PRODUCT LIFE CYCLE IN RETAIL INDUSTRY

In Retail Industry the buying and merchandising team classifies their products into categories based on sales and product life cycle. This gives them the edge to price the products and stay ahead of their competitors in assortment planning and pricing. Before we get into product classification, we will discuss the various phases a product goes through right from launch to phase out.

1. Launch
2. Growth
3. Maturity
4. Decline

Prior to launch, all the products will go through a product development lifecycle and procurement process which we will discuss in detail in separate blogs.

1. Launch

This is the first Phase a product goes through in Retail market and as the name suggests it is the launch of the product. In this phase the product is new to the market and it is still untested. This is the phase where the product needs huge advertising and marketing push through hoardings, commercials and test samples. Hence usually newly launched products are priced a bit towards the higher side to accommodate these additional costs. The main goal for a company in this phase is to create a positive vibe for the product in the market and attract customer through awareness. At times due to high marketing cost, the company can incur loses which can only be recovered from the other phases but this phase is a zero compromise phase for every product. So we are left with no option other than to invest in marketing at proportionate level expecting future returns.

2. Growth

The second phase sees the growth of the product and the benefits of the marketing activities carried out during the launch. We can observe the market response and demand for the product in the market. This will help us evaluate whether the product will be a hit among its consumers and sustain the competitor's pressure or not and if yes then how long. Marketing for the product does continue but on a lesser scale and price for the product is revised based on its demand in the market. A sudden drop in price during this phase will impact the product's sales and image among its consumers. Usually pricing will see a marginal drop or remain static from its launch price.
This phase also sees increase in gross margin for the product due to drop in marketing cost and production cost. If the product has a successful launch then the growth phase will see the product peak in its market share and have a better reach to its consumers.

3. Maturity

As the name suggests, when a product enters this phase, it is already well establish and enjoys a good market share but it does come with its own challenges. By now a handsome volume of your customers have used the product and given their feedback based on which the sales would have peaked. The product's sales volume will be in its peak. The faster the product reaches maturity the longer the product can sustain in the market because the product can enjoy the market share up till competition heats up.
But this stage is also full of challenges like :
- Clones being introduced in the market by competitors at lower price slabs. The company has to reduce prices to compete with the competitors and retain its customers in this case
- With more competitors offering similar product will force us to reduce the price of the product leading to drop in price
Due to heavy competition from competitors the product will lose the market share, so we need to differentiate the product form the competitors through improvisations and making the product better. This usually leads to a partial first phase again i.e. through marketing and re-launching the product with better features to maintain the market share gained and to stay one step above the competition.
If the product is not re-launched then the product will hit Saturation in market share and hit the decline phase

4. Decline

With increase in competition and better products being launched in the market for the same price, the product will eventually get into its decline phase. The continuity of manufacturing the product will be dependent on the available market share and cost of production. Retailers will try to penetrate lower end markets and new markets by selling the products for lower price. Retailers provide discounts on the product to liquidate the existing stocks and ultimately the product will be phased out by the retailers from the market.

EFFECTIVE PEOPLE MANAGEMENT

Treating employees and customers on par is important for a successful retail organisation. Employees are our internal customers. A frustrated staff or a staff with low moral will leave customers frustrated. Hence the below points of staff management will add value to efficient customer service.

1. Hire
2. Induct and Educate
3. Observe and Discuss
4. Performance Evaluation
5. Promote

1. Hire

This is the primary and the most significant process in hunting professional talents who can deliver and take the organisation towards achieving its set goals. But getting the right talent for the right role is a complex task because all you have is only 2 Hours on the whole to shortlist an employee. Never hire a person just by looking at his resume and qualification, prioritise your interview questions on the below points :

Aptitude :
Test the interviewee on simple to complicated aptitude question to know when he/she stands with respect to reasoning and analysis skills

Attitude :
His willing to adopt different culture, willingness to do short term business travel, how he will treat his superiors, subordinates and his customers in particular

Communication :
Willingness to learn local languages, verbal and written communication skills

Ability to train people :
Must be willing to train people and should have trained his colleagues or subordinates in previous organisation if he had a chance

Expertise he has gained : 
A  few simple question to understand how anxious the person is towards learning new things and how much expertise he has gained from his past experience (Ask them to keep in brief)

His/her view on politics :
His point of view towards employee politics (see how straight forward, confused or diplomatic his response is, that's how political he will be)

Work culture he/she would prefer :
workaholic or slow worker or perfectionist or fast paced

Once you have scrutinised the above, then move on to his technical and operational knowledge in the respective field you are looking to deploy him/her in. A wise guy with a wrong attitude poses more danger to your organisation than a dumb employee who can be trained.


2. Induct and Educate

Induction process should be as detailed and simplified as possible, so that the new employee can understand and accept the new work environment he is getting into. Induction process should be well planned and did over a short period of time. The below points have to be covered in the induction process :
- Company History
- Company's accomplishment
- Organisation's Goals
- Vision and mission statement
- Work culture
- Organisation hierarchy structure and departments
- HR policy

Upon completion of the Induction process, classroom training sessions should be conducted on the respective Key Responsible Areas. Job description should be covered in depth to impart the role and importance of the employee. A simple test should be conducted at the end of the session to access the efficiency of the employee. The report card should be shared with the respective store manager where the employee is being deployed. This is assist the store manager to understand the strengths and weaknesses of his employees and to train them to convert their weaknesses into strengths

Induction and training is not the end of this process, regular training on various expertise and conduction educational programs will motivate your staffs and also improve their skill levels.
A detailed training on the new styles, products to be introduced for the season before the launch will build confidence in the staffs and also enhance their product knowledge.
Human Resource department should play a major part in this activity by encouraging staffs to do certifications and other skill improvement activities.
A few retailers have commenced Post Graduation Management programs for their staffs to take them to the next level in their career which will benefit both the employee and the employer. A very good example for this is Future Group, India.
Education should also be coupled with behavioural training programs to training staffs on behaviour and custom handling techniques.

2. Observe and Discuss

Store manager or the respective department manager should be well aware of their staffs' strengths and weaknesses. Also they should be aware how they are placed in the store among the other staffs, what regards the other staffs have for him. It can be effectively done with the help of "Johari's Window" technique.

