPTIMISATION
1. Merchandise optimization refers to fine tuning of merchandise plans developed as a part of
demand planning. Optimization is done in terms of fine tuning the price, promotion as well as
assortment.
2. At the end of this chapter, you will be able to: Understand merchandise optimization and its
sub-elements. Explain assortment optimization. Define Product Life Cycle (PLC). Explain
optimization issues viz. price, promotion and markdown optimization.
3. Let us recall the Logical Process View. The Merchandise Optimization is one of the stages in
the logical process view. It consists of price, assortment, promotion, and markdown
optimization. These elements are fed back to the merchandise and assortment plans to yield a
more robust plan.
4. We already have an idea of what Merchandise is. Merchandising encompasses the activities
involved in acquiring particular goods and/or services and making them available at the places,
times, and prices and in the quantity that enable a retailer to reach its goals. Optimization
involves attaining the balance between two different goals towards maximization. In today's
economy, retailers are looking for ways to improve financial performance without adding stores.
With the increased pressures of competition, eroding margins, lack of differentiation, and
having achieved many of the back-office and supply chain efficiencies available to reduce costs,
the focus of retailing has shifted to growing comparable store sales and increasing margin
through more effective merchandising. In this context, merchandise Optimization is an
emerging category of solutions that help retailers make more profitable buying, allocating, and
pricing decisions based on customer demand. As with any emerging market, there are various
names for pieces of the merchandising puzzle: Pricing and Revenue Optimization, Demand
Based Management, Retail Revenue Management, etc. Based on a study by Accenture, it is
estimated that the top-tier U.S. retailers could gain $20 billion in incremental gross margin
dollars by employing Merchandise Optimization solutions.
5. The two major aspects of Merchandise optimization are Assortment Optimization and Product
Life Cycle. The latter has three elements namely Price optimization, Promotion optimization
and Markdown optimization.
6. We now begin our discussion on Assortment Optimization. Before this, let us rewind to
Assortment Planning. A store or a department has various merchandising categories, each
catering to a variety. Assortment is the number of S K Us within a category. Based on the
financial objectives set by the top management in a retail organization, decisions regarding
variety, assortment and product availability are made. Trade offs are arrived at, which finally
results in an assortment plan. The assortment plan describes in general what should be carried in
a particular merchandise category. Historical precedence is the starting point for developing
the assortment plan. The Gross Margin return on Investment, the previous sales data then help to
form the current sales data. The overall merchandise plan then with the help of the past data and
the forecast data result in the assortment plan. Adjustments are then made based on the
merchandise planner?s expectations for what items or fashions will be important in the coming
season. Ultimately, the assortment plan would yield for each store the quantity of each SKU to
be kept for each week. For example , an abbreviated assortment plan for girls? jeans will
contain the following: General styles like 5 ?pocket, straight cut jeans etc General price levels
like $ 20, $25 for traditional and $ 35, $40 for boot legged jeans Composition of fabric like
regular or stonewashed Colors like light blue or indigo. For each combination of the above,
for example a traditional regular $20 blue ? there could exist a size distribution. This is in turn is
done for each store and the output is what we can see in the form of a tabular chart.
7. As in other optimization processes, we are faced with issues to optimize the SKUs ? assortment
decision here. For example a decision to increase number of SKUs will help cater to diversity of
customer demands and help maintain service levels but this will also increase complexity in
operations. On the other hand, plan complexity will reduce the number of SKUs to deal with but
then retailers will run the risk of facing a drop in product availability. The constraints are the
Cognizant
Technology
Solutions
43
store space, efficiencies in the supply chain and this has to be done within the ambit of the
merchandise plan. Optimization of the assortment plan is in turn the optimization of the
financial and merchandising objectives and helps contribute to the increase the bottom-line of
the retailer.
8. We now deal with the second important element of merchandise planning viz. product life
cycle. The Product Life Cycle (PLC) is the progression of a product through a marked
sequence. This sequence is associated with changes in the marketing situation, thus impacting
the marketing strategy and the marketing mix. After a period of development a product is
introduced into the market; it gains more and more customers as it grows; eventually the market
stabilizes and the product becomes mature; then after a period of time the product is overtaken
by development and the introduction of superior competitors, it goes into decline and is
eventually withdrawn. However, most products fail in the introduction phase. Others have very
cyclical maturity phases where declines see the product promoted to regain customers. There
are strategies for the differing stages of the Product Life Cycle. Optimization of the product
during its PLC is concerned with the optimization of Price, Promotion and Markdown which we
shall see in the subsequent pages.
9. Consider the product life cycle graph on this page. It shows various phases of a typical PLC. Let
us examine certain strategies in each of the phase. In the Introduction Phase, the need for
immediate profit is not a pressure. The product is promoted to create awareness. If the product
has no or few competitors, a skimming price strategy is employed. Limited numbers of product
are available in few channels of distribution. In the Growth Phase, competitors are attracted
into the market with very similar offerings. Products become more profitable and companies
form alliances, joint ventures and take each other over. Advertising spend is high and focuses
upon building brand. In the Maturity Phase, those products that survive the earlier stages tend
to spend longest in this phase. Sales grow at a decreasing rate and then stabilize. Producers
attempt to differentiate products and brands are key to this. Price wars and intense competition
occur. At this point the market reaches saturation. Promotion becomes more widespread and use
a greater variety of media. In the Decline Phase, there is a downturn in the market. For
example more innovative products are introduced or consumer tastes have changed. There is
intense price-cutting and many more products are withdrawn from the market. Profits can be
improved by reducing marketing spend and cost cutting. However in reality very few products
follow such a prescriptive cycle. The length of each stage varies enormously The decisions of
marketers can change the stage, for example from maturity to decline by price-cutting. Not all
products go through each stage.
