When evaluating a point of sale (POS) solution, there are generally two approaches: best-of-breed solutions, and integrated solutions. Both have strengths and weaknesses, according to the information technology (IT) infrastructure. Retailers that have an existing back-office system should evaluate whether it is better to replace their legacy system or to choose a best-of breed solution.
For retailers that have neither a back-office system nor a legacy POS system, the question is, should they purchase a stand-alone POS system or not? In deciding between a POS system that is stand-alone, and one that is not, the organization must first understand what a POS system is. A POS system, also known as a point-of-purchase system, is composed of two main parts: software, and hardware.
It will be helpful to first provide an overview of the core and non-core areas of a POS software system, as well as a brief definition of the POS hardware component. This will help to determine whether a stand-alone POS solution should or should not be purchased.
Core Areas of POS Systems Software
Due to the diversity of the retail industry, different POS system features are required for different types of retailers. In assessing these features, the following have emerged as the six best practices core components, or must-have features, regardless of the intended application of the POS system.
- Transaction management: The transaction management component includes all the information required to complete a transaction. This component should capture key transaction data, such as sales, sales cancellations, voids, refunds, purchase of gift certificates, layaways, service transactions, creation of special orders, and the like. The transaction management component should validate item information, automatically calculate the total purchase amount, and process the payments. This enables sales associates to give their full attention to properly serving the customer, since processing a sale would then only require them to scan in the barcode and to ask the method of payment.
- Price management: The price management component allows a store manager or store employee to modify the retail price of an item. POS systems should allow modification of a retail price for different reasons, such as discounts on damaged items, discounts after negotiations, or competitive price matching. The price management module should track these retail price changes, by assigning a code to the reason, or total discount, or employee number, and so on. This module should have the capacity to generate a report for auditing purposes.
- Register management: The register management component includes processes for cash opening procedures, cash closing procedures, and cash balancing procedures. Moreover, this module consists of the management of register opening funds, paid-in transactions, paid-out transactions, tenders, currencies, and taxes. Register management should track the cash flow within the business day, and should flag any unusual events. This enables a store manager to monitor and reduce employee theft.
- Inventory management: The inventory management component includes item localization tools, physical inventory procedures, and inventory adjustments. This ensures that the store's inventory is up to date. It also helps employees to locate items at the store or corporate level. In other words, by knowing where the inventory is located and by having accurate information about the quantity on hand, this component allows employees to close sales and to increase customer service and satisfaction.
- Customer relationship management: The customer relationship management (CRM) component has the functionality to manage customer interactions, customer sales histories, customer contact information, customer preferences, customer characteristics, customer loyalty programs, and so forth. For a retailer, customer purchases are the most important avenue of revenue. To make things more challenging, today's customers are more educated, more skeptical, and more demanding than before. With the advent of the Internet, price transparency has become a major threat to retailers. Thus, offering a personalized service to customers is crucial. Having a good CRM module which tracks customer behavior and preferences will ensure healthy relationships. For more information about CRM, see Comparing On Demand Customer Relationship Management Service Alternatives.
- Reports and inquiries: Store employees use this component daily, to extract information on inventory, sales summaries, or commissions (if applicable). Reports and inquiries enable organizations to analyze the performance of the store by day, by week, by month, or even by year. It also shows the performance of items on numerous levels (such as color, dimension, size, characteristics, or attributes). Reports and inquiries also allow store managers to identify anomalies and to take corrective action if necessary. Reports and inquiries are widely used to obtain loss and prevention information.
Non-core Areas of POS Systems
Now that we have determined the components of a POS system that are essential regardless of the type and size of the retailer, let's continue by exploring the available features that are not essential to every system.
- Purchase orders: The purchase order feature enables buyers to communicate a purchase to vendors, and to receive the goods ordered. A merchandise management system (MMS) or stand-alone POS system, however, requires the ability to order and receive purchase orders (POs). POS systems which are integrated with a retail merchandising system only need the capability to process a receipt. The purchase order module from an MMS offers more functionality, such as different types of POs, automatic creation of POs, or the ability to add vendor discounts at an item level. On the other hand, the PO component from a POS system will allow simple ordering and receiving functionalities.
