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MERCADO CASE CHALLENGE- ROUND 2

The goal of merchandise planning for a store is to specify a merchandise plan that maximizes sales or
gross margin subject to various constraints, such as a limited budget for purchase of products, limited
shelf space for displaying products, and a variety of miscellaneous constraints such as a desire to have at
least two vendors for each type of product.
Unlike inventory management and pricing, where retailers have lots of data and analytical tools to guide
decision making, merchandise optimization is still much more art than science. And making the wrong
call can be disastrous. Consider these examples:

Following a survey in which customers said theyd like less cluttered stores, a grocery store
removed 15% of the SKUs it carried. Sales declined significantly, and it was forced to roll back
most of the changes.
Another grocery retailer, stopped carrying many of its low-selling dry grocery items to allow for
an expansion of fresh offerings. But the eliminated products turned out to be essential to
customers; when they couldnt find them, they took their business elsewhere, and the retailer
entered bankruptcy.
A retailer of home goods used demographic data to localize its assortments to better cater to
customers tastes. It started with fashion bedding and was thrilled to see an 18% revenue lift.
But when it applied the data to the fashion bath category, revenues didnt budge. Discouraged,
the retailer abandoned the effort.
When the new CEO of a tire retailer shifted its assortment from low-priced tires to moreexpensive ones, he learned the hard way that price mattered to his customers. The CEO was
replaced after two years, and his successor restored most of the products that had been
eliminated.

While its easy to spot the best sellers, but its far from obvious what slow sellers should be replaced
with. And there is always the nagging concern that a slow seller you delete might be an important
product to some of your best customers, prompting them to defect to competitors.
Plenty of software tools claim to support merchandize planning, by helping retailers decide which
combination of products will maximize sales. But with very few exceptions, they lack the ability to
forecast demand for new products or to estimate how much demand would transfer to other products if
a slow seller were dropped. The tools do little more than facilitate a manual planning process that relies
on the judgment of managers for key inputs. They do nothing to reduce the risk inherent in every
decision.
Most retailers segment the stock keeping units (SKU) they carry into groups called categories. For
example, for a consumer electronics retailer, a category might be personal computers. Within
categories, they will usually define subcategories, such as laptops and desktops within the computer
category. (The terminology used varies across retailers e.g. department, class and subclass may be used
instead of category and subcategory, but the practice of grouping SKUs with similar attributes for
planning purposes is universal.) Retailers focus most of their energy on deciding what fraction of their
shelf space and product purchase budget to devote to each category and subcategory. The resource
allocation decisions are based on their own historical sales in each subcategory, especially whether sales
in a subcategory have been trending up or down, together with external information from a variety of

sources such as industry shows, vendors and competitor moves. Given fixed store space and financial
resources, assortment planning requires a tradeoff between three elements: how many different
categories does the retailer carry (called a retailers breadth), how many SKUs do they carry in each
category (called depth), and how much inventory do they stock of each SKU, which obviously affects
their in-stock rate. The breadth vs. depth tradeoff is a fundamental strategic choice faced by all retailers.
Some, like department stores, will elect to carry a large number of different categories. Some retailers
will specialize in a smaller number of categories, but have great depth in each category.
We have all had the experience of going into a store looking for a particular product, not finding it, and
settling for another similar product instead. This is called substitution, and the willingness of customers
to substitute within a particular category plays an important role.
Impressions: Retailer of Footwear
Impressions has a countrywide network of exclusive showrooms at more than 190 prime locations
across 100 plus cities and 21 states in India designed to bring customers, an extensive collection of
footwear to suit their every need. What began as a single outlet has today grown into a nationwide
chain of exclusive fashion footwear and accessories stores for the entire family.
Impressions has a Pan India presence
Aggressively expanding across India
Offers for the entire family with over 50 leading brands and private labels in all the categories
like Men, Women, Kids etc.
Impressions states that important attributes for the consumers are brand, style, size, comfort and
warranty. The retailer offered several nationally advertised brands that the manager believed customers
regarded as interchangeable. The retailer also offered private labels, where prices of the products were
lower as compared to brands for equivalent quality. Warranty on the shoes was provided on the basis of
styling, material and the price on the product. Warranty varied from 1 year to 3 years. These warranties
of course were subject to certain conditions. Impressions, prides itself on providing shoes in 11 sizes and
had built customer loyalty for shoe sizes which were less available in the market.
Exhibit-A contains data for sales of womens ballerinas over a months period. It has been observed that
the demand for ballerinas does not vary much week on week. It can also be observed that the total
number of SKUs that the retailer could have carried is 143. But Impressions only carries 55 at most of
the stores. The count varied across the chain, mostly according to the size of the store, previous sales
record etc.

