CYRUS C. WILSONCHARLES D. GREENIDGE

Classification Merchandising:An Overlooked Opportunity

for IncreasingMerchandising Profitability

EPITOMEThe development of sophisticated information

technology in retailing has outpaced the develop-ment of sophisticated information systems. Up tothis point most installations of EDP equipmentliave been justified on the basis of cost displace-ment or savings through increased productivity.Merclwindising applications have empha.sized elab-orate unit control systems.

Profitability problems in retailing are most sus-ceptible to improved dollar-based inventory man-agement systems similar to NRMA's classificationmerchandising concept. In this article research re-sults of retailers using an advanced dollar systemare analyzed and conclusions are drawn. In addi-tion, the suitability of advanced dollar systems formeeting a variety of emerging retailing manage-ment problems is thoroughly discussed.

P^ THE USE OF ELECTRONIC DATA PROCESSING inbusiness has generally been justified on one or bothof two main grounds. For one thing, EDP has beenused to automate certain highly specialized and al-ready well-defined manual processes and, hence,has served as a means of reducing expenses and im-proving productivity. Second, EDP has offeredmanagement a broader information base for deci-sion making and has thus furnished a means of im-proving overall performance and increasing prof-itability.

FALL / 1969 / VOL. XII / NO. 1

The first of these two applicationswhich is oftencalled the housekeeping function of EDPhas gen-erally been the best understood and most widely ac-cepted. In fact, since the late 195O's, when the giantretailers first began installing EDP, most applica-tions have been limited to the automation of man-ual accounting functions where productivity gainscould be quickly exploited.^

The second applicationtlie one which rational-izes EDP as a management decision-making tool-has been until recendy a rather vague and poorlyunderstood promise held out for some unspecifiedpoint in the future. And yet it is this broader appli-cation which promises the greatest rewards, espe-cially in retailing.

EDP as a merchandising management tool. In re-tailing, the logical area for information system de-velopment is merchandising management. Sincemerchandise is the main source of revenue, a majorcreator of expenses, and a key asset item, the over-all profitability of a retail operation is largely afunction of the profitability of inventory invest-ments. This is why students of retailing have longfelt that EDP would yield its greatest payout bygenerating information for merchandising manage-ment.-

In harnessing EDP to the merchandising func-tion, retailers at first concentrated on automatingunit control systems. This was where the greatspeed and mass data-handling capacities of EDP

53

equipment seemed most useful. By 1963, however,the National Retail Merchants Association(NRMA) had become interested in the possibilitiesof dollar-based information systems, and the publi-cation of NRMA's Standard Classifications in 1967was a big step toward a more systematic way of or-ganizing dollar information on sales, reductions,gross margin, and inventory investment.^

The NRMA system, which is now known as clas-sification merchandising, can be used by a broadrange of retailersfrom small specialty stores togiant merchandise organizations. It is useful when-ever the retail manager must plan and control alarge number of merchandise items of low- tomoderate-unit value, and it is especially useful inmultidepartment or multistore operations. Most im-portantly, classification merchandising systems pro-vide profitability information for relatively narrowsegments of merchandise investment; because ofthis they are well suited to dealing with today's ad-verse profitability trends in retailing.

In fact, we believe that retailers-especially largeonesare overlooking a major opportunity for in-creasing merchandising profitability. Field researchfindings show that a controlled sample of smallmen's wear retailers improved their profit perfor-mance through a classification merchandising ap-proach to inventory management. At the same time,readings in the current periodical literature andpersonal interviews show tliat the great majority ofretailers, especially department stores and otherlarge concerns, are not using or do not understandthe classification merchandising concept.

What is the potential of classification merchan-dising? Our evaluation is organized in five steps:

1 / A brief analysis of merchandising profitabilitytrends, using the department store industry as an exam-ple.

Cyrus C. Wilson is Assistant Professor ofMarketing, Indiana University Graduate

School of Business and a Faculty Associateof Management Horizons, Inc. He has done ex-tensive research in automated merchandising.