10. Consider the product life cycle graph on this page. It shows various phases of a typical PLC. Let
us examine certain strategies in each of the phase. In the Introduction Phase, the need for
immediate profit is not a pressure. The product is promoted to create awareness. If the product
has no or few competitors, a skimming price strategy is employed. Limited numbers of product
are available in few channels of distribution. In the Growth Phase, competitors are attracted
into the market with very similar offerings. Products become more profitable and companies
form alliances, joint ventures and take each other over. Advertising spend is high and focuses
upon building brand. In the Maturity Phase, those products that survive the earlier stages tend
to spend longest in this phase. Sales grow at a decreasing rate and then stabilize. Producers
attempt to differentiate products and brands are key to this. Price wars and intense competition
occur. At this point the market reaches saturation. Promotion becomes more widespread and use
a greater variety of media. In the Decline Phase, there is a downturn in the market. For
example more innovative products are introduced or consumer tastes have changed. There is
intense price-cutting and many more products are withdrawn from the market. Profits can be
improved by reducing marketing spend and cost cutting. However in reality very few products
follow such a prescriptive cycle. The length of each stage varies enormously The decisions of
marketers can change the stage, for example from maturity to decline by price-cutting. Not all
products go through each stage.
11. We now deal with the first aspect of PLC namely Price optimization. Price optimization is the
process of optimizing price and inventory-order-quantity plan through more accurate demand
forecasting. The prime aim of price optimization is to maximize revenues and/or profits. This
can be achieved through sophisticated forecasting and optimization algorithms incorporated in
Cognizant
Technology
Solutions
44
high-performance decision support systems. Price Optimization Models are used to determine
initial pricing, promotional pricing and markdown (or discount) pricing which we shall be
seeing soon. The insights on Price Optimization help to forecast demand, develop pricing and
promotion strategies, control inventory levels, and improve customer satisfaction. The
governing principle is the price elasticity of demand which normally states that Demand
increases with reduced pricing. This however may not be true always. For premium, prestige or
fad items the reverse could be true. The overall aim is to optimize the variation of sales with
respect to price so that GMROI is maximized. We must mention here that GMROI is the
product of the Gross Margin Percentage and the Sales to Stock ratio. Further the gross margin
component of GMROI is affected by pricing decisions.
12. There are strategic implication of pricing. For example, in the introductory phase of the PLC,,
the need for immediate profit is not a pressure and hence ,low pricing can be applied. If
however, the product has no or few competitors, a skimming price strategy is employed and
retailers can hope to reap the maximum revenue in the shortest possible time. In the Decline
Phase, there could be intense price-cutting.
13. Price Optimization is also tuned in with the seasonality of demand. A moderate base price can
be set for the start of the season. As the season matures and reached its peak ? and demand starts
increasing, a markup on price can be added to ?make hay while the sun shines?. Towards the
end of the season, we see markdowns which induce the somewhat reluctant consumers to but
more merchandise. The off season will typically see discounts to sell of the excess stock and
still make profit out of it. Otherwise this excess stock could become an eyesore and impair a
store?s image. True price optimization is realized at three critical phases in the seasonal
planning process ? pre-season planning, in-season promotions and end-of-season clearance
14. We now come to the second aspect of PLC viz. Promotions optimization. In the introduction
stage, Promotion is aimed at innovators and early adopters. Marketing communications seeks to
build product awareness and to educate potential consumers about the product. In the Growth
stage, Promotion is aimed at a broader audience to fuel growth. In the Maturity stage Promotion
emphasizes product differentiation. In the decline stage , there will be efforts to stop the demand
fall. The phase out stage could look to promotional activities to provide information on new or
rejuvenated products.
15. The largest portion of a retailer?s communication budget is typically spent on advertising and
sales promotion. Promotional activities are typically used to achieve short-term objectives. In
today?s world, promotions have become so common that most consumers don?t even notice an
ad unless it screams out ? ?50% OFF; BUY ONE, GET ONE FREE.? Promotion
Optimization provides retailers the ability to maximize margin and revenue by accurately
determining which items or groups of items to promote, in which locations, at what price points
and via which promotional vehicles. Promotional Activities vary with the various stages of the
life cycle. In the next slide we look at the optimization variables in detail.
16. We can define a few metrics here that help evaluate the benefits reaped out of promotions. We
define ?lift? as the percentage increase in the sales revenue occurring as a result of the
promotion after removing out the effects of other programs. We can define ?reach? as the
percentage of the market exposed to the specific promotion. For example, if a promotional
program is directed to 2.6 million customers and 2.5 percent people respond to it , we can
estimate that the reach is 65,000 customers. If average sales previous to the program has been
around 500 thousand Dollars and the program increases sales by around 25 thousand dollars,
then the lift of the program is 5 percentage points. While the success of promotions is often
evaluated based on their impact on sales (often measured as lift or plus over normal or reach),
true promotion optimization focuses on developing a promotional plan that maximizes gross
margin dollars over the season. Many promotions may not have a positive gross margin
contribution, although sales could increase significantly. The problem centered on those deep
promotions supported by large ads that gave up too much gross margin and were too costly to
ever be profitable. The ultimate objective of Promotions Optimization is to find out the best
possible trade off between cost of implementing the program and the subsequent reach and lift
targetted.
17. Markdowns are reductions in the initial retail price. Markdowns usually come towards the end
of season and try to induce price-sensitive customers to but more merchandise. According to
Cognizant
Technology
Solutions
45
Levy & Weitz in Retailing Management, more than 60 percent of sales in department stores and
specialty chains come from marked-down merchandise. Tremendous financial benefit is
available if price changes are executed at the right time and deep enough to spur demand. If
merchants markdown merchandise too early, they are stuck with inventory shortages,
dissatisfied customers, and lost gross margin. If they markdown merchandise too late, which is
typically the case, they are left with excess inventory at the end of the season, have difficulty
finding room for new merchandise, and sacrifice gross margin dollars. The key is to minimize
the price cut and at the same time clear off the excess inventory and reap the maximum benefit
out of it. There however has to be a minimum bar beyond which price cannot be cut. Because
Markdown Optimization is one of the quickest and easiest ways for retailers to drive
productivity from their inventory investment, it's an excellent place to get started on the road to
using Merchandise Optimization across the entire merchandising process.
Cognizant
Technology
Solutions
46
CHAPTER 14: ORDER MANAGEMENT:
1. This module discusses the Order Management process and the various sub processes within with
a view to optimize them. The session begins with laying down the Order management
framework which sort of contains the steps to establish a streamlined order process. We look at
the key factors considered while choosing a vendor. We also look at Lead time Optimization.
