Ram Singh 0565 Effect of Plan o Gram, Inventory &amp VMI

Effect of plan-o-gram, Inventory and VMI
A RESEARCH PAPER
“Effect of Planogram, Inventory and vendor

managed inventory in Visual
Merchandising”
(AN EMPIRICAL STUDY)
Submitted in partial fulfillment of the
requirement of the (MBA Degree) Bangalore
University 2005-2007
By
Ram Singh
Reg. No. 05XQCM6072
Under the guidance of

Senior Prof. S. Ramgopal
M.P. Birla Institute of Management

Associate Bharathiya Vidya Bhavan
#43, Race Course Road,
Bangalore-560 001
M.P.Birla Institute of Management 1

STUDENT DECLARATION
I hereby declare that this Research paper entitled
“Effect of Planogram, Inventory and vendor managed inventory in
Visual Merchandising” has been undertaken and completed by
me under the valuable guidance of Senior Prof S. Ramgopal,
M.P.B.I.M, in partial fulfillment of Degree of MBA program is my
original work and no part of the work has been submitted for any
degree, diploma, fellowship or other similar title or prizes for any
institution previously, to the best of my knowledge.
Date:
Place: Bangalore (Ram Singh)

ACKNOWLEDGEMENT
I would like to express my profound gratitude to Mr. S. Ramgopal,
Senior Professor, M.P. Birla Institute of Management whose
guidance was significant in the successful completion of the
research paper.
I wish to thank our Dr. Nagesh Malavalli, Principal,
M.P. Birla Institute of Management for providing the means and
encouragement.
Date:
Place: Bangalore (Ram Singh)

PRINCIPAL’S CERTIFICATE
This is to certify that this report is the result of
Research Paper “Effect of Planogram, Inventory and vendor
managed inventory in Visual Merchandising” undergone by Mr.
Ram Singh bearing the register number 05XQCM6072 under the
guidance and supervision of Senior Prof. S. Ramgopal This has
not formed a basis for the award of any Degree/ Diploma of any
University, to be the best of my knowledge.
Date: Dr Nagesh. Malavalli
Place: Bangalore (Principal)

GUIDE’S CERTIFICATE
This is to certify that this report is the result of
Research Paper “Effect of Planogram, Inventory and vendor
managed inventory in Visual Merchandising” undergone by Mr.
Ram Singh bearing the register number 05XQCM6072 under the
guidance and supervision of Senior Prof. S. Ramgopal. This has not
formed a basis for the award of any Degree/ Diploma of any
University, to be the best of my knowledge.
Date: Prof. S. Ramgopal
Place: Bangalore (Guide)

CONTENTS
Executive Summary 8
Objective of the Study 8
Research methodology 9
Part-A
Plan-o-gram 12
1. Introduction 13
2. Recognizing and Directing Traffic Flow 14
3. Definition of plan-o-gram 16
4. Fixturing 16
5. Lighting used in retail stores 18
6. Graphics and Signage 19
7. Merchandising Similar Products Together 20
8. Cross-Mix Merchandising 21
9. Visual Merchandising Tools and Supplies 22
10. Plan-o-gram Examples ` 23
11. Basic Criteria for creating Plano-gram 25
12. Data analysis and interpretation 26
13. Findings 33
14. Suggestions and recommendations 33
Part-B
Inventory of Retail Stores 34
1. Introduction 35
2. Model Specification and Optimality Conditions 36
3. Sales Rate Function 38
4. Inventory Decision and Cost Model 40
5. Objective Function 42
6. The Separable Sates Rate Case 43
7. Compensating Prices 45

8. Boundary Values 46
9. Solving for the Optimal Inventory Commitment Io 47
10. Tabulated Solution and Interpretation 47
11. Interpretation of the Six Solution Cases 48
12. Two Models for Inventory Effects 50
13. Implementation Methods 52

14. Typical Price and Sales Trajectories 53
15. Conclusions 58
16. References 61
Part-C
Vendor Managed Inventory in Retail Industry 63
1. Introduction 64
2. Definition and Concept 65
3. Conventional Fulfillment Process from Retailer Perspective 66
4. The flow of the conventional fulfillment process 67
5. VMI Fulfillment Process from Retailer Perspective 68
6. The flow of fulfillment process using VMI 68
7. Activities Involved in Establishing VMI Process 69
8. EDI Documents used in VMI 71
9. Benefits of VMI Process 72
• Retailer Benefits 72
• Supplier Benefits 73
10. Challenges and Limitations of VMI 74
11. Overcoming the Limitations 74
12. Conclusion 74
Bibliography 75

NEED AND IMPORTANCE OF THE STUDY
• Marketing products using visual merchandising system is an age-old practice but

with accelerated growth of retail industry, the art, or arguably the science, of
Visual Merchandising has gone to occupy a newfound fancy. There is a growing
recognition of the need for effective Visual Merchandising. But even as it
continues to grow, the understanding of Visual Merchandising impact and
effectiveness is still in its infancy.
• The shopping behavior which governs the decision to buy is a function of three
stimuli viz., visual, auditory and kinesthetic; the visual stimulus is the easiest and
most widely used tool for attracting customers. Although Visual Merchandising
has long been an important part of retailing (clothing, house-wares, etc.) it is not
as well known or accepted within the food industry. While there is substantial
amount of research on each of the components of visual merchandising, a holistic
approach towards visual merchandising involving the consumers.
OBJECTIVE OF THE STUDY:
• . Study the merchandising factors along with Plan-o-gram and inventory that
influence the consumer buying decision for product category.
• Study the marketing mix for product category i.e. the product, its
characteristics and features, the price, the placement method used for product
category and promotional strategy used by this category (4p’s of marketing).
• Based on study of marketing mix for the product category, suggest changes in
planogram, inventory and availability that will help to increase in its sale in market.

Research methodology
Research approach:
The research for this study is Qualitative Research

A Qualitative Research involves an in depth understanding of human behavior and the
reasons that govern human behavior. It relies on reasons behind various aspects of
behavior. It investigates the WHY and HOW of decision making.
This study based on more of Qualitative Research comprises the following.
Primary source:
Primary source of data comprises of direct interaction with people in four Big Bazaar
and different modern trade supermarkets all across Bangalore by help of past sales
record. All the required information has to be collected from this source only.
Secondary source:
Relevant additional and supplementary information will be collected from news

papers, internet, journals and past sales data.
Tools for data collection:
The approved questionnaire for interview is the main tool used for primary data
collection in this study. The interview consists of structured and unstructured questions.
The interview questionnaire tool is mainly used because:
• Both qualitative and quantitative information can be gathered.
• Factual survey can be done.
• Opinion survey in order to secure personal opinions or on a particular matter can
be done effectively. This tool is administered through personal interview with the
target population.

SCOPE OF THE STUDY:
The study confines itself to a few modern trade super markets and people in Bangalore
only.
SAMPLING PLAN:
1. Sampling procedure-
How should the respondents be chosen?
The sampling technique chosen are simple random sampling and stratified
Random Sampling is a sampling in which a sample is drawn probabilistically from
each group.
2. SAMPLE SIZE:-
How many respondents to be surveyed?
Due to time and other constraints, the size is 150 respondents. These samples of
Respondents are chosen randomly of different age group.
CROSS SECTIONAL STUDY:

A Cross Sectional study is a type of research design involving the collection of
information from any given sample of population elements only.

SIMPLE RANDOM SAMPLING:
A probability sampling technique in which each element in the population has a known
and equal probability of selection. Every element is selected independently of every other
element and the sample is drawn by a random procedure from sampling frame.
STRATIFIED RANDOM SAMPLING:
A probability sampling technique is a technique that uses a two-step process to partition

the population into sub populations, or strata. Elements are selected from each stratum by
a random procedure.
ULTIMATE CONSUMER:
Ultimate consumer refers to those individuals who buy goods and services for final use or
consumption.
DATA ANALYSIS:
The data collected are analyzed and classified as required. Statistical techniques such as
frequency distribution, central Tendency, Percentages, etc, are used for analysis of
primary data. Conclusions are drawn based on the analysis and finding of primary and
secondary data.
DURATION OF THE STUDY:

The duration of the study is from 24 march 2007 to 24april 2006
LIMITATION OF THE STUDY
• An attempt has been made to complete the project within the structured time
frame.
• The study is limited to Bangalore only.
• The study is not too substantial for want of more time.

PLAN-O-GRAM

Introduction: -
Going the extra distance with the display and merchandising of product throughout your
store can not only impact immediate sales but can also help you create an identity and
ambiance that work to build a loyal customer base. Unless you have a strong sense of
design, this area of your business may seem confusing. This Display and Merchandising
Guide was designed to help demystify the basics of this important facet of your retail
business by offering you new ideas and tips for general signage, directing traffic flow,
product merchandising, lighting, props and fixturing.
We have grouped our information by general topics, some of which include application
ideas for both the windows and the interior of your store. Be sure to read through the
whole guide for ideas that work best for you.
In addition to creating visual excitement, remember to keep the five senses in mind when
laying out your store. For instance, music related to your store concept and merchandise
selections will help create an overall mood. Aromatherapy can work wonders; introduce a
light scent such as perfumes or potpourri (remember to keep the scent light, a heavy odor
can drive customers away). Where appropriate, allow your customers to touch and
"experience" the merchandise.
Before you begin to adjust the design, display, and merchandising of your store you must
have a clear understanding of the image you wish to project.
To do that you will need to understand the demographics of the community in which your
store is located. What age groups are represented? What is the average income? What
lifestyle do they live or aspire to? What interests do they pursue? Within that community
you should identify the type of individual you hope to appeal to and gauge whether the
population base can support the sales volume you need to succeed. Look at competitors
within your market to see if there is a void you can fill. Whatever approach you take, a
better understanding of who you are appealing to, and the message you wish to
communicate, will make your displays more focused, more effective and easier to create.
To give you a more hands-on sense of how to display product, be sure to shop at other
stores. Whether or not the stores you visit carry like product, a trip through your local

mall can offer adaptable ideas. When you browse through the many catalogs that reach
you through the mail, look for ideas. Vignettes and presentations pictured may be
duplicated or trigger an idea for a fabulous creation. Lastly when attending our shows,
don’t forget to note the innovative exhibit display techniques you see, participate in one
of our Retail Tours or attend a Merchandising and Display seminar.
Recognizing and Directing Traffic Flow: -

