McGraw-Hill/IrwinRetailing Management, 7/e © 2008 by The McGraw-Hill Companies, All rights reserved.

Chapter 13

Merchandise Planning Systems

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Merchandise Management

Retail Pricing

Chapter 15

RetailCommunication

MixChapter 16

Merchandise Planning Systems

Chapter 13

Managing Merchandise AssortmentsChapter 12

Buying Merchandise

Chapter 14

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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?

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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

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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

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Inventory Levels for Staple Merchandise

Cycle (base) stock: inventorythat goes up and down due tothe replenishment process

Backup (buffer, safety) stockInventory needed to avoid stockout

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Inventory Levels for Staple Merchandise

Retailers try to reduce the stock level to keep Inventory Investment low by reordering and receivingmerchandise often but without increasedadministrative and transportation costs with frequent reorders

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Basic Stock

Indicates the Desired Inventory Level for Each SKU

Cost of CarryingInventory

Lost Sale Due to Stockout

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Factors Determining Backup Stock

■ Higher product availability (service level) retailer wishes to provide to customers

■ Greater the fluctuation in demand■ Longer lead time from the vendor■ More fluctuations in lead time ■ Lower vendor’s Fill rate (% of

complete orders received from a vendor)

MoreBackup Stocks

Needed with

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Relationship between Inventory Investment and Product Availability

Product Availability (Percent)

600

500

400

300

200

100

080 85 90 95 100

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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 level

■ Forecasting future SKU demand with allowances made for seasonal variations and changes in trend

■ Developing ordering decision rules for optimum restocking

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Staple Merchandise Management

Ryan McVay/Getty Images

Most merchandise at home improvement centers are staples.

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

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

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Order Quantity

When inventory reaches the order point, the buyer needs to order enough units so the cycle stock isn’t depleted and sales dip into backup stock before the next order arrives.

Order Quantity = Order Point – Quantity Available

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Inventory Management Report for Rubbermaid SKUs

Avocado Bath MatQuantity available = Quantity on Hand + Quantity on Order = 90Order Quantity = Order Point – Quantity AvailableOrder Quantity = 132 – 90 = 42

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Fashion Merchandise Management Systems

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

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Merchandise Budget Plan

■ Plan for the financial aspects of a merchandise category

■ Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives

■ Not a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantities

Royalty-Free/CORBIS

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Steps in Developing a Merchandise Budget Plan

■ Set margin and inventory turn goals■ Seasonal sales forecast for category■ Breakdown sales forecast by month■ Plan reductions – markdowns, inventory loss■ Determine stock needed to support forecasted

sales■ Determine “open to buy” for each month

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Six Month Merchandise Plan for Men’s Casual Slacks

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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

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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 retailer’s annual sales.

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Monthly Sales (Line 2)

Sales % Distribution 1. Month 6 mo. data April May June July Aug Sept

100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%2. 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 %

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Monthly Reductions Percent Distribution (Line 3)

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%

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 customersMarkdownsShrinkage Discounts to Employees

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Shrinkage

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

Retailers measure shrinkage by taking the difference between

1. The inventory recorded value based on merchandise bought and received

2. The physical inventory actually in stores and distribution centers

Shrinkage % = $ shrinkage

$ net sales

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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 %

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

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

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

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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 buyer’s 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

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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

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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

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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

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BOM Stock (Line 6)

6. BOM Inventory 6 mo. data April May June July Aug Sept 98280 98280 68460 68640 98800 98280 8000

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

= $27,300 x 3.6

= $98,280

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

7. EOM Inventory 6 mo. data April May June July Aug Sept 85600 68640 68460 275080 98280 78000 65600

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

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Monthly Additions to Stock (Line 8)

8. Monthly additions to stock 6 mo. data April May June July Aug Sept 113820 4260 17910 48406 26180 8670 8420

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

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Evaluating the Merchandise Budget Plan

■ Inventory turnover GMROI, sales forecast are used for both planning and control

■ After 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 buyer’s control? Did the buyer react quickly to changes in demand by

either purchasing more or having a sale?

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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

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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

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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.

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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 matchthe demands of the demographics of shoppers in a local area

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Type of Merchandise Allocated to Storescontinued

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

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Sales of Capri Pants by Region

Timing of Merchandise Allocation to Stores

Seasonality differences and consumer demand differences

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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

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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.

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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 sales■ B items: 10% of SKUs, represent 20% of sales■ C items: 65% of SKUs, represent 10% of sales■ D items: 20% of SKUs, represent 10% of sales

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ABC Analysis Rank Merchandise By Performance Measures

■ Contribution Margin■ Sales Dollars■ Sales in Units■ Gross Margin■ GMROI■ Use more than one criteria

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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 vendor’s performance on those issues.

C Squared Studios/Getty Images

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Multiattribute Method for Evaluating Vendors

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Evaluating Vendors

A buyer can evaluate vendors by using the following five steps:1. Develop a list of issues to consider in the evaluation

(column 1)2. Importance weights for each issue in column 1 are

determined by the buyer/planner in conjunction with the GMM (column 2)

3. Make judgments about each individual brand’s performance on each issue (the remaining columns)

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

5. Determine a vendor’s overall rating, add the products for each brand for all issues

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Home Depot’s Vendor Evaluation

Home Depot take vendor evaluations seriously. Home Depot’s vendoranalysis scorecard gives everyone a quick view of how the vendor is doing. Green is good, but red isn’t.