The Johari window is a technique created in 1955 by two American psychologists, Joseph Luft and Harrington Ingham,used to help people better understand their relationship with self and others. It is used primarily in self-help groups and corporate settings as a heuristics exercise.
When performing the exercise, subjects are given a list of 56 adjectives and pick five or six that they feel describe their own personality. Peers of the subject are then given the same list, and each pick five or six adjectives that describe the subject. These adjectives are then mapped onto a grid.
Charles Handy calls this concept the Johari House with four rooms.
Room 1 is the part of ourselves that we see and others see.
Room 2 is the aspects that others see but we are not aware of.
Room 3 is our private space, which we know but keep from others.
Room 4 is the most mysterious room in that the unconscious or subconscious part of us is seen by neither ourselves nor others. (CREDITS : Wikipedia)

Open/Arena: Attributes that are known and recognised by both the staff and his peers. As a Manager you need to talk about this to the employee and advice what you feel is good and what he can improve upon

Blind Spot: Attributes that are known and recognised by his peers and not known to the staff himself. As a mentor you need to discuss this with the staff and understand how far are they genuine. Staffs are prone to do gossips in a people oriented environment. So blind spots may not always be genuine ones.

Hidden/Façade: Attributes that are known only to the employee but not known to others. Though this attribute can disturb the employee, for example personal problems which can deteriorate the employee's performance should be addressed to if feasible. For example if an employee needs paternity leave for a longer period of time, then you can route it though the Human Resource Department and provide relief to the employee rather than forcing him to work under mental pressure. This will improve both the employee moral and his regards for the team and organisation.

Unknown:  Attributes that neither exists or not known to the employee and his peers. As a manager you could have noticed these attributes through your observation. You need to discuss these and it can help is improving the capabilities of the employee

4. Performance Evaluation :

Performance Evaluation is a more friendlier alias for Appraisal. Maximum efforts should be put in by managers to understand the strengths, weaknesses and opportunities for every single employee reporting to him at the store. Appraisal or Performance evaluation should be done at least twice a year or half yearly, to check and review your employees' performance.
Performance evaluation should be done in three ways to get effective results as classified below :

1. Self-Evaluation : As an employee of the organisation, the staff should be given an opportunity to review his performance for the period of time. Give a set format with their KRA and rating scale. They will then have to rate themselves how they have excelled in each of their KRAs. He should also be given a column to mention his areas of improvement and what he expects from the organisation in the current appraisal cycle

2. Peers' Evaluation : Performance evaluation in a retail store should not just be a two way review just between an employee and his manager, it should be a three way review where is his colleague and managers of other departments should also be involved. They might play a very minimal role by just giving their review briefly about each employee but this will help you understand how the employee stands among his colleagues and also to understand his Blind Spots

3. Actual Evaluation/Appraisal Process : This is the most important and the final step and it does not begin after the above two process but well before them and it is a continuous process  and part of the manager's KRA. Keep a small track sheet or a log book for your department and list down your employee's names with their respective categories. Then keep dotting down their achievements, performance details, customer appreciations, etc. to be finally reviewed at the time of appraisal. With a detailed performance review already in a manager's hand, he will be able to compare his with others' reviews and come up a comprehensive and unbiased appraisal review

4. Promote :

This is one of the key motivating factors for every employee. Promotion should motivate an employee and appreciate him for his work. There should be an elevation is both his pay cheque and his position when the employee has hit the right chords with his KRA. The new position or promotion given should help the employee learn new expertise and diversify his skills, so that his learning is not halted. Whenever we promote a staff to higher responsibility it is advisable to change his store location post training to ensure he is comfortable to execute his new duties without any hassle which could be caused by his ex-colleagues. When a capable and efficient employee finds himself stagnant in the organisation, he will move out as the job market is always interested to absorb good talents.
Losing a well trained employee to a competitor will cost you both in business and in operations effectiveness because retail space in a people oriented business.
Below points are to be considered while promoting a staff :
- New position to be challenging and motivating the staff to improve his skill set
- Proper salary correction to be done considering the market standards
- Formal re-introduction to be given to store staffs on his new roles and responsibilities
- A short term review date to be set and communicated to the employee for reviewing his performance and difficulty he faces in his new role

           HIRE - TRAIN - CHECK - ADVICE - REVIEW - PROMOTE 

EFFECTIVE CUSTOMER SERVICE

 

With immense competition in Retail Industry, retailers are shuttling between multiple channels to gain market share and stay afloat. But with all this drama one thing has not changed and will never change; an organisation which cannot provide customer delight cannot be successful for long no matter what grade of product they serve to their cliental. In this stiff competition, a few retailers and business organisations have started evaluating a customer's importance through their purchasing power which is the first big mistake they are making. We should treat our customers with parity no matter he/she has come to buy a product or service for 100 Rs or 1,000,000 Rs.
Retailers are solution providers to Customers' needs and Customer is the King. This is the magical single liner solution to run your business organisation successfully. As the name KING suggests, customers may not be always right, but your solution should make them winners. Let us remember a simple formula: to get a new loyal customer it will cost you three times than retaining your existing customer.
 
Steps to ensure effective customer service on sales floor in retail industry :

1. Meet and Greet
2. Listen and Advice
3. Clarify
4. Sell the most suitable solution and take feedback
5. Explain the Product usage and care
6. Assist in Billing and enrol for loyalty program
7. Thank and Welcome

1. Meet and Greet

A smile and a greet from the CSR will give the customer confidence and comfort at the first place. Only one staff should greet a customer, multiple staffs clogging around a customer will cause discomfort.

A CSR or Customer Relationship Executive should be present at the entrance to greet a customer while his or her entry into the branch, this will ensure a positive note to our customers. This CSR responsibilities are as below :

A)     Greet the customer

B)    Guide the customer to the respective department as per the customer’s need when asked

C)    Clarify customer query

D)     Handover promotion leaflets to customer

The above responsibilities are also cascaded to the department staffs but with a small change.

A)    Greet a customer with a smile when customer makes eye contact with the staff

B)    Keep an eye and only if customer asks for help, approach the customer

 

2. Listen and Advice

This is one of the most important step which is usually overlooked by experienced staffs who believe to have understood their customers through their experience. But this perception is wrong. The staff should first understand the customer's requirement through polite questions :
- How may I assist you sir/madam
- What kind of a product you are looking for
- You have a budget in mind
Listen cautiously to the customer's need and then advice the suitable products from your product range.

