Merchandising: Assortment, Planograms, Open-to-Buy and GMROI
What this domain tests
Merchandising questions test the 'five rights' (product, place, time, quantity, price), assortment breadth and depth, category management, planograms, and the money arithmetic of open-to-buy and GMROI.
Core rules and concepts
- Merchandising is selecting and presenting the right product, in the right quantity, at the right place and time, at the right price, to meet the target customer's needs and the retailer's profit goals.
- Breadth (variety) is the number of product categories carried; depth (assortment) is the number of variants, brands, sizes or colours within a category. A specialty store usually goes narrow and deep; a hypermarket goes broad and shallow per category.
- Category management treats each category as a business unit with a category captain, a defined role (destination, routine, seasonal, convenience) and performance targets.
- Planogram is a visual diagram showing exactly where each SKU sits on a fixture, facings, and shelf space, designed to match customer decision order.
- Open-to-buy (OTB) = planned purchases at retail − stock on hand − stock on order.
- GMROI = gross margin ÷ average inventory at cost; it measures profit earned per rupee invested in stock. Stock turnover = cost of goods sold ÷ average inventory at cost.
Worked example
A store plans monthly sales of ₹8,00,000 with stock on hand of ₹5,00,000 and stock on order of ₹1,00,000, at retail. Planned purchases are set at ₹7,00,000. OTB = 7,00,000 − 5,00,000 − 1,00,000 = ₹1,00,000. Separately, a category earns a gross margin of ₹1,20,000 on an average inventory at cost of ₹80,000, so GMROI = 1.5, i.e. ₹1.50 of margin per ₹1 of stock investment. Reasoning: OTB limits buying so stock does not exceed plan; GMROI tells you whether a high-margin, slow-moving category is better than a low-margin, fast one. If GMROI falls below the store's target, cut the assortment's depth rather than its breadth.
Traps that cost marks
- Mixing breadth with depth in definitions.
- Computing GMROI using inventory at retail; the standard denominator is average inventory at cost.
- Treating OTB as a sales figure rather than a purchase limit.
- Forgetting that a planogram is a space-allocation tool, not a promotional poster.