11 & 12 CRM & Planning Merchandise Assortments

Chapter 11
CRM
Prof. Vikram Parekh on Retail Management
CRM
Customer relationship management (CRM) is a business philosophy and a set of strategies, programs, and systems that focuses on identifying and building loyalty with a retailer's most value customers. CRM is based on the philosophy that retailers can increase profitability by building relationships with their better customers. Effectively managing merchandise inventory and the stores provides value and supports the primary objective of building customer loyalty. The goal is to develop a base of loyal customers who patronize the retailer frequently.
Content: CRM
The CRM Process Collecting Customer Data Analyzing customer data & identifying target customers Developing CRM programs Implementing CRM programs
Content: CRM
The CRM Process

Retailers are now beginning to concentrate on providing more value to their customers using targeted promotions and services to increase their share of the wallet the percentage of the customers' purchases made from the retailers with these customers. This change in perspective is supported by research indicating that it now costs over six times more to sell products and services to new customers than existing customers and that small increases in customer retention can lead to dramatic increases in profits What is loyalty? Overview of CRM Process
The CRM Process

What is loyalty?
Customer loyalty, the objective of CRM, is more than having customers make repeat visits to a retailer and being satisfied with their experiences and merchandise they purchased. Customer loyalty to a retailer means that customers are committed to purchasing merchandise and services from the retailer and will resist the activities of competitors attempting to attract their patronage. Loyal customers have an emotional connection with the retailer. Their reasons for continuing to patronize a retailer go beyond the convenience of the retailer's store or the low prices and specific brands offered by the retailer. They feel such goodwill toward the retailer that they will encourage their friends and family to buy from it (WOM Publicity). Emotional connections develop when customer receive personal attention. Unusual positive experiences also build emotional connections.
The CRM Process

Overview of CRM Process CRM is an interactive process that turns customer data into customer loyalty through four activities: (1) Collecting customer data (2) Analyzing the customer data and identifying target customers (3) Developing CRM programs (4) Implementing CRM programs.
The CRM Process
Content: CRM
The CRM Process

Step 1: Collecting Customer Data
A. Customer database
Transactions Customer contacts Customer preferences Descriptive information Responses to marketing activities
B. Identifying Information
Asking for identifying information Offering a frequent shopper card (also called loyalty program) Linking checking account number and third party credit cards
C. Privacy and CRM Programs

Privacy concerns Protection customer privacy
Content: CRM
The CRM Process

Step 2: Analyzing customer data & identifying target customers
The next step in the CRM process is analyzing the customer database and converting the data into information that will help retailers develop programs for building customer loyalty. Data mining is one approach and is a technique used to identify patterns in data, typically patterns that the analyst is unaware of prior to searching through the data. Market basket analysis is a specific type of data analysis that focuses on the composition of the basket, or bundle, of products purchased by a household during a single shopping occasion. This analysis is often used for suggesting where to place merchandise in a store.
Market Basket Analysis Taught Wal-Mart to Change!
Product
Bananas Kleenex Measuring spoons
Placed Near
cornflakes, produce paper goods, cold medicine housewares, Crisco shortening
Flashlights
Little Debbie snack cakes Bug spray
hardware, Halloween costumes

coffee hunting gear
The CRM Process

Step 2: Analyzing customer data & identifying target customers
A. Identifying market segments B. Identifying best customers

LTV Life Time Value Customer pyramid (Platinum top 25%, gold next 25%, iron, & Lead lowest segment)
C. RFM (recency, frequency, monetary) Analysis

often used by catalog and direct marketers
Customer Pyramid
Platinum Best Most loyal Least price sensitive Gold Next best Not as loyal Iron Doesnt deserve much attention Lead Demands attention May have negative value
Content: CRM
The CRM Process

Step 3: Developing CRM Programs
The next step in the CRM process is to develop programs for the different customer segments. These include: 1. Retaining best customers
Frequent shopper programs Special customer service Personalization Community
2. Converting good customers into high-LTV customers

Customer alchemy Cross selling Add-on selling
3. Getting rid of unprofitable customers.