Charles D. Greenidge is Assistant Professorof Marketing at the University of Colorado

and a Faculty Associate of ManagementHorizons, Inc. Retail management infor-

mation systems are his special interest.

2 / Discussion of the limitations of unit systems forsolving profitability problems.

3 / Description of the classification merchandisingconcept and evidence indicating the degree of misun-derstanding that exists among large retailers.

4 / Profit improvement results from a panel of men'swear specialty stores which used a classification mer-chandising approach to merchandising management.

5 / Discussion of the potential applications of classifi-cation merchandising for retailers in general, with spe-cial emphasis on large retailers.

Department StoresOver the last ten years, several disturbing trends

have developed in retailing performanceespe-cially in department stores. We have chosen the de-partment store industry as an example because itcovers the broad spectrum of merchandising experi-ence and because it stands to benefit greatly fromclassification merchandising.

Merchandising performance data for 1957-1966are summarized in Table I. In those ten years, aslight increase in gross margin as a percentage ofnet sales was more tlian offset by declining inven-tory turnoverwith the net result of a decline inoverall merchandising profitability.

There are several explanations for this. First, thepast decade has seen continued expansion into sub-urban branch store locations. By 1965, in fact, over50 per cent of department store sales were inbranch stores.*

This expansion of branch operations has actuallyweakened merchandising performance. For onething, downtown department managers have usu-ally bought the merchandise for all locations he-cause this seemed the best way of keeping buyingexpenses low and of avoiding duplication of effortin dealing with suppliers. But the weakness of thisapproach is that it dilutes the department manag-er's knowledge of merchandise movement. Tradi-tionally, top management has felt that departmentmanagers should spend a lot of time on the sellingfloor so that they could personally observe customerreaction and sales activity in the department. Thisknowledge was considered essential for makingmerchandise-buying decisions. But \n\h severalbranch locations, such personalized informationfeedback was not possible. Some other way wasneeded to get merchandise movement informationinto department managers' hands.

54 Califomia Management Review

TABLE I. MERCHANDISING PERFORJUING DATA FOR DEPARTMENT

Median Performance1957 1958 1959 1960 1961 1962 1963 1964 1965 1966

Per CentChange

1957-1966

Gross margin tosales (%) 36.4 36.1 36.4 36.1 36.2 36.2 36.5 36.9 37.2 37.4 2.2%

Net sales to averageinventory at cost(Times) 6.3 6.4 6.5 6.2 6.3 6.3 5.6 5.7 5.7 5.7 (9.5%)

Gross margin / dollarinventory at cost ($) 2.30 2.30 2.36 2.24 2.29 2.28 2.03 2.11 2.11 2.12 (7.8%)

Net profit (A.T.) / dol-lar inventory at cost ($) .18 .20 .18 .15 .16 .17 .13 .15 .18 .17 (5.5%)

Inventory turnover(Times) 3.8 3.8 3.9 3.8 3.9 3.6 3.4 3.5 3.5 3.4 (10.5%)

SouncES: Controllers' Congress, National Retail Merchants Association, New York, and Di\ision of Research, Graduate School ofBusiness, Han-ard University.

* Data for 1957-1962 are for all owned departments, irrespective of the inventory accounting system used. Data for 1963-1966 are fordepartments using the retail method of accounting only.

Anotlier factor has been the development of the"shop" or "boutique" concept of merchandise pre-sentation. With this approach, merchandise frommany separate departments is assembled in a dis-tinct display focused on a particular shopping need.Again, the individual department manager's abilityto gather information visually is weakened.

Still another factor is the introduction of manynew merchandise items. The investment required tooffer a full assortment in a given line of merchan-dise has grown persistently large. Staple merchan-dise in many instances is developing a "fasliion"component, and assortment requirements, even intraditional fashion areas, are broadening. The impli-cations for the department manager are obvious.Even if he did not have to contend with multiloca-tion merchandising, tlie proliferation of items hasgreatly increased his information needs.