 

3. Clarify

This is a small step but an important one because it will ensure there is no communication gap between you and the customer. Clarify with the customer what you have advised meets their requirement and get their confirmation on the same

 

4. Sell the most suitable solution and take Feedback

Now that you have understood what the customer wants, provide them a solution within their budget. Note the word used "SOLUTION", we provide customers with solution and not products. We might not have all the products that a customer needs but always take extra efforts to show the customer the closest possible product in case of unavailability of the exact product. And in case the customer is willing to come back, ensure you note down the customer's details or customer’s loyalty card number and requirement on your ‘log book’. Communicate the requirement to your department manager and invite the customer when the product is available at the branch

5. Explain the Product usage and care

Never forget to explain the customer the product usage and extra care to be taken if any. This is beneficial both for our organisation and the customer; it will avoid unnecessary exchanges and also will avoid customers from misunderstanding that our products are of low quality.

6. Assist in Billing and enroll for loyalty program

Never leave the customer once the customer finalises their product. Ensure to assist the customer with the billing, particularly if the billing process in lengthy eg: Booking a Furniture or a product involving warranty certifications.

The time gap between the completion of purchase and the billing is a very vital time to convert a new customer into a loyal customer by enrolling them for your loyalty program. Explain the customer the benefits of your loyalty program while guiding your customer to the cash till for billing. But if the customer resists after explaining, please do not force the customer.

  

7. Thank and Welcome  

Always thank the customer with a smile no matter they have bought your products or not. This will ensure them that you are always willing to serve them and also ensure their come back for shopping. Also educate your billing staff to thank the customer and ensure that there are no products left behind at the cash till.

TYPES OF CUSTOMERS IN RETAIL

How many of us as retailers know how many types of customers/ shoppers walk in to our store on day to day basis. This is a gap which many retailers' business operations. They do not educate their sales staff on types of customers which at times leads to frustration in staff and there by leading to customer dissatisfaction. Customer relationship management starts from the sales staffs and not from your customer database. In this blog let's discuss a few types of customers I have come across in my experience in retail industry :

- Brand Loyal Customers
- Discount Customers
- Impulse Buyer
- Window Shoppers
- Emotional Customers
- Exchange Customers
- Need-Based Customers

1. Brand Loyal Customers :

These customers shop for the brand and usually are brand conscious. Such customers should be updated with any new product launch for the season and all the new Hits we receive at the store during the season. If you have a sales contribution of more than 60 per cent from Brand Loyal Customers then your customers are really happy with the quality, features, style, trend, price of your product and customer service at your store. The percentage of Brand loyal customers coming to shop at your store also reflects your Brand value and it is much easier to sell your product to such type of customers but it is difficult to retain Brand Loyal Customers. Some retailers have started to provide Personal Shopping experience to these customers to give that special attention to ensure they get the best shopping experience every time they shop.


2. Discount Customers :

Though some discount customers contribute good percentage to your sales , they do not good contributors to your gross margins. When percentage of sales contribution by discount customers at your store is more then your products are over priced or your product quality and features are not up to the price point. But some retailers do clearance through Factory Outlet stores banking completely on discount customers. Brand Loyal customers can sometimes become Discount customers when they find your products are good but are pricy. But educate your staffs not to take discount customers lights because we need them to have our stocks cleared or liquidated and also they spread the word out in the market faster to show off their bargaining and money saving skills. Such customers can be intimated first on Promotions and Sales Previews


3. Impulse Buyer :

Impulse Buyers are unplanned buyers. He / She will decide to buy a product just at the very moment because the product has impressed him/her. We can see more impulse buyers at Food Carts, Road side eateries, Malls and Fast Food stalls. Impulse Buyer can be converted into a high value shopper with the sales staff's expertise. They can help you build your brand image. Window shoppers can be converted into Impulse Buyers and in turn into a Brand Loyal Customer if you impress them in their first shopping experience at your store.


4. Window Shoppers :

With shopping malls being the latest hang out spot during weekends and evenings for Indians in Metros, window shopping has also increased multiple folds which has led to huge drop in Footfall conversion at stores located in Malls. Usually movie and café goers stop by at the stores in the mall floors to have a look at your products. Window shoppers are mostly attracted into the store due to visual merchandising in your Window Displays. This group of shoppers can be really helpful to build your brand image. When we walk into a store knowing that we won't buy anything but still we get a wonderful customer service and product experience from the sales staff, it will leave a lasting impression on us and we tend to talk about the brand and the customer service to our friends and family. Window shoppers can be converted into impulse buyers with effective service by sales staffs, though they may not buy your product at the very moment, they will come back to buy your product another day if they are impressed.

5. Emotional Customers :

These customers are social and out spoken. They also sort for personal assistance and special attention when they are shopping. When they find the right sales staff who assist them with pleasure and understand their requirements, they will tend to stick not just to your brand but also to that particular store of yours where their favourite staffs work. This can be seen more in retail floor and marketing, this is one reason your clients shift out of your organisation when your sales staff quite or marketing/sales manager quits. During my retail days, we have received calls from customers enquiring if a particular staff is available at store for the day as they wish to come for shopping then.

6. Exchange Customers :

With stiff competition among retailers to capture market , customer oriented policies are sure to come up but there will always be customers who take advantage of the benefits provided. Some customers make it a practise that they exchange their garments on frequent basis even after trying the merchandise before purchasing. Such customers are seen a lot at a garment store. They even go to extents that they get the used garments back for exchange claiming to be faulty. Customer service desk managers should be well trained to handle exchanges and make sure the product is not used and the billing for the same has been done within the stipulated days allowed for exchange. Customers should be advised that we will not entertain another exchange on an exchanged garment. These type of customers will frequent the store a lot but the contribution to sales will be very low. With E-commerce gaining momentum, E-retailers should ensure they draft a customer friendly yet clear exchange policies as reverse logistics will cost them a lot. At the same time if there is a genuine reason for exchange, we should consider the exchange with no second thought