We emphasize that Selling generates revenue, but buying right generates profit.
2. At the end of this chapter, you will be able to: Illustrate the order management process in a
logical view. Explain the procurement framework in sourcing. Describe the order management
framework. Explain lead time optimization.
3. As you know sourcing forms the first component of the Vendor-Customer Value Chain in any
Retail Organization. In this chapter, you will have a first look at the optimization involved in the
sourcing and ordering process. As it is evident, order management is somehow linked to the
other key processes, which makes optimization all the more complex and crucial here
4. It is known fact that retailers can?t succeed without their vendors. To survive, they must be able
to count on a predictable supply of merchandise at competitive prices and with sufficient
promotional support. We have already learnt about the vendor selection process and how
sometimes instead of Single sourcing, a vendor mix is selected to spread the risk, which
however may reduce a retailer's bargaining power. Contract Management is a component of this
Framework and is all about developing a transactional framework or a business agreement
between the Retailer and the supplier. The key here is to know more about the vendor
considering his history, scale of operations, exclusivity etc. Sourcing can then be looked at
from two different perspectives: Product Sourcing and Strategic Sourcing. Product sourcing
will look at identification of products to be sourced and the concerned vendors and this has to be
followed up with supplier-retailer contract which once defined, it often becomes a struggle to
change . This 'trader' or 'merchant' model was followed for many decades, largely buying from
those suppliers who could provide the best prices. Of course other parameters were considered
as well, such as desirability of the product, but price was the major driver. There was little, if
any, strategy to selecting the 'supply base'. Retailers, by and large, followed the domestic
sourcing route. Retailers such as Wal-Mart in the USA or Carrefour in France and many others
have had preferred suppliers who grew along with them. These suppliers were typically based in
the home country of the retailer. In the late 1990s, however a strategic scientific sourcing
principle began to be applied. It was good to cut down supplier numbers, since this reduced the
management effort on the part of the buyer to constantly look for new suppliers and maintain
current relationships. At the end of the 90s and into 2000, however, there seem to be
rumblings among retailers about the need for some more diversity in their supply bases. These
attempt at strategic sourcing keeps in mind the impacts of globalization, the long term and
immediate needs, time horizons, quality, responsiveness etc. The ultimate aim as we know
however is to reduce lead times and introduce an element of diversity in the vendor mix.
5. Let us focus on the multi-attribute method for Vendor selection criteria in more details. We
use the. First of all a list of parameters to be considered is developed. This list should not be too
short or too long. The list is to be balanced so that one dimension of vendor performance
doesn?t dwarf the others. Key parameters include the vendor?s reputation, his service levels, the
quality of his merchandise, markup opportunities etc. Thus different vendor brands are
qualified on each of the criteria and again a relative importance in terms of weights are assigned
to each of the parameters. This should be a joint decision between the category and merchandise
managers. The vendors are then evaluated on the basis of ?sum of the products? of the
parameters? importance along with the brand score on that parameter. A vendor?s overall rating
is thus obtained and this can be benchmarked against the other vendors? rating for the final
decision.
6. Establishment of the Order Management Framework is a product of the Procurement
Framework phase which we have already discussed. Order Management framework as we
understand in procurement contains a few key components for managing purchase orders,
Cognizant
Technology
Solutions
47
quotes, payments and supply contracts throughout their life cycles. The Order Management
framework provides an abstract model for aspects of order processing that are common across
several order-related processes (e.g., sales orders, purchase orders, and quotations). We are
concerned here with the Purchase Side Order process. The Order Processing framework
supports purchase orders and supply contracts. Its key tasks include generating, confirming and
tracking Purchase Orders . Obviously this will involve transmission of order to vendor and
logistics service provider and receipt of merchandise at the warehouse . This will finally
terminate in the stores getting their demand fulfilled and final payment being made to the
vendors.
7. Processes in a supply chain are divided into a series of cycles, each performed at the interfaces
between two successive supply chain stages. Here we see a snapshot of the Procurement cycle
and take you through the various steps involved in it. The ordering cycle occurs at the
manufacturer/supplier interface and includes all processes necessary to ensure that materials are
available for manufacturing to occur according to schedule. During the procurement cycle, the
manufacturer order components from suppliers that replenish the component inventories. At
the onset of the ordering process, a Purchase Order is prepared and sent to vendor with
disbursements to Accounts Payable, Central Receiving, and the Requesting department or
category department within the retailer?s business. The supplier ships the manufactured goods
and sends a notifies the shipment to the retailer through an Advance Shipment Notice. With the
goods arriving at the warehouse, a receipt of goods is sent to the Supplier Side Finance side
which in turn issues an invoice to the Retailer?s finance side. The latter verifies this with the
warehouse in order to match the goods received against that mentioned in the invoice, a process
called invoice matching, and makes payments to the Supplier.
8. Let us now a key optimization process in Sourcing, that is, Lead Time Optimization. Lead time
is the amount of time between a recognition that on order needs to be placed and the point at
which the merchandise arrives in the store and is ready for sale. This spans the entire cycle
consisting of Order processing time, the supplier manufacturing capability and the agility of the
logistics involved. If the supplier produces too early or the retailer stocks more, in both the
scenarios the inventory carrying costs will increase . However there?s a way around to it. Let
us take an example. If it takes 2 months to receive a shipment of a pair of Levi's jeans, the
possibility of running out of stock is greater than if lead time were only 2 weeks because the
Levi Strauss stores would have to forecast for a longer period. Use of special quick response
inventory systems lead to shorter lead times and hence lower level of backup stock required to
maintain the same level of product availability. We again emphasize the need for streamlining
and distributing the flow of goods and information across the entire supply chain.
Cognizant
Technology
Solutions
48
CHAPTER 15: REPLENISHMENT
1. Replenishment is the key to the supply side of the retail business. Supply planning essentially
gets divided into two parts; inventory planning and logistics planning. In this module we will
deal with inventory handling and management.
