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Category captain

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A favored vendor for the grocery store to help manage a specific category decided on in terms of reputation of vendor and sales the vendor generates to help balance assortments and improve profitability

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Merchandise categories

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An assortment of items that are seen as substitutes for one another

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To maximize the sales and profits of the entire category

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The reason for category management

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Selective collaboration, put down other vendors to profit more, learn sensitive information

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3 potential problems with a category captain

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Gross margin return on inventory investment

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GMROI stands for

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GMROI

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A way to evaluate merchandise management performance. $ of gross margin earned on every dollar of inventory investment made by the buyer

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Gross margin (%) X Sales to stock ratio

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GMROI equation =

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Return on assets (ROA)

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Good profitability measure for company as a whole, but not good to evaluation for management

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Net sales - cost

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Gross Margin ($) =

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Gross margin ($) / Net Sales ($)

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Gross Margin (%) =

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Net sales / average stock at cost

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Sales to stock ratio =

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GMROI

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To evaluate merchandise management performance at the merchandise management level

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ROA

answer

To evaluate merchandise management performance at the corporate level

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Operating expenses, human resources, real estate, supply chain management, information systems

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5 things category managers DO NOT have control over

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Type and amount of merchandise to buy, cost of merchandise, price at which merchandise is sold

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3 things category managers DO have control over

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Inventory turnover

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how fast merchandise is being sold

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Increase price, reduce cost of goods sold, reduce customer discounts

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3 ways to increase net sales or gross margin

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Cost of goods sold / average inventory at cost

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Inventory turnover at cost

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Net sales / average inventory at retail

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Inventory turnover at retail

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Increased sales volume, less risk of obsolescence and markdowns, improved sales person morale, more resources for market opportunities

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4 Benefits of rapid/high inventory turnover

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Lowered sales volume, increased cost of goods sold, decreased gross margin, increased operating expenses

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4 Disadvantages of rapid inventory

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Reduce # of categories, reduce # of SKUs within a category, reduce # of items per SKU, buy in smaller quantities reducing average inventory without reducing sales

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4 Approaches to improve inventory turnover

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Increase sales to stock ratio (or inventory turnover), increase gross margin

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2 ways to improve GMROI

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Markdown money

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Funds vendors give to retailers to cover lost gross margin ($) due to markdowns needed to sell unpopular items

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Variety/Breadth

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# of different categories

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Depth

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# of items within each category

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Product availability

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% of demand for a particular SKU that is satisfied

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Higher

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The higher the product availability, the (higher/lower) the amount of stock necessary

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Cycle stock/base stock

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Inventory that goes up and down due to replenishment

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Safety stock/backup stock

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A safety cushion for retailers before the next order arrives

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5%; 70%

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A items represent ___ of total SKUs, but accounts for ___ of sales. Always need these in stock. (Ex. milks and eggs at a grocery store)

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10%; 20%

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B items are of moderate consumer demand, but are not as important as A. Represents ___ of SKUs, but accounts for ___ of sales for the company. (Ex. shampoo and soap at grocery store)

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65%; 10%

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C items account for about ___ of SKUs, but is only 10% of sales. It is ok if they run out of stock for a while. (Ex. cooking ware and utensils at grocery store)

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Higher

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The more fluctuation in demand, the (higher/lower) backup stock

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Level of product availability, fluctuation in demand, vendor concerns

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3 Factors that may influence the level of required backup stock

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Lead time, fluctuation in lead time, fill rate

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3 vendor concerns when determining backup stock

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Long

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If (short/long) lead time, you need a higher backup stock

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More

answer

If (more/less) fluctuation in lead time, you need a higher backup stock

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High

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You want a (high/low) fill rate

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Low

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If fill rate is (high/low), you want higher backup stock

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Lead time

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How long it takes for the vendor to start the production of design until having the products in retail location for sale

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Fill rate

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The percentage of complete orders received from a vendor

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Cost, price sensitivity, competition

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Factors to consider when setting retail prices

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Price Elasticity

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To measure price sensitivity or rate of responses of quantity demanded due to a price change

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Margin guarantees and markdown money, additional markup opportunities, terms of purchase, exclusivity, transportation, advertising allowances

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6 things to possibly negotiate with vendors (knowledge is power)

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% change in quantity sold (new-old/old) / % change in price (new-old/old)

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Price elasticity equation

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lower

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In general, the higher the price, the (higher/lower) the sales

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Predatory pricing

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A dominant retailer INTENDS to set prices below its costs to drive other retailers out of business

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Horizontal price fixing

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An illegal tactic forming an agreement between retailers to set the same prices to reduce competition, resulting in charging consumers higher prices

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(Price elasticity X cost) / (price elasticity +1)

answer

Profit maximizing price equation =

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Necessities, substitutes, vacation (economy is down), car buying (luxury)

answer

4 factors influencing price sensitivity

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Hard to predict quantity change, time consuming

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2 problems with price elasticity

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Cost oriented method

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Addition of a fixed amount to the cost of the merchandise; markup pricing to maximize long-term

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Key-stoning

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Markup of 50% is called

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Break even analysis

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To determine how much merchandise needs to be sold to achieve a break-even profit (zero profit)

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Total Fixed Cost / (Actual retail price - Unit variable cost)

answer

Break-even point quantity =

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Price Discrimination

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Charging different prices for identical products to different customers

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First degree price discrimination

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Type of price discrimination: based on willingness to pay (cars, online auctions)

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Second degree price discrimination

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Type of price discrimination: require consumers to do something extra to get lower prices (mail-in rebate, coupons, buying in bulk, happy hour, etc.)

