Core merchandising is a very broad topic under which many different capabilities fall, but at a high level, it represents the foundation or backbone of all retail systems. In this article, we provide a comprehensive, expert overview of key core merchandising components and their importance, as well as common mistakes and challenges we have witnessed throughout Parker Avery’s many client projects. We also explore best practices and innovations that can help improve this key retail capability.

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What is core merchandising?

Core merchandising systems provide a common foundational data source for other retail systems, such as warehouse management, finance, planning, allocation, etc., and allow retailers to structure their data into product and location hierarchies. Typically, core merchandising supports saleable products, but some vendors provide some basic functionality for non-saleable items (e.g. fixtures, supplies).

Much of a retailer’s product-related data is contained and managed in the core merchandising system, enabling merchandising, buying, and planning business decisions to be made.  There are six major components in a typical core merchandising system:

  • Item Master

    Includes item setup, maintenance, and attribution for all retail SKUs as well as select non-SKU items such as fixtures and supplies

  • Foundation Data

    Includes product and org hierarchies, locations, and suppliers; supports inventory management and item/location eligibility

  • Vendor Master

    Supports vendor portal capability to include deal management, vendor details at any level, and mass update capabilities

  • Purchase Order (PO) Management

    Includes PO creation (and often order aggregation across channels), cost and retail changes, as well as vendor-specific data points such as freight, ship-to locations, and EDI details

  • Stock Ledger

    Holds financial data that incorporates financial transactions related to merchandising activities; includes sales, purchases, transfers, inventory, and price changes

  • Price Management

    Provides price execution support for a variety of pricing strategies across channels and in each banner, geography, and store location

What core merchandising capabilities are the most important?

  • Data structure and governance

Data structure and governance are critical to enabling downstream retail business capabilities. As an example, if not set up properly, an item may not ring in the store. This issue usually leads to manual and human error at the store level, resulting in shrink and bottom-line impacts.

Further, some states and localities have very specific laws around what and how products can be shipped into the state, and the data structure and correct attribution need to address those nuances. For example, many states have restrictions on shipping alcoholic beverages, furs, certain plant species, and nicotine products. There are also some obscure requirements like shipping a lamp to California requires an accompanying light bulb. These attributes are managed in the core merchandising system and prevent allocation or replenishment systems from sending products where they should not be shipped.

A significant number of project issues are the result of poor and inaccurate data or poorly structured data. Based on Parker Avery’s system implementation experience, in about 50% of projects, we must do significant upfront work on clients’ data to drive successful outcomes. These activities are typically around reclassifications, hierarchy changes, and overall data cleanliness.

  • Proper and efficient integration

Proper and efficient integration from core merchandising to downstream systems is one of the key benefits that retailers may be able to quantify. Companies without a solid core merchandising system in place typically have IT resources dedicated to managing data and supporting interfaces needed to drive assortment planning, allocation, replenishment, and other systems.  These resources are not only expensive but also sometimes possess rare technical knowledge that is critical for supporting legacy interfaces.  The increasing scarcity of skills to maintain older systems (e.g., FORTRAN coding) also represents a significant risk to the company.

  • Real-time inventory movements

To meet changing consumer demands and support services such as curbside pick-up or the ability to display in-stock availability on a website, retailers need to have access to real (or near-real) time inventory. This can be managed by setting minimum thresholds of availability (e.g., if fewer than three units are on-hand, the item is displayed as out of stock) or enabling mid-day updates to inventory levels. This has a dependency on the ability of in-store systems to send updated information throughout the day (e.g., “trickle pull) and for the core merchandising system to receive and update the information.

Because this process is not audited, there will need to be a true-up at regular periods to ensure that the on-hands are as accurate as possible.

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What common mistakes or challenges exist?

  • Replicating the past

Many clients have spent years customizing their current foundational systems (whether home-built or an antiquated, packaged solution), forcing them to maintain and manage information that is typically not part of modern vendor solutions. Existing legacy core merchandising environments are also characterized by highly manual processes needed to maintain data and integration to downstream systems. The familiarity and attachment with a “tried and true” legacy system environment—regardless of how broken and inefficient it may be—often hampers a company’s ability to modernize and adopt new ways of working.

Both the business and technical teams must take a deep and honest look at their current core merchandising flaws and inefficiencies, and outline specific benefits expected from migrating to a desired future state. This assessment should also include benefits that will translate beyond core merchandising.

  • The Band-Aid approach

Many companies do not have the appetite for the time and the money required to implement a core merchandising system properly. These retailers often attempt to piecemeal existing disparate systems together. However, this band-aid approach results in significant challenges when trying to implement newer technologies that rely on sound data structure to perform well and support desired capabilities.

Further, we have seen instances where companies have embarked on multiple intermediary IT projects to accommodate the lack of a solid core merchandising system—even to the point of spending the same, if not more, money or time on these smaller projects than they would have on core merchandising.  And the result is still multiple systems, typically higher support costs and risks, plus less flexibility.