However compelling the reasons for the decliningprofitability in department stores (and in retailinggenerally), they are still only explanations for anunsatisfactory situation. And explanations cannot beput in the bank. They cannot be distributed tostockholders as dividends, and they will not financeexpansion and growth. Rather, retailers need to re-verse current trends in merchandising profitability.

The key element, of course, is the increasing needfor information. Certainly, the power of EDP to au-tomate information feedback has wide currency asthe answer to today's merchandising dilemma. Andunit-based systems in particular have been tlie cen-

ter of attention. Yet results have been quite limited.The many promises made for unit systems have notbeen kept and perhaps never wiU be.

Even when unit-control systems are brought to fullmaturity, the challenge of better inventory managementwill not be entirely met. The reason, of course, is thatwhile unit-control systems can keep merchandise on theshelf, they do not provide suflBcient details of the ele-ments determining gross margins. . . .^

Properly conceived, unit systems provide infor-mation about the number of units of a merchandiseitem sold and on hand, or in sight. This informationis thought to be useful in deciding what action abuyer ought to take on a given item of merchan-dise. Should it be reordered, transferred, markeddown, or promoted in some way?

The hoped-for results of having such unit activityinformation are (1) better in-stock position and,hence, fewer lost sales from being out of stock; and(2) fewer overstocked situations and, hence, lowerinventories in relation to the sales level supported.Tliese results are expected to enhance profitabilitytlirough increased sales and faster inventory turn-over, and there is evidence that sometimes this hasbeen achieved. Thus, the current emphasis on unitsystems is not entirely unfounded. But there arelimitations on unit systems. And they are basicallytwofold:

They are extremely expensive to operate. They do not provide information about the profit-

ability of stock investments made.

FALL / 1969 / VOL. XII / NO. 1 55

In a highly controlled experiment involving onedepartment in a department store, Joseph Buchanand Ernest Koenigsberg demonstrated that a unitcontrol system can achieve better inventorybalance." Tlie difficulty with this and similar con-trolled demonstrations is that the full-cost impact ofwidespread applications is often not taken into ac-count. Increases in sales as well as turnover shouldbe weighed against the costs of system operation.According to the data processing manager of a largedepartment store which is aggressively expandingits unit systems using EDP, there are cost factors inlarge-scale applications which do not stand out insmall-scale experiments. Receiving and markingcosts are examples. When items were added to theautomated unit control program, the need to recordand mark merchandise items by unit, as opposed todepartment or classification, increased the flow-through time by ten. Data processing costs are alsoa good example. According to this same manager,there are no economies of scale in unit systems. Infact, his experience shows that computer processingtimes for unit systems grow geometrically as thenumber of stock-keeping units on the system isincreased.^

Even if accurate and relatively inexpensive unitdata were available, it would still provide only partof the information needed. Unit information can bevery useful in planning and controlling assortments,but by itself does not show profitability of merchan-dise investment because it does not attach a dollarvalue to sales, reductions, cost of merchandise, oraverage stock investment. This point is well madein all leading textbooks on merchandising, but it isworth re-emphasizing in view of current industryperformance trends and emphasis on unit systems.^

A DefinitionIn a sense, there is nothing startlingly new about

classification merchandising.The preparation of dollar classification reports re-

qtiires exactly tlie same kinds of infoimation that arepresently used in the preparation of [traditional] depart-ment accounting records. These may be broadly classi-fied as follows:"

1 / Sales and returns.2 / Inventory: opening inventory; purchases and ven-

dor returns; transfers; and additional markons and can-cellations.

3 / Markdowns and cancellations.

4 / Open-to-buy: merchandise plans; and ordersplaced.

The major difference between traditional dollarcontrol and the classification merchandising ap-proach is the level of application. In fact, tliis verypoint has caused confusion among traditional de-partment and specialty stores.Retailers themselves appear to be divided by the newclassification system these days. There are those that ac-claim Classification Merchandising as today'sand to-morrow'sbetter way of learning customer demand, ofmeasuring merchandise performance, of planning sales,of assigning inventory dollars, of spaceand those whoclaim we have had the likes of this for years.^

This same problem was brought out in a studyperformed by a leading firm of certified publicaccounts.^^ Retailers apparently do not have a clearidea of what is meant by a "classification" or ofwhat the objectives of "classification merchandising"are. In the study quoted above, 50 departmentstores were asked if dollar data on sales and stockswere gathered below the department level. Thesewere the results:

32 stores indicated that they coflected at least salesbelow the department level.