In order to begin making changes to the product placement in your store you need to map
out an overall plan. To do this, you first need to recognize the current traffic flow of your
store and develop a plan to direct traffic flow so that customers will shop your entire store
and with their attention focused where you would like it to be. By strategically placing
demand/destination products and impulse items throughout the interior of your store, you
can balance the traffic flow throughout your store and increase your overall sales by
making the best use of every square foot. Start by taking the pulse of your merchandise
selection from the front to the rear of your store and follow these tips for redirecting
customer traffic to maximize your sales:
• At the entry, introductory displays including graphics welcome and educate the
customer. The entry area is often referred to as the "decompression zone," where
the customer makes an adjustment to the new environment; takes off their glasses,
closes an umbrella and takes visual stock of the entire store. Sales rarely take
place in the "decompression zone" - in fact, most sales take place after the
customer passes through this area. For this reason, companies like Estee Lauder
prefer their cosmetic counters to be placed a few feet in from the department store
entry.
• Once your customer passes through the "decompression zone" they look at the
price of the first item, generally to their right, that is easily accessible. This initial
item should have a price point that is not overwhelming to your customers, as this
area, called the "strike zone," offers your customer their first impression of your
store's prices. Extensive video auditing by professional retail designers has found
that in Western cultures, customers usually turn right immediately upon entering
a store into the "strike zone" and continue on their journey through your store.

You should consider placing a compelling display of affordable products (in

relation to the price point of your overall merchandise) in the "strike zone."
• Once through the "strike zone", the right wall of your store is usually your most
valuable real estate as this is the area that is generally traveled first and viewed
most thoroughly by our customers. On the right wall you may want to place
affordable items (in relation to other products within your store). This can include
products that you are promoting but which are not necessarily demand items.
Demand merchandise includes those items that the customer has made the
decision to purchase before they enter your store.
• Traditionally, the cash wrap is centrally located. It is highly recommended that
you place your wrap to the left of the store entry and place impulse products
around the cash wrap. The cash wrap also serves as a security checkpoint and as
an area that can allow visibility to all parts of the store. When designing the cash
wrap area, keep in mind the many functions that will be accommodated by the
space and plan accordingly.
• One of the most highly trafficked areas is the cash wrap. Add-on and impulse
merchandise should be placed above, behind and near the cash wrap where
possible. The cash wrap is the location that offers the most captive audiences (a
waiting customer) and is the point at which impulse sales are most often made.
• High demand products placed in the rear of the store will pull customers through
the store, increasing the visibility of other products along the way. Hallmark
stores often place their greeting cards at the rear of the store moving traffic
through seasonal, collectible and other merchandise to reach the destination area.
• Add-on merchandise and impulse products are usually placed near the demand
merchandise in a highly trafficked area to suggest further purchases.
• Place impulse items in the front of your store and in locations of high traffic
between the door and displays of demand products but outside of the
"decompression zone."

Plan-o-gram: -
The placement of merchandise that is arriving to the store can be planned out on paper by
using a Plan-o-gram before the products actually arrive to the store. A plan-o-gram is a
retailer's drawing (blueprint) which visually communicates how merchandise and props
physically fit onto a store fixture or window to allow for proper visibility and price point
options. The retailer can plan to mix the new products with current items or initiate
entirely new displays. If you have more than one store this is an excellent way to
communicate to your staff how you would like displays executed.
Planogramming is a skill developed in the fields of merchandising and retail space
planning. A person with this skill can be referred to as a planogrammer.
Fixturing
Fixturing is the furniture that holds and displays the majority of your merchandise. It is
one of the more difficult subjects to address because every store has different needs to
show its merchandise. The style of fixture you choose should reflect the store's image and
include anything from hardwood custom cabinetry to inexpensive raw wood or brass and
glass shelving. Crate and Barrel became famous by using the shipping crates in which the
product arrived as fixtures for display. Depending on the type of product you sell, the
product itself can also serve as shelving. You may sell furniture pieces that, while in your
store, can act as display units. Don't overlook antiques or unique pieces of furniture that
can create a signature look to your store.
Change and rotate the fixtures within the store to add variety and excitement to the
shopping experience. Keep in mind that some fixtures can be used for display in a
window as well as on the sales floor and fixture and window rotation is up to the
individual shopkeeper. Usually, the retailer changes the interior and window displays
according to the return pattern of their typical customer within a given period of time. For
example, if a customer shops your store twice a month, make a small change twice a
month and a dramatic change once a month. A small change can consist of switching key

merchandise in a window or interior display. A dramatic change can consist of moving

fixtures within the store or redesigning the front display window. Think about putting
your display racks on wheels so that you can easily reconfigure your departments to
emphasize and de-emphasize product categories depending on inventories, promotions
and seasons.
The most successful fixture systems are installed to be flexible and offer you the
opportunity to make major display reconfigurations with little or no additional
investment. Use the flexibility of these fixtures on a frequent basis to add interest and
excitement to your store.
Basic types of fixtures for consideration:-

• Wall shelving
• Floor standing shelving units
• Pedestals
• Tables
• Bins
• Revolving display stands
• Wheeled carts
• Security fixtures like glass showcases
• Hanging fixtures
• Waterfall
• Faceouts
• Roundracks.
• Bar
• Antiques
• Armoires
• Unique pieces of furniture

Tips for fixture selections:

• Keep in mind the scale and size of your merchandise while planning your
purchase of fixtures.
• Make certain the fixture you select will physically carry the weight of the product
you plan to display on it.
• Include costs for shipping to your location into the overall expense of the fixtures.
• Consider the cost of the fixture as compared to the possible revenue that will be
generated from it in its area of real estate within your store.
• When purchasing the hardware accessories for any fixture for your store, consider
the different types of product that might be displayed on each unit. For instance,
some units offer shelving which can be removed to make way for a hang-bar. Be
sure that when someone buy the unit you purchase all the hardware necessary for
each configuration you will use.
• If your store has a vendor or brand shop, the fixtures in this area may be different
than fixtures used in the rest of your store, in order to add a special cache to the
brand merchandise. Special terms sometimes apply to vendor fixturing purchased
with merchandise (i.e. free freight). These types of fixtures should be used on a
limited basis and primarily with very high-profile merchandise. Too many vendor
fixtures in varying types can detract from the store's overall ambiance.
Lighting used in retail stores: -

There are many different varieties of lighting fixtures a retailer can use in a store. Simply
changing the type of light bulb in your current fixture can make a large difference. The
lighting industry is constantly changing and introducing new variations of light bulbs to
the market. Visit your local lighting store to discover the selection of bulbs available.
Quartz halogen bulbs and compact fluorescent bulbs have recently made dramatic
additions to the market with their technologically advanced color renditions. Here are a
few lighting choices to consider and an explanation of the applications they are most
suited for:

General lighting illuminates both the merchandise and the traffic path in a store. It is
usually not flexible
Accent lighting can accentuate merchandise and is usually designed for adjustability.
Most accent lighting is placed to highlight focal displays, or other areas of prime real
estate.
Task lighting is used in work areas, such as under the counter of the cash wrap or in a
stock room. This lighting is usually fluorescent and should not create shadows.
Graphics and Signage: -

Interior graphics and signage can show brand identification of specific products, identify
classifications of product within your store, and, depending on the size of your store,
offer direction to various departments. Interior signage can be a medium for promoting a
campaign, previewing a product "coming soon" or announcing an upcoming event like a
book signing, demonstration, or a holiday promotion.
Here are a few ideas for graphics and signage:

• Large graphics can reflect product style. For instance, you could use a blow-up of
a Monet floral painting behind a display of floral merchandise. For added impact,
repeat that Monet graphic within your store near the merchandise for sale. If your
store sells children's products, like educational toys, you could use a blow-up of a
little red schoolhouse or a college campus as a backdrop for the merchandise.
• Large graphics can suggest a lifestyle or how your products are to be used once
purchased. For example, a graphic of a family enjoying the outdoors can be
placed behind picnic or beach items that you might have for sale. To promote a
casual summer line of clothing a recent Ann Taylor window pictured a large
graphic of a summer lighthouse behind the clothing display.