- Price changes: The price change feature is used to manage the retail (selling) price of goods. This feature can offer tools for lowering or raising the retail price. A POS price change component allows permanent or temporary markdowns and markups. The price change module included in the retail merchandising system, on the other hand, offers multipricing capabilities, markdown and markup cancellations, or price changes at location, department class, and vendor levels. Due to the increase of awareness among customers, prices on products must be equitable; they cannot be higher than the competitor, but they cannot be lower than the cost. Moreover, to lessen the loss, markdowns allow retailers to liquidate discontinued or out of fashion products.
- Financials: The financials component is not considered a core element of POS systems. However, all vendors must at least have the means to communicate with a third-party financial system. This component includes general ledger, fixed assets, cost accounting, cash management, budgeting, accounts payable, reporting, and other bookkeeping requirements. For more information about financials, see Customer Choices for Achieving Growth.
In addition to the non-core components mentioned above, other features such as replenishment and e-commerce capabilities can be offered in certain POS Systems, but are usually found in a merchandising solution. Note once again that when replenishment is offered in a POS system, the capabilities are not as extensive as when the same module is found in a retail system. Moreover, other components such as planning and forecasting, allocation and distribution, open-to-buy, and stock optimization can be included within a retail system. These are all features that ease merchandise process analysis, increase return on investment (ROI), and increase employee productivity. For more information about merchandising systems, see Retail Systems: A Primer.
As mentioned earlier, a POS System is composed of software and hardware components. There are two types of POS systems that are available on the market: electronic cash registers (ECR), and computer-based POS systems. An ECR will only have the capability to accumulate the total sales transaction amounts, whereas a computer based POS system allows more extensive features, due to its software. The devices in a computer based POS hardware system typically include a monitor, a cash drawer, a keyboard, a mouse, a receipt printer, and sometimes a barcode scanner. Compared to the cash register, a computer based POS system allows retailers to compute more extensive sales analysis, track "hot items," or track customer preferences, all with only a few clicks.
In addition to the typical computer based POS system, other hardware components are available, such as magnetic stripe readers, conveyor belts, personal shopping assistant (PSA) devices, pole displays, or in-counter scanner or weight scales. These optional devices reduce the time spent in serving a customer. For example, a pole display informs customers of the total amount, to encourage them to quickly have payment ready. Moreover, recent technologies also include devices which use biometric identification. In the near future, customers will be able to pay for purchases with literally one touch. All these hardware devices are tools used to increase customer satisfaction and to ensure their loyalty.
Should the POS solution be stand-alone, or not? Depending on the case, here are the recommendations:
For a retailer who already has a retail system, the solution is probably the best-of-breed approach. Therefore, when evaluating a new POS solution, the organization should include all core components. Any non-core components are a bonus feature, but it is not necessary to pay for what is not needed. The downside of this approach is the difficulty of finding a software vendor who can coexist with the existing merchandising system, without charging an exorbitant fee to do the work.
For a retailer looking to replace a legacy system which includes back-office and front-office systems, the best solution is likely to have a fully integrated solution. This way, no extra costs are necessary for integration, and the look and feel of the application are consistent across the organization. The weakness in this approach is that the initial cost of implementation is higher, because software which is rich in functionality is being purchased. Moreover, the time of implementation is increased dramatically, since all back-office and front-office systems are being replaced.
For a retailer who does not have either a retail back-office system or a POS system, and who has ten stores or less, a stand-alone POS system should probably be evaluated, including all the core and non-core components. By including these, the initial costs are probably lower, and all the functions and features should satisfy the needs of the retailer. The disadvantage of this approach is that when a retailer needs to upgrade to an MMS, integration of the two systems might not be straightforward, and some features from the POS may become obsolete.
Best-of-breed or integrated systems are the two main approaches in the software evaluation process. When choosing between a POS system that is stand-alone and one that isn't, the core components of transaction management, price management, register management, inventory management, and CRM are always included. With the exception of a small retailer who has no MMS or POS system, the non-core components (purchase orders, price changes, and financials) are nice-to-have features. Whether the retailer is a large or small enterprise, they should above all consider their software strategy prior to purchasing the hardware necessary for a POS system.