Chapter 13

Merchandise Planning Systems

Merchandise Management

Retail
Pricing

Chapter 15

Retail
Communication Mix
Chapter 16

Merchandise Planning Systems
Chapter 13

Managing Merchandise Assortments

Chapter 12

Buying Merchandise

Chapter 14

Questions

How does a staple merchandise buying system operate?What are a merchandise budget plan and open-to-buy systems, and how are they developed?How do multi-store retailers allocate merchandise to stores?How do retailers evaluate their merchandising performance?

Types of Merchandise Management Systems

Staple Merchandise

Predictable Demand

Relatively Accurate Forecasts

Continuous Replenishment

Fashion Merchandise

Unpredictable Demand

Difficult to Forecast Sales

Merchandise Budget Plan

Open-to-Buy

The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

The McGraw-Hill Companies, Inc./Lars A. Niki, photographer

Staple Merchandise Planning

Buyer Determines:

Basic Stock or Assortment Plan

Level of Backup Inventory

System:

Monitors Inventory levels

Automatically reorders when inventory gets below a specified level

Inventory Levels for Staple Merchandise

Cycle (base) stock: inventory
that goes up and down due to
the replenishment process

Backup (buffer, safety) stock

Inventory needed to avoid stockout

Inventory Levels for Staple Merchandise

Retailers try to reduce the stock level to keep

Inventory Investment low by reordering and receiving
merchandise often but without increased

administrative and transportation costs with frequent

reorders

Basic Stock

Indicates the Desired Inventory Level for Each SKU

Cost of Carrying
Inventory

Lost Sale Due
to Stockout

Factors Determining Backup Stock

Higher product availability (service level) retailer wishes to provide to customersGreater the fluctuation in demandLonger lead time from the vendorMore fluctuations in lead time Lower vendors Fill rate (% of complete orders received from a vendor)

More

Backup
Stocks

Needed

with

Relationship between Inventory
Investment and Product Availability

Product Availability (Percent)

600

500

400

300

200

100

0

80859095100

Staple Merchandise Management Systems

Staple merchandise planning systems provide information needed to assist buyers by performing three functions:

Monitoring and measuring current sales for items at the SKU levelForecasting future SKU demand with allowances made for seasonal variations and changes in trendDeveloping ordering decision rules for optimum restocking

Staple Merchandise Management

Ryan McVay/Getty Images

Most merchandise at home improvement centers are staples.

Inventory Management Report
for Rubbermaid Merchandise

Inventory available

sales rate

Performance measures

Backup stock for desired product availability

desired product availability

Sales forecasts

Appropriate ordering decisions

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Order Point

the point at which inventory available should not go below or else we will run out of stock before the next order arrives

Order point = sales/day (lead time + review time) + buffer stock

Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week

Order point = 100 (3+1) = 400

Assume Buffer stock = 50 units, then

Order point = 100 (3+1) + 50 = 450

We will order something when order point gets below 450 units.

Calculating the Order Point

Avocado Bath Mat

In a situation in which the lead time is two weeks, the buyer reviews the SKU once a week, 18 units of backup stock are needed to maintain the product availability desired, and the sales rate for the next four weeks is 5.43 per day. Order Point?

Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock

132 units = [5.43 units x (14 + 7 days)] + 18 units

So Buyer Places Order When Inventory in Stock Drops Below 132 units

Order Quantity

When inventory reaches the order point, the buyer needs to order enough units so the cycle stock isnt depleted and sales dip into backup stock before the next order arrives.