• Repetition of large graphics in one window, various windows or throughout the

store in various sizes serves as a reminder of a particular product, creates a
dramatic effect and draws your customer from the window through the store.
• If you have a well designed logo, reproductions of the logo on theatre scrim,
another type of fabric or paper can be hung in your window as a backdrop to
changing product displays.
Merchandising Similar Products Together: -

Merchandising similar product together can create a dramatic impact, while quickly
educating a customer to the depth of product you carry within a given category. This type
of merchandising presents a visually clean image and makes the best use of the
customers' time in your store by making it easy to identify where the product is located.
Displaying similar products together in a window is called creating an impact window.
This type of presentation is dramatic and creates an awareness of the variety of a
particular selection inside the store. For example:
• If you carry an extensive line of mugs, you could create a dramatic presentation
by simply stacking your product in the window.
• Placing similar products together inside the store is called creating a shop interior,
anchor area or niche. This is sometimes called creating a store within a store.
These areas are the basic building blocks of your store and this type of interior
organization is most commonly used by retailers. When you create an anchor area,
merchandise is usually placed together with similar product, brand, color or texture. For
instance, all of your lamps will be in one section, perhaps organized by brand, while all
of your stationery will be in another. This product grouping works especially well for
demand items. It allows your customers to quickly find what they are looking for and to
see the breadth of product you offer within any given category. You may want to create a
focal point which incorporates cross-mix merchandising within each area

Cross-Mix Merchandising: -
Cross-Mix Merchandising is displaying a variety of seemingly unrelated products
together to create a comprehensive visual story. This type of merchandising
communicates breadth of product and educates your customer about merchandise they
may be unaware that you carry.
Cross-mixing merchandise within a Window can increase the visibility of your store
image and promote the look of a certain lifestyle for customers to buy into. It illustrates
the variety of selection or breadth of product you carry.
To cross-mix you can use larger items within your product lines as props for smaller
items. Pottery Barn has created vignettes that cross merchandise items like adirondack
chairs, lanterns, outdoor dinnerware and throws. They carry the theme into the store by
creating smaller versions of the vignette throughout various departments of their store.
Williams Sonoma created a window display including a large graphic of cherries in
bushels behind a selection of product including a Cuisinart, ceramic pie plate, measuring
spoons, pastry board and checkered towels. Their theme "pie making" was stenciled on
the window. Tiffany created a cross-mix window representing a "fantasy" lifestyle. A
small picnic table, chairs and mosquito net served as prop back-drops for a selection of
high-end dinnerware, crystal, candle holders, pitchers and serving pieces. A wide-
brimmed sun hat was draped over a chair on gravel flooring and a floral arrangement
completed the picture.
Tips for Cross-mix merchandising:

• Retailers today often sell merchandise by portraying a dream lifestyle for the
customers to buy and take home. Sell your products by selling dreams.
• Remember to keep your cross-mixed visual merchandising displays clean and to
the point. The average customer views a focal display of merchandise for about
one second.
• Be sure to place displays featuring cross-mixed products in high traffic areas and
as focal points within a department. Don't be afraid to use both demand and
impulse items in your display.

Visual Merchandising Tools and Supplies: -

Here is a list of visual merchandising and display supplies every store should have on
hand:
• Calendar listing of all holidays and special occasions
• Duct tape
• Fishing line
• Glass cleaner
• Hammer
• Hot glue gun
• Hot glue sticks
• Iron with board or steamer
• Ladder
• Light bulbs (extras)
• Nails and screws (assorted)
• Pencils and sharpener
• Rubber bands
• Scissors
• Screwdrivers, flat tip and phillips head
• Straight dress pins
• Tape measure
• Tool box
• Two-faced tape
• Utility/ razor knife
• Velcro strips
• Wire
• Yellow pages

Plan-o-gram Examples: -
Photographic Plan-o-gram: -
Plan-o-gram Block Layout: -

Plan-o-gram Line Layout:-

Basic Criteria for creating Plano-gram
1. Sales appeal (demand).

2. Margin (profitability).
3. Taste.
4. Flavor and size.
5. Consumer behavior.
6. Buying behavior.
7. Consumer convenience
8. Balance
a) Formal balance (placing large items with large items and small items
with small items in display)
b) Informal balance (balancing a large item with several smaller ones)
9. Dominance. (All display should have a central point that will attract
Viewer’s eye)
10. Eye movement (Human eyes tend to scan from left to right and also the
mind tends to retain the last object seen by eye. We can use this psychology to
improve sales)
11. Gradation (it is the sequence in which items are arranged)
12. Height of merchandise.
13. Grouping merchandise (Place all the company products with similar need
at one place)
14. Keeping it simple and systematic
Creation of Plan-o-gram for Real juices of Dabur Foods Limited in Big Bazaar and the
sales data and analysis are given below

DATA ANALYSIS
AND
INTERPRETATION
Real activ 1 lt. sales during year2006-07:-

Flavour Total (1lt ) Total (330 ml.)

Apple 4242 886
Beetroot carrot 1193 273
Orange 3688 886
Orange carrot 2804 631
Cucumber spinach 1238 655
Real Active 1lt.
Apple Beetroot carrot Orange Orage carrot Cucumber spinach
5000
4000
Quantity
3000
2000
1000
0
Apple Beetroot Orange Orage carrot Cucumber
carrot spinach
Flavour
Real Activ of 1 lt.

1. Apple -3 facings
2. Orange -3 facings
3. Orange carrot -3 facings
4. Beetroot carrot -2 facings
5. Cucumber spinach -2 facings
Total 13 facings
This should keep in lower shelf because of the size and margin in rupee.

Real active 330 ml. sales during year2006-07:-
Flavour Total
Grape 942
Guava 2133
Litchi 3951
Mango 3806
Mausambi 620
Mix fruit 5223
Orange 4163
Pineapple 1189
Tomato 770
Cranberry 1344
Real Active 330 ml.
Apple Beetroot carrot Orange Orange carrot Cucumber spinach
1000
800
Quantity
600
400
200
0
Apple Beetroot Orange Orange Cucumber
carrot carrot spinach
Flavour
Real Activ of 330 ml.
1. Apple - 2 Facings
2. Beetroot carrot - 2 Facings
3. Orange - 2 Facings
4. Orange carrot - 2 Facings
5. Cucumber spinach - 2 Facings
6.
Total No. of facings - 10 facings
This should keep in fridge section upper shelf because of the size and margin in
rupee and sales.

Real Juice 1 lt. sales during year2006-07:-
Flavour Total
Grape 942
Guava 2133
Litchi 3951
Mango 3806
Mausambi 620
Mix fruit 5223
Orange 4163
Pineapple 1189
Tomato 770
Cranberry 1344
Real Juice 1 lt.
6000
5000 Grape
4000 Guava
Quantity
Litchi
3000
Mango
2000 Mausambi
1000 Mix fruit
Orange
0
Pineapple
it
ry
va
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at
Tomato
pp
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Li
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To
O
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au
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Cranberry
in
C
M
Flavour
Real Juices of 1 lt.

1. Litchi -3 facings 2. Mango -3 facings
3. Guava -3 facings 4. Cranberry -3 facings
5. Grape -2 facings 6. Mix fruit -3 facing
7. Mausambi -2 facings 7. Pineapple -2 facings
8. Tomato -2 facings 9. Orange - 3 facings
10. Pineapple -2 facings
Total 28 facings
This should keep in the middle shelf, since customer attraction is more for middle
shelf.

Real Juice 200 ml. sales during year2006-07:-
Flavour Total
Grape 786
Guava 4199
Litchi 3567
Mango 2324
Mausambi 2292
Mix fruit 3760
Orange 3817
Pineapple 1319
Real Juice 200 ml.
Grape Guava Litchi Mango

Mausambi Mix fruit Orange Pineapple
5000
4000
Quantity
3000
2000
1000
0
it
va
le
pe
bi
go
e
hi
fru
ng
pp
m
tc
ua
ra
an
sa
Li
ra
ix
ea
G
O
M
au
in
M
Flavour P
Real Juice of 200 ml: -
1. Litchi -2 facings 2. Mango -2 facings

3. Guava -2 facings 4. Grape -2 facings
5. Orange -2 facings 6. Mix fruit -2 facing
7. Mausambi -2 facings 7. Pineapple -2 facings
8. Tomato -2 facings
Total -16 facings
This should keep in the middle shelf fridge section, since customer attraction is more
for middle shelf.

Real Twist Juice 1 lt. sales during year2006-07:-
Flavour Total (1 lt.) Total (200 ml.)

Twist orange 2626 1802
Twist papaya 266 2715
Real Twist 1 lt.
Twist orange Twist papaya
3000
2500
Quantity
2000
1500
1000
500
0
Flavour
Real Twist Juice of 1 lt.

1. Real Twist orange - 3 facings
2. Real Twist papaya - 2 facings
Total facings - 5 facings

This should keep in side of Real juice because it attracts customer due to different
colour and packaging
Real Twist Juice 200 ml. sales during year2006-07:-
Real Twist 200 ml.
3000
2500
Quantity
2000
1500
1000
500
0
Flavour
Real Twist Juice of 200 ml.

1. Real Twist orange - 2 facings
2. Real Twist papaya - 2 facings
Total - 4 facings
This should keep in upper and middle shelf of fridge section and it can compete with
frooti and other soft drinks

Coolers 1 lt. and 200 ml. sales during year2006-07:-
Flavour Total Total

Aampanna 2029 6920
Lemon barley 156 1246
Rose litchi 2106 1448
Water melon 430 2216
.
Coolers 1 lt.
Ammpanna Lemon barley Rose litchi Water melon
2500
2000
Quantity
1500
1000
500
0
Flavour
Coolers of 1 lt. (Summer juice drink)

1. Aampanna -3 facings 2. Rose litchi -3 facings
3. Water melon -3 facings 4. Lemon barley -2 facings
Total: - 11 facings
This should keep in the upper shelf and also in fridge section, due to special product
Coolers 200 ml
8000
6000
Quality
4000
2000
0
Flavour
Coolers of 200 ml.

1. Aampanna -2 facings 2. Rose litchi -2 facings
3. Water melon -2 facings 4. Lemon barley -2 facings
Total: - 8 facings
This should keep in the upper shelf and also in fridge section, due to special product
for summer

Some facts or psychology used to make a good plan-o-gram in packaged

fruit industry: -
• Human eyes tend to scan from left to right and also the mind tends to retain the
last object seen by eye. We can use this psychology to improve sales.
• Since most customers are right handed (about 90%) they will tend to take the
product on the right hand, instead of reaching across their body to take the
product kept in left side. So we can keep fast moving juices in right and slow
moving in left side ..
• We should arrange similar brand in one shelf (horizontally).like Real juice all
flavor in one shelf.
• Keep all variant vertically at one place so that accessibility and visibility will be
convenient for the customer
Suggestions and recommendations: -

• First, in the upper shelf coolers and small packs of real juices and coolers
small packs, then real juice 1lt, then small pack of mango twist and
remaining real juice flavors, then real active small packs and in lower shelf
real active 1lt.
• Since in big bazaar outlets and also in modern trade outlets, the shelf size is
not constant so that we have to adjust some variation in vertical
arrangement, in horizontal arrangement all outlets shelves are similar.
• Total number of facing for all juices: - 95 facings in most of modern trade
outlets.