12 stores indicated that they developed stock plansand open-to-buy controls below the department level.

None of tlie stores was developing gross margin databelow the department level.

Typical of tlie stores included in this study isRich's, a large, progressive department store locatedin Atlanta, Ceorgia. Rich's has about 1,400 mer-chandise breakdowns below the department level(about 10 per department), and each breakdownaverages an inventory investment of $5,000.^- Whilethis may seem to be a fairly detailed breakdown ofinventory investment, it does not really approachthe level of analysis anticipated by proponents ofclassification merchandising.

To talk in terms of numbers of inventory break-downs, however, is to miss the point on classifica-tion merchandising. The development of classifica-tion merchandising basically reflects the demise ofthe department as the primary responsibility andprofit center in department store retailing. As Ed-ward Waterbury of Woodward & Lothrop recentlysaid:The rapid expansion of our business in terms of thenumber of stores, as well as volume and the remotenessof the buyer from the ever-growing percentage of the

56 California Management Review

business, accelerated the demand for accurate and timelyinformation at the classification

In this sense, the merchandise class is becoming thebasic building block of merchandising.

Anticipating tliat "classes are the departments ofthe immediate future . . ."" NRMA has developedstandard definitions for a four-level breakdownbased on increasingly specific merchandise charac-teristics.^'

First level: Broad groupings, most nearly similar tohistorical store divisions; but designed as logical group-ings of related merchandise for broad customer end-use.Merchandise Groups.

Second level: Family groupings most nearly similarto historical store departments; but designed to breakdown merchandise by types, not by size groupings,price ranges, etc. Merchandise Demand Genters.

Third level: Assortment of items within each second-level breakdown, on basis of relationship for customerend-use. Classes.

Fourth level: Groupings on basis of items that are in-terchangeable or substitutable for specific customerend-use. Gategories.

The NRMA classification scheme is basically afour-digit coding system where the first level corre-sponds to the first digit. This coding system has thecapacity for 9 Merchandise Croups, 99 Merchan-dise Demand Centers, 999 Classes, and 9999 Cate-gories. NRMA's immediate purpose in promulgatingstandard definitions is to facilitate collection andexchange of merchandising results at the class orthird level.

Unit VS. Dollar SystemsFor the individual firm, whether or not it em-

braces NRMA's definitions, classification merchan-dising offers many benefits:

^ One is the abihty to measure profitability of nar-rower and more homogeneous groupings of merchandise.This perspective on profltabihty allows management tomake better decisions on the allocation of the scarce re-sources of space, inventory dollars, and promotional ex-penditures.

Management should be able to pinpoint expansionopportunities and isolate problems or poor performanceareas.

I Merchandise plans and controls will be more mean-ingful at a class (or even a category) level because theywill be focused on a particular customer end-use. Pur-chasing for one class will not be closed ofF because an-other class is over budget, as often happens when plans

and conbols are fonnulated for a more conglomeratemerchandise grouping, such as a department or dissec-tion.

I Merchandising by class also facilitates planning andcontrolling in the modem context of multiple locationsand boutique operations.

Usually unit systems and dollar systems arethought to complement one another, although theyserve different purposes. Unit systems providemovement and stock level information in terms ofphysical pieces of merchandise, while dollar systemsprovide similar information in financial terms. Tra-ditionally, unit systems have been specifically ori-ented toward merchandising operations, whereasdollar systems have been used to regulate total in-vestment by major segments of the business. Theclassification merchandising approach, however, ex-tends the level of detail of dollar systems to tliepoint where they can also become useful in a mer-chandising sense. In some cases, fine-line dollar sys-tems can even be substituted for unit systems. Ifthis is true, what might be the advantages of reallo-cating development funds and management empha-sis from unit systems to fine-line dollar systems?