2. At the end of this topic, you will be able to: Understand replenishment process from a planning
and optimization point of view Explore inventory management as a crucial consideration for
retailers Compare various inventory policies Explain the trade off between service level and
cost Understand the variables and constraints in inventory optimization Throw light on
allocation optimization and shelf space optimization
3. As seen in the logical process view, the Replenishment Process consists of inventory planning
and optimization, allocation optimization and shelf space optimization. We discuss the key
optimization issues in each of these subsequently.
4. In today?s competitive retail environment, where profits are increasingly dependent on having
the right inventory on the shelf at the right time, price , and stores, ensuring optimal stock levels
is the number one issue for many retailers. While the demand side of the business attempts to
figure out how to get the rights accurately, replenishment and supply side of the business
attempts to ensure these are executed when there is a demand at the store. Increased data
visibility and the ability to predict and react to change well in advance provide the competitive
advantage retailers need for the timely and optimal in-stock positions, which we call
replenishment . This level of coordination requires the participation of not only the retailer and
manufacturer, but also all the players involved in the supply chain . It is here that retailers
around the world have implemented collaborative replenishment planning programs also called
CPFR. Collaborative replenishment planning enables manufacturers and retailers to jointly
manage replenishment activities - such as forecast adjustments, and target order quantities and
timing ? online, in a disciplined, automated fashion.
5. Today, increasingly complex supply chains are strained by shorter product life cycles, a growing
universe of SKUs and multi-layered supply chains. Retailers, thus, have to deal with weakened
in-stock positions, lower revenues and declining margins. To succeed in this demanding
environment, businesses need planning to keep products in-stock and available for sale.
Replenishment Planning is concerned with balancing demand, supply and re-stocking in the
retail environment. Replenishment Planning can be used to analyze sales data, calculate time-
phased forecasts and to create SKU-level demand plans, all these while balancing required
service levels with inventory investments. The bottom-line is to strive meet the customer
demand anywhere at any point of time. This is done by viewing costs to anybody as costs to the
chain and hence collaborating to meet demand.
6. Replenishment planning has to begin with Inventory planning and optimization. Inventory
planning and optimization answers questions like how to handle and coordinate merchandise
from different suppliers, what are the trade-offs between faster supplier delivery and higher
shipping costs, what supplier support is expected in storing merchandise or setting up displays,
which items require customer delivery. This should not be done in a stand-alone fashion; rather
this must be tightly coupled with the ordering and transportation processes. The results of
this advanced planning process is an actionable receipt plan over time based on demand
forecasts, replenishment parameters, and inventory availability at the numerous points within
the supply chain. AIP provides a tactical inventory plan needed to run the business. The
purpose is to optimally forecast consumer demand, source supply and fulfill demand in a time-
phased manner, thus providing the ability to align the supply chain into a virtual enterprise
creating visibility across the supply chain to demand, supply and any constraints. As PWC
rightly remarks, ?nowadays, it?s the competition between supply chains and not just companies?
.
7. Setting service levels is the first step in the inventory planning and optimization process. This
determines the availability of goods at the right place in the right quantity. Understanding the
concept of service levels is the foundation upon which inventory planning and optimization is
Cognizant
Technology
Solutions
49
built. The main objective to stock goods is to ensure Product availability to the end
consumers, and satisfy their demand, thus preventing Stockouts and Lost Sales. Product
Availability is determined by a parameter called ?Fill Rate?. Fill rate can be defined as the
percentage of customers whose demand for a particular SKU is met. For example if 100
customers in a Store ask for a 100gram of Dove soap, and 97 of them actually get it on the
shelves, fill rate for that SKU at the Store is 98%. Fill rate is also defined as the percentage of
demand for a customer for a particular SKU that is met. Thus if a customer walks in a Store and
asks for 10 Dove soaps, and he could get only 8, fill rate is 80%. Typically higher the fill rate,
higher should be the amount of back-up stock necessary to ensure a Target Service level. A
related measure is ?stock-out? that is a red alert that during the lead time, demand for a
particular stock has not been met. Inventory management is a classic business problem
because it represents a fundamental trade-off. On the one hand, inventory allows us to serve our
customers by over-stocking. But if we don?t, it could amount to losing customer requirements.
Service levels will vary directly with the level of inventory. However if some companies are
able to improve inventory management practices, they can decrease inventory levels and
increase service levels at the same time. Wal-Mart is a classic example in retailing. By
combining improved Point of Sale information with more frequent replenishment and enhanced
logistics practices, Wal-Mart is able to both turn its inventory faster, and offer its customers
better service levels.
8. What is an ideal inventory across the various nodes of the supply chain? The question is not
only tricky but also difficult to answer correctly, because there are so many variables and
constraints. It is precisely for this reason, that we need to have optimization. Mathematical
models are available that take into account the demand forecast at various points in the chain,
the service levels associated with a particular retailer, the lead time for various suppliers and the
inherent dynamism involved in this lead time etc. and then prepare a time phased inventory
holding at the various nodes. There are also a number of macro variables that come into play.
For example, after optimization, even if a particular warehouse has to have, say, an x amount of
inventory of an SKU at some point of time, holding that amount over a period of time could
require more investment than is earmarked in a retailer's financial plan. Moreover one cannot
stock more than what the capacity is. And then, there is also the constraint imposed by logistics.
The key here is not to have a static plan but rather a dynamic, forward-looking plan that re-
stocks based on initial and predicted values and is agreeable to all the players involved.
9. Inventory can be seen as combination of various components. While a working amount of stock
is required to meet day-to-day demand, a retailer has to incorporate various amounts of other
stock quantities to meet the target service level, say a particular fill rate. We require a buffer
amount of safety stock because of the inherent uncertainty in the supply and demand of goods.
Then we require strategic stock due to unpredictable, unusual events like a moving being
declared ?hit? and the branded apparel displayed in it becoming a rage. We would require in
transit stock due to the delays in the lead time of order. Presentation Stock is required for being
displayed at stores to gather attention. Finally Tactical stock is required because of distortion in
the production routine. The actual inventory may not be an addition of all these stocks, but
an aggregate amount determined by considering various trade offs.