Inventory of
Retail Stores

Introduction
KNOWLEDGE of monthly inventory trends is a useful guide for business management
and an important factor in economic analysis and planning. Trends of orders, production,
and sales require this additional item in order to be the basis of policy-making on a large
or small scale. While some data are avail able currently on inventories in the hands of
producers and wholesalers, little is available on a monthly basis concerning the stocks of
retailers, and practically nothing concerning consumers’ holdings. Retailers’ stocks on an
annual basis or at less frequent intervals are available from the Bureau of the Census and
a number of private research organizations and trade associations. On an all-commodity
basis there are available monthly reports of the Federal Reserve Board on department
stores’ inventories (and to a limited degree on several other lines). The A. C. Nielsen
Company and other organizations compile retail commodity inventories, but little of this
statistical information is published. It may be said for most trades that very little is known
of the behavior of retailers’ inventories.
Accurate data on changes in inventories and their relation to changes in the volume of
trade would be very valuable at present to several groups of interests:
1) The inventory policy of an individual retail store may be formulated more intelligently
if its management knows inventory trends in the trade. There are approximately
1,70o,ooo retail stores, whose operations might be more or less altered by the availability
of adequate information on stock movements. Both buying and selling should shift with
changes in inventory. When stocks are low, the merchant must take an active part in the
market or find himself outbid in his at tempts to replenish his shelves. Conversely,
increased competition to sell follows inventory accumulation and selling efforts
(including advertising promotion) must be quickened to offset such changes in inventory
position.
(2) The inventory position of retailers not only is a factor in their own operation but
influences schedules of producers and merchandising policies at the intermediate level of
distribution. Inherent in the more integrated phases of business is the greater importance
of single decisions. Therefore, such information is more critical to these business men in
arriving at their far-reaching decisions.

(For the last two years, knowledge of inventory positions has been increasingly needed
by those who are directing the mobilization of national re sources in an all defense effort.
The flow of goods from producers to the armed forces, lend-lease aid, or consumers,
requires the maintenance of adequate but not overabundant inventories at each of the
several levels of production and distribution.
(In broader terms, knowledge of changes in inventories, and their relation to changes in
the volume of trade, is important to the economist because changes in inventory
accumulation and depletion assist in forecasting the direction, timing and amplitude of
cyclical changes.
Model Specification and Optimality Conditions

In developing a decision-making framework for clearance markdowns, it is important to
note at least four ways in which clearance prices differ from other types of retail pricing
decisions: (1) Clearance markdowns are
permanent, i.e., prices are not permitted to increase, (2) demand tends to decrease at the
end of the clearance period due to incomplete assortments and reduced merchandise
selection, (3) clearance prices are generally not advertised, which allows different pricing
policies to be used at different locations in the same geographic area, and (4) the
clearance period is so short that there is little time to correct pricing errors by reacting to
observed sales.
Motivated by these observations and other factors discussed below, our modeling
assumptions are as follows
Sales rate depends explicitly on price, seasonal variations, and inventory level.
• Sales rate is decreased by low inventory levels but not affected by high
inventory levels.
• Competition, demand uncertainty, and time discounting are not explicitly

included in the model.
Price dependence specifies the increase in sales rate as a function of the clearance
markdown. Seasonal variations capture the increase in sales rate that tends to occur

during certain prime shopping periods, such as Christmas and back-to-school, and the
decrease that occurs at the end of the product’s season. When the on- hand inventory falls
below a certain level at any given store, the sales rate may drop. This is especially flue
for apparel when there is an incomplete selection of sizes and colors. In addition, for
some items, it is important to have sufficient inventory to create an attractive in-store
display to draw customers’ attention to the product.
A significant positive correlation between inventory levels and retail sales was found by
Wolfe (1968) and Bhat (1985). We found a similar correlation in apparel sales. However,
we argue in §3 that the inventory effects should be “one sided” in our applications, i.e.,
low inventory decreases sales, but high inventory does not necessarily increase sales. The
retailers we studied tend to intentionally schedule larger deliveries during periods of high
sales, implying that “causality” should not be attributed to high inventories, even though
positive correlation exists. On the other hand, virtually all buyers felt that inventories
below some threshold level do reduce sales, which was supported by our regression
results. Retailers often define a minimum on-hand inventory for each product, sometimes
called “fixture fill,” which is the quantity required for adequate presentation. We use this
threshold in defining the inventory effect in our model.
Competition and demand uncertainty are not explicitly captured in our sales rate model.
However, sales by competitors are implicitly reflected in the seasonally adjusted rate of
sale. This is appropriate as tong as competitors do not react directly to each others’ price
changes. For unadvertised clearance markdowns taken at the store level, competitive
reactions seem very unlikely, given that most retail chains have hundreds of stores, each
with different local competitive conditions.
Demand uncertainty clearly exists, but complicates the analysis to a great extent. Optimal
clearance pricing in the presence of gradually decreasing demand uncertainty would
require multistage pricing decisions, which would need to be jointly optimized by
stochastic dynamic programming. The state space for this problem is extremely large,
because it must capture all the possible changes in the states of information that influence
each update of the pricing policy. Because the clearance period is relatively short and
sales rates are declining, the first clearance markdown tends to be the dominant decision

economically, thus reducing the importance of multistage optimization. The last

observation also justifies the lack of time discounting in the model, We therefore develop
a deterministic pricing formulation and allow for the possibility of revisiting the pricing
decision, at most once or twice during the clearance period.
Sales Rate Function

The sales rate is defined as a continuous function of time, price, and inventory using the
parameters listed below The decision variables are the optimal inventory commitment Io
and the optimal price trajectory p(t).
to = current time of the season,
te =end of the season, sometimes known as the “outdate,
t = an arbitrary time to ≤ t ≤ te,
Ho = on-hand inventory at time to
Io = inventory commitment at time to, Io ≥ Ho,
ƒo = minimum required inventory, or “fixture fill”
‘In microeconomic analysis, the demand function is typically derived from a

parameterized family of customer utilities or way to pay. This is the approach taken by
Dhebar and Oren (1985) and Stoke>’ In the marketing literature, it is more common to
simply define a price dependent sales rate, as in I (1963)and in the literature, on
diffusion models. This paper adopts the later approach on the grounds that it is easier to
estimate sates rates directly than to estimate the underlying family of customer utilities.
p(t) = price trajectory at time t,
s(t) = cumulative sales from current time to to time t,
H(t) = the on-hand inventory at time t,
I(t) = I0 — s(t) = inventory commitment at time t,
se= S(te) = total units sold by te and
x(p, H, t) = the sales rate at time t, with price p and on-hand inventory H.

Some explanation of the difference between the inventory commitment and on-hand
inventory is war ranted. The inventory commitment I(t) is defined as the sum of the on-
hand inventory H(t) plus planned future deliveries. Thus, I(t) = Io - s(t) is always non
increasing in t, but H(t) could increase at certain points in time when shipments are
received. For the purpose of my analysis, it is useful to write the sales rate in terms of
I(t), rather than H(t), because I(t) can be expressed in terms of the cumulative sales s(t).
The value ƒo defines the threshold at which the sales rate actually begins to be affected by
the on-hand inventory level. The following assumption allows the sales rate to be written
in terms of I(t).
ASSUMPTION 1:
If H(t) < ƒo then I(t) = H(t). Thus x(p, H, t) = x(p, I, t).
That is, by the time sales become sensitive to the inventory level, the inventory
commitment and the on-hand inventory are equal and remain equal for the remainder of
the season. This assumption holds in general for the seasonal merchandise sold by the
retailers I studied because all deliveries of new merchandise are completed well before
the period starts. Occasionally, merchandise that is unexpectedly popular falls below the
fixture fill ƒo before the period starts. However, planned deliveries would typically be
accelerated for this merchandise, thus satisfying the assumption.
The effect of the minimum inventory level ƒo on the sales rate function can be illustrated
by graphing the function y(I) = x(p, I, t) / x(p, ƒo, t), holding p and t fixed. The special
case of a linear y(I) is illustrated in Figure 1. Since inventory above ƒo makes no
additional contribution to sales, y(I) = 1 always holds for I ≥ ƒo Clearly

Which can also be expressed as a differential equation for I(t):
I’(t) = -x(p(t), I(t), t) for each t. ………. (2)
It is also required that se ≤ Io, where the unsold units Io - se = I(te) are salvaged.
Inventory Decision and Cost Model
With Io as a decision variable, the cost function must reflect the cost of changing to Io
from the current inventory commitment, which is denoted by I’o:
I’o= the current inventory commitment level.
The current inventory commitment I’o can often be adjusted up or down within specified
limits. Planned future delivery quantities may be reduced, for example, subject to a
cancellation charge paid to the supplier or an implicit cost reflecting loss of goodwill.
Additional units may also be ordered to increase the inventory commitment within limits.
Due to the shortness of the period, this cost model does not use time discounting or time-
based holding costs for on-hand inventory. This removes the need to consider the
delivery schedule explicitly, as long as it satisfies Assumption 1. For most items, the on-
hand inventory cannot be returned once it is placed on display and it is not cost effective

to ship on-hand units to another store. Unsold units at the end of the clearance markdown
period typically have a positive salvage value because the retailer may sell leftover
merchandise to a discounter, or donate it to charity, receiving a tax deduction.
The inventory cost therefore depends upon H0 and I’0, as well as the following
parameters:
A0 = maximum possible inventory commitment,
cd= total unit cost for items delivered and displayed in the store,
ce = unit salvage value for inventory left unsold at the end of the season, and
r = unit cost for reducing the inventory commitment.
A piecewise linear function c(I0) can be defined as follows to express the total inventory
cost:
The cost c(I0) is the total cost, reflecting both sunk costs and the cost of the change from
I’0 to I0 For Io≤ Ho, cdHo is a sunk cost and Ho — Io is excess inventory, which generates
revenue ce per unit. This revenue there fore appears with a negative sign in the cost
function. (In fact, it will never be optimal to adjust Io≤ Ho because any part of the
inventory Ho that is not sold by the end of the clearance period will simply be salvaged.)
For Ho ≤ Io≤ I’o, planned future deliveries are canceled at a unit cost r, and revenue is
generated from the salvaged units Ho - Io. For Io> I’o additional units are obtained up to
the limit Ao