First, classification merchandising gives dollar in-formation on sales, markups, reductions, margins,and investments. This is critically needed on a de-tailed breakdown basis to deal with the adverseprofitability' trends in department stores and in othersectors of retailing.

Second, even tliough proponents of unit systemsargue that unit information can be built up into dol-lar figures, the fact is that executives using unit dataare seldom able to bridge the gap. The problems in-volve system accuracyaccounting for reductions,policing tlie entry of unit receipts, and even captur-ing unit sales data. Buyers also tend to be myopicabout a given merchandise item or stock-keepingunit, and as a result they are less able to spot trendsacross an entire assortment or group of related mer-chandise items. Furthermore, planning and control-line on the basis of an individual item can be veryhard because of the relatively \vide fluctuations ofitem demand around its average value. Such fluctua-tions tend to be less chaotic for the entire range ofitems in a customer end-use category when taken asa whole.

Third, tlie expenses of establishing and maintain-in o- a classification system are generally lower thanthose of a unit system. Since most large retailers al-

FALL / 1969 / VOL. XII / NO. 1 57

ready have some form of departmental dollar con-trol, all the administrative procedures and informa-tion sources for a classification system already exist.The new expenses of replacing departmental break-downs with more comprehensive classificationbreakdowns are rather marginal. Finally, no matterhow sophisticated the classification system, it is un-likely to exceed 10,000 categories, whereas for aunit system, 10,000 stockkeeping units doesn't evenconstitute a good start.

Certainly, good arguments can be developed forclassification merchandising, but tliey are meaning-less unless they can be backed up with evidence ofconcrete results. To date, the evidence consists ofisolated success stories, but then no systematic re-search into the effect of a classification merchandis-ing program on profitability has been previously re-ported. To help fill this gap, the first-year results ofour continuing study of the impact of classificationmerchandising on a sample of thirty smaller men'swear retailers is presented below.

The inventory management report. An exampleof the inventory management report, the heart ofthe new information system, is shown in Table II.This report permits the retailer to divide his inven-tory investment into as many as 799 classifications.The report represents a quantum jump for all tlieretailers studied in terms of sophistication, fre-quency, and timeliness of information. The median

jump in number of classifications was from 16 to180. The median amount of inventory investmentper classification decreased from $5,000 to about$600. Information is now being received monthly,whereas less than half of the retailers enjoyed suchfrequency before. More important, the informationis available 3 to 5 days after the end of the month,as opposed to anywhere from 20 to 90 days usingmanual methods. Taken together, such quantitativeand quahtative improvements in infomiation wouldlogically point to improved performance. But, inspite of such strong logic, there are several a priorireasons why improved inventory management per-fomiance might not occur, especially during thefirst year:

Inventories tend to increase initially as a result oftaking corrective action on imbalanced stocks.^

There is no history upon which to base planningfor the newly formed classifications.

The basic tendency of small companies is to shyaway from planning.^^

Results and EvaluationResults of improved information. Several impor-

tant findings resulted from the analysis of first-yeardata. Dramatic changes in inventory managementperformance were observed. Table III summarizesthe first-year results of a comparison of observed in-

TABLE II. AN INVENTORY MANAGEMENT REPORT OF THE TYPE USED BY RETAILERS IN THE PANEL

Dept.1112131415161718192021222324252627

Totals

Sales

2,440.00400.00800.00100.0050.00

450.00920.00960.00100.00200.00300.00150.0050.00

750.001,850.00

250.00200.00

9,970.00

% Sales

Total

24.64.08.01.0

.54.59.29.61.02.03.01.5

.57.5

18.62.52.0

100.0

GrossProfit

856.00103.00232.0028.0016.0094.00

280.00384.0039.0062.0099.0048.0017.00

285.00666.0094.0060.00

3,363.00

Maint.ft/1 Q 7.fTI Y\ijXtXl ^lU

07/C

35.031.029.028.032.032.035.040.039.031.033.032.034.038.036.042.030.0

33.7

Mos.