10. Unfortunately most retailers are unable to predict demand and replenishment times without
error. As a result they carry backup stock also known as safety stock so that they won?t run out
before the next order arrives. In the chart that you see here, a retailer can plot the amount of
stock he has at various point of times against time. However doe to the inherent supply and
demand variations and various other factors ? this seldom presents a true picture of stock
required and hence buffer stock is required. Several issues determine the level of backup
stock required. Key issues include unique demand and lead time pattern for each SKU, service
level of each store, fluctuations in demand, lead time available from the vendor, fluctuations in
this lead time and the vendor?s product availability. To illustrate , if for instance a Levi Strauss
store wants to satisfy almost all its customers who wish to purchase a pair of Levi?s 501 jeans in
size 31-32, it must carry a great deal of backup stock compared to what it needs to satisfy only
75 % of the demand for this SKU.
11. Various policies are available that help a retailer or any player for that matter to maintain
optimum level of stock taking care of all the stock components. It indicates the timing and
Cognizant
Technology
Solutions
50
quantity of order of various SKUs. In the next few slides we will get an overview of the various
inventory policies.
12. One of the goals of a supply chain is to minimize inventory costs. To minimize costs, the
Economic Order Quantity (EOQ) is employed. EOQ is a formula used to minimize the ordering
and inventory holding costs. We visualize total cost as the sum of the Inventory carrying cost
and the cost of ordering goods with an intention of not carrying inventory. Apparently, these
costs are conflicting and hence we require optimization. We employ mathematical techniques
and then find out a formula for the Economic Order Quantity. We assume here that lead time is
constant , that demand arises continuously in time, no stockouts are allowed and that we are
considering only one SKU. Basically we cannot predict uncertainties here. EOQ is not a
?magic bullet? that will solve inventory cost problems. But it is a good tool to employ in
analyzing which ordering policy is best for the organization.
13. After arriving at the EOQ, we can calculate the reorder Point on the chart which is the time at
which reorder has to be made with the amount of EOQ so that stock-outs don?t occur. Hence
ROP is the reorder point at which time a stock replenishment requisition would be submitted to
maintain the predetermined or calculated stock objective. Mathematically speaking, reorder
point is equal to demand during lead time multiplied by lead time plus safety stock. We can see
this from the graph. There is a constant amount of safety stock included in the inventory at any
point of time. A constant reorder point or ROP is calculated which is shown in the graph as a
straight line parallel to the X-axis. The sloping line then gives the inventory at any point of time
and the maximum height above the ROP line is the EOQ.
14. In this variation of the ROP Inventory Policy a review period is fixed. During this time a fixed
inventory level is determined based on a retailer?s service level or his requirement of various
SKUs. If the inventory levels slope down considerably, an order is made to replenish this
inventory to bring it to fixed determined level. This order can be raised even before the review
period gets over if the inventory level crosses the safety level mark. We can observe here that
the order quantity is not fixed.
15. In the previous few slides, we saw that the aim of the inventory policies is to determine where to
hold the stock amongst the various nodes in the supply chain and in what quantity. The
decision of where to hold stock is a strategic one and one could either go for flexibility or
responsiveness. On the one hand, holding all safety stock in downstream distribution centers
improves performance but requires greater investment in inventory. On the other hand, holding
all safety stock in a central warehouse (CW) saves inventory costs but adversely affects
performance.
16. Inventory managers need a reliable way to make the trade-off between fiscal inventory costs and
performance. And they need to perform a trade-off analysis between the performance achieved
by holding stock at a centralized level versus the performance achieved by holding stock at
individual sites. There are constraints to be kept in mind like the lead time taken to re-supply
stores from DC or supplier directly and whether there are currently promotional or brand related
activities going on in the stores.
17. Having decided where to stock, the second issue is to decide how much to stock so that fill rates
can be maintained. This has to be done in conjunction with the earlier activity of determining
where to stock. Moreover the service level to be maintained could be done at various levels of
aggregations as for example the SKU level, the store level, the product group level, the
contribution of a particular SKU to the store image and ultimately to the profitability of the
store. Retailers also could use heuristics to determine the amount to stock like just in time,
historical data, safety level, discounts availed if purchased in bulk etc.
18. This in gist is, inventory optimization as in how much and where to stock. All this will be done
to satisfy the service levels most of the time keeping in mind the financial constraints of
carrying inventory or reordering as well as the finite capacity imposed by the distribution
centers and the stores. A few tips to optimize are to negotiate lower lead times with suppliers,
standardize parts and supplies, improve Forecasts, negotiate More frequent Deliveries & On-
time Delivery and more importantly treat a cost of one player as a cost to another in the whole
chain.
19. Having dealt with how much to buy and where to stock it, the final issue is to decide how to
allocate it amongst the various stores .Allocation Optimization helps recommend initial and in-
Cognizant
Technology
Solutions
51
season allocations based on store demand and many other factors. With the whole business
riding on having the ?right product, in the right place, at the right time,? one needs an easy-to-
use and accurate method of allocating merchandise. One could either go for Top-down
Assortment plan or bottom-up real demand. In the former, depending on the forecast an
aggregate sales figure is drawn up and this is distributed down to the various stores depending
on the service levels, constraints and historical figures of that store. In the latter each store
individually builds up its demand on near term forecasts. These are aggregated and then an
indicative list of allocation required for each store comes up. In real environment, both the
policies may be followed simultaneously and then a negotiable point can be reached so that
stock outs can be avoided, service levels can be maintained. The overall Gross Margin return on
Investment has to be maximized. This ratio is a similar concept to the return on assets and
multiplies the gross margin percentage with the sales-to-stock ratio. GMROI is also affected by
the pricing decisions.
20. The retails store?s shelf space is the final battleground for the consumer's dollar. Recent data
from the Point-of-Purchase Advertising Institute suggest that 70 percent of supermarket
shoppers and 74 percent of mass-merchant shoppers make their purchase decision inside the
store. If we can quantify the value of giving each SKU a certain number of facings at each
possible shelf location, then we can maximize the value of the product shelf positioning, subject
to not exceeding the available shelf space. This is the ultimate objective of shelf space
optimization and answers the questions of what SKUs to keep at the shelves and in what
quantities. The Objective is of course to increase availability of goods and increase a
consumer?s need to buy something in store.
