Retail Systems: A Primer

Introduction

Although many people recognize technology terms such as enterprise resource planning (ERP) or supply chain management (SCM), RMM and MMS are acronyms that lack such widespread awareness. Moreover, the terms retail merchandise management system (RMM) and merchandise management system (MMS) likely have little more market recognition than their acronyms. Despite their relative anonymity, these systems, also known as retail ERP systems, are the enterprise back-office software solutions upon which the majority of retailers rely to manage and to support their daily tasks.

The following article provides an overview of both retail and the core and non-core areas of retail ERP systems.

Retail Overview

The retail industry evolved from merchants selling goods to local villagers, to the opening of stores by small business owners, to the creation of department stores and big box retailers by major corporations. Although today's brick and mortar retail industry is dominated by these major corporations, the Internet has provided smaller business owners with new opportunities, allowing them to operate as e-tailers.

Today's retail industry is diverse. Retail companies come in many different types and flavors. There are retailers, such as BMW, Louis Vuitton, and McDonald's, that have a global presence. Banks, hotels, and medical professionals fall within the service retailer category. On-line stores, such as eBay or Amazon.com, are e-commerce businesses that represent a relatively new breed of retailers. There are also companies whose activities include more than just retailing. For example, companies like Nike and Guess are both manufacturers and retailers because they produce their own products and sell them directly to consumers. Lastly, wholesalers, such as Costco and Sam's Club, are blurring traditional lines as they sell bulk items not only to small companies (business-to-business [B2B]), but also to consumers (business-to-consumer [B2C]). This list illustrates that the retail industry in fact has verticals within a vertical.

The Information System for Retailers: Functions and Features

RMM, MMS, retail systems, and retail ERP all designate information systems used by retailers. Essentially, RMM solutions can record product performance to allow buyers to purchase merchandise according to this information and to make accurate merchandise decisions. To achieve this objective, communications to third party systems play an integral role in an RMM system. Successful retail operations generally require communication between the SCM or ERP solutions and the RMM system.

Due to the diversity of the retail market, a one size fit all approach to MMSs does not work. Depending on the retail segment and strategy, different features and functions are needed for every retailer. Banks and hotels may both be considered retailers, but they have different requirements. For instance, an apparel retailer such as Louis Vuitton is product-oriented; a service retailer is usually client-oriented; and an e-tailer is likely transaction- or security-oriented. Therefore, customizing retail systems according to the functionality required by different verticals is a common task for MMS vendors.

Core Area Definition

Categorizing the requirements of various types of retailers into five main areas will aid in the understanding of the components of a merchandising system. The following categories can be considered as the core or "must have" areas of a retail system.

1. Inventory management
2. Inventory optimization
3. Revenue management
4. Sales management
5. Reports and inquiries

Note that this nomenclature is not an industry standard. Different merchandising software vendors have different naming conventions. However, all the capabilities categorized under these main areas are core components of a retail solution.

1. Inventory management. No matter which proprietary title (e.g., merchandise management, merchandise inventory and analysis, or merchandise operations) inventory management goes by, this area covers basic functionality that relates to the inventory on hand or in transit. Inventory management tracks the ins and outs of a product down to its color and size level, using capabilities such as purchase order process, receipt process, allocation process, distribution process, transfer process, style consolidation process, physical count process, and inventory freeze process. The schematic below reveals why efficient inventory management is the first rule of thumb for a retailer.
   
   
   
   
2. Inventory optimization. Inventory optimization consists of tools used by merchandisers to make important buying and selling decisions regarding inventory. Though vendors employ varied terms, such as strategic merchandise management, merchandise and assortment planning, planning decision support, and replenishment, to describe inventory optimization, all these terms refer to software that helps merchandisers make accurate decisions and that ensures products are placed at the right time, price, and place. The tools inventory optimization uses to do this often include planning, forecasting, replenishment, and stock optimization. These functions help users determine both where items have the best sell through rate and sales trends, so that the system can replenish stores appropriately. However, planning and forecasting capabilities are not necessarily integrated in all the retail systems available on the market. Some vendors instead choose to integrate with best-of-breed solutions specialized in those areas of interest.
   
   
3. Revenue management. Due to increased awareness among customers, product prices must be equitable; they cannot be higher than the competitor's prices, but cannot be lower than the products' cost. Thus, revenue management's main purpose is to ensure that inventory is sold at the right price. It does this by looking at sales history and trends, sometimes with the help of a planning and forecasting tool. Revenue management also aids in creating promotional events, such as "two for one sales", to attract more consumers into the store. In addition, it is responsible for determining markdowns, which allow retailers to liquidate discontinued or out of fashion products in order to lessen losses. Also known as price change management, retail profit optimization, or price management, revenue management's functionality includes markdown creation, markup creation, price change simulations, promotion creation, vendor discounts, and allowances.
   
