Merchandising and inventory management are key success factors for firms in the retail industry. The two ideas are tied together. Merchandising reflects in the product mix a store offers, but also in the ways in which that product mix is presented. Inventory management in part reflects the merchandising needs of an organization, but it also reflects on the optimal profitability that a company can have. Merchandising tactics allow the store to optimize its retail space for revenue and profit generation. Effective merchandising will allow the store to have the products that are in demand at the time that they are in demand. Furthermore, the choice of how certain goods are displayed, where in the store, at what level, and beside what other products, all influences consumer buying decisions. Part of merchandising is simply understanding demand and ensuring that the supply is there to meet that demand -- a basic example would be to have enough umbrellas at the front of the store on a rainy day to meet the spike in demand that the weather will bring. Another part of merchandising, however, is in how to use displays and placement within the store to simulate demand. A classic example of this is the high end boutique with sparse racks of clothes, and no item repeated, all to create the impression of uniqueness in the garments, given that exclusivity is one of the main attractions in high-end clothing.

Modern retailers have taken to using modelling to help optimizing their merchandising decisions. In particular, such modeling can help them to understand different demand conditions (Piotrowski & Sladkowski, 2001). This modeling is naturally...

An example of this principle applied would be the decision to put salsa on sale. That pricing decision is fairly basic. The store can examine the price elasticity of demand to know how much demand will increase given the discount. But the store should also understand the cross-price elasticity for tortilla chips. Further merchandising analysis would be able to distinguish between the cross-price elasticity for tortilla chips if they are placed on display next to the discounted salsa at the end of the aisle, versus if the tortilla chips are left in their normal position in the store. Estimating this demand is then tied to inventory management, because the company will need to use these new estimated demand figures to ensure that each store has enough inventory on hand to meet this extra demand.
There are any number of strategic objectives that could drive merchandising decisions. The store could be focused on increasing foot traffic, increasing inventory turnover, maximizing revenue or maximizing profit. But whatever the objective, the merchandising decision should support that objective. This is how both merchandising and inventory management are used to create competitive advantage. They are tools to understand the outcomes of all the different potential decisions that could be made in the store. The basic principle is simply -- having the right goods for sale at the right times in the right places. So even if the execution in the modern retail environment is a complex, data-driven exercise, the principle is easy to understand. Retail stores compete on the basis of making the best decisions with respect…