7. Need Based Customers :

Need based customers are shoppers with a requirement and plan in hand as the name suggests. They are articulate and know what exactly they need. A well trained staff can convince a customer to buy a similar product when the actual product is not available but usually such customers would leave without a purchase if they don't find the product matching their requirement. In chain stores, when one store doesn't have the product, the CSD manager enquires if they can get the same from other branches of the retailer even if it would cost a little extra for the logistics or the product is reserved on the customer's name so that he or she can collect it from the available branch. We can see more of these customers in Banking and Insurance sectors

RETAIL FORMULAE - THEIR USAGE AND BENEFITS TO BUSINESS OPERATIONS

- Opening Month Inventory for an Item was 10 units at a total cost of  500 Rs. (unit cost : 50 Rs.)
- Closing Month Inventory for the Item is 4 units at a total cost of 200 Rs. (unit cost : 50 Rs.)
- The Item was being sold at 75 Rs. through out the period and total sold quantity was 6 units.
- The Vat rate for the item is 14 per cent (9.21 Rs. unit vat)
- The selling area provided for the product was 9 sq.ft stand

With the above business picture, we can look at a few formulae that can help us to do a business health check : 

1. Weighted Average Cost (WAC) :

Weighted average cost is the average cost at which an item is held with the retailer based on history purchases. It is calculated based on the weightage of quantity purchased and the cost at which they are purchased. It keeps changing over the period based on the cost and quantity of goods received, hence it is also known as Moving average cost.

WAC = {(SOH x unit cost) + (IQ x unit cost of purchase)}/ (SOH+ IQ)

SOH - Stock on Hand
IQ - Incoming Quantity / In-transit Quantity / GRN quantity

For example if our SOH is 10 units as 5 unit cost and a new PO is being received for 5 units at 6 unit cost then the WAC will be calculated as follows :

WAC = {(10 x 5) + (5 x 6)}/(10+5)
          = {50 + 30 } / 15
          = 80 / 15
          = 5.33 Rs.

Weighted average cost is the basis for all stock evaluations and capital expenditures in financials when the Retailer works on Cost Based accounting Method.

2. Gross Margin Percentage (GM) :

Gross Margin percentage is the percentage of profit made from selling a product at POS before Taxes. It is a very simple and effective formula to calculate the percentage of Margin made from the sales revenue minus the cost of goods sold

Gross Margin % = {(Selling Unit Retail - weighted average Cost) / selling Unit Retail} x 100
                           = (75 - 50)/75 x 100
                           = 25/75 x 100
                           = 33.33 % is the gross margin made from sales

3. Net Margin Percentage (GKM) :

Net Margin percentage is the percentage of profit made from selling a product at POS after Taxes. It is a very simple and effective formula to calculate the percentage of net Margin made from the sales revenue minus the cost of goods sold. Retailers highly depend on this margin percentage to set their Mark Up percentage. This is also known as Gate Keeper Margin (GKM)

Net Margin % = {(Net Unit Retail - weighted average Cost) / Net Unit Retail} x 100
where
  Net Unit Retail = [Selling Unit Retail/(1+(vat rate/100))]
                            = [75/(1+(14/100))]
                            = [75/1.14]
                            = 65.79 Rs. is the net unit retail after tax

Net Margin %    = (65.79 - 50)/65.79 x 100
                           = 15.79/65.79 x 100
                           = 24 % is the net margin made from sales after tax deductions

4. Gross Margin Return on Investment (GMROI)

This ratio helps retailers in particular Merchandisers, category buyers and investors to know what level of returns can be obtained upon the investment made for a stipulated time period. In simple terms it helps us understand the performance of a category/ item with respect to gross sales margins.
In financial terms this ratio will help us understand the rate of cash turnover upon inventory investment during a stipulated time period

GMROI = (Gross Margin value / Average Inventory Cost)
where
Gross Margin value= (Gross Sales value - Cost of Goods Sold)
Average Inventory
 ={(opening inventory cost of each month- Closing inventory cost of last month)/(No. of months+1)}

 = (450 - 300) / {(500+200)/(1+1)}
 = 150/350
 = 0.43

GMROI % = 0.43 x 100 = 43% of the total cost of inventory held for the period

The above example shows that the Item is low on sales and high on inventory holding cost because we need to hold the inventory for a longer period of time to clear stock through sales.

another formula for GMROI is

GMROI = (Gross Margin% X Sales) / Average Inventory Cost

where Gross Margin= (Gross Sales - Cost of good Sold)/Gross Sales

How to improve GMROI ?
- Reduce holding inventory value and increase sales
- Do not excess order
- Maintain a stable Margin% based on fluctuation in cost
- Keeping your production cost or Procurement cost low

Benefits of GMROI :
- Gives visibility to actual gross profit made from selling a product
- Helps in differentiating your STAR , CASH COW and DOGS in your product line based on actual
   margins made rather than sales value (Ref : BCG MATRIX)

5. Gross Margin Return on "Selling Area" / " Footage " (GMROS) / (GMROF)

This ratio explains the gross margin made by the product upon the selling area allocated for the product. This is used by retailers to find the gross margin per square feet in the selling area and take decision on expansion of selling area or reduce the selling area or discontinue the product all together

GMROS = (gross margin value/selling area)

                = (Gross Sales value - Cost of Goods Sold)/selling area (in sq.ft)
                = (450 - 300)/9
                = 150/9
                = 16.67 Rs / sq.ft


another formula for GMROS is

GMROS = (Gross Margin% X Sales) / Selling Area

Benefits of GMROS :
- Helps in space allocation of selling area as per the category performance
- Helps is designing shop floor planogram
- Helps is visual merchandising and changes is display area within the shop floor

How to improve GMROS ?
- Display the products at the right place within the shop floor eg. placing chocolates and gums near cash tills helps in reducing the display space and increase sales there by increasing GMROS
- Effective and easy access to products category wise to customers
- Reduce excess stacking of products on shop floor

6. Inventory Turnover :

Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year

Inventory Turnover  = Cost of Goods Sold / Average Inventory cost

                                    = 300 / {(500+200)/(2)}
                                    = 300 / {350}
                                    = 0.86 is the inventory turnover for the month

The above Inventory turnover of 0.86 means the inventory has not been sold out even once.
Inventory turnover is also known as stock turnover

7. Stock Turnover Days / Average Days to Sell the Inventory :

The average days taken to sell the inventory for a particular stock Turnover level