Objective Function
The objective is to maximize profit, defined as revenue minus cost for the remainder of
the season. At any point in time t the profit equals the revenue obtained from the I0 units
in the inventory commitment minus the cost c(Io). The profit can be expressed as:
First-order necessary conditions (FONC) for maximizing (4) with respect to p(t), subject
to the stated constraints, can be obtained from the Hamiltonian H = (p -λ)x, treating I(t)
as the state variable and p(t) as the control, where the Lagrange multipliers ate
θ = the Lagrange multiplier for the constraint Io -se = I(te) ≥ 0, and
λ(t) = the Lagrange multiplier for I’(t) = -x(p(t),It,t) at time t.
The FONC for the optimal control p(t) are: -
(Subscripts p and I denote partial derivatives and the independent variable t has been
suppressed for notational compactness.) By substituting for p -λ from (6) into (5), we
obtain
By evaluating (9) at t = te and combining with (7), we obtain a boundary condition for θ

The choice of the inventory commitment Io affects the FONC for p(t) only through (10),
in that only θ depends upon Io
The decision variable Io selected so as to maximize R(Io) — c(Io) where R(Io) denotes the
revenue from (4) using the optimal price trajectory with inventory commitment Io. Since
there is no discounting, a FONC for Io can be obtained from the fact that the marginal
revenue derived from the last unit Io must equal its marginal cost c’(Io) i.e.,
Discounting is not included in this formulation because the clearance period is so short
typically three to four weeks. Fixed handling costs associated with preparing
merchandise for display can be incorporated into cd and ce. Our discussions with
retailers indicated that fixed handling and display costs are the primary drivers of store-
level inventory costs. The shortness of the clearance period also reduces the Importance
of time dependent costs. The three-part form of c(S) assumes that ce < cd –r < cd. If cd –r
< ce, order cancellations are never attractive and c(S) has two parts.
The Separable Sates Rate Case
Specific assumptions concerning the functional form of the sales rate x(p, I, t) allow (8),
(9), and (10) to be solved explicitly for the optimal price trajectory. A common form,
which we adopt in this paper, is a multiplicative, separable function with exponential
price sensitivity
where
k(t) = seasonal demand at time t,
y(I) = inventory effect when inventory commitment is I, and
e-γp= sensitivity of demand to price p.

Although much of this paper’s development can be car ried through for a more general
demand function, a closed form solution is obtained only for the separable function (12).
Exponential price sensitivity has been ap plied widely in marketing studies and has
generally been found to be superior to linear price sensitivity in empirical studies.
For the separable form (12), we have that x/xp = -1 / γ is a constant. From (8), it
therefore follows that p’(t)= λ’(t). Thus, (8) and (9) yield a differential equation
that can be solved for p(t)
Mathematically similar formulations have been studied in other contexts. Kalish (1983),
Dhebar and Oren (1985), and Mahajan et al. (1990) developed formula tions that are
sensitive to experience effects rather than inventory, which lead to similar conditions for
the op timal price trajectories. Rajan et al. (1992) obtain optimal price solutions for a
separable demand form that is anal ogous to (6), with a time varying y. Gallego and van
Ryzin (1994) obtain an optimal price trajectory for the case of exponential price
sensitivity and Poisson demand arrivals. These formulations do not consider the
dependence of sales on the current inventory level or seasonal variations.
Rajan et al’s generality is in their analysis of variable cycle length and their explicit
consideration of shrinkage and other inventory costs. They obtain closed form optimal
price trajectories for the cases of linear and exponential price sensitivities. Some
shrinkage is likely to occur in the retail environments we studied. For our analysis, we
believe that the clearance pricing period is short enough that this effect can be neglected.
Variable cycle length is used for clearance pricing of discontinued basic items by some of
the retailers we contacted. In the three applications we analyzed, however, a fixed
clearance calendar is required to coincide with the planned arrival of new merchandise.

Compensating Prices
We solve (13) by proving that the optimal p(t) adjusts the sales rate in such a way that
x(p, I, t) is proportional to k(t) for all t. That is, p(t) should exactly compensate for any
reduction in sales due to y(I(t)). This result is stated as the following lemma.
LEMMA 1.
For the multiplicatively separable sales rate function given by (12), Equation (13) implies
tb1zt the optimal policy is to adjust p(t) so that sales remain proportional to k(t).
PROOF:- We wish to show that
is constant in t. Suppressing the dependence on t and I
from (13), after substituting I’ = -kye-γp from (3).
Lemma 1 implies that p(t) should be selected so that
wherey. = y(I(te)), I(te) = -Io- se and pe = p(te) are the terminal values of the parameters.
Equation (15) shows that the optimal price p(t) depends upon I(t), but not upon t.
Therefore, by defining a new function P(I(t)) = p(t), (15) can be solved for the price
trajectory as a function of the inventory level I
The cumulative sales from to to t is determined by substituting (12) and (15) into (2)

Boundary Values
The complete so of (16) requires the determination of the terminal values pe and ye. From
(17), it follows that
where K= K(to,te). Substituting (18) into (16) yields
One of two cases must hold at time te.. Either θ > 0 and se = Io, which gives
ye = y( Io- se) y(0). Otherwise, θ = 0 and pe = ce + 1/γ is determined from (10), using the
fact that x/xp = -1/γ for the case being considered.
For the case of θ > 0, the terminal price specifies the trajectory that sells precisely the
inventory I We define this price as a Function of Io
Since Pe ≥ce + 1/γ must always hold, it follows that
The price trajectory (19) is now completed by determining s If pe = po(Io) in (22), all units
are sold and se= Io. If pe = ce + 1/γ in (22), the solution for se . is obtained by substituting
the right side of (20) for pe and rearranging terms to obtain the relationship

Since y(Io - se) is non increasing in se and po(Io) < ce + 1/ γ implies y(0)Ke- γce-1 < Io it
follows that (23) must have a unique solution for se
Solving for the Optimal Inventory Commitment Io
All the FONCe obtained so far apply when I is a deci sion variable as well. From (11) the
additional relation ship pe + 1/ γ = c’(Io) allows Io to be determined by substitution into
(22)
Since po(Io) is decreasing in Io, the solution of (24) is unique, as long as the marginal cost
c’(Io) is non decreasing.
It is interesting to note that the terminal price pe and the optimal inventory commitment Io
depend only upon the minimum inventory effect value y(0) and not upon the shape of the
function y(I), except that y(I) is non- decreasing. However, to determine the price
trajectory P(I), the shape of y(I) is required. From (19), it can be seen that the initial point
on the price trajectory at t = to satisfies
This allows the optimal price trajectory to be solved for ward in time from to to te
Tabulated Solution and Interpretation
The solution of (23) is illustrated in Figure 2 and is tabulated in Table 1. Since the
marginal revenue is decreasing in 1 and the marginal cost is increasing in the step wise
manner shown in Figure 2 there must be exactly one intersection. The six possibilities
arise from the different ways in which the marginal revenue pe - 1/ γ from the last unit Io
can equal the marginal cost c’(Io).

Interpretation of the Six Solution Cases
The six cases can be interpreted as follows. The number of mills sold equals the total
inventory commitment in all cases except Case 1
1. The on-hand inventory is so large that it cannot all be sold using the minimum terminal
price ce + 1/ γ. Reduce the inventory commitment to the quantity on- hand and use the
minimum price.
2. All the on-hand inventory can be sold using a terminal price po(Ho), which is greater
than the minimum. However, the marginal Cost savings cd - r obtained by reducing the
inventory commitment is greater than the marginal revenue pe (Ho) - 1/ γ that can be
obtained from selling the merchandise. Therefore, reduce the inventory commitment to
the amount on-hand by cancel ling future deliveries and use the price that clears all on-
hand inventory.
3. The marginal cost cd - r of increasing the inventory commitment lies between the
marginal revenue associated with selling all the on-hand inventory and selling all the
inventory commitment. Set the inventory commitment so that the marginal revenue is
equal to cd - r and use the pricing policy that clears all this inventory.
4. The marginal revenue po(I’o) - 1 / γ associated with clearing all the current inventory
commitment lies between the marginal cost of decreasing the inventory commitment and
the marginal cost of increasing it. Therefore, keep the current inventory commitment and
use the pricing policy that clears all inventory.
5. The marginal cost c associated with increasing the inventory commitment is less than
the marginal revenue associated with the current inventory commitment. Therefore,
increase the invent commitment until the marginal revenue equals cd and use the pricing
policy that sells all this inventory.
6. When the maximum units available Ao are sold, the marginal revenue is still greater
than the marginal cost cd. Therefore, increase the price so that exactly A0 units are sold
and set the inventory commitment to Ao

Observations Concerning the Optimal Trajectories
The optimality conditions (23), (24), arid (25) can be used to derive some insights
concerning the behavior of the optimal price trajectory and the optimal number of units
sold. These will be discussed in terms of a parameter μ that measures the sensitivity of

y(I) to inventory effects. A linear sensitivity is illustrated in Figure 1, and an exponential

sensitivity is discussed later in this section. The observations below assume only that y(I)
decreases monotonically as μ increases.
1. If the inventory effect is active for part of the time, total unit sales decrease as the
inventory sensitivity μ increases. For a sufficiently high inventory sensitivity, some units
will always be left unsold at the end of the season.
2. The optimal initial price P(Io) is invariant to the inventory sensitivity, as long as all
units are sold. When not all units are sold, increasing the inventory sensitivity leads to a
higher initial price during the regular selling season.
3. When it is optimal to sell all units, an increase in the inventory commitment leads to an
equal increase in the wilts sold. When it is not optimal to sell all units, an increase in the
inventory commitment leads to (i) a fractional increase in the optimal units sold when
inventory effects are active and (ii) no change in the units sold when the inventory effects
are not active.
Proofs for these observations are given in Appendix A.
Two Models for Inventory Effects
The optimal solutions in Table 1 hold for any smooth function y(I) that is non decreasing
in I and bounded 0≤ y(I) ≤1. For the three clearance markdown applications described in
this paper, we selected a two-part linear function of the form
Where
I = the current inventory level,
ƒo = the threshold level or minimum inventory for effective presentation, and
μ = sensitivity to inventory level, with 0 < μ < 1,
As illustrated previously in Figure 1. When substituted into (16), the linear form
(26) leads to a price trajectory that depends logarithmically on the inventory level.