xnv. on ^Hand

3.68.73.42.92.8

10.73.42.93.83.23 .18.54.01.71.53.63.6

3.5

Additions

Cost

980.00500.00960.00

375.00810.00520.0090.00

175.00130.00145.0075.00

350.00910.00175.00160.00

6,355.00

Retail

1,508.00725.00

1,353.00

552.001,247.00

867.00148.00254.00194.00213.00114.00565.00

1,422.00302.00228.00

9,692.00

MarkDowns

32.00

75.0067.00

20.00

194.00

End Inv.Cost

5,796.002,403.001,912.00

208.0096.00

3,219.002,040.001,664.00

229.00437.00619.00353.00132.00785.00

1,786.00519.00500.00

22,698.00

End Inv.Retail

8,918.003,483.002,695.00

289.00141.00

4,734.003,138.002,774.00

376.00634.00924.00519.00200.00

1,267.002,792.00

894.00714.00

34,492.00

% Inv.

Total

25.910.17.8

.8

.413.89.18.01.01.82.71.5

.63.78.12.62.1

100.0

58 California Management Review

/entory investment versus predicted inventory in-vestment, and observed gross margin dollars earnedI'ersus predicted gross margin dollars earned. Thepredicted values of gross margin dollars earned andinventory investment are based on a least squaresregression of each value on sales volume for the pe-riod 1961-1965. The differences between predictedand actual value for each variable were convertedto standard units and partitioned to highlight thedegree of change. Changes of greater than one stan-dard deviation in eitlier direction are considered tobe significant. For the panel as a whole, the first-year results indicate strong improvement in grossmargin doUars earned and an equally strong in-crease, an unfavorable change, in inventory invest-ment.

TABLE III. COMPARISON OF THE AMOUNT OF CHANGEFROM PREDICTED VALUES FOR GROSS MARGIN DOLLARS

EARNED AND INVENTORY INVESTMENT,PANEL RETAILERS, 1966

Greater than + 1 standarddeviation

Between + 1 and 1standard deviation

Less than 1 standarddeviation

NumberInventory

Investment

5

11

15

of RetailersGross Margin

Dollars Earned

17

11

2

SOURCES: Cyrus C. Wilson, "Explaining Management Per-formance Under Conditions of Improved Information in SmallerRetail Firms"; and Charles D. Greenidge, "The Effect of Im-proved Information on Profitability in Smaller Retailing Firms";both unpublished Ph.D. theses, Ohio State University, 1967.

Interpretation of results. The strong improvementshowTi by panel members on the gross margin-to-sales ratio tends to support the idea that classifica-tion merchandising is an effective way to improveprofitability. However, panel results showed an un-favorable outcome for the sales-to-inventory ratio.But there are strong indications that the increasesin this measure are transitory. Improved inventoryinvestment information on a fine-Hne basis is likelyto result in two kinds of management action:

1 / Increasing inventory on some classes to avoid lostsales from being out of stock on briskly demanded mer-chandise.

2/Reducing inventory on some classes which arepresently overstocked in relation to demand.

FALL / 1969 / VOL. XII / NO. 1

Understocked conditions can be quickly correctedby placing orders for additional merchandise. Over-stocked conditions, however, usually will not becorrected immediately but will slowly correct them-selves as normal sales reduce the excess stocks. Thenet result is that inventory will tend to increaseimmediately after improved information becomesavailable, and better balance will be achieved onlyover a period of time, as the excess merchandise issold off.

Transitory increases in inventory investment havebeen observed in several merchandising informationsystems. For example, Buchan and Koenigsbergnoted that inventory investment 'iDulged" immedi-ately after system installation and did not comeback into balance with sales volume until sixmonths later.^^ Of course, their study involved a de-partment in a large department store with brisk cus-tomer traffic, whereas our study covers smallerstores with correspondingly lower traffic. Therefore,while the comments of our panel retailers and theresults of other studies show that the unfavorablechange in the sales-to-inventory ratio is a temporaryphenomenon, it is very hard to say how long the"bulge" will last. We might conclude, however, thattlie ultimate result of improved information will bea liigher salcs-to-inventory ratio and, hence, anoverall improvement in profitability.