Stock Turnover Days = No. of Days in Year / Inventory Turnover ratio
            
                                      = 365 / 0.86
                                      = 424 Days

424 will be the days taken to clear the inventory with above Inventory turnover level and average inventory level


8. Rate of Sale  (ROS) :

Rate of sales percentage is the increase or decrease in sales percentage over a period of time.
This is a comparative figure, arrived at by comparing sales from two similar period in time.
For example month over month, year on year, week on week sales comparisons. It can be done at
cost, Retail or Quantity level

Rate of Sale = {(Current Period Sale - Previous Period Sale) / Previous Period Sale}x100

Lets take an example of an SKU which had sold 10 units in March 2014 and 8 units in March 2013.
Now to know the rate of sale :

ROS  = {(10-8)}/8 x 100
          = 2/8 x 100
          = 0.25 x 100
          = 25 % increase in Sales YOY for the month of March


Benefits of ROS:
- Helps in Identifying TOP selling SKUs
- Helps in identifying growth and decline in sales
- Helps in identifying the current status of the product in the Product lifecycle phase

How to improve ROS ?
- Proper availability of product all around the year
- Upgrading the quality and performance of the product on regular basis
- Ensure right product is available at the right time and sold at the right price


9. Return on Investment  (ROI) :

It is the percentage to measure the performance of gains obtained from the total investment made in a product or total capital invested in a business. It will give clarity on how soon we can recover our investment cost or what percentage of profit we can expect from our investment.
For example:  a food retailer has invested 2,00,00,000 Rs. to start his coffee Shop and after 1 year he has incurred an addition operational expense of 2,00,000 Rs. By year end he had total net gain after tax of Rs. 20,00,000


ROI = {Net Profit/Total Investment} x 100
        = (2000000/20200000) * 100
        = 9.9 % is the total investment recovered by Net Profits for the financial year.
With the current operational cost year on year, it will take around 10 Years to attain break even


10.Acid Test Ratio:
With this we will be able to find out the current status of the retail organisation i.e. the assets to liabilities ratio.  This is one of the key parameters taken into consideration by investors, a simple health check of the organisation's financial status, this excludes the holding inventory value
Acid Test Ratio = (Current assets - inventory value)/Current Liabilities


10.Working Capital Ratio:
With this we will be able to find out the current status of the retail organisation i.e. the assets to liabilities ratio inclusive of the inventory value.  This is a simple health check of the organisation's short term financial status, this includes the holding inventory value
Working Capital Ratio = Current assets/Current Liabilities

SHRINKAGE CONTROL - HOW AND HOW MUCH HAVE YOU LOST ?

We will be discussing the below topics in this blog :

- Understanding Shrinkage

- Causes of Shrinkage and Control Measures

UNDERSTANDING SHRINKAGE :

Shrinkage is the variance between the actual physical inventory at store and the perpetual book inventory in our system. This missing inventory is also known as obsolete inventory. The below illustration will help you understand it better.

ILLUSTRATION :
A retailer opened his home needs store at Chennai on 1-Mar-2014. He has an opening inventory of 

50 Units for an SKU (WhiteCrystal Toothpaste 100 gm) in his system based on the first purchase made. Post opening the store to public, there were other transactions done for the SKU. Based on the transactions he had a closing inventory of 73 Units at the end of the month on 31-May-14 

Opening Inventory                                   = 50 Units (first Purchase made) 

PO Goods Received Note (PO-GRN)    = 180 Units

Sales                                                       = 150 units

Return to Vendor (damaged Goods)        = 10 units

Customer Returns / Sales Return              = 3 unit

Closing Inventory in system / Book Stock = 73 Units

Stock ledger movement in Units will be as below :

Closing system Inventory = Opening Inventory + PO GRN - Sales - Return To Vendor + Customer Returns

= 50 + 180 - 150 - 10 + 3

= 73 Units

On 31st of May 2014 the retailer does a Physical Inventory count for the complete store and found that only 69 Units are physically available at the store. This has caused a difference of 4 Units from the book inventory

Perpetual Book Inventory    = 73 Units

Counted Physical Inventory  = 69 Units

Variance / Shrinkage            = 4 Units ( loss to the retailer)

Now that the customer has already paid for the inventory of 4 units while purchasing the same, he has lost the revenue on the product both on unit cost and retail. If we assume the unit cost of the product is 35 Rs. and selling unit retail of the product is 60 Rs.

Purchase Loss to the retailer at Unit Cost         = 4 X 35 = 140 Rs.

Sales Loss to the retailer at Unit Retail              = 4 X 60 = 240 Rs.

Now that we have understood the variance / shrinkage, we will understand the cause for the variance of 4 units in the chapter "Causes of Shrinkage" and how the retailer found out the actual cause for the inventory loss

CAUSES OF SHRINKAGE and CONTROL MEASURES : 

1. Employee or Internal Theft :

More than 60% of shrinkage is caused due to internal theft, that is people from the very organisation they work for. Though it is sad to hear this, this is the reality in retail industry. Employee theft takes place at multiple points within a store i.e. at Cash Tills, Back warehouse, Shop Floor. Below are a few instances or examples :

a. Cash Tills :
- While billing a product, cashiers can purposefully skip a product in the  bill and hand it over as part of the shopping baggage to the customer
- Credit Notes are issued to customers even without taking return of a physical product
- Credit Notes issued for higher value than the product returned
- Change not given to customer retained by the cashier
- Billing products on wrong barcodes

b. Back Warehouse :
- Products received not booked in GRN and claimed from supplier as In-transit loss, due to minimal uantity the supplier accepts it but when collated as a quarterly data, the loss booked will have a considerable value
- Wrong In-transit Loss booked for receiving done against transfer of inventory from warehouse
- Products sent out of the store as part of empty cartons and later removed by the employee from the garbage disposal area

c. Shop Floor :
- Tag removers used to remove security tags from products, to facilitate acquaintance take the product from trial rooms unnoticed
- Interchanging the garment tags between high value and low value SKUs
- Sneak away though gates with small products without being frisked by security guard
- Carry small products in lunch boxes, hand bags and back bags
- Bring in old or used product and take a new similar product out
- Take products out through duplicate gate passes

