Merchandise mgmt

Merchandise Management 11.1

Key Issues

Stores as products Merchandise planning decisions Developing a successful merchandise plan What makes shoppers tick Assortment, depth issues Mechanics of merchandise management Inventory-level planning


Are Stores “Products”?

Stores as products new product development product positioning target marketing product life cycle

Note the kinds of products

that characterize ...Upscale department storesDiscounters


Two Aspects toMerchandise Mgmt

Merchandise Selection Decisions

Merchandise Planning Decisions


Objectives ofMerchandise Planning

To meet corporate objectivesTo meet corporate objectives To define management’s responsibilitiesTo define management’s responsibilities To establish timing guidelines for merchandiseTo establish timing guidelines for merchandise To forecast budgetary needs for merchandiseTo forecast budgetary needs for merchandise

Objective of good merchandise planning: improved customer Objective of good merchandise planning: improved customer service, leading to more loyalty and repeat business, which service, leading to more loyalty and repeat business, which eventually leads to more new business and greater profits. The eventually leads to more new business and greater profits. The retailer wants to …retailer wants to …

- get the right product- get the right product

- to the right stores- to the right stores

- at the right time- at the right time

- to satisfy customers- to satisfy customers


Merchandising Organization

Assistant Buyer Associate Buyer Buyer Divisional Merchandising Manager

(DMM) General Merchandising Manager

(GMM)


Merchandising Organization

Girls Levi jeans, sz 5, stone washed blue,

straight leg

SKUSKU

Chairman

Sr. vice pres merch mgr

Women’s ready-to-wear


Men’s, child’s, intimate apparel


Cosmet, shoes, jewelry, access.


Soft homefurn., kitchen

Div. merch manager

Men’s suits, slacks, dress

shirts

Div. merch manager

Men’s sports-wear, Polo

Div. merch manager

Young men’s, boys’ apparel

Div. merch manager

Children’s apparel

Div. merch manager

Intimate apparel

Buyer

Preteen

accessories

Buyer

Girls’

Size 7-14

Buyer

Girls’

Size 4-6

Buyer

Toddlers’

Buyer

Infants’

Buyer

Little boys’

Sportswear Dresses Swimwear Outerwear

Merchandise GroupMerchandise Group

DepartmentDepartment

ClassificationClassification

CategoryCategory

V.P.Planning

Div Dir.Planning

Mgr.Planning

Planning Planning GroupGroup


Developing a Successful Mdse PlanWhat Makes Retail Shoppers Tick

MerchandiseMerchandisePlanPlan

Innovativeness

Brands

Timing

Forecasts

Allocation

Assortments


Staple MerchandiseAssortment Merchandise

Product Lines etc.Model Stock Plan

Fashion MerchandiseSeasonal MerchandiseFad Merchandise

What Makes Shoppers TickForecasts

Fashion Trends

Retailer’s Image

Competition

Customer Segments

Investment Costs

Profitability

Risk

Innovativeness

VerticalA “designer” trend which will change as it filters down to other mkts

HorizontalA trend accepted by a wide no. of people on its introduction

Fashion Trends

Assortment Assortment Types

Manufacturer (National)

Private Label (Dealer)

Brands

Product Quality

Width

Depth

Considerations:Sales & ProfitSpace RequirementsInventory TurnoverCannibalization

Width

Dep

th

Wide Narrow

Dee

pS

hallo

w


Assortment Width & Depth

WidthD

epth

Wide NarrowD

eep

Sha

llow

Aimed at Convenience CustomersLeast CostlyHigh Turnover of ItemsBUT

Broad MarketHigh Customer TrafficEmphasis on Conven. ShoppersLess Costly Than Wide and DeepOne-Stop ShoppingBUT

Special ImageGood Selection in Category(ies)Specialized PersonnelCustomer LoyaltyNo Disappointed CustomersLower Cost than Wide and DeepBUT

Broad MarketHigh Level of Customer TrafficCustomer LoyaltyOne-Stop ShoppingNo Disappointed CustomersBUT


General Merchandising Forecasting Innovativeness Assortment Allocation Category Management