Exhibit-A

SIZES

Brand/Private
Label
Quality
Style Number
A
B
C
D
E
F
G
H
I
J
K
Total Sales

Brand
High
H1
42
28
86
24
154
72
44
14
8
0
4
476

Private Label
Medium
H2 M1 M2
46 12 64
12 56
102 98 72
102 43
200 230 87
176 80
78 84 84
64 62
32 43 42
19 19
24 8
14
482 848 623

High
M3 H1
32 22
45 32
54 14
60 56
41 212
62 300
74 24
55 178
48 82
36 12
28 54
535 986

Medium
H2 M1
M2
10 46
33
8
194
99
54 16
45
22 64
56
18 586
315
88 786
412
30 84
76
26 348
202
49 512
97
36 478
76
42 64
42
383 3178 1453

Low
M3
L1
69
204
178 72
87
64
93
302
203 406
84
504
86
289
93
300
275 214
102 78
78
142
1348 2575

L2
102
205
98
214
222
107
102
87
302
98
95
1632

Impressions Current Spread:

North: Ajmer, Aligarh, Allahabad, Alwar, Ambala, Amritsar, Bairely, Bhillai, Bhiwadi,
Bhopal, Bilaspur, Chandigarh, Dehradun, Delhi, Faridabad, Ghaziabad, Gurgaon, Noida,
Haldwani, Haridwar, Hisar, Indore, Jabalpur, Kurukshetra, Lucknow, Ludhiana, Meerut,
Moradabad, Panipat, , Rohtak, Satna, Varanasi, Yamunanagar.
West: Ahmedabad, Aurangabad, Bhavnagar, Ichalkaranji, Jamnagar, Jaipur, Kolhapur,
Kota, Mumbai, Nagpur, Nasikh, Nanded, Pune, Rajkot, Sangli. Sri Ganganagar, Udaipur,
Vadodara.
South: Bangalore, Belgaum, Bhimavaram, Chennai, Coimbatore, Eluru, Guntur, Gulbarga,
Hubli, Hyderabad, Kakinada, Kannur, Khammam, Kochi, Kollam, Kurnool, Madurai,
Mangalore, Mysore, Rajhamundry, Thrissur, Tirupathi, Tiruppur, Trivandrum, Tumkur,
Vijayawada, Visakhapatnam, Warangal.
East: Bhubaneswar, Berhampur, Cuttack, Dhanbad, Durgapur, Guwahati, Jamshedpur,
Kolkata, Muzaffarpur, Patna, Raipur, Ranchi, Rourkela, Sambhalpur, Siliguri, Shilchar,
Shillong.

L3
75
46
54
88
48
35
54
65
23
54
56
598

Problem Statement

Can Impressions improve their sales by replacing slow-selling products with new ones? What is
the likely demand for the potential new items?
If customers dont find their ideal product, what is the likelihood that they will substitute
another?
How will sales change if we increase or decrease the number of products we carry?
Does customizing merchandize by store or store clustermake sense? If so, for which
categories? If we decide to create clusters of stores with distinct merchandize, how many should
we create, and what criterion should we use in creating them?

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