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MERCHANDISE PLANNING & MANAGEMENT
Chapters 12 & 13 by Levy & Weitz
Buying Decision Process
What to Buy? How much to When to buy? buy?
From whom to buy?
Store Image
Satisfy Cust. Wants
Type of Merchandise
Control Systems
MerchandisePolicies
Financial Obj. Open-to-buy
Mdse.Budget
SalesReductionsInventories
PurchasesShortages
Estimated Sales
Beginning Inv.
Ending Inv.
Suppliers
The Market
Negotiations
Unit Price Terms
Merchandise Management
The planning and control of merchandise inventories to meet desired sales and product-related objectives.
Also includes the planning of the size and composition of the merchandise inventories, as well as a variety of functions dealing with the purchase, display, pricing, promotion, and sale of merchandise.
Merchandise Planning
Involves those activities which are needed to ensure a balance between inventories and sales.
Marketing the right merchandise at the right place at the right time in the right quantities at the right price.
Management of the product component of the marketing mix.
Essential Terms
Product: what retailer is selling (or service)
Product line: all products/services offered by retail firm
Category: assortment of items that the customer sees as reasonable substitutes for each other
Assortment: range of choices/selection in a given product line (# of SKUs in a category)
Inventory turnover: # of times the avg. inventory of an item or SKU is sold, usually in annual terms
Category Management at BordersCategory Management at BordersLO3
In early 2001 Borders group reorganized to emphasize category management. As a result, Borders has broken down its business into specialized categorizes of books, children’s, multimedia, gifts and stationary, periodicals, calendars and café. Before the change, sales, marketing andmerchandising functionswere aligned by type ofoutlet, i.e., Borders, Waldenand Borders.com.
Merchandise Assortment
Width (Breadth): refers to assortment factors necessary to meet needs of target market and competition
Brand of Beer Types Sizes Coors reg., light 6-pk, 12-pk Miller Budweiser Michelob
SKUs = 16
Assortment cont’d.
Support (Depth): Determination of how many units of merchandise are needed to support expected sales of each assortment factor (e.g. brand, type, size, color, etc.) Rely on customer needs, past sales
trends, image of department and store, etc.
Why plan stock levels?
Meet sales expectationsAvoid out-of-stock conditionsGuard against overstockKeep inventory investment at
acceptable level
Merchandise Planning Objective
Ensure that both the customer’s merchandise needs and the retailer’s financial requirements are satisfied by creating an acceptable balance between merchandise inventories and sales
Merchandise Budgeting
Planning Annual SalesAnnual sales estimates
time series judgmental forecasting
Make monthly sales estimates
Forecasting Sales
Staples: demand year-round (appliances, hardware, etc.). Consider sales trends, profitability, quantity discounts
Seasonal Merchandise: use past knowledge, info. from vendors, length of season, planned sales, selling price
Style and perishable items
How much to order?
Lead time: length of time between order placement and receipt of goods
Importance of safety or cushion stock: protection against strikes, delays
Base or cycle stock: amount sufficient to accomodate regular sales
Lead time + Safety stock + Basic stock = Inventory Level
Example
Al’s Party Shop wants to maintain a 3-week supply of domestic beer in inventory and average sales of Miller Lite beer are 500 6-packs per week. The order point is 1500 (500 X 3 weeks). When inventory drops below 1500, more beer should be ordered.
Example cont’d.
Suppose the order interval is 2 weeks. We must consider to include stock to maintain during the order interval and add to our order point -- in order to determine our order ceiling. Order ceiling=Order point+Order interval sales. 1500 + (500 X 2) = 2500
Example cont’d.
We can then determine our order quantity by subtracting stock on hand from order ceiling. Order Quantity = Order ceiling - stock
on hand
Inventory Turnover
Turnover @ retail Retail sales/Avg. inv. in retail $
Turnover @ cost Cost of goods sold/avg. inv. at cost
Total $ Available for Sale= BI + PurchasesCOGS=Total $ available for sale - Ending
inventory
Turnover based in units # of units sold/Avg. inv. in units
Determining Stock-to-Sales Ratio
Divide the turnover figure into 12 (months in year) to determine the number of times of merchandise needed to support the desired sales based on turnover Examples:
Turnover = 4; Stock-to-sales = 3.0Turnover = 2.8; Stock-to-sales = 4.28Turnover = 10; Stock-to-sales = 1.2
Lower the turnover, the higher the stock-to-sales ratio
Calculating BOM Stock-to-Sales RatiosStep 1: Calculate sales-to-stock ratio
GMROI=gross margin% * sales-to-stock ratioStep 2: Convert sales-to-stock ratio to
inventory turnover Inventory turnover = sales-to-stock ratio *
(100% - Gross margin %, expressed as decimal)Calculate average stock-to-sales ratio
Average stock-to-sales ratio = # months/inventory turnover
Calculate monthly stock-to-sales ratios
Stock ratios considerations
Don’t confuse stock-to-sales ratio with the sales-to-stock ratio
Sales are the same in both ratiosStock in the sales-to-stock ratio is the
average inventory at cost over all days in the period
Stock in the average stock-to-sales ratio is the average BOM inventory at retail
BOM stock-to-sales ratio is an average for all months
Determining Planned Purchases
BOM stock = monthly sales * BOM stock-to-sales ratio
EOM stock (BOM stock for current period is the same as the end-of-month for the previous period)
Monthly Additions to stock = Sales + Reductions + EOM inventory - BOM inventory
GMROI & Sales-to-Stock
GMROI = gross margin return on inventory investment measures how many gross margin dollars are earned on every dollar of inventory investment
Sales-to-stock ratio = net sales/avg. inv.
GMROI = gross margin/avg. inv.GMROI combines the effects of profits
and turnover
Calculating Open-to-Buy for Current Period
Calculate Projected EOM stock Actual BOM stock + monthly additions
+ order amount - Planned monthly sales - planned monthly reductions
Open-to-buy = Planned EOM stock - Projected EOM stock
Calculating Open-to-Buy for Future Periods
Calculate projected EOM stock Projected BOM stock + actual order -
monthly sales - planned reductionsOpen-to-buy = Planned EOM stock -
Projected EOM stock
Analyzing Merchandise Performance
ABC Analysis Rank order merchandise categories (SKUs)
by some performance measureContribution marginSales Dollars/UnitsGross marginGross margin return on investmentSales or gross margin per square foot
Determine optimal stocking formulas based on performance measures
Analyzing Performance continued
Sell-Through Analysis Comparison between actual and planned
sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand
Multiple-Attribute Method Used to evaluate vendors using a
weighted average score for each vendor (current or proposed).