Software Availablefor All of These


Implementing Mdse Plans

1. GatheringInformation

about customerdemand

2. Selecting &Interacting with

Vendors3. Evaluation ofMdse & Vendor

4. Negotiationof Price& Terms

5. ConcludingPurchases

6. Receiving &Stocking

Merchandise

8. Reevaluationof Mdse &

Vendor7. Reordering

Establish a Formal or Informal Buying Organization

Make M’dise Plans: What to Stock, How Much, When, Where in Store


Basic Mdse Mgmt Issues

Knowing how much

to buy in dollars

The merchandisebudget in dollars

Open to buy

The assortmentplan

Unit control systems

Knowing what to buy

in units and dollars

Discounts andterms of sale

Retailing/Vendorrelationships

Knowing how to make the buy


Mechanics of Merchandise Management:“Dollars” View

Stock Balance

Assortment PlanningAssortment Planning

VarietyVariety

$ Planning$ PlanningTurnoverTurnover

PurchasePurchasePlanPlan

ReductionReductionPlanPlan

StockStockPlanPlan

SalesSalesPlanPlan

Initial MarkupInitial MarkupPlanPlan RetailRetail

$ Control$ Control

CostCost

OTBOTB• DollarsDollars• UnitsUnits

22

33

44

5566

77

88 99 1010 1111

12121313

1414

1515

Width. Which products, & the number ofmerchandise categories in a store or department.This is the Buyer’s decision.

Depth or support. The numberof SKUs within a category, & theinventory depth. Most often theinvt’y control analyst’s decision


Mechanics of Merchandise Management:“Units” View

Stock Balance

Assortment Planning

Variety

$ PlanningTurnover

PurchasePlan

ReductionPlan

StockPlan

SalesPlan

Initial MarkupPlan Retail

$ Control

Cost

OTB

2

3

4

56

7

8 9 10 11

1213

14

15

Width. Which products, & the number ofmerchandise categories in a store or department.This is the Buyer’s decision.

Depth or support. The numberof SKUs within a category, & theinventory depth. Most often theinvt’y control analyst’s decision

• Dollars• Units


Typical Sales Variations of Levi’s

Fall sales --- typically 40 percent of annual salesSpring/Summer --- typically 15 percent of annual sales

Winter sales --- typically 30 percent of annual sales.


Distributing Seasonal Sales Plans

% of BusinessSeason’s PlannedMonth in 6 mos. Sales Forecast Sales

February 10% $52,000 $5,200March 10% 5,200April 25% 13,000May 15% 7,800June 30% 15,600July 10% 5,200

TOTAL 100% $52,000 $52,000


Reduction Planning

Planned Planned Amount ofMonth Sales Reduction* Reduction

February $5,200 30% $1,248March 5,200 -- --April 13,000 -- --May 7,800 -- --June 15,600 30% 1,248July 5,200 40% 1,664

TOTAL $52,000 100% $4,160

* Percent of season total


Recall the Strategic Profit Model

Return onInvestment

= x

Net ProfitNet Worth

AssetTurnover

Net SalesTotal Assets

LeverageRatio

Total AssetsNet Worth

Net ProfitMargin

Net ProfitNet Sales

x

The FinancialObjective

The Financial Program(The SPM)

Rate of Return on Assets


ROA vs GMROI

xAsset

Turnover

Net Sales .Avg. Total Assets

Net ProfitMargin

Net Profit DollarsNet Sales

Rate of Return on Assets

xInventoryTurnover

Gross ProfitMargin

Net Sales . Avg. Inventory

Gross Profit DollarsNet Sales

Gross Margin Returnon Inventory Investment

The ROA measure is used by corporate management It can control G,S,&A &

therefore net profit It can control total

investment & therefore total assets


So … GMROI:

GMROI = Gross Margin $ (@ Retail or Cost) Average Invty $ (@ Retail or Cost)

xInventoryTurnover

Gross ProfitMargin

Net Sales . Avg. Inventory

Gross Margin DollarsNet Sales

Gross Margin Returnon Inventory Investment

xGMROI = Gross MarginAvg Inventory

=

Gross MarginAvg Inventory

=


GMROI Examples

GMROI = Gross Marg $ X Net Sales =

Gross Margin .