Order Quantity = Order Point Quantity Available

Inventory Management Report for Rubbermaid SKUs

Avocado Bath Mat

Quantity available = Quantity on Hand + Quantity on Order = 90

Order Quantity = Order Point Quantity Available

Order Quantity = 132 90 = 42

Fashion Merchandise Management Systems

The system for managing fashion merchandise categories is typically called a Merchandise Budget Plan

Merchandise Budget Plan

Plan for the financial aspects of a merchandise categorySpecifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectivesNot a complete buying plan--doesnt indicate what specific SKUs to buy or in what quantities

Royalty-Free/CORBIS

Steps in Developing a Merchandise Budget Plan

Set margin and inventory turn goalsSeasonal sales forecast for categoryBreakdown sales forecast by monthPlan reductions markdowns, inventory lossDetermine stock needed to support forecasted salesDetermine open to buy for each month

Six Month Merchandise Plan
for Mens Casual Slacks

Monthly Sales Percent Distribution to Season (Line 1)

1. Sales % Distribution to Season

6 mo. data April May June July Aug Sept 100.00%21.00%12.00%12.00%19.00%21.00%15.00%

The percentage distribution of sales by month is based on

Historical data Special promotion plans

Monthly Sales Percent Distribution to Season (Line 1) Continued

Retail sales are very seasonal. The Christmas season often accounts for more than 40% of a retailers annual sales.

Monthly Sales
(Line 2)

Sales % Distribution

Month 6 mo. data April May June July Aug Sept 100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%Mo. Sales $130,000$27,300 $15,600 $15,600 $24,700 $27,300 $19,500

Monthly sales =

the forecasted total season for the six-month period x monthly sales %

Monthly Reductions Percent Distribution (Line 3)

To have enough merchandise every month to support the monthly sales forecast, buyers need to consider factors that reduce the inventory level in addition to sales made to customers

Markdowns

Shrinkage
Discounts to Employees

3. Reduction % Distribution to Season

6 mo. data April May June July Aug Sept

100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%

Shrinkage

Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping.

Retailers measure shrinkage by taking the difference between

The inventory recorded value based on merchandise bought and received

The physical inventory actually in stores and distribution centers

Shrinkage % = $ shrinkage

$ net sales

Monthly Reductions
(Line 4)

Reduction % Distribution

3. Month % 6 mo. data April May June July Aug Sept

100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%

4. mo.

reductions $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320

Monthly Reductions = Total reductions x Monthly reduction %

Beginning of Month (BOM) Stock-to-Sales Ratio (Line 5)

Stock-to-Sales Ratio specifies the amount of inventory (in retail dollars) that should be on hand at the beginning of the month to support the sales forecast and maintain the inventory turnover objective for the category

Retails often use a related measure, Weeks of Inventory

5. BOM Stock to Sales Ratio

6 mo. data April May June July Aug Sept

4.0 3.6 4.4 4.4 4.0 3.6 4.0

Steps in Determining
the Stock-to-Sales Ratio

Step 1: Calculate Sales-to-Stock Ratio

GMROI = Gross margin% x Sales-to-stock ratio

Sales-to-Stock Ratio = GMROI/Gross margin %

Assume that the buyers target GMROI for the category is 123%, and the buyer feels the category will produce a gross margin of 45%.

Sales-to-Stock Ratio = 123/45 = 2.73

Steps in Determining
the Stock-to-Sales Ratio Continued

Step 2: Convert the Sales-to-Stock Ratio to Inventory Turnover

Inventory Turnover = Sales-to-stock ratio x (1 GM%/100)

Inventory Turnover =2.73 x (1 45/100) = 1.50

Steps in Determining
the Stock-to-Sales Ratio Continued

Step 3: Calculate Average Stock-to-Sales Ratio

Average Stock-to-Sales Ratio = 6 months/Inventory turnover

= 6/1.5 = 4

Steps in Determining
the Stock-to-Sales Ratio Continued

Step 4: Calculate Monthly Stock-to-Sales Ratio

Monthly stock-to-sales ratios vary in the opposite direction of sales

To make this adjustment, the buyer considers the seasonal pattern, previous years stock-to-sales ratios

BOM Stock
(Line 6)

BOM Stock

= monthly sales (line 2) x BOM stock-to-sale ratio (line 5)

= $27,300 x 3.6

= $98,280

6. BOM Inventory

6 mo. data April May June July Aug Sept

98280 98280 68460 68640 98800 98280 8000

End-of-Month (EOM) Stock
(Line 7)