ConclusionsThe evaluation procedure presented earlier also

reflects the argument for greater emphasis on theclassification merchandising approach.

k The department store industry, specifically, and re-tailing, generally, are faced with a merchandising profita-bility problem.

I Present emphasis on unit systems for reasons of costand kind of Infonnation provided is not solving theprofitabilit}' problem.

^ Fine-line dollar systems have been proposed buthave not received a great deal of support. The executivesof large department and specialty stores seem to misun-derstand the classification merchandising concept.

Smaller specialty stores using a classification mer-chandising approach have shown strong improvement forgross margin performance in the first year and can beexpected to show overall improvement for merchandis-ing profitability in the future.

The experiences of panel retailers with fine-linedollar systems offer some good insights for large re-

59

tailers. For example, the variety of classificationschemes used effectively by the panel retailers sug-gests that the NRMA standard classifications, whilenecessary for figure exchange, may not be the mostfruitful metliod of classification for purposes of mer-chandise investment management. Several panel re-tailers did not conform to the general recommenda-tion of classifying on the basis of end-use or de-tailed merchandise characteristics and employedbases of price-line, vendor, season, or even color.These retailers often had specific examples of howclassifying on a basis other than detailed merchan-dise characteristics had helped them eliminate aprice-line or achieve better control over a vendor.From this we conclude that many alternative classi-fication schemes might well be used below the thirdlevel, altliough additional research needs to bedone, of course, to find the relative effectiveness ofalternative methods for various lines of merchan-dise.

NRMA seems, implicitly, to want to avoid classi-fying on any dimension other than merchandiseend-use or detailed characteristic. Part of the reasoncould be a desire to avoid pushing dollar classifica-tion systems too deeply into the traditional provinceof unit systemsan artificial limitation. As some ofthe panel retailers indicated, too much informationcan be a limitation to management. Because of thelarge numbers of merchandise items, even insmaller retail stores, managers cannot effectivelyplan and control on an item basis. The strategy ofmost retailers in the panel was to use fine-line dollarinformation as a trigger mechanism. They reviewedthe dollar results of each class, looking for excep-tional deviations from expectations. When theyspotted a class with results that seemed unusual,they focused their attention on that class for furtherstudy.

The next step might be a complete assortment re-view of the class tlirough a physical inventory todetermine the exact source of trouble. This, ofcourse, is nothing more than the management-by-exception principlebut it's noteworthy that thepanel retailers felt better able to do this withbroader dollar data than witli more detailed unitdata.

For staple merchandise, fine-line dollar data al-lowed several panel retailers to retain financial con-trol of a classification while delegating the actualassortment merchandising to a supplier's representa-

tive. This technique is often used successfully in thehosiery departments of large retail stores where thesupplier is actually operating the unit system underthe supervision of the department manager. Tliis isanother strong argument for classification merchan-dising as opposed to unit systems. It may very wellbe that unit systems, or preoccupation with items, aremore realistically and economically a vendor func-tion rather than a retailer function. Naturally, thispresupposes more formalized vendor-retailer coop-eration in planning model assortments and seasonalmerchandising programs. Actually, there is alreadya trend toward more tightly structured vendor-re-tailer relationshipsas witnessed by the growingpopularity of programmed merchandising.

The emergence of the classification or category astlie basic level of merchandise planning and controlwill also affect management practices. The presentdepartmental and subdepartmental breakdownsgenerally have such a heterogeneous merchandisecomposition that dollar measures, such as open-to-buy, are often criticized as misleading. Acceptableperformance for the department as a whole maysimply be an average of very good and very bad forthe classifications or categories which are groupedtogether to form the department. There has been a"credibility gap" about the usefulness of such infor-mation. But dollar data on a classification or cate-gor)' basis should be more directional since it isbased on more homogeneous merchandise group-ings. This should enhance the value of open-to-buycontrols and encourage the use of several other per-formance measures which, until now, have playedrather minor roles.