An exponential model of the form can also be used, which leads to an optimal price
trajectory that depends linearly on the inventory level. It should also be noted that (26)
and (27) are approximately equivalent when μ is fairly small. Both models use a
threshold level ƒo, so that y(I) = 1 for I ≥ ƒo. The threshold ƒo is motivated by the
requirement for a minimum inventory for merchandise presentation, discussed
previously.
To test the correlation between sales and inventory level both with and without the
threshold, we per formed regressions on sales data from a department store that
frequently had low in-store inventories of apparel merchandise. (The regression equation
is given in §4.) Pooling sales data from four product categories over a two-year period,
we obtained the following results for the inventory effect on sales.
Parameter μ t Statistic Adjusted R-Square
With Threshold 0.651 8.9 0.81
Without Threshold 0.746 16.6 0.80
It is clear that inventory effects are highly significant in both cases, and that the resulting
parameter and R-square values are not greatly different. Thus, the explanatory power of
the model, as measured by the adjusted R-square, is not reduced by truncating the
inventory effect.
Wolfe (1968) and Bhat (1985) also found significant positive correlation between
inventory level and sales using a linear model analogous to (26) with no threshold level.
For our applications, the buyers felt (and we agreed) that it is not appropriate to attribute
high sales to high inventory levels, although our regression analyses found a positive
correlation. This is because retailers tend to plan deliveries of extra inventory when they
expect unusually high sales. On the other hand, low inventories do have a causal basis for

decreasing sales due to broken assortments or poor presentation. Thus, introducing the
threshold ƒo appears to result in a more appropriate causal model.
Implementation Methods
The model described in this paper has been implemented in various forms at three major
retail chains. This section illustrates typical sales rate and price trajectories and discusses
methods for estimating the model’s parameters that are relevant for all the applications.
The applications themselves are described in the next section.
The parameters required by the model were estimated by a combination of regression
analysis and subjective inputs. We found it convenient to separate the seasonally adjusted
sales k(t) into a base weekly sales rate B, which is different for each product and each
store, and a seasonal variation V(t), which is the same for all stores and a category of
products. That is, let
V(t) = seasonal variation associated with time t,

po = regular price of the product,
B = base sales rate for this product at the regular price po, and
μ = the price sensitivity parameter.
A normalized price sensitivity γ* = γpo was defined so that items with different regular
prices could be pooled if necessary. Thus, forecasted sales at time t with price per unit
p(t) and inventory level I(t) would be
The right side of (29) has a convenient intuitive interpretation because 1 - p(t) / po equals
the percentage markdown from the regular price po.
The optimal trajectory p(t) was not implemented directly in the three applications.
Instead, Table 1 was used to generate a solution for the optimal inventory commitment Io
and the prices pe and po(Io) The average price [pe + po (Io)]/2 was used instead of p(t). The
average price was then updated based on the information available at the next price
change (usually two to three weeks later). Since prices are not permitted to increase, the

current price would either remain unchanged or be lowered to the table’s recommended
price at each update. The discrete price approximation appears to reduce the maximum
revenue by no more than 1 percent to 2 percent based on the example calculations in the
next section.
Typical Price and Sales Trajectories
Properties of the optimal price trajectory can be illustrated by plotting the results for
sample parameter values. Figure 3 shows the underlying seasonal variation and the
optimal price and sales trajectories for one retailer’s private label men’s dress shirts with
a regular price of po = $20.00 for the last 12 weeks of the fall season. The outdate is
February 4, and 12 weeks is the longest time window over which permanent price
reductions might be considered for this merchandise.
The top graph in Figure 3 shows the normalized seasonal variation V(t), which was also
smoothed by taking a three-week moving average. For this example,
k(t) =1,000 corresponds to V(t) = 1. For γ* = γ po = 3.2, this results in base sales B =
40.76 in (28) and K= 20,772 in (18). Other parameter values for these graphs are listed in
Table 2. The trajectories shown in Figure 3 assume that both 1 and the price are
optimized in the current week.
The optimal solution for p(t) in Figure 3 corresponds to Case 2 in Table 1, because from
(21), po(Ho) - 1/γ = $8.90 - $6.25 = $2.65, which lies between ce = $2.00 and cd - r =$9.00.
It is optimal to reduce the price to $16.41 immediately. This price is held constant until
approximately December 17, when the inventory effect model (26) becomes active. After
December 17, (16) is used to specify the optimal decreasing price trajectory,

Which stimulates sales in such a way that the cumulative sales s(t) remain unaffected by
the reduced inventory. Since poIo = $16.41, the average price is O.5*($8.90 + 16.41)=
$12.66. For the discrete approximation, this price was used in the last five weeks of
Figure 3, resulting in a total revenue during the 12 weeks of clearance of $23,432 versus
the maximum revenue obtained with the optimal price trajectory of $23,517.

Table 2 Input Parameter Values for Example Graphs
to =0, te = 12 γ* =3.2 cd = $l0 ce = $2.00 pe = $20
r = $1.00 μ = 0.7 to =300 Ao = 2,000 Ho = 1,500 I’o = 2,000
The graphs in Figure 3 are clearly dependent upon the initial inventory level and the
inventory sensitivity. Figure 4 illustrates how the optimal price trajectory is affected by
the inventory sensitivity μ. Notice that as μ increases, the optimal initial price is slightly
higher, but once the inventory effect becomes active, the optimal price trajectory declines
more steeply. For μ = 0.99, 75 units are not sold. For the μ = 0 case, it is optimal to
receive an additional Io - Ho= 306 units and lower the price immediately to $15.25, but
there is no further decline when the inventory effect becomes active. Table 3 gives the
combinations of input and out put values corresponding to these graphs. All input
parameters not listed here are set to the values shown in Table 2.
Table 3 Inputs and Optimal Values for Figure 4
μ=O μ =O.25 μ =O.7 μ =O.99
Ho 1,500 1,500 1500 1,500
I’o 2,000 2,000 2,000 2,000
Io 1,806 1,500 1,500 1,500
se 1,806 1,500 1,500 1,425
po(Io) $15.25 $16.41 $16.41 $16.73

Figure 5 gives an analogous sensitivity to the current inventory level. For lower inventory
values (H = 300 and 600), the current price of $20.00 is optimal, until the inventory effect
becomes active. For H = = 300, it is best to order 162 additional units. On the other hand,
for H = 3000 it is optimal to cut the price to $12.28 immediately and to sell only 2,904
units. A larger initial inventory also postpones the time at which the inventory constraint
becomes active. Table 4 gives the combinations of input and output values corresponding
to these graphs. In Figure 5, the full retail price of $20.00 is maintained when H = 300
and 600. When Ho = 1,500 and 3,000, it is optimal to take immediate mark downs to
$16.41 and $12.48, respectively, and then further markdowns when the on-hand
inventory falls be low fixture fill ƒo = 300.
To evaluate the impact of the discrete price approximation, the revenues obtained from
using the optimal price trajectory were compared with the revenues obtained from using
the approximation for the combinations of parameter values given Tables 2, 3, and 4. The
reductions in revenue for the clearance period using this approximation were less than 1
percent in all cases but one (2.5 percent for the combination Ho = 300, μ = 0.99). Thus, it
appears that the approximation does not lead to substantial revenue losses.

Table 4 Inputs and Optimal Values for Figure 5
Ho = 300 H = 600 H = 1,500 H = 3,000
I’o 300 600 1,500 3,000
Io=se 462 600 1,500 2,904
po(Io) $20.00 $20.00 $16.41 $12.28
Parameter Estimation Equation
Taking the logarithm of the reported sales and perform ing the appropriate
transformations on the resulting coefficients, the complete regression equation is in (sales
in week t at price p with inventory level I)

(See Smith et al. (1994) for further discussion of this regression approach) The threshold
level ƒo was provided by the buyers. Buyers felt that sales should de cline linearly for
inventory levels below fixture fill ƒo. Thus (26) was used as a model for inventory
effects, even though (27) is more analytically convenient.
Although we have used a regression model similar to (30) to estimate parameters for
promotion responses during the regular season for a number of retailers, the historical
data available in the three applications were only partially adequate. Additional details
are given in the next section.
Conclusions
General properties of the optimal pricing policy for merchandise that is sensitive to the
inventory level can provide guidelines for developing corporate strategies for these
products. Inventory sensitivity implies that prices should be set higher before the
clearance period begins, and then reduced more sharply during the clear ance period. For
some products, it is optimal to leave some quantity of merchandise unsold at the end of
the season, especially if it has a salvage value. In general, our optimal pricing policies
indicated that the initial clearance markdowns should be deeper than buyers were
accustomed to taking, while excessive markdowns at the end of the season should be
avoided in favor of salvaging, or even discarding, unsold merchandise.
I studied; roughly 15-20 percent of their merchandise is sold during this period. The
successful applications reported in this paper demonstrate that it is possible to build and
implement a system that achieves major financial benefits.