Offering less costly approaches for satisfying the needs of lead customers Charging the customers for the services they are abusing.
Content: CRM
The CRM Process

Step 3: Implementing CRM Programs
Increasing sales and profits from the CRM program is a challenge. The effective implementation of CRM programs requires the close coordination of activities by different functions in a retailer's organization. The MIS department needs to collect, analyze, and make the relevant information readily accessible for employees implementing the programs the front-line service providers and sales associates and the marketers responsible for communicating with customers through impersonal channels (mass advertising, direct mail, and e-mail). Store operations and human resource management needs to hire, train, and motivate the employees who will be using the information to deliver personalized services.
RECAP: CRM
The CRM Process
What is loyalty
Overview of CRM process
Collecting Customer Data

Customer database Identifying information
Privacy and CRM processes
Analyzing customer data & identifying target customers Developing CRM programs
Customer retention
Converting good customers into best customers

Dealing with unprofitable customers
Implementing CRM programs

Chapter 12
Planning Merchandise Assortments
Content: Planning Merchandise Assortments

Intro to Merchandise Management Organizing the planning process by categories Setting objectives and merchandise plan Sales forecasting Assortment planning process Assortment plan

Introduction
Merchandise management is the process by which a retailer attempts to offer the right quantity of the right merchandise in the right place at the right time while meeting the companys financial goals. Small and large retailers are required to make decisions about thousands of individual items from hundreds of vendors. If the buying process is not organized in a systematic, orderly way, chaos will result. As in any business, a retailer's ultimate objective is to achieve an adequate return on the investment to the owners. This chapter shows how financial objectives trickle down the merchandising organization, and how these objectives are used to make buying decisions.
Introduction
Once the financial objectives are set, the retailer starts the task of determining what to buy. Retailers are limited by the amount of money available for merchandise and the space in the store. They must decide whether to carry a large variety of different types of categories or carry fewer categories but a larger assortment within each category. The process of trading off variety, assortment, and backup stock is called assortment planning. An assortment plan is a list of merchandise that indicates in very general terms what should be carried in a particular merchandise category.

Organizing the Buying Process by Categories

The category is the basic unit of analysis for making merchandising decisions. In general, a category is an assortment of items that the customer sees as reasonable substitutes for each other, such as girls' apparel, boys' apparel, and infants' apparel. Each of these categories has similar characteristics. Category management is the process of managing a retail business with the objective of maximizing the sales and profits of a category. Some retailers turn to one favored vendor to help them manage a particular category. Known as the Category Captain, this supplier forms an alliance with a retailer to help gain consumer insight, satisfy consumer needs, and improve the performance and profit potential across the entire category. A stock keeping unit (SKU) is the smallest unit available for keeping inventory control.

Setting objectives and merchandise plan

Retailers cannot hope to financially successful unless they preplan the financial implications of their merchandising activities. Financial plans start at the top of the retail organization and are broken down into categories, while buyers and merchandise planners develop their own plans & negotiate up the organization. Top management looks at the overall merchandising strategy. Buyers and merchandise planners, on the other hand, take a more micro approach. The financial planning process start with the firms overall financial goals and break them down into categories. The resulting merchandise plan is a financial buying blueprint for each category. Once the merchandise plan is set, the category managers and planners develop the assortment plan

Putting Profits, Sales, and Turnover Together: GMROI.
At the corporate level, return on assets is used to plan and evaluate performance of overall retail operations. Return on assets = Net profit margin X Asset turnover Also, Return on assets = Net profit / Total assets GMROI (gross margin return on inventory investment) is a similar concept to return on assets, only its components are under the control of the buyer rather than other managers. GMROI = Gross margin percentage X Sales-to-stock ratio Also, GMROI = Gross Margin Average Inventory

Measuring Inventory Turnover
Inventory turnover = Net Sales / Average Inventory at Retail
Inventory turnover = Cost of goods sold / Average Inventory at cost

Sales-to-stock ratio = Net Sales / Average Cost Inventory Retailers normally express inventory turnover rates on an annual basis rather than for parts of a year.
Average inventory =
Month1 + Month2 + Month3 + . . . -------------------------------------------Number of months
Most retailers no longer need to use physical "counts" to determine average inventory. Point-of-sale (POS) terminals capture daily sales and automatically subtract them from on-hand inventory. Retailers with POS systems can get accurate average inventory estimates by averaging the inventory on hand for each day in the year.