Net Sales Average inventory Average Inventory

Milk GMROI = $2,000 X $150,000 =

$ 2,000

$150,000 1,000 1,000

= 1.33% X 150 = 200%

Caviar GMROI = $150,000 X $300,000 =

$300,000

$300,000 75,000 150,000

= 50% X 4 = 200%

Milk Caviar

Gross Margin $ 2,000 $150,000

Sales 150,000 300,000

Average Inventory 1,000 75,000

InventoryTurnover

Gross ProfitMargin

Gross MarginAvg Inventory


Discounts & Terms of Sale

Terms of Sale:Terms of Sale: Conditions under which retailers must make payment Conditions under which retailers must make payment to vendors.to vendors.

Trade discounts:Trade discounts: A price reduction granted to retailers or wholesalers A price reduction granted to retailers or wholesalers for performing services.for performing services.

Quantity discounts:Quantity discounts: Discounts from the invoice offered to retailers Discounts from the invoice offered to retailers who purchase a specific quantity. who purchase a specific quantity. Cumulative quantity discount: The values of all orders in a period are Cumulative quantity discount: The values of all orders in a period are added together for the calculation of quantity discounts.added together for the calculation of quantity discounts.

Invoice: A bill sent by suppliers calling for payment.Invoice: A bill sent by suppliers calling for payment.

Seasonal discounts:Seasonal discounts: Discounts retailers earn by ordering or taking Discounts retailers earn by ordering or taking delivery of merchandise before the normal selling period is done.delivery of merchandise before the normal selling period is done.

Terms of Payment:Terms of Payment: Conditions under which retailers must make Conditions under which retailers must make payment to vendors.payment to vendors.

Cash discounts:Cash discounts: Deductions in price given by suppliers for prompt Deductions in price given by suppliers for prompt payment of invoice.payment of invoice.


Payment Requirements

Shipping terms

F.O.B. (Free on board): Merchandise is placed on board a truck, railroad car or airplane with title to goods passing from seller to buyer at the F.O.B. point.

F.A.S. (Free alongside ship): At a named port the seller quotes a price for the goods including charges for delivery and loading alongside a vessel.

C.I.F. (Cost, insurance, and freight): The seller quotes the price including transportation, insurance, and miscellaneous expenses.

C.O.D. (Cash on delivery): The seller requires that the buyer pay for the goods at time of delivery.

Advanced dating Vendors offer retailers more time in which to pay their bill in order to entice them to purchase their goods.

Extra dating: One type of advanced dating which lengthens the time that retailers have to take advantage of cash discounts.

EOM (End of month) dating: Under EOM dating, the ordinary period does not begin until the end of the month of the date shown on the invoice.

ROG (Receipt of goods)dating: Under ROG dating, the terms of the discount do not begin until the date that goods are received in the store.

Anticipation discount: Discounts given by some vendors as an inventive for early payment in the form of a percentage rate per year.


Inventory Level Planning Methods Basic stock method:

The retailer buys an amount equal to planned sales plus a “basic stock” E.g., BOM invty = planned sales + basic stock

Percentage variation method: Recommended when stock turnover is > 6 times per yr. Actual stock on hand in any month is allowed to vary by only half of the

month’s variation from avg. estimated monthly sales E.g., if we expect a month to have a sales increase of 14% over the avg.

month, invty for that month is increased by only 7% E.g., if avg invty = $100k, sales = $70K/mo. & planned sales = $80K,

then BOM invty = $100K x ½(1 + $80K/$70K) = $107K

Weeks’ supply method: Assumes stock is carried in proportion to sales -- stock on hand equals

several weeks’ sales E.g., BOM invty = avg weekly sales x # weeks

Stock-to-sales ratio method: Assumes the retailer wants to keep a specified ratio of mdse to sales. E.g., a ratio of 3 means that an expected $10K month must be

supported by $30K invty