21. The manager of a retail store such as a supermarket must decide both where to place each stock
keeping unit (SKU) on the shelf but also how much space or ?facings? to allocate to the SKU.
For example, products that are subject to impulse purchases should be placed in high traffic
aisles and/or at eye level. SKU?s that appeal to children may be put on lower shelves. SKU?s
that have high sales volume should receive more shelf facings because that will tend to reduce
the labor devoted to keeping the SKU in stock.
Cognizant
Technology
Solutions
52
CHAPTER 16: TRANSPORTATION
1. Transportation is the other major segment of supply side of the retail business, and it primarily
deals with management of movement of inventory through the supply chain. In this chapter,
you will learn how transportation is the most crucial element of logistics. J ust like other
processes, you will see the various planning optimization issues involved in transportation. You
will understand the scientific rationale behind bridging the supply demand gap and conclude
with a treatment on Route Planning.
2. At the end of this chapter, you will be able to: List and explain the key departments in retail
enterprise
3. Why do we need to optimize transportation processes? Transportation is by far the largest
logistics expense area for most companies. Surveys done by the Council of Logistics
Management (CLM) have estimated that logistics expense represents about 10 percent of the
U.S. GDP and that transportation spending by itself is six percent of GDP. Transportation is
the critical bond to upstream and downstream links in the retailer?s supply chain. Senior
management is focusing on transportation because a dollar saved on transportation goes straight
to the bottom line. Corporate hierarchies are beginning to see how important the transportation
role is and to understand that improvements in transportation operations are often very fast to
implement and require little or no capital investment. Transportation optimization makes good
business sense. In this chapter, you will learn a bit more about how to optimize the design of
the distribution network, the allocation of merchandise from supply points to demand points and
the various routes taken for merchandise to flow.
4. You know that Transportation Management is all about managing the modes of transport (like
Rail, Road, Air, Shipping) and different mix-mode arrangements to suit the procurement
strategy. Its also about managing the different Shipment operations like Loading, Unloading,
Stock Handling, Packaging, Un-Packing, re-packing, Bulk breaking and Stock disbursements to
Stores from the Warehouses. The different merchandise flows can be from vendor to
Distribution center or warehouses and then to stores or alternatively from vendors directly to
stores. This brings to focus two aspects of Transportation Management. While Inbound
logistics management develops all the inbound transportation plans for delivery to the DC?s and
Warehouses from the Suppliers Factory, Outbound Logistics on the other hand manages all the
outbound distribution functions from the DC?s and the Warehouses to different Stores. The
whole idea in transportation optimization is focused on two areas: cost and service. Managing
these two successfully can be a very difficult balancing act. Cut costs too much and service
may slip. Let service at any cost become the accepted standard, and the company may spend its
way out of business. Transportation optimization seeks to achieve the balance between cost and
service. Here we group planning and optimization into two stages: the Distribution Network
stage and the Stock Movement within a Network stage.
5. In the wake of increasingly complicated supply chains, distribution network design plays a key
role in controlling the cost of doing business. What we are looking at are the constraints
imposed by the Multi-Source-Multi-Sink Supplier Retailer Model. The retailers have to deal
with multiple suppliers - each supplying their SKUs and at the other end have to dispatch these
SKUs to the various retail outlets and sometimes to non store channels. Add to that the
Inventory holding costs of goods in transit and the costs involved in maintaining and utilizing
warehouses. Controlling distribution costs involves striking a balance between warehousing
and transportation. While more distribution centers drives down the cost of transportation, the
opposite holds true as well. Optimization helps to find out the size, location, service strategy and
number of Warehouses and DCs.
6. The Supply Demand matching has been an area of wide interest and has efficient transportation
algorithms to optimize the Cost-time trade-off. While doing that one must keep in mind the
constraints of a finite DC capacity as well as the allocation required for a store. Retailers utilize
historical sales information but they also pay close attention to current supply and demand
situations to determine the proper allocation. For instance if a retailer is having difficulty
Cognizant
Technology
Solutions
53
meeting demand because a vendor is unable to deliver, or if actual sales are lagging behind the
forecast, the retailer will have to adjust the historically derived allocation downward. The
ultimate aim is to minimize the overall cost of transportation while maintaining good service
standards ? the output of which will be a chart showing a ?dynamic? store-DC allocation of
merchandise. In the given example, there are five DCs and 10 stores, and the distribution is to
be made for a single item. Each DC can store a finite inventory quantity, and each store
demands a finite inventory quantity as well. The attempt of this multi source multi sink model
would be to distribute inventory from each DC to each store so that both the constraints are met
and cost of transportation from DC to store is minimized.
7. The key issue now is to minimize the cost involved in the actual transportation of merchandise
from one point to another. Once again we face the classic cost-time trade off in determining
what volume to ship. A Large volume increases time taken and at the same time decreases the
costs involved for shipment. Another typical constraints is the Service level associated with that
retailer. Imagine a router in a network handling the dynamic internet traffic and dynamically
changing routes for the decongestion of routes and quicker flow. One can drive that analogy
here for clubbing and un-clubbing of routes and volumes so that a trade off between lead time
and cost can be achieved. There are efficient algorithms and heuristics involved in proper
route planning and optimization utilizes these and much more to strike a fit balance between
cost and lead time.
Cognizant
Technology
Solutions
54
CHAPTER 17: COGNIZANT INITIATIVES IN RETAIL
1. The objective of this module is to have a basic understanding of the working of Point Of Sale or
P.O.S., Global Trade Identification Number or G.T.I.N., Global Data Synchronization or G.D.S.
and Radio Frequency Identification or R.F.I.D. As you proceed further through this module, you
will have an overview of each of these initiatives and their relevance to the retail industry. You
will also look at the initiatives taken by Cognizant in the retail space
2. At the end of this chapter, you will be able to: Describe the evolution of Point Of Sale system.
Understand BuyYourWay. List the types of barcodes. Explain Global Trade Identification
Number. Explain the need of Global Data Synchronization. Describe Radio Frequency
Identification. List the RFID solutions provided by Cognizant.