Measuring Inventory Turnover
Advantages of High Inventory Turnover
Increased sales volume Less risk of obsolescence and markdowns Improved salesperson morale More money for market opportunities Decreased operating expenses Increased asset turnover
Dis-advantages of High Inventory Turnover

Lowered sales volume Increased cost of goods sold Increased operating expenses

Sales Forecasting
An integral component of any merchandising plan is the sales forecast. A retailer needs to forecast sales to determine how much to buy. Product categories typically follow a predictable sales pattern--sales start off low, increase, plateau and then ultimately decline. Yet the shape of that pattern varies considerably from category to category. The category life cycle describes a merchandise category's sales pattern over time, and is divided into four stages; introduction, growth, maturity, and decline. Knowing where a category is in its life cycle is useful for predicting sales. However, the shape of the life cycle can be affected by the activities undertaken by retailers and vendors.
Sales Forecasting
An integral component of any merchandising plan is the sales forecast. A retailer needs to forecast sales to determine how much to buy. Category Life Cycles Product categories typically follow a predictable sales pattern--sales start off low, increase, plateau and then ultimately decline. Yet the shape of that pattern varies considerably from category to category.
The category life cycle describes a merchandise category's sales pattern over time, and is divided into four stages; introduction, growth, maturity, and decline.
Knowing where a category is in its life cycle is useful for predicting sales. However, the shape of the life cycle can be affected by the activities undertaken by retailers and vendors.
Sales Forecasting
Variations on the Category Life Cycle
Fad Sales over many seasons No Fashion Yes Staple Yes Seasonal Yes
Sales of a specific style over many seasons
No
No
Yes
Yes
Sales vary dramatically from one season to the next

SALES
No
Yes
No
Yes
(Sales against Time)
TIME
TIME
TIME
SALES
TIME
SALES
SALES
Illustration
Sales Forecasting
Developing a Sales Forecast
A simple way to develop a sales forecast for a merchandise category is to adjust the past sales to make projections into the future. This type of sales forecasting is done at the category, rather than SKU level, and is used primarily for fashion merchandise. Forecasting sales of staple merchandise is typically done at the SKU level.
Sources of Category-Level Forecasts

Previous sales volume Published sources Customer information Shop competition Vendors and resident buying office Store-level forecasting CPFR
Sales Forecasting
CPFR collaboration, planning, forecasting, and replenishment is a natural outgrowth of the EDI technology. CPFR is a collaborative inventory management system in which a retailer shares information with vendors. Since the forecast is more accurate, the fill rate (the percentage of an order that is shipped by the vendor) increases. A higher fill rate means that instore merchandise availability increases, resulting in fewer out-of-stocks. Thus, the goal of CPFR is to increase on-shelf availability while lowering inventory throughout the supply chain. The CPFR methodology comprises of a nine-step process designed for planning, forecasting, and replenishment of retail inventory by enhancing coordination of all trading parties in a supply chain. It centers on sharing of: business plans, promotion plans, new-product plans, inventory data, POS data, production and capacity plans, and lead-time information.

Assortment Planning Process

Merchandise decisions are constrained by the amount of money available to invest on inventory and the amount of space available in the store. Retailers need to make strategic trade-offs between variety, assortment, and product availability. There also additional special issues that must be considered by e-tailers. Variety is the number of different merchandising categories within a store or department. Stores with a large variety are said to have good breadth.
Assortment is the number of SKUs within a category. Stores with large assortments are said to have good depth.
Product availability, also referred to as the level of support or service level, defines the percentage of demand for a particular SKU that is satisfied.

Determining Product availability Product availability defines the percentage of demand for a particular SKU that is satisfied. The higher the product availability, the higher the amount of back-up stock necessary to ensure that the retailer won't be out of stock on a particular SKU when the customer demands it. Cycle stock, also known as base stock, is inventory that results from the replenishment process and is required to meet demand when the retailer can predict demand and replenishment times (lead times) perfectly. Unfortunately, most retailers are unable to predict demand and replenishment times without error, so, they carry back-up stock, also known as safety stock or buffer stock, as a safety cushion for the cycle stock so they won't run out before the next order arrives.

Determining Product availability
Several issues determine the level of required back-up stock. First, since every SKU shows a unique demand and lead-time pattern, inventory management systems should calculate safety stock requirements for each SKU. Second, backup stock and therefore, overall inventory investment depend on the product availability the retailer wishes to provide. Third, the higher the fluctuations in demand, the greater the need for backup stock. Fourth, the amount of backup stock also depends on lead time from the vendor. Lead time is the amount of time between recognition that an order needs to be placed and the point at which the merchandise arrives in the store and is ready for sale. Fifth, the fluctuations in lead time also affect the amount of backup stock. Many retailers using quick response inventory systems are forcing their vendors to deliver the merchandise within a very narrow window to reduce the fluctuations in lead time and thus the amount of required backup stock. Finally, the vendor's product availability also affects the retailer's backup stock requirements.