Various approximations and assumptions were required in each application to apply the
regression estimation methods described in §4. Retailers’ POS systems have captured the
detailed information on sales transactions necessary for parameter estimation for some
time. Unfortunately, because of the expense of storing the large volume of data, who
implemented the system either aggregated the data inappropriately or discarded it too
quickly to permit estimation of the complete model. However, applications indicate that a
model based partially on subjective parameter estimates can perform effectively. Once
the data requirements for the system are known, the company’s information systems can
begin to accumulate the appropriate data for improved parameter estimates. Thus, we
believe that retailers with successfully implemented systems will have the data necessary
to improve their models over time.
My response model is unique in that it includes a one-sided dependence on the inventory

level. Retail buyers in our studies, particularly in apparel products, felt that having
adequate inventory for presentation strongly affects sales and our regression analysis
found that low inventories were highly correlated with reduced sales. Adopting a
multiplicative, exponential price response function, which has previously been successful
in modeling the response to promotional, leads to an optimal price trajectory that exactly
compensates for the effects of reduced inventory, independent of the form of the
inventory sensitivity.
We believe that our model can provide the basis for further research in pricing policies
that include dependence on inventory effects. Possible enhancements, which have been
considered in other related research, include time discounted cash flows and time
dependent inventory holding costs. Another interesting generalization is the use of initial
clearance prices to elicit in formation about customers’ response to markdowns. When
combined with inventory adjustments and the sensitivity of sales to inventory, this
remains an unsolved problem to my knowledge.. Finally, we believe that our successful
applications should encourage others to apply management science models in situations
that require a combination of data analysis and subjective estimates of parameters.

Appendix A. Proofs of Properties of the Optimal Solutions
To verify Observation 1, we take the total derivative of (23) with respect to μ and se..
Rearranging terms this gives
Where the subscript μ denotes a partial derivative. Since increasing μ decreases y(Io -se)
for Io -se <ƒo for the numerator is negative in this case and se, is decreasing in μ. The
limiting case for μ follows from (21) and (22). As μ increases, the increasing sensitivity
to inventory implies that y(0) must decrease. Eventually, y(0) becomes sufficiently small
that pe = ce + 1/γ in(22).
The first part of Observation 2 follows directly from (25), since both y(Io) = 1 and s, I are
independent of μ. When se < Io but y(Io) = 1, we take the derivative of (25) with respect to
μ to obtain
Since it was observed that (31) implies that dse/dμ <0, (32) implies that P(Io) is increasing
in μ.
The first part of Observation 3 follows by definition. Part (i) of Observation 3 can be
demonstrated by taking the total derivative of (23) with respect to se and Io (holding μ
fixed) and rearranging terms to obtain
This shows that the increase ins, is a fractional multiple of the increase in Io, as long as
y’(Io - se > 0, i.e., the final inventory Io - se < ƒo. Part (ii) follows from (33) as well, since
the derivative is zero in this case.

References
Achabal, Dale, Shelby McIntyre, and Stephen Smith, “Maximizing Profits from
Department Store Promotions,” J. Retailing, 66, 4 (1990), 383—407.
Besanko, David, and Wayne L. Winston, “Optimal Price Skimming by a Monopolist

Facing Rational Consumers,” Management Sci., 36, 5 (1990), 555—567.
Bhat, Rajendra R., Managing the Demand fir Fashion Items, UMI Re search Press, Ann
Arbor, MI, 1985.
Bitran, Gabriel R., and Susana V. Mondschein, “Periodic Pricing of Seasonal Products in
Retailing,” Management Sci., 43,1(1997), 64—
79.
Bolton, Ruth N., “The Relationship Between Market Characteristics and Promotion Price
Elasticities,” Marketing Sci., 8,2 (1989), 153—
169.
Braden, David J., and Shmuel S. Oren, “Nonlinear Pricing to Produce Information,”
Marketing Sd., 13, 3 (1994), 310—326.
Dhebar, Anirudh, and Shmuel Oren, “Optimal Dynamic Pricing for Expanding
Networks,” Marketing Sci., 4 (1985), 336—351.
Eliashberg, Jehoshua, and Richard Steinberg, “Marketing-Production Decisions in an

Industrial Channel of Distribution,” Management
Sci., 33 (1987), 981—1000.
Feng, Youyi, and Guillermo Gallego, “Optimal Starting Times for End- of-Season Sales
and Optimal Stopping Times for Promotional Fares,” Management Sci., 41, No. 8 (1995),
1371—1391.
Gallego, Guillermo, and Garrett van Ryzin, “Optimal Dynamic Pricing of Inventories
with Stochastic Demand,” Management Sci., 40, 8 (1994), 999—1020.
Kalish, Shiomo, “Monopolistic Pricing with Dynamic Demand and Production Cost,”
Marketing Sci., 2, 2 (1983), 135—159.

“A New Product Adoption Model with Price, Advertising and Uncertainty,” Management
Sci., 31, 12 (1985), 1569—1585.
Kalyanam, Kirthi, “Pricing Decisions Under Demand Uncertainty: A Bayesian Mixture

Model Approach,” Marketing Sci., 15, 3 (1996),
207—221.
Kamien, Morton I., and Nancy Schwartz, Dynamic Optimization, North Holland, New
York, 1981,
Karlin, Samuel, “Dynamic Inventory with Varying Stochastic De mands,” Management

Sci., 6, 3 (1960), 231—258.

Vendor Managed
Inventory in Retail
Industry
Introduction

Vendor Managed Inventory popularly known as VMI is gaining great momentum in retail
business processes. In this era of tough competition retailers are implementing every
supply chain optimization process that will reduce their costs, reduce inventory levels and
increase profits. Efficient supply chain management requires the rapid and accurate
transfer of information throughout a supply system. Vendor Managed Inventory (VMI) is
designed to facilitate that transfer and to provide major cost saving benefits to both
suppliers and retailers customers. Vendor Managed Inventory is a continuous
replenishment program that uses the exchange of information between the retailer and the
supplier to allow the supplier to manage and replenish merchandise at the store or
warehouse level. In this program, the retailer supplies the vendor with the information
necessary to maintain just enough merchandise to meet customer demand. This enable
the supplier to better project and anticipate the amount of product it needs to produce or
supply.
• Vendor Managed Inventory (VMI) is a family of business models in which the
buyer of a product provides certain information to a supplier of that product and
the supplier takes full responsibility for maintaining an agreed inventory of the
material, usually at the buyer's consumption location (usually a store). A third
party logistics provider is involved who makes sure that the buyer have the
required level of inventory by adjusting the demand and supply gaps.
• As a symbiotic relationship, VMI makes it less likely that a business will
unintentionally become out of stock of a good and reduces inventory in the supply
chain. Furthermore, vendor (supplier) representatives in a store benefit the vendor
by ensuring the product is properly displayed and store staff are familiar with the
features of the product line, all the while helping to clean and organize their
product lines for the store.
• One of the keys to making VMI work is shared risk. Often if the inventory does
not sell, the vendor (supplier) will repurchase the product from the buyer
(retailer). In other cases, the product may be in the possession of the retailer but is
not owned by the retailer until the sale takes place, meaning that the retailer
simply houses (and assists with the sale of) the product in exchange for a
predetermined commission or profit. A special form of this commission business

is scan-based trading whereas VMI is usually applied but not mandatory to be

used.
• This is one of the successful business models used by Wal-Mart and many other
big box retailers. Home Depot uses the technique with larger suppliers of
manufactured goods (ie. Moen, Delta, RIDGID, Paulin). VMI helps foster a closer
understanding between the supplier and manufacturer by using Electronic Data
Interchange formats, EDI software and statistical methodologies to forecast and
maintain correct inventory in the supply chain. Vendors benefit from more control
of displays and more contact to impart knowledge on employees; retailers benefit
from reduced risk, better store staff knowledge (which builds brand loyalty for
both the vendor and the retailer), and reduced display maintenance outlays.
Consumers benefit from knowledgeable store staff who are in frequent and
familiar contact with manufacturer (vendor) representatives when parts or service
are required, store staff with good knowledge of most product lines offered by the
entire range of vendors and therefore the ability to help the customer choose
amongst competing products for items most suited to them, manufacturer-direct
selection and service support being offered by the store,
Definition and Concept

Vendor managed inventory process can be defined as “A mechanism where the supplier
creates the purchase orders based on the demand information exchanged by the
retailer/customer”. To say this in simple terms, VMI is a backward replenishment model
where the supplier does the demand creation and demand fulfillment. In this model,
instead of the customer managing his inventory and deciding how much to fulfill and
when, the supplier does.
The VMI concept provides improved visibility across the supply-chain pipeline that helps
manufacturers, suppliers and retailers improve production planning, reduce inventory,
improve inventory turnover and improve stock availability. With information available at
a more detailed level, it allows the manufacturer to be more customer-specific in it’s
planning. The VMI concept is being widely used in many packaged consumer goods

processes where the end-user’s demand for products is relatively stable with short-term
fluctuations in supply chain. With the ability of supply-chain applications to manage
inventories at retailer locations, VMI concepts are being applied at both the distribution
center-level and the store-level.
Conventional Fulfillment Process from Retailer Perspective

In the conventional fulfillment process, sales are typically forecasted in their
replenishment systems using the historical sales data. Then, the retailer/customer tracks
the sales information and inventory information (usually on-hand and available
quantities) and forecasts the orders. The corporate buyers keep watch on the ordered data
and perform order pushes for the items they are responsible for. The created purchase
orders will be communicated to the vendor using the EDI 850 document. The vendor
looks at the available inventory and determines whether or not the order can be fulfilled.
If the inventory is available at the vendor, the product will be shipped to the retailer’s
warehouse or store and an “Advance Shipment Notice” (EDI 856 document, ASN) will
be communicated to the retailer. Soon after this, the vendor sends the invoice to the
retailer using the EDI 810 document. Upon receiving the product, the retailer does the
invoic matching and handles payment through their account payable systems.
The flow of the conventional fulfillment process is depicted in the following picture.

VMI Fulfillment Process from Retailer Perspective: -

In the fulfillment process using VMI, typically the activities of forecasting and creating
the purchase orders are performed by the vendor/supplier and not by the retailer.