The BOM stock for the current month = the EOM stock in the previous month

7. EOM Inventory

6 mo. data April May June July Aug Sept

85600 68640 68460 275080 98280 78000 65600

Monthly Additions to Stock
(Line 8)

Additions to stock

= Sales (line 2) + Reductions (line 4) + EOM Stock (line 7) BOM Stock (line 6)

Additions to stock (April)

= $27,300 + $6,600 + $68,640 - $98,280 = $4,260

8. Monthly additions to stock

6 mo. data April May June July Aug Sept

113820 4260 17910 48406 26180 8670 8420

Evaluating the Merchandise Budget Plan

Inventory turnover GMROI, sales forecast are used for both planning and controlAfter the selling season, the actual performance is compared with the plan

Why did performance exceed or fall short of the plan?

Was the deviation from the plan due to something under the buyers control?

Did the buyer react quickly to changes in demand by either purchasing more or having a sale?

Open-to-Buy System

The OTB system is used after the merchandise is purchased

Monitors Merchandise Flow

Determines How Much Was Spent and How Much is Left to Spend

PhotoLink/Getty Images

PhotoLink/Getty Images

Six Month Open-to-Buy

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Allocating Merchandise to Stores

Allocating merchandise to stores involves three decisions:

how much merchandise to allocate to each store what type of merchandise to allocate when to allocate the merchandise to different stores

Inventory Allocation Based on Sales Volume and Stock-to-Sales Ratios

Smaller stores require a proportionally higher inventory allocation than larger stores because the depth of the assortment or the level of product availability is too small, customers will perceive it as being inferior.

Type of Merchandise Allocated to Stores

Retailers classify stores according to the characteristics of the stores trading area

The assortment offered in a ready-to-eat cereal aisle should match

the demands of the demographics of shoppers in a local area

Type of Merchandise Allocated to Stores
continued

Even the sales of different apparel sizes can vary dramatically from store to store in the same chain.

Sales of Capri Pants by Region

Timing of Merchandise Allocation to Stores

Seasonality differences and consumer demand differences

Analyzing Merchandise Management Performance

Three types of analyses related to the monitoring and adjustment step are:

Sell through analysis ABC analysis of assortments Multiattribute analysis of vendors

Sell Through Analysis
Evaluating Merchandise Plan

A sell-through analysis compares actual and planned sales to determine whether more merchandise is needed to satisfy demand or whether price reductions are required.

ABC Analysis

An ABC analysis identifies the performance of individual SKUs in the assortment plan.

Rank - orders merchandise by some performance measure determine which items:

should never be out of stock

should be allowed to be out of stock occasionally

should be deleted from the stock selection.

A items: 5% of SKUs, represent 70% of salesB items: 10% of SKUs, represent 20% of salesC items: 65% of SKUs, represent 10% of salesD items: 20% of SKUs, represent 10% of sales

ABC Analysis Rank Merchandise
By Performance Measures

Contribution MarginSales DollarsSales in UnitsGross MarginGMROIUse more than one criteria

Multiattribute Method for Evaluating Vendors

The multiattribute method for evaluating vendors uses a weighted average score for each vendor. The score is based on the importance of various issues and the vendors performance on those issues.

C Squared Studios/Getty Images

Multiattribute Method for Evaluating Vendors

Evaluating Vendors

A buyer can evaluate vendors by using the following five steps:

Develop a list of issues to consider in the evaluation (column 1)

Importance weights for each issue in column 1 are determined by the buyer/planner in conjunction with the GMM (column 2)

Make judgments about each individual brands performance on each issue (the remaining columns)

Develop an overall score by multiplying the importance of each issue by the performance of each brand or its vendor

Determine a vendors overall rating, add the products for each brand for all issues

Home Depots Vendor Evaluation

Home Depot take vendor evaluations seriously. Home Depots vendor
analysis scorecard gives everyone a quick view of how the vendor is doing.

Green is good, but red isnt.

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