  • Skipping stock ledger

Many companies do not realize that having a stock ledger in core merchandising ties in more seamlessly with the transactional data which then feeds data from merchandising and planning systems into the financial ledger. When implemented well, core merchandising systems can tie a retailer’s systems together for a much more cohesive, consistent, and strategic use of data. Retailers that do not yet have good stock ledgers or stock ledgers at all usually struggle with data issues, requiring extreme manual manipulation to bridge the disconnect between merchandising, planning, and finance operations. This disconnect typically results in confusion in how the company reports or understands operations, sales, and measurements.

  • Overcomplicating the hierarchy

Some retailers overcomplicate the product hierarchy with too much detail that should really be product attributes or not even in the core merchandising system at all but rather enhanced by other systems (e.g., product information system or PIM or even an e-commerce platform).  Extra layers in the hierarchy only make the overall experience throughout all systems more difficult to navigate and manage. A good rule of thumb is to only include characteristics that are planned and reported against in the product hierarchy. This also helps with setting targets. The hierarchy should be kept as simple as possible and yet impactful to business decisions.

  • Expecting a direct ROI

Core merchandising is sometimes overlooked because it’s not considered an innovative technology.  Further, there is no direct, quantitative ROI attached to a core merchandising system implementation. However, it enables many other capabilities to generate ROI. As an example, assortment planning is very difficult without a solid item master, and doing an assortment plan well is nearly impossible without the proper attributes associated with those items.  This data all resides and is managed in the core merchandising system.

  • Rushing the implementation

Some companies try to rush a core merchandising implementation. The upfront assessment required of all the downstream systems, capabilities, and data requirements takes time, even before the system is designed, configured, tested, trained, and rolled out. A typical core merchandising implementation can take anywhere from nine to twelve months, and with ROI difficult to quantify, as mentioned earlier, the long timeframe and expense are often hard for retailers to swallow. However, as the key foundational layer upon which essentially every other retail system will rely, this cannot be a quick project.

  • Lack of business support and change management

Changing data structures and hierarchies, data management processes, and adding data governance will fundamentally change how people work. As such strong organizational representation from impacted business teams, executive support, and change management are critical. Many large global retailers have been operating with a myriad of legacy foundational systems for decades, and implementation of a core merchandising system represents an enormous change to business processes, as associates tend to be comfortable with what they know. As such, issues and user expectations must be carefully managed. Ample internal and external communication beginning early in the project and throughout is key to success.

What retailers or consumer brand companies excel at core merchandising?

The retailers who do core merchandising well consider their end-to-end process. This is one of the more difficult system layers to implement because it is important to get it right. And the only way to truly get it right is to strategically answer key questions such as

  • How will the business be planned?
  • How will assortment planning be performed?
  • How are we going to distribute via allocation and replenishment?
  • How are the execution activities separated from reporting activities to reduce noise in foundation structures?
  • What other business processes do we need to think through?

Companies that have a solid core merchandising system have thoroughly evaluated all their downstream solutions and capabilities that need data, as well as the existing (or potential) data structures. This type of end-to-end assessment must be done prior to implementation and needs to include all competing data types as well as the levels of consumption because all those systems will consume data in very different ways.

Very related to considering the end-to-end process is making data integrity a priority.  Companies that excel with core merchandising have well-structured data governance programs and dedicated data stewards in place. Data governance ensures any changes to the foundational data layer are planned, structured, reviewed, and approved. This approach helps ensure all the work to get the data in shape for core merchandising and all the other systems was not done in vain.  It further helps the data remain as clean and properly managed for the business as possible.

While data governance helps maintain structure and cleanliness within core merchandising, it is the system itself that enables nimbleness to accommodate business changes such as new channels, fulfillment methods, or geographies.

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What innovations can improve a company’s core merchandising capabilities?

Utilizing integrated technologies like vendor catalogs, product lifecycle management (PLM) systems, and product information management (PIM) systems reduces data management workload and ensures data quality stays high. Many national brands now provide the ability to import product data along with attributes from an online vendor catalog directly into core merchandising solutions. Further, many solutions have induction capabilities so data from spreadsheets can be uploaded into a retailer’s solution. Many of these tools were not available even 10 years ago.

By leveraging these methods, organizations can expect up to an 80% reduction in the manual effort required for master data setup. As mentioned earlier, the implementation of a core merchandising system does not typically come with a direct ROI. However, there are efficiencies in the workloads associated with data setup and maintenance, reductions in IT support costs and risks, and significantly diminished negative impacts associated with data errors. Other, indirect impacts include much quicker realization of ROI on downstream systems, such as advanced analytics and price optimization, because the data is already in a clean, well-managed state with much more seamless integration.

Authors

Marty Anderson, Principal

Marty Anderson
Principal

Heidi Csencsits, Senior Manager

Heidi Csencsits
Senior Manager

The Parker Avery Group is a leading retail and consumer goods consulting firm that specializes in transforming organizations and optimizing operational execution through the development of competitive strategies, business process design, deep analytics expertise, change management leadership, and implementation of solutions that enable key capabilities.

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