Control Measures :
- The retailer should develop good relations with its employees and keep high morale in team
- We need to keep a tight check on our employee movements within the store premises with proper security cameras and frisking at gates
- Movement of inventory from back warehouse to the shop floor and vice versa should be tracked properly through inventory movement registers
- All credit notes issued has to revalidated as part of Day end process by head cashier
- All products to be returned back to the shop floor should be tracked
- Credit Notes and cash back should be issued only at Customer Service Desk, only redemption to be  entertained at Point Of Sale/Cash Tills at Large Format stores
- Regular tracking and scrutinising of In-transit loss report and GRN-PO difference report by loss prevention team
- Weigh, check and send the empty cartons out of the store in the presence of a security officer
- Surprise perpetual inventory check has to be done by Department Manager for a single SKU and verify the same against book quantity
- Employee entrance and exit should be different from customer entry and exit
- Employee declaration register to be made available at employee entrance and exit
- Full frisking and bags need to be checked by security guards at entry and exit
- Gate pass register has to be maintained and gate pass status has to be validated at regular intervals
- Security Tag counts and security Tag removers should not be made available to floor and warehouse staffs

2. Shoplifting :

 Shoplifting, otherwise known as customer theft is the second biggest contributor to shrinkage at stores. It is also a very sensitive issue because even if you know that the customer has committed a theft, you need to have concrete evidence to prove and recover the product from the customer or bill the customer. Handling customer theft is also sensitive because it will tarnish our brand image if we are found wrong or we have misunderstood a loyal customer for a shop lifter.

Control Measures :
- Security tagging of products will help us to a larger extent in reducing shoplifting
- Garments handed over to customer for trial has to be tracked with a token system
- Trial Rooms should be checked by floor staffs on regular basis for loose tags and if found has to be reported immediately to the operations / store manager
- Loss Prevention Cell / Team has to be formed and the members have to be well trained on handling shop lifters
- Should not encourage customers consume edible products in the store without billing the same
- Surveillance cameras / CCTV should be placed at right places across store location and a security officer should be appointed to monitor the same

3. Damage and Expiry:

This is one area where regular check is required and it has to be done religiously by the floor staffs for their respective departments. Near expiry products should be cleared through clearance sale to reduce loss. Excess ordering should be avoided for short shelf life products
Damages can be customer or staff damages. Incase of a staff damage the product value can be recovered from the staff and in case of a customer damage, we have to bill the product based on its retail value to the customer. Usually customer damages for low value products are not billed to the customer if its a genuine mistake or if he is a loyal customer.

Control Measures :
- Do not entertain customers to carry pets into department stores
- Do not entertain customers to consume edibles or juices in garment stores
- Spillages on floor should be immediately attended to and cleaned
- Ensure shop floor is not slippery
- Educate staffs on handling various types of products
- FIFO method has to be followed in replenishing the products in shop floor
- Short shelf life products should not be excess ordered
- Non-selling products should be returned back to Vendor in case of Sale or Return products

4. Administrative and System Error

Administrative and paperwork errors such as mark up and mark down of the prices cause around 15 per cent of the retail shrinkage. This is coupled with ERP system errors wherein sales information, stock movement information are not updated in Book stock causing incorrect book inventory. This causes wrong shrinkage booking during inventory checks

Control Measures :
- Mark up and mark down of prices error can be validated through sales auditing, oracle ERP has a
  very robust sales audit module where in retailers can identify SKUs selling on wrong Selling retail
- Sales errors should be identified and rectified as part of sales audit process
- Price changes in system should be verified by merchandisers before approving the same
- IT Team plays a vital role in ensuring all stock movement are correctly updated in ERP without
  message loss, this is done though regular monitoring of messages in the interface between systems
- Maintenance of registers for all stock movement is a must at store level for reference
- Scan margin report will help to a large extent to ensure products are sold at correct price

5. Vendor Fraud :

Vendor frauds are easy to identify if proper tracking mechanism is in place. Two points were vendor comes in contact with stores is at the time of Receiving of goods and Return of Goods. Vendors tend to send less or more physical stock as compared to the ordered quantity. At times wrong product is shipped by vendor and delay is pick up of vendor returns causing inventory damage

 

Control Measures :

- Ensure products are scanned and checked while GRN (goods received note)

- RTV (return to vendor) should be shipped on time and vendors should not entertained for delays

- Invoice matching should be robust i.e. Purchase order , Vendor Invoice and GRN has to be matched and discrepancy if any has to be highlighted and resolved before payment. Oracle ERP's ReIM (retail Invoice Matching) is a very robust system which facilitates retailers identify and correct both staff and vendor frauds
 

With the above understood, the retailer analysed the stock movement of the toothpaste at his store and found that last GRN done against the PO was for 30 units but the actual physical inventory received was only for 26 units. This was identified while validating the supplier invoice in which supplier had mentioned that he had supplied only 26 units against the PO of 30 units but the staff has done the GRN as per the PO qty of 30 units without physical check, there by causing an obsolete inventory of 4 units in the system. Perpetual Inventory Check and Invoice Matching process helped the retailer identify the issue.
 

To control this issue, retailer introduced physical scanning of products in GRN process to avoid human error and appreciated the invoice matching team for identifying the error in GRN

                               ILLUSTRATIVE REPRESENTATION OF SHRINKAGE

 

RETAIL STORE FORMATS

Retail stores fall under multiple formats. We will discuss the major classifications in retail store formats based on their line of business and product assortment.

- Chain Stores
- Department Stores
- Category Killers
- Store on Wheels
- Dark Store
- Mom and Pop store / Kirana stores

CHAIN STORES:

These are a set of retail outlets managed centrally, working for the set of goals which the organisation has put forward. They share the same business standards, management policies and operation procedures. This retail approach has wide reach across various geographic locations or even worldwide. Chain stores share the same brand and franchise retail model is also common among chain stores. A few good examples of chain stores in food retail are Subway, McDonalds, etc.

DEPARTMENT STORES: 
These stores are multi brand retail outlets catering to wide range of products at multiple price points for customers to choose from. The products range will include general merchandises, toys, jewellery, grocery, electronics, electrical, food, bakery products, home needs, baby care, etc. Good examples of department stores are Wal-Mart stores, Landmark's Centre Point and More Hypermarkets.
Department stores are further classified into supermarkets and hypermarkets based on their size and product assortments.