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Third degree price discrimination

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Type of price discrimination: based on different demographic markets (senior discounts, military discounts, student discounts, etc.)

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Price bundling

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A form of "coupon" offering two or more different products/services for sale at one price. Ex. Comcast selling the phone, internet, and TV for a better price

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42%

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Redemption rate of (mail-in) rebates

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Multiple-unit pricing

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A form of "coupon" that is similar to price bundling but with similar products/services. Ex. BOGO, 10 for $10

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False

answer

Coupons are only used by people with lower incomes. (True/False)

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Zone pricing

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Charging different prices in different stores, markets, or zones in response to different competitions or costs in different markets (in Hawaii milk can be $6-$12; cheaper online versus in store)

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Leader pricing

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Pricing certain items lower than normal (can be much lower than competitors) to increase store traffic and boost sales of other products

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Loss leaders

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Products with leader pricing to help attract consumers. The price sometimes may be below cost for retailers, but it is to get the consumer in the store. Best for frequently purchased products (eggs, milk, soda).

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Increase store traffic, boost sales of other products

answer

2 reasons to use leader pricing

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Price lining

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A limited range of price points, with each point representing a distinct level of quality to simplify merchandise task and reduce confusion for consumers and differentiate product qualities (Ex. tires)

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To simplify the merchandise task

answer

1 reason pricing lining helps retailers

question

To reduce confusion due to multiple price choices, to differentiate product qualities and possibly "trade up"

answer

2 reasons price lining helps the consumer

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Odd pricing (magic/psychological)

answer

Using a price that ends in an odd number, typically a 9, for the implication of a cheaper price. Good for price sensitive items.

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To prevent stealing

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The historical background of why odd pricing was used

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Consumers like to receive change, less information processing involved, implication of cheaper price

answer

3 reasons to use odd pricing

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Bait and switch tactics

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Advertising a product at a very low price but the item is either not not available for sale or is sold out, inducing customers to purchase a higher priced product (have to say "while supplies last" or offer rain checks otherwise this is illegal)

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C. Category

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A(n) ________ is an assortment of items that customer sees as reasonable substitutes for each other. A. Merchandise group B. Assortment plan C. Category D. SKU

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C. Product availability

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_______ refers to the percentage of customer demand for a specific product that can be satisfied. In general, the higher the percentage, the higher level of stocks needed. A. Base stock B. Gross margin return on inventory investment C. Product availability D. Sales-to-stock ratio

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D. Store location

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Which of the following may NOT be controlled by category managers? A. Cost of merchandise they buy B. Price promotion of merchandise C. Amount of merchandise they buy D. Store location

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C. Vendors could take advantage of their position and maximize their own sales and put down other smaller vendors

answer

What is a drawback of utilizing a category captain? A. Retailers tend to ignore best practices advice B. Retailers take advantage of the information and test legal limits C. Vendors could take advantage of their position and maximize their own sales and put down other smaller vendors D. Retailers can take advantage of their position and minimize competing brands E. There are no drawbacks to utilizing a category captain

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A. Improved employee morale

answer

Which of the following can be the outcome of having a high inventory turnover? A. Improved employee morale B. A decrease in the cost of goods sold C. A decrease in sales-to-stock ratio D. More risk of product obsolescence E. All of the above

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C. Buyers can control the gross margin percentage, but they cannot influence the sales-to-stock ratio

answer

Which of the following is NOT true about GMROI? A. It combines gross margin percentage and the sales-to-stock ratio B. Buyers' activities regarding setting the prices and negotiating the prices with vendors affect GMROI C. Buyers can control the gross margin percentage, but they cannot influence the sales-to-stock ratio D. GMROI refers to the amount of gross margin dollars earned on every $1 invested in the inventory E. It is a financial measure which assesses merchandise management performance in regards to the factors that buyers (or category managers) have more control over

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B. Reduce the number of SKUs within a category

answer

Which of the following is one of the approaches to increase inventory turnover? A. Increase the number of SKUs within a category B. Reduce the number of SKUs within a category C. Increase the number of items in a SKU D. All of the above

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B. Fill rate

answer

______ refers to the percentage of complete orders received from a vendor. It influences the amount of backup stock retailers would like to keep. A. Cycle stock B. Fill rate C. Product availability D. Lead time

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D. Cycle stock (or base stock)

answer

_______ refers to inventory that goes up and down due to selling activities and replenishment. A. Fill rate B. Product availability C. Backup stock (or safety stock) D. Cycle stock (or base stock)

question

C. Liz Claiborne dress, size 4, red with ling sleeveless, silk

answer

Which of the following is an example of a SKU? A. Leggs pantyhose B. Jewelry C. Liz Claiborne dress, size 4, red with ling sleeveless, silk D. Dockers pants E. Women's wear

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