Chapter 13

Merchandise Planning Systems

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Questions

■ How does a staple merchandise buying system operate?

■ What is a merchandise budget plan and how is it developed?

■ What is an open-to-buy system?

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■ The actual management of a retailer’s inventory on a daily basis is quite complex. Example: Walmart 100,000 SKU Multiple items per SKU

■ Retailers use computer-based merchandise planning systems to assist with this challenge

■ Two Distinct types: One for staple merchandise One for fashion merchandise

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Types of Merchandise Management Systems

Staple Merchandise

Predictable Demand

Relatively Accurate Forecasts

Continuous Replenishment

Manages Inventory at the SKU

level

Fashion Merchandise

Unpredictable Demand

Difficult to Forecast Sales

Merchandise Budget Plan

Manages Inventory at the category level

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Staple Merchandise Management Systems

Staple merchandise planning systems perform three primary functions :

■ Monitor and measure current SKU sales

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

■ Develop ordering decision rules to determine when and how much to reorder

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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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Backup Stock

Extra stock the retailer keeps on hand as a cushion so it doesn’t stock out before the next order arrives.

Also called safety stock or buffer stock

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Order Point

The amount of inventory below which the quantity available should not go or the item will be out of stock before the next order arrives. Tells the buyer that when the inventory level drops to this point, additional merchandise should be ordered

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

■ Assume Lead time = 14 days, review time = 7 days, demand = 10 units per day

Assume backup stock = 50 units, then

Order point = (10 x 21) + 50 = 260We will order something when order point gets below 260 units.

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Order Quantity

Tells the buyer how much to order when inventory reaches the order point.

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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

■ Specifies the planned inventory investment in dollars in a fashion 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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Six Month Merchandise Budget Plan for Men’s Casual Slacks

■ Goal – trying to calculate “Monthly Additions to Stock”■ Tells the buyer how much merchandise in retail dollars

he or she needs to have arriving in the stores and available for sale each month

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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%

Projects what percentage of the total sales for the season is expected to be sold in each month

Based on:• Historical data• Special promotion plans

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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 sales for the six-month period x monthly sales %

$27,000 = $130,000 x 21%

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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

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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 %$6,600 = $16,500 x 40%

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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

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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 – the amount of inventory planned for the beginning of the month

= 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

Monthly additions to stock – the amount to be ordered for delivery in each month given turnover and sales objectives

= 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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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

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