3. The earliest Point of sale system was where cash was accepted from the customer and hand
written or manual receipts handed over to them. Gradually this system evolved to one where
cash registers were used and a printed bill handed over to the customer. The credit card
transactions were manually processed separately. Then came the POS system as you know
them today. These were computers, which retrieved the relevant product information from a
database and processed the payment, made in cash or by credit cards. These systems gradually
had more featured built into them such as inventory management, provisions for special offers,
sales promotions, financial accounting, tax computations and customer relationship
management software. These systems are now transforming into the next generation systems
like touch screen POS, wireless POS and Web enabled POS.
4. A good POS system helps in tracking customer orders, maintaining inventory and increasing
employee efficiency. It also provides better customer service at reduced counter space
occupation. Efficiency is increased by reducing time spent on Sales transactions, inventory
control, purchase orders, sales reports and raising invoices. An efficient POS Solution increases
efficiency with improved data flow, providing a single window for all customer information.
The advanced inventory control system helps the retailer avoid physical counting of
merchandise and maintain optimum stock levels. Faster billing and keeping a track of
customer?s purchasing habits result in increased sales. Labor cost and time is saved by having a
provision for offering special prices and incentives with ease without re entry of data. Operating
costs are reduced by providing efficient and precise information and increasing employee
productivity.
5. The BuyYourWay wireless personal shopping assistant (PSA) addresses some of major
challenges faced by retailers. It aims to bring innovation at the point-of-sale and transforms it
into point-of service. This is done by leveraging various other enterprise IT systems to provide a
seamless shopping experience to the customer with access to multi-channel information and
personalized promotions. BuyYourWay can be used to advertise in store specials and various
personalized, targeted promotions reflecting the individual consumer profile in addition to the
usual generic promotions. It can be an effective way to promote store brands or sponsored
specials and increase total number of items that a customer purchases. Customers can take full
advantage of more visible offers and promotions. Its smart checkout lets the customer bypass
queues and reduces checkout time. These features are achieved by building in Personalization,
Channel Integration, multiple Payment Modes, the ARTS data model and UPOS into the
underlying system.
6. You would have seen dozens of bar codes everyday, on virtually every item you use. They may
seem all the same for you, however they are actually very different from each other. There are
two major types of bar code symbologies used across the globe. The UCC (Uniform Code
Council) - 12 is the bar code symbology used in North America and the EAN (European Article
Number) symbology is used in the rest of the world. The significance of each digit is shown, for
example the eAN country code for India is 890.
7. The UCC and EAN have jointly developed a new global standard 14 digit code, to have a
uniform system of product codes. This encompasses the existing UCC-EAN codes. The Global
Trade Identification Number is the umbrella term used to describe this entire family of
Cognizant
Technology
Solutions
55
UCC.EAN data structures for trade item identification. These data structures include UCC-12,
EAN/UCC-13, EAN/UCC-14 and EAN/UCC-8. The GTIN is the foundation for electronic
commerce. The introduction of GTIN will help the retailers improve the efficiency of global
trade and remove the need for re-labeling. Thus error free information will be available across
the enterprise with improved supply chain efficiency.
8. The GTIN would thus encompass the 8,12 and 13 digit codes within its 14 digits by adding the
relevant number of left pad zeroes as shown in the picture. Hence a bar code reader capable of
reading GTIN would also be able to read UCC-8, UCC ? 12 and EAN-13 codes.
9. During the item?s life in the supply chain from the manufacturer through the Supply Chain
Components to the end user, it passes through various phases as shown in the picture. On the
manufacturer side, it uses GTIN based on first item level, then case level and finally pallet level.
Once it passes into the SSCC, the identification is from pallets, trucks and distributor level.
Coming near the end user, the identification focus shifts again using GTIN to pallet, case and
finally item level.
10. The main need for data synchronization arise out of inconsistencies in information between the
manufacturers? and their trading partners? systems. Often, they use multiple data formats, and
hence conversions have to be frequently made using data conversion maps. Maintaining and
updating the various attributes of an item from multiple redundant data sources cause
inefficiencies and errors. Due to these shortcomings, retailers worldwide face huge losses.
3.5% of sales are lost each year due to supply chain inefficiencies. A large cost is also incurred
due to various errors like item catalogue and invoice generation errors. Significant time is also
spent due to non synchronized data ? an average of 25 minutes per year per SKU is taken to
clean out the out-of-sync items and a new product launch takes about 4 weeks.
11. Using the Global Data Synchronization Model, real time information updations and exchanges
take place between the suppliers and the retailers. Thus there is a uniform view of the business
information and redundancies are removed. The picture shows the working of a GDS solution.
The supplier publishes the item information into his data pool, which in turn sends basic
information to the Global Data Registry (GDR). When a retailer wishes to buy an item, it sends
this information to his own data pool which in turn searches the basic information in the GDR.
Once the information has been found and a supplier identified, the information is synchronized
between the trading partners using a synchronization engine.
12. Radio frequency identification (RFID) is a technology that uses RF waves to transfer data
between a reader and a movable item to identify, track or locate that item. It does not require
line of sight or contact between the reader and the tagged item. RFID systems have several
advantages over bar codes, including non contact readability, longer read range, durability,
multiple reads at the same time and real time tracking. The information which can be stored on a
tag is also many times the information a normal barcode can store. Another significant
difference is that the bar code stores a code and the relevant details are read from a database.
RFID tags do infact store information about the product on them and do not necessarily need a
database to function. Thus RFID gives total supply chain visibility of the item, case or pallets,
depending on the level of tagging implemented. Due to the complex nature of duplicating them,
RFID is also emerging as a technology to check the genuineness of an item. However, the
drawback of RFID is the high cost of tags (25 cents per tag) and the high cost of infrastructure.
Further, the real time data has to be integrated into the enterprise?s ERP at a significant cost.
Along with these cost related issues, there is also a cultural resistance to change offered by
employees of many companies.
13. Let us now see how the RFID works. The different components of an RFID system: A typical
RFID system comprises three components: an antenna, RFID tags (the transponder) that are
electronically programmed with unique information and an RF module with decoder
(transceiver) Antenna: A radio signal emitted by the antenna activates the RFID tag, allowing
data to be read and, in some instances, to have data written to it. Antennas provide the conduit
between the RFID tag and the RF module. Antennas are often found in portals, such as
doorways and tollbooths, where they receive data from persons or objects passing through.