   
4. Sales management. By definition, a sale is an exchange of goods (tangible or intangible) for money or its equivalent. Sales transactions are thus the primary objective of a retailer, and a sales management system structures these transactions. Sales management therefore handles sales entry, sales audit, consignment sale entry, and stock ledger aspects of the retail system. Retailers use the sales management system to close the month, a process also known as period end or stock ledger closing, by calculating the total profit for the merchandising period.
   
   Point-of-sale (POS) is also classified in the sales management area. Unlike the stock ledger or sales entry functionality, the POS system is part of the front-office system. It is this system that is used at the cash register where the sales transaction is entered. The POS system will transfer sale transactions data to the MMS, where the merchandiser can validate sales before the business day closing period. Retailers with only one or two stores can use a POS system, which is less expensive than an MMS, as their main system for tracking inventory and processing sales.
   
   Not all retail system vendors include a POS in their package. Many MMS vendors will have a partnership with a third party POS system company, allowing them to offer a best-of-breed application. This situation generally occurs when the vendor's target market is a retailer with over one hundred stores, where the business needs are greater. Vendors that aim for smaller retailers' business usually have a POS system integrated into their retail software, though the functions and features are usually not as complete.
   
   For more information on POS, please contact Technology Evaluation Centers Inc. (TEC). The POS evaluation center is currently in diagnostic mode, and a POS request for information (RFI) is available from TEC.
   
   
5. Reports and inquiries. Merchandisers use reports and inquiries daily to extract information that upper management can understand and can use to take appropriate actions, if necessary. This information provides a bird's eye view of sales and quantity on hand at a corporate level. Reports and inquiries enable analysis of the performance of sites, of styles on numerous levels (e.g., color, dimension, size, characteristics, or attributes), of vendors, and of the various levels of the merchandising hierarchy (e.g., company, division, department, class, or sub-class). The report generator may also communicate with a third party business intelligence (BI) system (for more information on BI systems, see Business Intelligence: Its Ins and Outs).

Non-core Areas

As previously mentioned, many MMS vendors must adapt themselves to the different verticals within retail due to the diversity of the retail industry. Much of this customization relates to non-core areas. Some vendors even develop new functions and features to satisfy their clients. The down side of this approach is that these new capabilities are not always used by all companies, and the added features can become confusing for end users.

Another approach is for vendors to acquire, or enter in a partnership with, third party companies, and develop an interface that allows the two solutions to communicate. By creating these interfaces, vendors can offer a best-of-breed solution to large enterprises, and they can also stay competitive for smaller retailers by customizing the MMS to their customers' needs. However, since the software comes from different vendors, the graphical user interface (GUI) and navigation through the system is not consistent. Thus, more user training may be required.

The following is a list of the third party systems or non-core components most commonly associated with merchandise systems.

1. Financial. Financial software includes general ledger, fixed assets, cost accounting, cash management, budgeting, accounts payable (AP), reporting, and other bookkeeping requirements. For more information on financial components, see Customer Choices for Achieving Growth.
   
   
2. SCM. SCM pertains to the management of supplier, manufacturer, wholesaler, retailer, and customer business processes. SCM addresses demand management, warehouse management, international trade logistics, transportation execution, and many other issues that are necessary for a complete solution. For more information on SCM, see Supply Chain Portfolio 2004.
   
   
3. ERP. ERP systems support a range of production capabilities, such as production planning, shop floor control, product costing, batch control and reporting, formula and routing, and material management capabilities. They also provide information for discrete and process manufacturing, as well as other enterprise management modules. For more information on ERP, see ERP: Origins, Development, and Trends.
   
   
4. Customer relationship management (CRM). CRM modules have the capacity to manage customer interactions, marketing campaigns, sales force automation, help desk support, and other important CRM functions. For more information on CRM, see Comparing On-demand Customer Relationship Management Service Alternatives.
   
   
5. Warehouse management system (WMS). A WMS manages the movement and storage of products throughout the warehouse. It should include capabilities such as yard management, inventory management, order picking, receiving, logistics, shipping, and distribution.

Conclusion

The retail industry represents a vertical with many vertical segments. Nonetheless, regardless of the type of retail business, all retailers have some business processes in common. Without exception, inventory management, inventory optimization, revenue management, sales management, and reports and inquiries comprise the core components of an MMS, while financial, SCM, ERP, CRM, and WMS are typically non-core areas. Companies that are purchasing an MMS will require all of the core components. The need for non-core components, on the other hand, should be evaluated on a business by business basis. The end result of this is that most organizations ultimately purchase customized solutions. To avoid costly and unsuccessful software implementation projects, retailers must therefore know their business processes thoroughly and analyze the available functionality in terms of how it will help employee productivity before choosing an MMS. Retailers should also consider the trade-offs between out-of-the-box product functionality and the vendor's service capabilities, based on the combination of core and non-core components required.