MERCHANDISE PLANNING & MANAGEMENT

Chapters 12 & 13 by Levy & Weitz

Buying Decision Process

What to Buy? How much to When to buy? buy?

From whom to buy?

Store Image

Satisfy Cust. Wants

Type of Merchandise

Control Systems

MerchandisePolicies

Financial Obj. Open-to-buy

Mdse.Budget

SalesReductionsInventories

PurchasesShortages

Estimated Sales

Beginning Inv.

Ending Inv.

Suppliers

The Market

Negotiations

Unit Price Terms

Merchandise Management

The planning and control of merchandise inventories to meet desired sales and product-related objectives.

Also includes the planning of the size and composition of the merchandise inventories, as well as a variety of functions dealing with the purchase, display, pricing, promotion, and sale of merchandise.

Merchandise Planning

Involves those activities which are needed to ensure a balance between inventories and sales.

Marketing the right merchandise at the right place at the right time in the right quantities at the right price.

Management of the product component of the marketing mix.

Essential Terms

Product: what retailer is selling (or service)

Product line: all products/services offered by retail firm

Category: assortment of items that the customer sees as reasonable substitutes for each other

Assortment: range of choices/selection in a given product line (# of SKUs in a category)

Inventory turnover: # of times the avg. inventory of an item or SKU is sold, usually in annual terms

Category Management at BordersCategory Management at BordersLO3

In early 2001 Borders group reorganized to emphasize category management. As a result, Borders has broken down its business into specialized categorizes of books, children’s, multimedia, gifts and stationary, periodicals, calendars and café. Before the change, sales, marketing andmerchandising functionswere aligned by type ofoutlet, i.e., Borders, Waldenand Borders.com.

Merchandise Assortment

Width (Breadth): refers to assortment factors necessary to meet needs of target market and competition

Brand of Beer Types Sizes Coors reg., light 6-pk, 12-pk Miller Budweiser Michelob

SKUs = 16

Assortment cont’d.

Support (Depth): Determination of how many units of merchandise are needed to support expected sales of each assortment factor (e.g. brand, type, size, color, etc.) Rely on customer needs, past sales

trends, image of department and store, etc.

Why plan stock levels?

Meet sales expectationsAvoid out-of-stock conditionsGuard against overstockKeep inventory investment at

acceptable level

Merchandise Planning Objective

Ensure that both the customer’s merchandise needs and the retailer’s financial requirements are satisfied by creating an acceptable balance between merchandise inventories and sales

Merchandise Budgeting

Planning Annual SalesAnnual sales estimates

time series judgmental forecasting

Make monthly sales estimates

Forecasting Sales

Staples: demand year-round (appliances, hardware, etc.). Consider sales trends, profitability, quantity discounts

Seasonal Merchandise: use past knowledge, info. from vendors, length of season, planned sales, selling price

Style and perishable items

How much to order?

Lead time: length of time between order placement and receipt of goods

Importance of safety or cushion stock: protection against strikes, delays

Base or cycle stock: amount sufficient to accomodate regular sales

Lead time + Safety stock + Basic stock = Inventory Level

Example

Al’s Party Shop wants to maintain a 3-week supply of domestic beer in inventory and average sales of Miller Lite beer are 500 6-packs per week. The order point is 1500 (500 X 3 weeks). When inventory drops below 1500, more beer should be ordered.

Example cont’d.

Suppose the order interval is 2 weeks. We must consider to include stock to maintain during the order interval and add to our order point -- in order to determine our order ceiling. Order ceiling=Order point+Order interval sales. 1500 + (500 X 2) = 2500

Example cont’d.

We can then determine our order quantity by subtracting stock on hand from order ceiling. Order Quantity = Order ceiling - stock

on hand

Inventory Turnover

Turnover @ retail Retail sales/Avg. inv. in retail $

Turnover @ cost Cost of goods sold/avg. inv. at cost

Total $ Available for Sale= BI + PurchasesCOGS=Total $ available for sale - Ending

inventory

Turnover based in units # of units sold/Avg. inv. in units

Determining Stock-to-Sales Ratio

Divide the turnover figure into 12 (months in year) to determine the number of times of merchandise needed to support the desired sales based on turnover Examples:

Turnover = 4; Stock-to-sales = 3.0Turnover = 2.8; Stock-to-sales = 4.28Turnover = 10; Stock-to-sales = 1.2

Lower the turnover, the higher the stock-to-sales ratio

Calculating BOM Stock-to-Sales RatiosStep 1: Calculate sales-to-stock ratio

GMROI=gross margin% * sales-to-stock ratioStep 2: Convert sales-to-stock ratio to

inventory turnover Inventory turnover = sales-to-stock ratio *

(100% - Gross margin %, expressed as decimal)Calculate average stock-to-sales ratio

Average stock-to-sales ratio = # months/inventory turnover

Calculate monthly stock-to-sales ratios

Stock ratios considerations

Don’t confuse stock-to-sales ratio with the sales-to-stock ratio

Sales are the same in both ratiosStock in the sales-to-stock ratio is the

average inventory at cost over all days in the period

Stock in the average stock-to-sales ratio is the average BOM inventory at retail

BOM stock-to-sales ratio is an average for all months

Determining Planned Purchases

BOM stock = monthly sales * BOM stock-to-sales ratio

EOM stock (BOM stock for current period is the same as the end-of-month for the previous period)

Monthly Additions to stock = Sales + Reductions + EOM inventory - BOM inventory

GMROI & Sales-to-Stock

GMROI = gross margin return on inventory investment measures how many gross margin dollars are earned on every dollar of inventory investment

Sales-to-stock ratio = net sales/avg. inv.

GMROI = gross margin/avg. inv.GMROI combines the effects of profits

and turnover

Calculating Open-to-Buy for Current Period

Calculate Projected EOM stock Actual BOM stock + monthly additions

+ order amount - Planned monthly sales - planned monthly reductions

Open-to-buy = Planned EOM stock - Projected EOM stock

Calculating Open-to-Buy for Future Periods

Calculate projected EOM stock Projected BOM stock + actual order -

monthly sales - planned reductionsOpen-to-buy = Planned EOM stock -

Projected EOM stock

Analyzing Merchandise Performance

ABC Analysis Rank order merchandise categories (SKUs)

by some performance measureContribution marginSales Dollars/UnitsGross marginGross margin return on investmentSales or gross margin per square foot

Determine optimal stocking formulas based on performance measures

Analyzing Performance continued

Sell-Through Analysis Comparison between actual and planned

sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand

Multiple-Attribute Method Used to evaluate vendors using a

weighted average score for each vendor (current or proposed).