Merchandise Planning

McGraw-Hill/IrwinRetailing Management, 6/e

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 13

Merchandise Planning

13-2

Merchandise Management

RetailCommunication

Mix

Merchandise PlanningSystems

PlanningMerchandiseAssortments

BuyingMerchandise

Pricing

13-3

Types of Buying Systems

Staple Merchandise

Predictable Demand

History of Past Sales

Relatively Accurate Forecasts

Fashion Merchandise

Unpredictable Demand

Limited Sales History

Difficult to Forecast Sales

The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

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13-4

Staple Merchandise Planning

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

13-5

Staple Merchandise Planning

Ryan McVay/Getty Images

Most merchandise at home improvement centers are staples.

13-6

Inventory Levels for Staple Merchandise

13-7

Factors Determining Backup Stock

• Level of backup depends on product availability retailer wishes to provide

• The greater the fluctuation in demand, the more backup stock is needed

• The amount of backup stock needed is also affected by the lead time from the vendor

• Fluctuations in lead time affect the amount of backup stock

• Vendor’s product availability affects retailers’ backup stock requirements

13-8

Relationship between Inventory Investment and Product Availability

Product Availability (Percent)

600

500

400

300

200

100

080 85 90 95 100

13-9

Cycle and Backup StockU

nit

s A

vail

able

Weeks

150 -

100 -

50 -

0 - 1 2 3 4

Order 96

Cycle Stock

Buffer Stock

13-10

Basic Stock List

• Indicates the Desired Inventory Level for Each SKU– Amount of Stock Desired

Cost of CarryingInventory

Lost Sale Due to Stockout

13-11Inventory Management Report for Rubbermaid Merchandise

13-12

Order Point

• 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.

• Assume Lead time = 0, Order point = 0• Assume Lead time = 3 weeks, review time =

1 week, demand = 100 units per week• Order point = demand (lead time + review

time) + buffer stock• Order point = 100 (3+1) = 400

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Order Point continued

• Assume Buffer stock = 50 units, then

• Order point = 100 (3+1) + 50 = 450

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

13-14

Calculating the Order Point

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

167 units = (7 units x (14 + 7 days) + 20 units

So Buyer Places Order When Inventory in Stock Drops Below 167 units

13-15Merchandise Planning for Fashionable Merchandise

• 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 money

13-16

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

13-17

Six Month Merchandise Plan for Women’s Casual Slacks

13-18

Monthly sales percent Distribution to Season (Line 1)

Sales % Dist. to 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%

13-19

Monthly sales (Line 2)

Sales % Dist. to 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

13-20

Monthly Reductions Percent Distribution (Line 3)

Reduction % Distribution to3. Month

6 mo. data April May June July Aug Sept 100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%

13-21

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

13-22

Monthly Reductions

Reduction % Distribution to3. 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

13-23

Beginning of Month 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

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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 78000

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EOM Stock (Line 7)

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

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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

13-27

Open to Buy

Monitors Merchandise Flow

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

PhotoLink/Getty Images PhotoLink/Getty Images

13-28

Six Month Open to Buy

13-29

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

13-30

Allocation Based on Sales Volume

13-31

Different Geodemographic Segments

13-32

Apparel Size Difference Across Stores

13-33

Sales of Capri Pants by Region

13-34

Analyzing Merchandise Management Performance

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

• Sell through analysis• ABC analysis• Multiattribute analysis of vendors

13-35

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.

13-36

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.

