Retail Stores Merchandising Inventory Management

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 tied to inventory management. 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 to inventory, merchandising and pricing. Stores use merchandising to drive traffic, and inventory management can help to fulfill demand and increase cash flow.

Inventory management is especially useful with respect to cash flow. The store can use modeling to help with merchandising, but still must decide how much inventory to have on hand, including the safety stock. There are a number of different variables at work, including ordering lead times, inventory holding costs and perishability. In many retail operations, minimizing inventory holding costs is a key objective. That means maximizing inventory turnover, which in turn shortens the cash conversion cycle. A company like Costco excels at cash conversion to the point where they often sell goods to consumers before they pay suppliers, but still pay suppliers quickly enough to get their early payment discounts.

An additional consideration is the role that returns and reverse logistics play in this. Returns are an inevitable part of the retailing business, so having inventory management that takes returns into account, and builds in an efficient reverse logistics system, can lower the cost of returns to the company, again something that tightens the cash conversion cycle and helps the company become more profitable (Stock, Speh & Shear, 2006).

So there are several areas where merchandising and inventory management help a retail business. They can help to increase demand by offering the right things at the right prices at the right times. Furthermore, these things can be used to tighten the cash conversion cycle. Merchandising in particular is related to marketing, and can be used for a number of different strategic ends with regards to selling specific products at specific times. Inventory management is more strictly related to cash flow, but it is necessary to have an inventory management strategy where the company works with its suppliers to ensure that there are no stockouts, for example. In many cases, retail outlets have integrated information systems, with automated ordering, so that they work closely with suppliers in order to ensure that there are never stockouts, that extra inventory is ordered in advance of sales, or that orders are reduced if there is surplus inventory. All told, higher levels of communication on the inventory management side of the business will go hand-in-hand with effective merchandising.