12/13/20141Chapter 12Managing MerchandiseAssortments12-212/13/2014212-3Merchandise ManagementBuyingMerchandiseChapter 14RetailPricingChapter 15ManagingMerchandiseAssortmentsChapter 12MerchandisePlanningSystemChapter 13RetailCommunicationMixChapter 1612-4Questions How is the merchandise management processorganized? Why do the merchandise management processes differfor staple and fashion merchandise? How do retailers evaluate the quality of theirmerchandise management decisions? How do retailers forecast sales for merchandiseclassifications? How do retailers plan their assortments and determinethe appropriate inventory levels? What trade-offs must buyers make in developingmerchandise assortments?12/13/2014312-5Merchandise ManagementProcess by which a retailer offers the correctquantity of the right merchandise in the rightplace at the right time and meets the companysfinancial goals. Sense market trends Analyze sales data Make appropriate adjustments inprices and inventory levelsc) image100/PunchStock12-6Merchandise Management andInvestment Portfolio Management Dollars to invest in inventory Invest inhot merchandise Save a little for opportunities(open to buy) Monitor portfolio ofmerchandise (stocks) Sell losers (markdowns)Traders on the stock exchange floormanage a portfolio of stocks, and retailbuyers manage a portfolio of merchandiseinventory. Both continuously assess the risksassociated with their purchase decisions.12/13/2014412-7Buying OrganizationMerchandise GroupDepartmentClassificationCategorySKUEach merchandise group is managed bya general merchandise manager (GMM),senior VPDepartments are managed bya divisional merchandise manager (DMM),A group of items targeting the samecustomer type, such as girls sizes 4-6Each buyer manages several merchandisecategories (e.g., sportswear, dresses,swimwear, outerwear categories for girlssizes 4-6The smallest unit available for inventory controlSize, color, style12-8Merchandise Classifications & Organization12/13/2014512-9Merchandise Category The Planning UnitA merchandise category is an assortment of items thatcustomers see as substitutes for each other.Vendors might assign products to different categoriesbased on differences in product attributesRetailers might assign two products to the samecategory based upon common consumers and buyingbehavior12-10Category ManagementBreakfast cereal category vs. Kellogg CornFlakesMens knitted shirts vs. Polo shirtsDiary product category vs. Carnation milkproducts The process of managing a retail business with theobjective of maximizing the sales and profits of a category Objective is to maximize the sales and profits of the entirecategory, not just a particular brand12/13/2014612-11Category CaptainSelected vendor responsible for managing a categoryVendors frequently have more information and analytical skillsabout the category in which they compete than retailers Helps retailer understand consumer behavior Creates assortments that satisfy the customer Improves profitability of categoryProblems Vendor category captain may have different goals thanretailer12-12Evaluating Merchandise ManagementPerformance - GMROIMerchandise managers have control over The merchandise they buy The price at which the merchandise is sold The cost of the merchandiseMerchandise managers do not have control over Operating expenses Human resources Real estate Supply chain management Information systemsSO HOW ARE MERCHANTS EVALUATED?12/13/2014712-13GMROIProductivity MeasuresInventoryGrossMarginInput OutputA measurement of how many gross margin dollarsare earned on every dollar of inventoryinvestment made by the buyer12-14GMROI =Gross Margin Percent x sales-to-stock ratio= gross margin x net salesnet sales avg inventory at cost= gross marginavg inventory at costInventory Turnover= (1 Gross Margin Percent) x sales-to-stock ratioGMROIGross Margin Return on Inventory Investment12/13/2014812-15How do buyers influence GMROI?Components that buyers can control: Gross margin component: Price: Prices that buyers set Prices that buyers negotiate with vendors Sales-to-stock ratio component: Popularity of the merchandise buyers buy12-16ROI and GMROIAsset Productivity MeasuresStrategic Corporate Level Return on Assets = Net ProfitTotal AssetsMerchandise Management Level GMROI = Gross MarginAvg. Inventory at Cost12/13/2014912-17Illustration of GMROIMerchandise categories with different margin/turnover profilescan be compared and evaluatedCanned foodCanned foodFresh BakeryFresh Bakery12-18GMROI for Selected Departmentin Discount Stores12/13/20141012-19Measuring Sales-to-Stock Ratio Net Sales/Average Inventory at Cost Retailers report on an annual basis If the sales-to-stock ratio for a three-monthseason is 2.3, the annual sales-to-stock ratio willbe 9.2 Estimation of average inventory Use information system: averaging the inventory instores and distribution centers at the end of each day Divide the sum of the end-of-month (EOM)inventories for several months by the number ofmonths12-20Managing Inventory Turnover Inventory turnover = Net SalesAverage inventory at retail Inventory turnover = Cost of goods soldAverage inventory at cost Average inventory = Month1 + Month2 + Month 3 +Number of months Inventory Turnover helps assess the buyers performance in managingasset (merchandise inventory) But focusing on increasing inventory turnover can actually decrease GMROI Buyers need to consider the trade-offs associated with managing Inventory TurnoverCalculation12/13/20141112-21Inventory TurnoverMonth Retail Value of Inventory EOM January $22,000 EOM February 33,000 EOM March 38,000 Total Inventory $93,000 Average inventory = $93,0003 = $31,00012-22Inventory Turnover andStock-to-Sale RatioInventory