More attention will be given to return-on-invest-ment measures on a classification basis to measureprofitability and productivity and to allocate limitedfactors. Cross margin return on average inventoryinvestment is one example of the type of profitabil-ity measure that fine-line dollar information willmake more meaningful. Other measures would in-clude: gross margin return on space utilized, mar-gin after direct expenses return on inventory andspace, and return on promotional outlays. With allthese measures we need to develop standards ofperformance for classes, and we need to educatemanagement to their use.

Class performance measures, new and old, shouldease the dilemma created by the breakdown of thedepartment as a profit center and the growing sepa-

60 California Management Review

ration of buying and selling into separate job re-sponsibilities." In the future, merchandising will bemore and more a joint responsibility, and proce-dures should be adjusted to give the store opera-tions executive a greater voice in merchandisingtliose classifications from which he is supposed tosell. He should be able to work with the buying ex-ecutive in developing the merchandise program forhis location. Without suggesting an adversary rela-tionship, the store operations executive could treatthe buying executive as a "source of supply," and hecould then be held responsible not only for ex-penses but also for the profitable use of workingcapital and space at his location. The operationsman would also need to be able to expand or con-tract the part of his budget which is allocated to agiven classification. Tlie buying executive, workingfrom his own budget, could then be held responsi-ble for total classification performance across all lo-cations.

Tlirough such joint merchandising responsibility,the store could establish a store operations profitcenter for each location, and could simultaneouslycreate a classffication profit center oriented towarda specific buying responsibility, regardless of sellinglocation.

In summary, there appear to be many potentialbenefits for large retailers who adopt tlie classifica-tion merchandising concept. Although this system isnow widely misunderstood, it seems to be an effec-tive means of reversing adverse profitability trends.Most importantly, it appears to be consistent withemerging patterns of change in the retailing indus-try.

REFERENCES1. R. Stanley Laing, "Tomorrow's Retail Systems,"

address to the Ninth Annual EDP Gonference for Re-tailers, Retail Research Institute, National Retail Mer-chants Association (NRMA), Sept. 26, 1967.

2. For example, see "EDP's Major Justification: Mer-

chandise Gontrol," Chain Store Age, April 1962, pp.E21-E23.

3. Standard Classifications (New York: NRMA,1967).

4. Gontrollers' Gongress, Merchandising and Operat-ing Results of Department and Specialty Stores in 1966(New York: NRMA, 1967), p. 2.

5. Laing, "Tomorrow's Retail Systems."6. Joseph Buchan and Ernest Koenigsberg, Scientific

Inventory Management (Englewood Gliffs, N.J.: Pren-tice-Hall", 1963), p. 75

7. Data in this paragraph are provided by the dataprocessing manager of a leading department store. Thename of the individual and his finn are withheld by re-quest.

8. For example, see William R. Davidson and AltonF. Doody, Retailing Management (New York: TheRonald Press Gompany, 1966), pp. 404-405.

9. Albert 1. Schott as quoted in Putting ClassificationMerchandising to Work (New York: NRMA, 1967), p.20.

10. George Baylis, "Are the Brakes Too Tight to Letthe Train Roll?" Retail Control, Oct. 1965, p. 18.

11. GarroU E. Ebert, "Merchandise Glassification,"ibid., Feb. 1966, p. 23.

12. Authors' conversation with John Bradley, Gon-ti^oller of Rich's.

13. Edward S. Waterbury, "Gathering GlassificationData by Manual and Mechanical Systems," Retail Con-trol, Feb. 1966, p. 20.

14. William Buiston in Standard Classifications, p.31.

15. Putting Classification Merchandising to Work, p.65.

16. Buchan and Koenigsburg, p. 75.17. See Roger A. Golde, "Practical Planning for

Small Business," Harvard Business Review, XLII:6(Nov.-Dec. 1964), 148

18. Buchan and Koenigsburg, p. 75.19. Wheelock H. Bingham and David L. Yunich,

"Retail Reorganization," Harvard Business Review,XUUA (July-August 1965), 129-146.

FALL / 1969 / VOL. XII / NO. 1 61