CATERGORY KILLERS:

These are speciality stores offering multiple brands and multiple range of products under one category of merchandise such as electronics (Croma) or Baby Products (Baby Shop Concept) or Sporting Goods (Decathlon). Offering very wide assortment in a single category at lower price points will make them "Killers" in their retail category by taking away sales from other retailers. Category Killer stores also set the industry standards and bring about changes in trends in their category.

STORE ON WHEEL:
These are moveable stores set on vans or buses catering to a special occasion or an event. For example during a Rally championship the viewers would like to purchase eatables and drinks, to cater to their needs a supermarket retailer can set up a small moveable retail store on wheels with limited set of products. Such temporary stores are low is operational cost and ensure high returns for the retailer.

DARK STORES:

Also known as dotcom centre, these are retail outlets or distribution centres that caters exclusively for online shoppers of that particular retailer. Its a large warehouse that can either be used to facilitate a "click-and-collect" service whereby a customer collects an item they have ordered online, or as an order fulfilment platform for online sales. It is not open to the public and it resembles a cash and carry supermarket where is products are arranged in slotted angles under different aisles. Usually information of orders placed online along with customer details are sent to these stores. Here picking is done for the ordered products and home delivered to the customers.
Tesco opened a "fourth generation dotcom store" in Erith in October 2013, with a much larger product range – 30,000 lines – and higher degree of mechanisation that brings items to pickers rather than requiring them to collect individual products manually (CREDIT : Wikipedia)
A good example will be Flipkart's distribution centres in India.

MOM and POP STORES / KIRANA STORES :

These are small, family run stores and the product range can be varied as per the requirement from the locality the store caters to. These are individual stores run by family members or individuals and they try to make the best business out of the individual store. These stores are usually smaller is selling area.

POP UP STORES:

There is also an emerging trend where in facility management institutions are leasing mall store space for a short period to brands for selling their merchandise. The fixtures, space and at times employees are all provided by the facility management company. Systems and merchandise are brought by the retailer. This ensures rotation of retail space and also provide fresh collection to the customers every time they step in.

Pop up stores can also be used as experimental stores to understand the catchment’s response to a retailer’s assortment or a product brand.  Or they can be setup for a holiday season or a fare. 

TYPES OF INVENTORY CONTROL SYSTEMS

Managing our inventory as a retailer is a humongous task. Inventory management grows more and more complicated with increase in sales volume and diversification of product assortments. In this post, we will discuss the various methods I have come across in retail industry for inventory control.

Types of Inventory Control systems :

- ABC
- Two Bin Method
- Three Bin Method
- Fixed Order Quantity
- Fixed Period Ordering
- Just In Time
- Vendor Managed Inventory

ABC Method :
This is one of the common methods used across retail industry and it is at times coupled with other methods for better control on inventory. This is more of an inventory classification technique where in products are classified based on the sales contribution and importance of the same in their assortment plan.
A- Category products will be the maximum grocers in sales and flagship products with higher margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales are classified under A category where tight control on inventory is required to ensure no loss in sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle
C-Category products are bottom of the line contributing less to sales. These items are marginally important for the business and are kept only for the sole purpose of customer requirement. This will also include Items that are nearing or hit obsolescence and need to discontinued from the product portfolio
B-Category products are important to the retailer but are less important compared to A Category products.

TWO BIN Method :
This is a simple method used usually in warehousing where in an item is stored in two locations or bins in a warehouse and the stock is replenished in the first bin from the second bin once the first bin is consumed completely. The required quantity to be filled in the second bin is placed for ordering.
The availability of stock in each bin is calculated based on reorder lead time to ensure enough stock is made available till the new stock arrives. The below flow diagram will explain the process

THREE BIN Method :

This is a common method followed in manufacturing where Kanban system is used.
It is similar to two bins system with a third bin at the suppliers' location. The supplier will not manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each with a Kanban card tracking movement of inventory is available , one at manufacturing/ shop floor, one at the shop/back store, one with the supplier. Once the inventory in manufacturing/shop floor bin/display is consumed/sold, it is replenished with the complete bin from the back store/shop. Later the back store bin is sent to the supplier and replace with a complete bin from the supplier. Then the supplier will manufacture to fill the inventory in the third bin with him. This will act as a complete loop until manufacturing of the product is ceased.
The below flow diagram will explain the above process with respect to a retail scenario

 FIXED ORDER QUANTITY :

This method is used to avoid ordering mistakes and ensure regular replenishment of existing products. Only a fixed quantity can be ordered at one time for the item. This type of ordering is usually used in auto replenishment of goods where in auto reordering point is set in system and when the product's inventory level hits the reordering point or minimum stock levels, an order is placed to the maximum stocking capacity of the product. To use this method the retailer should know the minimum and maximum stocking capacity of the product based on space allocated and the sales trend. Below example will explain this scenario :

PRODUCT CODE	PRODUCT	MIN STOCK	MAX STOCK	STOCK ON HAND	RECOMMENDED ORDER QTY
3391891961066	ICE CUBE TRAY PINK	4	24	4	20

 In the above, the item has maximum stocking capacity of 24 and reorder point is set as 4, so when the inventory has hit 4 units, a purchase order is auto generated for 20 units to full fill the gap.

 FIXED PERIOD ORDERING :

In this system there is fixed time interval between every order placed for the item. For example a vendor will visit the store in person and check the inventory of the respective products and resupply the products based on the sales for the time duration. This kind of ordering is done in small format stores like pharmacies and grocery stores

JUST IN TIME :

The objective of JUST IN TIME method is to increase the inventory turnover and at the same time reduce the inventory holding cost. JIT inventory system also exposes the unwanted or the dead inventory held my the retailer/ manufacturer. This method is ideal for manufacturing organisation and it is not used in Retail industry in general. This will also involve usage of Kanban card to track inventory movement.

VENDOR MANAGED INVENTORY :

As the name explains, it involved SKUs managed directly by the supplier. Inventory is replenished based on the sales on regular intervals by the vendor. The retailer provides shop floor space and the vendor is charged a consignment rate on every product sold at the location. The ownership of the items from receiving to sales and inventory loss if any will be with the supplier.