Electronic data interchange (EDI) is an integral part of VMI process and takes a vital role
in the process of data communication. The retailer sends the sales and inventory data to
the vendor via EDI or other B2B Collaboration facilities and the supplier creates the
purchase orders based on the established inventory levels and fill rates. In VMI process,
the retailer is free of forecasting and creating the orders as the vendor generates the
orders. The vendor is responsible for creating and maintaining the stock plan for the
retailer. The vendor sends the shipment notices before shipping the product to the
retailer’s store/warehouse. Soon after this, the vendor sends the invoice to the retailer.
Upon receiving the product, the retailer does the invoice matching and handles payment
through their account payable systems.
The flow of fulfillment process using VMI is depicted in the following picture.
Activities Involved in Establishing VMI Process

Vendor managed inventory process impacts the many different replenishment practices
on the retailer side. The retailer and the supplier must establish clear guidelines on

inventory levels and fill rates. The VMI process involves exchange of critical and
sensitive information between retailer and supplier. If this data is not shared or
notaccurate as per the established guidelines, it will have severe impact on the overall
success of the VMI process. High-level descriptions of the various activities involved in
establishing the VMI process are described below.
Management Commitment and Buy-in from Inventory Staff

If a retailer is establishing the VMI process, it should be treated as a strategic initiative
and the objectives of this process should be communicated to the organization especially
for the inventory and replenishment planners. The strategic management team should
understand the concept of VMI and be ready to accept the concept of inventory
management by a third party. Employees should be given a complete overview of VMI
and the benefits the organization receives from the VMI process. The support of
inventory analysts, e-business analysts and replenishment planners are very essential for
the success of this program.
Data Synchronization and EDI Set Up

The product data like UPC and other catalog information should match between retailer
and vendor. Prior to start up, product data should be audited and differences with respect
to product data should be resolved. Also, a process for communicating the product data
changes should be established. Ensure that the vendors are setup in EDI system. Verify
and validate that the inbound and outbound transmission occurs as intended and in
accurate manner. EDI testing is an iterative process and should be done covering all
possible documents exchanged and for all types of products.
Setting up the Agreements

As discussed earlier, in the VMI process, the vendor creates the order and maintains the

stocking plan for the retailer. To avoid situations where retailers question suppliers
regarding the creating of orders for a product that they did not require and to prevent over
and under allocations scenarios, agreements on inventory turns, fill rates, frequency of
replenishment and SLAs should be predetermined.
Data Exchange
Two types of data exchange occur between retailer and supplier. One is a one-time
exchange of retailer’s sales history that allows the supplier to base the inventory. The
second type of data exchange is ongoing product activity data exchange. Product activity
data exchange primarily contains quantity on-hand, sales volumes, back orders and
returns. Product activity data exchange can be daily/weekly depending on the need.
EDI-852 is the EDI document that is used for product activity data exchange.
Ordering
Upon receiving the EDI-852 data, the vendor calculates the reorder point (ROP) for each
item based on the movement of data and any overriding guidelines established. The
quantity available with retailer is then compared to the calculated reorder quantity at the
item/location level and order quantities are determined. The created orders will be
communicated to the retailer using the EDI-850 document. Some partners use EDI-855
(PO acknowledgement document) in addition to EDI-856. The 856 is sent before the
shipment has been made. When it comes to fulfillment, the VMI customers generally
receive priority service for replenishment. Since vendors control the forecasting and
fulfillment, even package quantities can be modified to reduce processing at customer
receiving facilities
Invoice Matching

Once the retailer receives the product, invoices are matched and payments will be made
to the supplier accordingly. The important point in VMI is the ownership of the
inventory. VMI does not change the ownership of the inventory.
Measurement
An effective measurement process should be agreed upon and implemented to monitor
the success of VMI. This should include improvements in inventory turn over, stock
availability, inventory reduction and distribution.
EDI Documents used in VMI

EDI is an integral part of VMI process. Some of the EDI transactions used in VMI are
listed below:
850 Purchase Orders
852 Product Activity
855 Purchase Order Acknowledgement
856 Advance Ship Notice
810 Invoice

Benefits of VMI Process

The VMI process brings benefits for both retailers and suppliers. Some of those
benefits are listed below.
Retailer Benefits
Reduced inventory:- This is the most obvious benefit of VMI. Using the VMI process,
the supplier is able to control the lead-time component of order point better than a
customer with thousands of suppliers they have to deal with. Additionally, the supplier
takes on a greater responsibility to have the product available when needed, thereby
lowering the need for safety stock. Also, the supplier reviews the information on a more
frequent basis, lowering the safety stock component. These factors contribute
tosignificantly lower inventories.
Reduced stock-outs:- The supplier keeps track of inventory movement and takes over
responsibility of product availability resulting in a reduction of stock outs, there-by
increasing end-customer satisfaction.
Reduced forecasting and purchasing activities: As the supplier does the forecasting
and creating orders based on the demand information sent by the retailer, the retailer can
reduce the costs on forecasting and purchasing activities.
Increase in sales: Due to less stock out situations, customers will find the right product
at right time. Customers will come to the store again and again, there-by reflecting an
increase in sales.

Supplier Benefits
Improved visibility results in better forecasting: Without the VMI process, suppliers
do not exactly know how their customers are going to place orders. To satisfy the
demand, suppliers usually have to maintain large amounts of safety stocks. With the VMI
process, the retailer sends the POS data directly to the vendor, which improves the
visibility and results in better forecasting.
Reduces PO errors and potential returns: As the supplier forecasts and creates the
orders, mistakes, which could otherwise lead to a return, will come down.
Improvement in SLA: Vendor can see the potential need for the item before it is
actually ordered and right product is supplied to retailer at right time improving service
level agreements between retailer and supplier.
Encourages supply chain cooperation: Partnerships and collaborations are formed that
smooth the supply chain pipeline.

Challenges and Limitations of VMI

The VMI approach has its own set of challenges and limitations:
• Some companies continue to manufacture to stock without leveraging customer-
specific data effectively for production planning
• In order to provide priority service to VMI partners, some vendors reserve
inventory resulting in shortages to other customers
• Insufficient level of system integration results in incomplete visibility
• High expectations from retailers
• Resistance from sales forces due to concerns of losing control, effecting sales
based incentive programs
• Lack of trust and skepticism from employees
Overcoming the Limitations

Effective implementation of VMI depends on smoothly overcoming the limitations and
addressing the concerns of various stake holders. Some of the concerns can be
addressed as explained below:
• Redefine incentive programs based on partnership building instead of sales
volume
• Build strong partnerships with management commitment to effective
communication, active sharing of information, commitments to problem solving
and continued support
• Conduct simulations and pilots before actual implementation
• Organize training sessions before launching VMI program
• Set reasonable targets for benefits of VMI
• Establish agreements on service levels and process to handle exceptions
Conclusion
Supply chain optimization requires efficient and accurate transfer of information with in
all the members of the chain. VMI facilitates that transfer of information and provides
cost saving opportunities to both vendors and retailers.

Bibliography: -
• Achabal, Dale, Shelby McIntyre, and Stephen Smith, “Maximizing Profits from
Department Store Promotions,” J. Retailing, 66, 4 (1990), 383—407.
• Clearance pricing model by Stephen J Smith, Achabal,
• Journal of management
• Journal of marketing
• Indian journal of marketing
Wibliography: -
• www.jstor.com
• www.google.co.in
• www.yahoo.com

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Effect of plan-o-gram, Inventory and VMI

“Effect of Planogram, Inventory and vendor

Under the guidance of

M.P. Birla Institute of Management

M.P.Birla Institute of Management 1

I hereby declare that this Research paper entitled

“Effect of Planogram, Inventory and vendor managed inventory in

Visual Merchandising” has been undertaken and completed by

me under the valuable guidance of Senior Prof S. Ramgopal,

M.P.B.I.M, in partial fulfillment of Degree of MBA program is my

degree, diploma, fellowship or other similar title or prizes for any

institution previously, to the best of my knowledge.

Place: Bangalore (Ram Singh)

M.P.Birla Institute of Management 2

I would like to express my profound gratitude to Mr. S. Ramgopal,

Senior Professor, M.P. Birla Institute of Management whose

guidance was significant in the successful completion of the

I wish to thank our Dr. Nagesh Malavalli, Principal,

M.P. Birla Institute of Management for providing the means and

Place: Bangalore (Ram Singh)

M.P.Birla Institute of Management 3

This is to certify that this report is the result of

Research Paper “Effect of Planogram, Inventory and vendor

managed inventory in Visual Merchandising” undergone by Mr.

Ram Singh bearing the register number 05XQCM6072 under the

guidance and supervision of Senior Prof. S. Ramgopal This has

University, to be the best of my knowledge.

Date: Dr Nagesh. Malavalli

Place: Bangalore (Principal)

M.P.Birla Institute of Management 4

This is to certify that this report is the result of

Research Paper “Effect of Planogram, Inventory and vendor

managed inventory in Visual Merchandising” undergone by Mr.

Ram Singh bearing the register number 05XQCM6072 under the

guidance and supervision of Senior Prof. S. Ramgopal. This has not

formed a basis for the award of any Degree/ Diploma of any

University, to be the best of my knowledge.

Date: Prof. S. Ramgopal

Place: Bangalore (Guide)

M.P.Birla Institute of Management 5

2. Model Specification and Optimality Conditions 36

3. Sales Rate Function 38

4. Inventory Decision and Cost Model 40

6. The Separable Sates Rate Case 43

M.P.Birla Institute of Management 6

9. Solving for the Optimal Inventory Commitment Io 47

10. Tabulated Solution and Interpretation 47

11. Interpretation of the Six Solution Cases 48

12. Two Models for Inventory Effects 50

13. Implementation Methods 52

M.P.Birla Institute of Management 7

NEED AND IMPORTANCE OF THE STUDY

• Marketing products using visual merchandising system is an age-old practice but

OBJECTIVE OF THE STUDY:

M.P.Birla Institute of Management 8

The research for this study is Qualitative Research

Relevant additional and supplementary information will be collected from news

Tools for data collection:

M.P.Birla Institute of Management 9

SCOPE OF THE STUDY:

CROSS SECTIONAL STUDY:

M.P.Birla Institute of Management 10