INVENTORY CONTROL AND PRODUCT LINE ANALYSIS

With increase in competition and customer demand, the product line has become infinite for Hypermarket retailers. Managing and analysing the SKUs (stock keeping Units / Items) have become a challenge. Few techniques can be used in analysis and classification of SKUs. We shall discuss the same in the below :


1. ABC Analysis
Methodology used in classifying the product range into 3 categories such as
-  'A' category products where tight inventory control is required because they contribute a lot to the profit of the organisation in terms of return on investment and sales. Regular perpetual inventory  checks are required to ensure minimal shrinkage. Reordering points are frequently amended to match the market demand
-  'B' category products are the ones with good inventory control deployed but there is no need for regular perpetual inventory checks. They contribute a good value to your sales as well
-  'C' category products are the ones with less inventory control and contribute a low percentage to sales. Retailers usually keep them in the product line due to customer requests or for clearance
This methodology uses Pareto's principle where in 20 % of the inventory contributes to 80% of the total sales value. It is also known as the 80-20 rule
Please do not confuse ABC analysis with Activity Based Accounting. These are two different terms and have their own importance in operations.


2. HML Analysis
Its a simple way to classify the products based on the selling price of the product i.e. 'H'igh value , 'M'edium value and 'L'ow value products. It helps in understanding what percentage of these stocks are held by us


3. VED Analysis
These are 'V'ital, 'E'ssential and 'D'esirable products that has to be maintained in our inventory. This is used in the field of pharmacy where inventory is based on the criticality of the drug and in spare parts store where criticality is based on the parts that ware out more often and needed on immediate basis for replacements


4. FSN Analysis
This methodology is used to identify the product sales i.e. 'F'ast moving, 'S'low moving and 'N'on moving. Please do not confuse this with ABC analysis. FSN analysis is based on the quantity of inventory flow for that particular product, it doesn't not evaluate the contribution of the product to sales value. It evaluates the contribution of the product to the sales quantity. In case of manufacturing the classification is based on consumption of the product


5. SOS Analysis
This is a simple way to monitor the seasonal products through the year lying in our inventory. They shift between 'S'easonal and 'O'ff-'S'easonal based on the seasonality. This is done to ensure the product is purchased and sold before the season expires or to ensure enough stock is kept on hand to facilitate sales during the beginning of the season. This method is critical with respect to seasonal fruits and vegetables


6. SDE Analysis
Methodology used by retailers in procurement side of the business operations.
- 'S'carcely available products are the ones which are imported and are not available locally. The supply does not meet the demand and it is difficult to procure due to its short supply. Hence extra caution and monitoring is required by the buyers to get the products on hand from the manufacturers
-  'D'iffult to procure products are those manufactured domestically but difficult to procure due to distance from supplier/manufacturer, short supply or less number of suppliers available in the market
-  'E'asy to acquire products are the ones that are locally available in plenty and the supply meets the demand


7. GOLF Analysis
This is the hybrid of SDE analysis where in procurement of inventory is classified based on :
-  'G'overnment supplied inventory
-  'O'rdinary available products which has supply meeting the demand, the product is easy to procure and is available within the country
-  'L'ocally available products from local vendors, these are usually perishable products with short shelf life procured locally within the state/city limits
-  'F'oreign source is required for the supply of the product

ORDER CONTROL

We will discuss in brief the different types of order management :

1. Make to Order
2. Make to Stock
3. Assemble to Order
4. Engineer to Order
5. Configure to Order

1. MAKE TO ORDER (MTO)
Manufacturing of the actual product starts only after the order is placed by the customer. This method is used in customer designer products where product is made as per the customer's requirement from start to finish. Such products are expensive and it will be a combination of the base product and the customisation needed by customer. Demand fulfilment is slow in this case compared to regular demand fulfilment rate. The advantage with make to order is that there is no excess storage cost involved after completion of the manufacturing because a customer order is already available in advance.

2. MAKE TO STOCK (MTS)
In this scenario, the products are manufactured well in advance as per the forecasted market demand.
The products once manufactured are partially stocked in warehouse and the rest is made readily available to the customer at the shop floor. The sold products are then replenished form the stocked inventory. Demand fulfilment is immediate but this also involves storage cost and also the risk of over manufacturing because we don't have a firm customer order prior to manufacturing unlike MTO. Manufacturing cost of such products are low as they are standardised with very minimal to no change in the product line.

3. ASSEMBLE TO ORDER (ATO)
This is a hybrid of MTS and MTO process. In this model product components are manufactured and kept ready. Only the assembling of the final product is done as per the customer's requirement after the customer's order is placed. This strategy can be used by manufacturers when there is a variety of finished products made available from the relatively same set of components. Manufacturers will have a subassembly line to cater to such orders upon customer's requirement, such that both the manufacturing and storage cost is reduced for the manufacturer without compromising highly on demand fulfilment rate unlike the case of MTO

4. ENGINEER TO ORDER (ETO)
This is a highly customised process as per the customer requirement. There is no defined based product unlike MTO. The product will require reengineering of the existing product or engineering a new product all together as per the customer's requirement. Fulfilment rate is very slow due to complications in the process. Usually such scenario are used to manufacture a reengineered product of an existing product or a working prototype for new product. Cost of manufacturing in very high and highly skilled manpower would be required for the process as this will involve more of human skill and not a regular assembly line setup

5. CONFIGURE TO ORDER (CTO)
This is a hybrid of ATO process wherein customer is given more flexibility and the visibility is given to the component level for the customer to choose from. Based on the configuration chosen by the customer the final product costing is calculated and assembly begins. In this way high customer satisfaction and productivity is achieved, its a win-win situation for both manufacturer and the customer. A simple example will be a computer where in customer can choose this RAM , ROM and Chipset configurations before purchasing the product and the quote for the final product is given by the manufacturer based on the configuration setup. Once the final product is agreed upon, the retailer or the manufacturer will have the product assembled as per the chosen configuration

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