FLIPKART vs AMAZON : CUSTOMER IS THE WINNER FOR NOW

Before we proceed with comparison and the impact of the two in Indian Online Retail Industry, lets understand a few facts about these two online retail giants :

AMAZON :

Amazon founder Jeff Bezos

 

Amazon.com, is an American international electronic commerce company with headquarters in Seattle, Washington, United States. It is the world's largest online retailer. Amazon.com started as an online bookstore, but soon diversified, selling DVDs, VHSs, CDs, video and MP3 downloads/streaming, software, video games, electronics, apparel, furniture, food, toys, and jewellery. The company also produces consumer electronics—notably, Amazon Kindle e-book readers, Kindle Fire tablets, Fire TV and Fire Phone — and is a major provider of cloud computing services. Jeff Bezos incorporated the company (as Cadabra) on July 5, 1994 and the site went online as Amazon.com in 1995. Bezos changed the name cadabra.com to amazon.com because it sounded too much like cadaver. Additionally, a name beginning with "A" was preferential due to the probability it would occur at the top of any list that was alphabetized.
Amazon has separate retail websites for United States, United Kingdom, France, Canada, Germany, Italy, Spain, Australia, Brazil, Japan, China, India and Mexico, with sites for Sri Lanka and other South East Asian countries coming soon. Amazon also offers international shipping to certain other countries for some of its products. In 2011, it had professed an intention to launch its websites in Poland, Netherlands, and Sweden, as well. ( CREDITS : Wikipedia.org)


FLIPKART



Flipkart Founders Sachin Bansal and Binny Bansal

Flipkart.com is an e-commerce company founded in 2007, by Sachin Bansal and Binny Bansal. It is registered in Singapore, and owned by a Singapore-based holding company. It operates in India, where it is headquartered in Bangalore, Karnataka. According to Alexa Internet, Flipkart's website is one of the 10 most visited websites in India. Flipkart has launched its own product range under the name "DigiFlip", offering camera bags, pen-drives, headphones, computer accessories, etc.
Legally, Flipkart is not an Indian company since it is registered in Singapore and majority of its shareholders are foreigners. Because foreign companies are not allowed to do multi-brand e-retailing in India, Flipkart sells goods in India through a company called WS Retail. Other third-party sellers can also sell on the Flipkart platform.  ( CREDITS : Wikipedia.org)

Both the retailers have advantages over each other, with Flipkart enjoying a much bigger market share of Indian E-commerce and Amazon having better international presence and more investment power. Amazon investment power was shown when it announced that it will be investing 2 billion USD in Indian market to strengthen its operations. But our desi Flipkart is not far behind, with its announcement of fund raiser equal to 1 billion USD which it will use to diversify its product range and strengthen its operations and people.

With both the online tycoons investing equally on their infrastructure and product lines, the edge will be gained by the one who also invests on its talent and people training.
Another ground to battle will be number of sellers featuring their products on these market places
Flipkart aims to increase its sellers from current number of 4,000 to 50,000 by the end of next fiscal year. And Amazon already having 8,000 + sellers, aims at improving its count.
To show uniqueness in their product range both flipkart and Amazon are looking at exclusive product launches such as MOTOROLA launching its new line of phones MOTO E, MOTO G and MOTO X exclusively on Flipkart followed by CHina's XIAOMI phones which sold out in a record breaking 5 seconds at the time of launch a few days ago. Amazon also launched Samsung phone and Swipe's Slice tablets exclusively. Flipkart, following the foot steps of Amazon has also launched its new Tablet, though with less success it will the beginning of a new story for in-house branded products being sold at Flipkart.

"We are here for the long term. Our aspiration is to make Flipkart a $100-billion company," said Bansal, 32, whose company clocked $1 billion in sales in March 2014 (Credits : ET)

 "The aim is to have a 30% market share soon," said a senior executive at Amazon  (Credits : ET)

Also Flipkart gained market advantage with its acquisition of Myntra, a leading Fashion Online Retailer in India. This gave Flipkart the opportunity to venture into higher margin garment retailing.

Flipkart is also actively scouting for companies to purchase. "We are looking across the board. We will acquire if we find interesting companies in wearable devices, fashion technology, mobile internet, and robotics and in other areas," said Flipkart's Bansal  (Credits : ET)

Recent launch of its very own tablet , Flipkart has shown its aspiration to own private labels. Though looking at the past business strategy of Flipkart, one can easily spot a lot of similarity to the one of Amazon's, the home advantage is always with Flipkart. To compete with Flipkart and to break its home advantage on customer base, Amazon has to look for a more compelling strategy that will benefit its sellers and its customers. Amazon does have to muscle power to absorb initial losses in margins to gain market share, so we need to wait and watch for the race has just begun.

Flipkart has gone one step further to take the advantage on customer loyalty by launching its Customer Loyalty Program FLIPKART FIRST at just Rs.500 per year. This will motivate customers to hit Flipkart first before checking with other online retailers. Also their new speedy one day delivery system is a big hit among customers. I have personally preferred to pay Rs.90 extra for within a day delivery during my purchases from Flipkart.

With the above being said, the only player who seems to be close enough for a competition with these two juggernauts is Snapdeal. Who will win this race of dominance in the Indian E-Commerce market will be decided only after a few years but for now the clear winner are the customers who get the best out of the two with better deals and a huge product range to choose from.


E-commerce has definitely given a greater and larger access to consumers in terms of reaching out to international brands and feeling west-like! According to recent news, 2010 was the year when India was in full-swing in the E-commerce market and since then it is only reaching bigger heights.
The question that arises here is, why are people turning their backs on the traditional buying mediums like malls and stores? The answer is simple, flexibility. Whereas the nearby book store closes at 9 PM sharp, flipkart works 24*7 on 365 days! Making an order on any e-commerce website is extremely simple. Why get dressed, walk to the store and stand in the queue to make the payment when you can order it in no time sitting at the convenience of your home. Click on buy and TADA, get the product delivered on your doorstep! Not only that you receive heavy discounts, different offers like buy 1 get 2 free etcetera.
India, talking about the number is lagging behind the USA , UK and China but making a fast growth at the same time. Online business is not a new concept to the western people however the concept is a baby here. As reports suggest, by 2025 Indian E-commerce market would touch 260 billion USD.
Lets cross our fingers and hope that the figure is achieved way before 2025 arrives! (CREDITS: EduKart)