Assortment Plan
An assortment plan describes in very general terms what should be carried in a particular merchandise category.
The more fashion-oriented the category, the less detail will be found in the assortment plan because the merchandise planner requires more flexibility to adjust to fashion changes.
The merchandise planner uses the sales, GMROI, and turnover forecast along with the assortment plan from the previous season to develop the plan for the current season. Adjustments are then made based on the merchandise planners expectations for what items or fashions will be important in the coming season.
A good assortment plan requires a good forecast for sales, GMROI, and inventory turnover along with a mix of subjective and experienced judgment.
Depth & Breadth of merchandise
MENSWEAR
DEPARTMENT
PRODUCT LINE
SHIRTS
TROUSERS
ACCESSORIES
ZODIAC
VAN HEUSEN
LOUIS PHILLIPPE DEPTH
ARROW
BREADTH
STYLES COLOURS
SIZES
Model Stock Plan
The model stock plan gives the precise items and quantities that should be on hand for each merchandise line. A model stock plan needs to be compiled for each line of merchandise.
Steps for Model Stock Plan
Identify the attributes that the customer would consider in buying the product.
Decide on the levels under each attribute.
Allocate the total money or the units to the respective item categories.
Creating a model stock plan
A retailer has allocated Rs. 1 lakh to buying shirts. Assuming that the purchase price for the shirts is Rs.100, he will be able to stock 1,000 shirts. Create a model stock plan?
Identify the number of levels under each attribute.

Type of shirt Dress, Casual, Formal, Sport Size Small, Medium, Large, Extra Large Sleeve Length Full Sleeves, Short Sleeves Collar Type Saville, Button Down Color White, Blue, Cream, Grey Fabric Cotton, Cotton Blend
Type
% of Sales 10
Dress
40
Casual
Medium
40 Half Sleeves 70
Formal
20 30
Sport
Extra Large
10
Sizes
% of Sales Sleeve Length % of Sales
Small
25 Full Sleeves 30
Large
25
Allocate the total units to the respective item categories
Mens Shirts 100% (1,000)
Dress 10% (100) Small 25% (100) Full Sleeves 30% (48)
Casual 40% (400) Medium 40% (160)
Formal (20%) 200 Large 25% (100)
Sport 30% (300) Extra Large 10% (40)
Half Sleeves 70% (112)
Button Down 40% (45)
Saville 60% (67)
White 40% (18) Cotton 25% (4)
Blue 30% (14)
Cream 20% (9)
Grey 10% (4)
Cotton Blend 75% (14)

Prof. Vikram Parekh on Retail Management @ 2009
RECAP: Planning Merchandise Assortments


11 &amp; 12 CRM &amp; Planning Merchandise Assortments

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Chapter 11

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

The CRM Process

The CRM Process

The CRM Process

Prof. Vikram Parekh on Retail Management

The CRM Process

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

The CRM Process

C. Privacy and CRM Programs

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

The CRM Process

Prof. Vikram Parekh on Retail Management

Market Basket Analysis Taught Wal-Mart to Change!

hardware, Halloween costumes

Prof. Vikram Parekh on Retail Management

The CRM Process

A. Identifying market segments B. Identifying best customers

C. RFM (recency, frequency, monetary) Analysis

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

The CRM Process

2. Converting good customers into high-LTV customers

3. Getting rid of unprofitable customers.

Prof. Vikram Parekh on Retail Management

The CRM Process

Prof. Vikram Parekh on Retail Management

Overview of CRM process

Collecting Customer Data

Privacy and CRM processes

Converting good customers into best customers

Implementing CRM programs

Planning Merchandise Assortments

Prof. Vikram Parekh on Retail Management

Content: Planning Merchandise Assortments

Prof. Vikram Parekh on Retail Management

Content: Planning Merchandise Assortments

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

Content: Planning Merchandise Assortments

Prof. Vikram Parekh on Retail Management

Organizing the Buying Process by Categories

Prof. Vikram Parekh on Retail Management

Content: Planning Merchandise Assortments

Prof. Vikram Parekh on Retail Management

Setting objectives and merchandise plan

Setting objectives and merchandise plan

Prof. Vikram Parekh on Retail Management

Setting objectives and merchandise plan

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

Month1 + Month2 + Month3 + . . . -------------------------------------------Number of months

Setting objectives and merchandise plan

Dis-advantages of High Inventory Turnover

Content: Planning Merchandise Assortments

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

Prof. Vikram Parekh on Retail Management

Sales of a specific style over many seasons

11 & 12 CRM & Planning Merchandise Assortments

11 & 12 CRM & Planning Merchandise Assortments