PPT 13-1

5th Edition

PPT 13-2

Chapter 13

Buying Systems

McGraw-Hill/IrwinLevy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

PPT 13-3

Merchandise Management

Buying

Systems

Planning

Merchandise

Assortments

Buying

MerchandisePricing

Retail

Communication

Mix

PPT 13-4

Merchandise Management Issues

PPT 13-5

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

PPT 13-6

Staple Merchandise Buying System

Forecast

SKU

Sales

Order

Merchandise

Monitor

Sales and

Inventory

Compare

Inventory

to Basic

Stock List

PPT 13-7

Considerations in Determining

How Much to Order

• Basic Stock Plan

• Present Inventory

• Merchandise on

Order

• Sales Forecast

– Rate of Sales of

SKU (Velocity)

– Seasonality

PPT 13-8

Inventory Management Report for

Rubbermaid Merchandise

PPT 13-9

Basic Stock List

Indicates the Desired Inventory Level for Each SKU

– Amount of Stock Desired

Cost of Carrying

Inventory

Lost Sale Due

to Stockout

PPT 13-10

Relationship between Inventory Investment and Product Availability

Inven

tory

in

vestm

en

t D

oll

ars

Product Availability (Percent)

600

500

400

300

200

100

0

80 85 90 95 100

PPT 13-11

Cycle and Buffer Stock

Un

its A

vailab

le

Weeks

150 -

100 -

50 -

0 -1 2 3 4

Order 96

Cycle

Stock

Buffer

Stock

PPT 13-12

Buffer Stock

We need it so we won’t loose sales, complementary sales, and customers

Buffer stock is dependent on:

-Forecast interval variance (Forecast interval = lead

time + review time)

-Variation in Demand (actual demand - forecasted

demand)

-Time to Get Product from Supplier

-Time to Get Product from Distribution

Center

- Product availability requested of IM systems

PPT 13-13

Forecasting Demand

Forecasting -- extrapolating

the past into future using

statistical and mathematical

methods

Objectives:

– Ignore random

fluctuations in demand

– But be responsive to real

change

PPT 13-14

Forecasting Sales

• Tradeoff Recent Sales Against Past History of Sales

– Recognize Recent Trends, But Don’t Over Weight Recent

Experience

• Exponential Smoothing

Old = Old + ά x (Recent – Old)

Forecast Forecast Demand Forecast

84 = 96 + .5 x (72 – 96)

• ά ranges for 0 to 1

– Higher ά Weighs Recent Sales More

PPT 13-15

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

PPT 13-16

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.

PPT 13-17

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

PPT 13-18

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.

PPT 13-19

Six-Month Merchandise Budget Plan for Men’s Tailored Suits

PPT 13-20

Steps in Preparing Plan

• Forecast Six Month Sales for Category

• Breakdown Total Sales Forecast into Forecast for each

Month (lines 1, 2)

• Plan Reductions for Each Month (lines 3, 4)

• Determine Beginning of the Month (BOM) Stock to

Sales Ratio (line 5)

• Calculate BOM Inventory (line 6)

• Calculate EOM Inventory (line 7)

• Calculate Monthly Additions to Stock (line 8)

PPT 13-21

Open to Buy

• Monitors Merchandise Flow

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

PPT 13-22

Six Month Open to Buy

PPT 13-23

Open-to-buy for Past Periods

• Projected EOM stock = actual EOM stock

• Open-to-buy = 0

• There is no point in buying merchandise

for a month that is already over.

PPT 13-24

Open-to-Buy for Current Period (I)

• Projected EOM stock =

• Actual BOM stock

• + Actual monthly additions to stock (what was

actually received)

• + Actual on order (what is on order for the

month)

• - Plan monthly sales

• - Plan reductions for the month

PPT 13-25

Open-to-Buy for Current Period (II)

• Open-to-buy =

• Planned EOM stock (from merchandise budget

plan)

– Projected EOM stock (based on what is really

happening)

PPT 13-26

Allocating Merchandise to Stores

Percentage of total sales 1 1.5 2.5 3.5 4 6 8 12

Percentage of total inventory 1.5 2 3 4 4 4 6 10

Fewer Sales, More Sales,More Inventory Less Inventory

PPT 13-27

Breakdown by Store of

Traditional $35 Denim Jeans in Light Blue

Source: Banner Distributing Company, Denver, Colorado; used with

permission.

(1)

TYPE OF

STORE

(2)

NUMBER OF

STORES

A

B

C

Total sales $150,000

4

3

8

10.0%

6.7

5.0

$15,000

10,000

7,500

60,000

30,000

60,000

429

286

214

(3)

% OF TOTAL

SALES, EACH

STORE

(4)

SALES PER

STORE (TOTAL

SALES X COL. 3)

(5)

SALES PER

STORE TYPE

(COL. 2 X COL. 4)

(6)

UNIT SALES

PER STORE

(COL. 4/$35)

PPT 13-28

ABC Analysis

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.

PPT 13-29

Analyzing Merchandise Management

Merchandise Performance

– ABC Analysis

– Sell Through Analysis

Vendor Analysis

– Multiattribute Method

PPT 13-30

ABC Analysis Rank Merchandise

By Performance Measures

• Contribution Margin

• Sales Dollars

• Sales in Units

• Gross Margin

• GMROI

• Use more than one criteria

PPT 13-31

ABC Analysis for Dress ShirtsP

erc

en

tag

e o

f S

ale

s D

oll

ars

10 20 30 40 50 60 70 80 90 100

Percentage of Items

No Sales

100

90

80

70

60

50

40

30

20

10

0

C

10%

B

20%

A

70%

A B C D5% 10% 65% 20%

Sales

PPT 13-32

Sell-through Analysis for Blouses

Week 1 Week 2

Stock Actual-to-Plan Actual-to-Plan

Number Description Plan Actual Percent. Plan Actual Percent.

1011 -Sm White silk V-neck 20 15 -25 20 10 -50

1011 -Med White Silk V-neck 30 25 -16.6 30 20 -33

1011 -Lg White Silk V-neck 20 16 -20 20 16 -20

1012 -Sm Blue Silk V-neck 25 26 4 25 27 8

1012 -Med Blue Silk V-neck 35 45 29 35 40 14

1012 -Lg Blue Silk V-neck 25 25 0 25 30 20

PPT 13-33

I j *i 1

n

P

i j = Sum of the expression

I j= Importance weight assigned

to the ith dimension

P i= Performance evaluation for

jth brand alternative on the

jth issue

1 = Not important

10 = Very important

Evaluating a Vendor:

A Weighted Average Approach

PPT 13-34

Evaluating a Vendor:

A Weighted Average Approach

Performance Evaluation of Individual

Brands Across Issues

Importance

Evaluation 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

P

1

ij

PPT 13-35

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.

PPT 13-36

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.

PPT 13-37

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.

PPT 13-38

Disadvantages of RIM

• System that uses average markup.

• Record keeping process involved is burdensome.

PPT 13-39

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

PPT 13-40

Retail Inventory Method

Cumulative Markon = (total retail - total cost) / total retail:

($290,000 - $160,000) / $290,000 = 44.8%

The Cost Multiplier = cumulative markon

(100% - cumulative markon%) = 55.2%

Ending book = total goods handled at retail - total

inventory at retail reductions: $290,000 - $208,000 = $82,000

Ending book = ending book inventory at retail x cost

inventory at cost multiplier: $82,000 x 55.2% = 45,264

PPT 13-41

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

PPT 13-42

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

Retail Inventory Method Example