13-37ABC Analysis Rank Merchandise By Performance Measures

Contribution Margin

Sales Dollars

Sales in Units

Gross Margin

GMROI

Use more than one criteria

Ryan McVay/Getty Images

13-38

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

13-39

Multiattribute Method for Evaluating Vendors

Performance Evaluation of Individual Brands Across Issues

ImportanceEvaluation Brand A Brand B Brand C Brand D

Issues of Issues (I) (Pa) (Pb) (Pc) (Pd)

(1) (2) (3) (4) (5) (6)

Vendor reputation 9 5 9 4 8

Service 8 6 6 4 6

Meets delivery dates 6 5 7 4 4

Merchandise quality 5 5 4 6 5

Markup opportunity 5 5 4 4 5

Country of origin 6 5 3 3 8

Product fashionability 7 6 6 3 8

Selling history 3 5 5 5 5

Promotional assistance 4 5 3 4 7

Overall evaluation = 290 298 212 341Ij *i

n

P1

ij

13-40

Evaluating a Vendor: A Weighted Average Approach

Ij *i 1

n

P ij = Sum of the expression

Ij = Importance weight assigned to the ith dimension

Pi= Performance evaluation for jth brand alternative on the jth issue

1 = Not important

10 = Very important

13-41

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 brand’s performance on each issue (the remaining columns)• Develop an overall score by multiplying the importance for each issue the performance for each brand or its vendor

13-42

Retail Inventory Method (RIM)

Two Objectives:– To maintain a perpetual or book inventory of

retail dollar amounts.

– To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory.

13-43

Retail Inventory Method: The Problem

Retailers generally think of their inventory at retail price levels rather than at cost. When retailers compare their prices to competitors’, they compare their retail prices. The problem is that when retailers design their financial plans, evaluate performance and prepare financial statements, they need to know the cost value of their inventory.

One way to do this is to take physical inventories – time consuming and costly!

Another way is to use the Retail Inventory Method (RIM)

13-44

Advantages of RIM

The retailer doesn't have to “cost” each time.

Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower.

13-45

Advantages of RIM cont’d

• Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage can be compared with historical records or industry norms.

• Useful for determining shrinkage.

• Can be used in an insurance claim case of a loss.

13-46

Disadvantages of RIM

System that uses average markup.

Record keeping process involved is burdensome.

13-47

Steps in RIM

• Calculate Total Merchandise Handled at Cost and Retail

• Calculate Retail Reductions

• Calculate Cumulative Markup and Cost Multiplier

• Determine Book Inventory at Cost and Retail

13-48

Retail Inventory Method Example

Total Goods Handled Cost Retail

Beginning inventory $ 60,000 $ 84,000

Purchases 50,000 70,000

- Return to vendor (11,000) (15,400)

Net Purchases 39,000 54,600

Additional markups 4,000

- Markup cancellations (2,000)

Net markups 2,000

Additional Transport. 1,000

Transfers in 1,428 2,000

- Transfers out (714) (1,000)

Net Transfers 714 (1,000)

Total Goods Handled $100,714 $141,600

13-49

Retail Inventory Method Example

Total Goods Handled Cost Retail

Gross Sales $ 82,000

- Consumer Returns & Allowances ( 4,000)

Net Sales $ 78,000

Markdowns 6,000

- Markdown Cancellation (3,000)

Net Markdown 3,000

Employee Discounts 3,000

Discounts to Customers 500

Estimated Shrinkage 1,500

Total Reductions $ 86,000

13-50

Calculate Total Goods Handled at Cost and Retail

Record beginning inventory at cost and at retail

Calculate net purchases

Calculate net additional markups

Record transportation expenses

Calculate net transfers

The sum is the total goods handled

(c) Stockbyte/PunchStock

13-51

Calculate Retail Reductions

Record net sales

Calculate markdowns

Record discounts to employees and customers

Record estimated shrinkage

The sum is the total reductions

13-52

Calculate the Cumulative Markup and Cost Multiplier

Cumulative markup = total retail – total cost total retail

If the cumulative markup is higher than the planned, then the category is doing better than planned

13-53

Determine Ending Book Inventory at Cost and Retail

Ending book = Total goods handled at retail inventory at retail – total reductions

The ending book inventory at cost is determined in the same way that retail has been changed to cost in other situations – multiply the retail times (100% - gross margin percentage)

Ending book = Ending book inventory x cost multiplier