RFID Tags: RFID tags require a power source and generally fall into one of two basic
categories: active or passive. Active RFID tags have internally battery-powered memory, radio
and circuitry. Active tags are typically ?read/write.? The battery power of an active tag gives it a
Cognizant
Technology
Solutions
56
read range of approximately 300 feet. Active tags are typically larger, more Expensive and
have a shorter operational life than passive tags. They have a memory capacity of up to 1MB.
Passive RFID tags operate without a separate power source and obtain operating power from
the reader. Passive tags are typically ?read only? and have a shorter read range of 4 inches to 15
feet. Passive tags are typically smaller, less expensive and have a much longer operational life
than active tags. They have a memory capacity of 32 to 128 bits. RFID tags can be attached to
almost anything: pallets, drums or cases of products. Transceiver: The transceiver consists of
the RF module and a decoder and is often packaged with the antenna to create a reader or
?interrogator.? The interrogator can be mobile or it can be positioned at a fixed point, such as an
entrance or exit. The reader decodes the data from the RFID tag?s circuit and passes the data to
the host computer for processing. Frequency: A RFID system?s performance is affected by the
frequency in which it operates. Low-frequency systems ?operating in the range or 30kHz to
500kHz (see Note 2) ? have short read ranges of less than six feet and lower system costs. They
are most commonly used in inventory control, security access and asset-tracking applications.
Intermediate-frequency systems ? operating from 10MHz to 15MHz (see Note 3) ? have short-
to-medium reading ranges, medium reading speeds, and are typically used in smart cards and
access control applications. High-frequency systems ? operating in the range of 850MHz to
5.8GHz (see Note 4) ? have long reading ranges (more than 100 feet) and high reading speeds.
(High-frequency systems can transfer data up to 10 times faster than low frequency systems.)
However, the longer read range makes the high-frequency systems susceptible to
environmental interference from dirt and moisture. They are most commonly used in railroad
car tracking and toll collection applications. Memory: The transponder memory may be read-
only, ?write once/read many? (WORM) or read/write. A read-only tag is much like a license
plate or a traditional bar code. It comes equipped with a unique identifier, or the user can add an
identifier after purchase. Although read-only tags are reusable, the data content cannot be
changed. Read-only RFID tags can be used for pallet tracking. With WORM tags, each field can
be programmed just once. Information can be incrementally added to the tag, but once added, it
cannot be changed. WORM tags can be used for recording history, such as the time or date that
an event (e.g., a receipt, put away or pick) took place. Read/write tags provide the greatest
flexibility and support a variety of applications, but they cost more than read-only tags. They
can be written in increments and can be erased and reused. Read/write tags can be used to
record the status of an item or the contents of a container.
14. Cognizant provides a complete array of services with regard to RFID implementation to its
clients. Strategic Adoption focuses on the business application of RFID. The organization can
leverage its upfront investment in RFID by proliferating to other business areas through
strategic planning and foresight. Cognizant will partner with its clients to select the most
appropriate business areas for RFID adoption, carry out pilot projects and determine the ROI for
the next stage of Strategic Adoption. Cognizant?s consulting services include applicability
analysis, scenario modeling, technology and vendor evaluation, Return On Investment
validation, RFID roadmap and RFID auditing. Once the consulting phase is over, and the client
feels they want to go ahead with the next step, Technology Adoption which Involves
identification of suitable RFID technology to be implemented as well as the selection and
deployment of RFID hardware and system integration is carried out, followed by
implementation coupled with simulating the entire exercise before the actual roll out.
15. Cognizant?s implementation services focus on application development, middleware
customization and deployment, performance and scalability tuning and system integration. The
applications developed so far include Slap and ship, RFID ? SAP integration, Smart shelf, goods
receipt and put away, and real time analytics.
16. The benefits achieved out of Cognizant?s RFID solution will be cost savings by way of ?
Retrieving Efficiency and Accuracy, Improved Stock Visibility, Reduction in Inventory,
Physical Inventory Counting Efficiency, Picking Efficiency, Reduction in Theft, Reduction in
Unsaleables, Reduction in Out-of-Stock, and Increase in Point of Sale Efficiency.
17. Now let us see how an RFID system implemented by Cognizant actually works. Emphasis here
is on the middle ware, which is the software between the hardware and the client?s ERP
application. There are three main layers in the middleware ? the hardware control layer, data
decoder and translator, and the business rule processor. These layers are independent of the
Cognizant
Technology
Solutions
57
RFID hardware and the client?s ERP Package. In order to make our middleware compatible
with any hardware, a vendor specific adaptor is used and similarly, adaptors, depending on the
ERP package are used to pass on the information from the middleware to the Client ERP
package. Each layers of the middleware filters out redundant information, for example, the
hardware Control layer prevents multiple reads of the same tag in a particular read cycle, the
data decoder and translator converts the data into GTIN nad the business rule processor will
prevent a passing tag from being read into the inventory of a particular shelf. The entire
middleware process is handled by a process controller.
18. Now we shall see a case study on an actual implementation carried out by cognizant. A
Delegate Tracking System developed for NASSCOM. The client wanted an RFID system to
track the delegate participation at NASSCOM 2005: India Leadership Forum. Cognizant came
up with the solution including the initial analysis including Ergonomics & Environmental
planning, Hardware Performance Testing and Selection; Application and Middleware
Adaptation; Load Simulation and Testing & Implementation in Production of RFID enabled
delegate-tracking system in less than a month. The solution?s functionality included Delegate
Registration, Tracking, Administration setup and reporting.
19. The benefits derived from the solution are Real time information on delegate participation at
conference tracks ; Customized reports in form of informative graphs ; Scalable solution
capable of handling large number of delegates which and could be used for multiple events and
RFID data enabling analysis for the planning future events.

Retail L0

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Retail L0

Uploaded by

Copyright:

Available Formats

RETAIL LEVEL 0 FOUNDATION COURSE

You might also like