turnover = Net Sales(at retail) Average inventory at retailInventory turnover = Cost of goods sold(at cost) Average inventory at costSock-to-Sales Ratio = Net SalesAverage cost ofinventory12/13/20141212-23Advantages of Rapid Turnover Increased sales volume Less risk of obsolescence and markdowns Improved salesperson morale More resources to take advantage of newbuying opportunities12-24Approaches for Improving Inventory Turnover Reduce number of categories Reduce number of SKUs within a category Reduce number of items in a SKUBUT if a customer cant find their size or color orbrand, patronage and sales decrease!another approach12/13/20141312-25another approachTo improve inventory turnover Buy merchandise more often Buy in smaller quantities which should reduce averageinventory without reducing salesBUT by buying smaller quantities Buyers cant take advantage of quantity discounts so Gross margin decreases Operating expenses increase Buyers need to spend more time placing orders andmonitoring deliveries12-26Merchandise Planning Process12/13/20141412-27Types of Merchandise ManagementPlanning ProcessesTwo distinct types of merchandise management systemsfor managing Staple (Basic) Merchandise Categories Continuous demand over an extended time period Limited number of new product introductions Hosiery, basic casual apparel Easy to forecast demand Continuous replenishment Fashion Merchandise Categories In demand for a relatively short period of time Continuous introductions of new products, making existingproducts obsolete Athletic shoes, laptop computers, womens apparel12-28Merchandise Management Process1. forecasting sales2. Developing an assortment plan3. Determining the appropriate inventory level12/13/20141512-29Developing a Sales Forecast Understanding the nature of the product life cycle Collecting data on sales of product and comparableproducts Using statistical techniques to project sales Work with vendors to coordinate manufacturing andmerchandise delivery with forecasted demand:Collaboration, Planning, Forecasting, and ReplenishmentSystems (CPFR)12-30The Category Product Life CycleKnowing where a category is in its life cycle is important in developinga sales forecast and merchandising strategy12/13/20141612-31Variations in the Category Life Cycle12-32Types of MerchandiseStaple MerchandisePredictable DemandHistory of Past SalesRelatively Accurate ForecastsFashion MerchandiseUnpredictable DemandLimited Sales HistoryDifficult to Forecast SalesThe McGraw-HillCompaniesInc./KenCavanaghPhotographerThe McGraw-Hill Companies, Inc./Lars A. Niki,photographer12/13/20141712-33Forecasting Fashion MerchandiseCategoriesRetailers develop fashion forecasts by relying on: Previous sales data Personal awareness Fashion and trend services Vendors Traditional market research12-34Personal AwarenessHow do fashion buyers know the trends? Internet chat rooms Look in closets Go to the movies Go to rock concerts Go to nightclubsRyan McVay/Getty ImagesSCANShop the retail stores, Web sites and catalogs of competitors as acustomer wouldConverse with consumers, sales clerks, and neighborsAct like your customerNotice12/13/20141812-35Fashion and Trend ServicesBuyers subscribe to forecasting services and fashionpublications Trendzine (www.FashionInformation.com) Doneger Creative Services (www.Doneger.com/web ) Fashion Snoops (www.fashionsnoops.com) Earnshaws Womens Wear Daily (WWD) DNR Home Furnishings News (HFN)12-36Work with Vendors:Collaboration, Planning, Forecasting, and ReplenishmentSystems (CPFR) Vendors have proprietary information about theirmarketing plans (e.g., new product launches, specialpromotions) Procedures used by retailers and vendors to worktogether to insure that the right merchandise is at theright place at the right time. Benefits both retailers and vendors Increases fill rate, reduces stockouts, increases inventory turns12/13/20141912-37Developing Assortment PlanningAssortment plan is a list of the SKUs that a retailer will offerin a merchandise category and reflects the variety andassortment that the retailer plans to offer in a merchandisecategoryVariety (breadth) is the number of different merchandisingcategories within a store or departmentAssortment (depth) is the number of SKUs within acategory.Product availability defines the percentage of demand for aparticular SKU that is satisfied.12-38Assortment Plan for Girls Jeans12/13/20142012-39Model Stock Plans12-40Importance of Backup (Buffer) StockChoosing an appropriateamount of backup stock iscritical to successfulassortment planning If the backup stock is too low loose sales and customers If the backup stock is too high scare financial resources will bewasted on needless inventory thatcould be more profitably invested inmore variety or assortment12/13/20142112-41Understanding the Challenges ofAssortment Planning and Allocation12-42Assortment Planning A Keyto FinancialSuccessFinancial success =good assortmentstrategy+good assortmentexecutionRightProductRightPlaceRightTimeRightQuantities+ + + =HappyCustomer12/13/20142212-43 43Reality Customers respond to a promotion, only to findthe store is out of stock Customers find a piece of clothing in everysizebut not hers Customers go to a store, only to find theinventorypicked over12-44 44For A Retailer,These Situations Are Very Costly Objective of assortment planning system is tomatch Inventory to demandBy quantityBy sizeBy geographyBy store format Mismatch Results In Serious ConsequencesOverstocks create markdowns and lostgross margin dollarsUnder stocks create lost sales andunhappy customersA retailer was stuck with $400 million in excess inventoryaftermisreading consumer demand for products at the right price point.--Forrester Research