CHAPTER 6

PRODUCT QUANTITY DECISIONS AND STOCK MANAGEMENT

LEARNING OBJECTIVES Introduce the objectives and principles of stock

management Understand the risks associated with getting buying

quantities wrong Appreciate that different stock control approaches

are applicable in various retail contexts Understand the relationship between sales, stock

levels and ordering quantities Account for influences on product quantity

requirement

STOCK (INVENTORY) MANAGEMENT PRINCIPLES

How much? By store, region, whole organisation For a day, week or whole season

Not enough? Stock out, lost sale, lost complementary sale, lost

customer, poor image Too much?

Additional costs: stock investment, maintenance, use of space, reduced margin to clear

The Ideal? - one product sold, one taken into stock?

STOCK MANAGEMENT PRINCIPLES (2)

Stock management includes:stock control (controlling flow of physical product

in line with sales) financial control (managing finance tied up in

product)consideration of supply factors: discounts for

large quantities, delivery quantities, lead times (time between order and delivery) and minimum quantities

STOCK MANAGEMENT FOR STAPLE ITEMS

Consistent demand Relatively straightforward Many systems based on the principles of the

periodic revieweasy to administeradjustments can be made to ensure stock-out is

avoidedreview time can be varied between products, according

to lead times

PERIODIC REVIEW

Insert Figure 6.1

ECONOMIC ORDER QUANTITY (EOQ)

Order quantities can be: large, placed infrequentlysmall, placed frequently

EOQ determines the most cost effective quantity to order, based on costs of ordering and possession

Useful in conjunction with periodic review type system

PRINCIPLES OF EOQ

Costs of acquiring a product: ordering administration supplier search and selection expediting inspection increase with frequency of order (smaller quantity)

Costs of possessing a product: finance tied in stock handling costs maintenance costs

EOQ is where total buying cost is lowest, or where cost of acquisition = cost of possession

EOQ

Insert figure 6.4

LIMITATIONS OF EOQ

Only applicable to non-perishable products with staple demand

Ignores delivery quantities and discounts Assumes storage space is unlimited Assumes retailer controls delivery scheduling Cost structures have changed, e.g. ordering

costs reduced by e-commerce, stock is seen as a liability not asset

THE NEED FOR STOCK INVESTMENT

Stock service level is (along with width and depth) a dimension of the retailer’s product assortment offer

High stock service maximises sales opportunities high stock investment (money and space) risk of too much stock

Variety requirement varies according to product (see Figure 6.5)

Dishwash Coffee Chilled deserts Party dresses

>>>>>>> Increasing variety requirement >>>>>>>

FIGURE 6.5

THE NEED FOR VARIETY

STOCK MANAGEMENT SYSTEMS

Used in most large retailers by merchandisers to give overview of stock position by itemcalculate buying quantitiesobserve sales patternsprovide information for forecasting

SALES FORECASTING

Necessary for all products, but more challenging for those with fashion and seasonal influences

EPOS data is the starting point for sales forecasting Factors that influence a sales forecast:

seasonality fashion product endorsements price changes availability of product substitute sales of complementary products promotional activity

SALES FORECASTING TECHNIQUES

Moving Average Exponential Smoothing Base upwards forecasting Top-down forecasting Using DC (distribution centre)

THE MERCHANDISE BUDGET PLAN (MBP)

Concerned with financial side of merchandise planning

Aims to balance: money flowing out for supplies money flowing in from sales

Aims to provide flexibility taking into account: the need to pre-order for some stock variation between forecast and actual sales

ILLUSTRATION OF MBP STOCK LEVEL VARIATION Insert figure 6.7

Add Table 6.6

MBP: STOCK TO SALES RATIO

Depends on: lead times, likelihood of product selling out, importance of keeping in stock, variety requirement.

Generally, when sales are low, stock to sales ratio rises, when sales are high, stock to sales ratio falls

Average stock to sales ratio can be varied through season to build and run down stock

MBP: OPEN-TO-BUY

Planned purchases represents value of stock at retail

OTB is value at cost available to spend with suppliers

OTB rises when actual sales exceed forecast, and falls when actual sales are below forecast

Some of OTB will be already committed to forward orders, remainder and any OTB generated is available for spending

MBP: REDUCTIONS

Account for reduction in stock value other than salesexternal theft internal pilferageshop soiling and damagemark-downscustomer discountsstaff discount

In effect a retailer has to buy extra stock to compensate for reductions