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)

OMNICHANNEL RETAILING / CROSS CHANNEL RETAILING

What is Omnichannel retailing , to understand this we need to first understand the various channels in retail industry :
1. Brick and Mortar stores (BNM)
2. E-Commerce
3. Catalogue Stores


1. BRICK and MORTAR STORES

These are the regular retail stores where we walk in, pick our products, bill them and leave. Though they are customer friendly, it is becoming more and more expensive for retailers to maintain physical stores in today's retail environment. With retailers working on wafer thin margins in grocery and FMCG, it is getting difficult to maintain profits by running a physical store. Moreover brick and mortar stores have high overheads such as Monthly Bills, Repair and maintenance, store sales staffs, management staffs, housekeeping and security expenses, rentals, CAM charges, etc. To dilute the expenses, retailers have moved on to open bigger Hypermarkets and reduce the number of departmental and supermarkets in their chains. Exclusive brand outlets are fading off and multi-brand outlets are gaining popularity in value retailing. In this growing trend small retailers and entrepreneurs find it difficult to penetrate the market and fight alongside with big time retailers. This is also one of the main reasons FDI in Multi Brand Retailing is opposed in India. Types of Brick and Mortar stores are :
- Chain Stores
- Department Stores
- Category Killers
- Store on Wheels
- Dark Store


2. E-COMMERCE

The latest mantra of every retailer. Reduced operating expense, better offers for customers, more number of products to offer, etc, are the benefits of E-commerce retailing. The best example is FLIPKART, which started of an online book store with a total face value of just 4,00,000 and has grown into a muti billion dollar company over a short time span of less than 10 years
(60.8 billion in revenue for FY 2013-14)
Flipkart is an e-commerce company founded in 2007, by Sachin 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 (Credits : Wikipedia)
Online stores also offers customers a wide range of products, one stop shopping and home delivery options. Competition in Online retailing has further pushed the online retailers to offer various modes of payment from online payments to cash of Delivery. E-commerce is also helping the customers to save time in today's fast paced life. A few online retailers have taken the technology to new levels, one such retailer is RAYBAN who offers customer to try their sunglasses in a virtual environment.
You can try it if you haven't through the below link :


RAYBAN VIRTUAL MIRROR : http://www.ray-ban.com/usa/virtual-mirror

3. CATALOG STORES

Catalog stores , also known as catalog merchant. In this case the merchant sells his product to his customer through catalogues. Once the customer fianlises his/her selection then the merchant picks the product from the back warehouse and bills it for the customer. This is cost effective but with Online stores gaining market, catalog stores are fading off.


OMNICHANNEL RETAILING

Now that we have understood the above channels of retailing, we can proceed to Omnichannel Retailing. Omnichannel was preceded by multichannel retailing where in the retailer had presence in both Brick and Mortar and in E-commerce channel of retailing. Slowly multichannel retailing gave way for Omnichannel retailing where in retailers have one database serving all their products to both the customers online and offline. Customers can surf online and buy from a BNM store or see the physical product in a BNM store and buy online. This has also taken shopping experience to a all new level where in when a particular product is out of stock in a BNM store, sales staff can assist customer purchasing the product online and pay for the same at the BNM store or take a cash of delivery. Omnichannel retailing has picked pace and will be the future of retail industry. In near future, retailers will have fewer stores, either exclusive or cash and carry format stores and the rest will be Hubs spread across geographic locations for distribution of products purchased online. Customer loyalty programs will play a big part is retaining customers, we will discuss the same in my future blog. BNM and E-Commerce are closely interlinked in this format and with mobile technology revolutionising the way we browse, retailers are releasing apps in various platforms of mobile OS.
Thus making their presence in Mobile, social media and PCs through E-commerce and through BNM stores in tangible format for customers to choose from. Pricing strategy and category mix is usually maintained the same across all platforms thereby ensuring hassle free shopping for customers.
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.
There is a new format of retailing which is also gaining popularity which is CLICK and COLLECT stores. Click and Collect model enables the patrons to avail a personalised, one-to-one service and experience the brand first hand. Unlike the conventional retail shops, these stores are also equipped with iPads that give access to the online portal as well aid the customers to place an order instantly in case of non-availability of a product. These facilities are transforming the whole process of purchasing products into a gen-next experience.
LENSKART , an Indian Eye-wear retailer has introduced this format of retailing in India recently


Happy Shopping :)