Chapter 13Merchandise Planning

13-*Merchandise Management Retail Communication Mix Merchandise Planning Systems Planning Merchandise Assortments Buying MerchandisePricing

13-*Types of Buying SystemsStaple MerchandisePredictable DemandHistory of Past SalesRelatively Accurate ForecastsFashion MerchandiseUnpredictable DemandLimited Sales HistoryDifficult to Forecast SalesThe McGraw-Hill Companies Inc./Ken Cavanagh Photographer The McGraw-Hill Companies, Inc./Lars A. Niki, photographer

13-*Staple Merchandise PlanningStaple 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-*Staple Merchandise PlanningRyan McVay/Getty Images Most merchandise at home improvement centers are staples.

13-*Inventory Levels for Staple Merchandise

13-*Factors Determining Backup StockLevel of backup depends on product availability retailer wishes to provideThe greater the fluctuation in demand, the more backup stock is neededThe amount of backup stock needed is also affected by the lead time from the vendorFluctuations in lead time affect the amount of backup stockVendors product availability affects retailers backup stock requirements

13-*Relationship between Inventory Investment and Product Availability

13-*Cycle and Backup Stock

13-*Basic Stock List Indicates the Desired Inventory Level for Each SKUAmount of Stock DesiredCost of Carrying Inventory Lost Sale Due to Stockout

13-*Inventory Management Report for Rubbermaid Merchandise

13-*Order PointOrder 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 = 0Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per weekOrder point = demand (lead time + review time) + buffer stockOrder point = 100 (3+1) = 400

13-*Order Point continuedAssume Buffer stock = 50 units, thenOrder point = 100 (3+1) + 50 = 450We will order something when order point gets below 450 units.

13-*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-*Merchandise Planning for Fashionable MerchandiseSteps in Developing a Merchandise Budget PlanSet margin and inventory turn goalsSeasonal sales forecast for categoryBreakdown sales forecast by monthPlan reductions markdowns, inventory lossDetermine stock needed to support forecasted salesDetermine open to buy for each money

13-*Merchandise Budget PlanPlan for the financial aspects of a merchandise categorySpecifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives.Not a complete buying plan--doesnt indicate what specific SKUs to buy or in what quantities.Royalty-Free/CORBIS

13-*Six Month Merchandise Plan for Womens Casual Slacks

13-*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-*Monthly sales (Line 2)Sales % Dist. to Month 6 mo. data April May June July Aug Sept 100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%Mo. Sales $130,000$27,300 $15,600 $15,600 $24,700 $27,300 $19,500

13-*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-*Shrinkage Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping.

Retailers measure shrinkage by taking the difference betweenThe inventory recorded value based on merchandise bought and receivedThe physical inventory actually in stores and distribution centers

13-*Monthly ReductionsReduction % 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-*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

13-*BOM Stock (Line 6)6. BOM Inventory 6 mo. data April May June July Aug Sept 98280 98280 68460 68640 98800 98280 78000

13-*EOM Stock (Line 7)7. EOM Inventory 6 mo. data April May June July Aug Sept 85600 68640 68460 275080 98280 78000 65600

13-*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-*Open to Buy Monitors Merchandise Flow

Determines How Much Was Spent and How Much is Left to SpendPhotoLink/Getty Images PhotoLink/Getty Images

13-*Six Month Open to Buy

13-*Allocating Merchandise to StoresAllocating 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-*Allocation Based on Sales Volume

13-*Different Geodemographic Segments

13-*Apparel Size Difference Across Stores

13-*Sales of Capri Pants by Region

13-*Analyzing Merchandise Management PerformanceThree types of analyses related to the monitoring and adjustment step are:

Sell through analysis ABC analysis Multiattribute analysis of vendors

13-*Sell Through Analysis Evaluating Merchandise PlanA 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-*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-*ABC Analysis Rank Merchandise By Performance MeasuresContribution MarginSales DollarsSales in UnitsGross MarginGMROIUse more than one criteria Ryan McVay/Getty Images

13-*Multiattribute Method for Evaluating VendorsThe 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 vendors performance on those issues.C Squared Studios/Getty Images

13-*Multiattribute Method for Evaluating Vendors

13-*Evaluating a Vendor: A Weighted Average Approach

13-*Evaluating VendorsA 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 brands 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-*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-*Retail Inventory Method: The ProblemRetailers 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-*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-*Advantages of RIM contdAmounts 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-*Disadvantages of RIM

System that uses average markup.

Record keeping process involved is burdensome.

13-*Steps in RIMCalculate Total Merchandise Handled at Cost and RetailCalculate Retail ReductionsCalculate Cumulative Markup and Cost MultiplierDetermine Book Inventory at Cost and Retail

13-*Retail Inventory Method Example

13-*Retail Inventory Method Example

13-*Calculate Total Goods Handled at Cost and RetailRecord beginning inventory at cost and at retailCalculate net purchasesCalculate net additional markupsRecord transportation expensesCalculate net transfersThe sum is the total goods handled(c) Stockbyte/PunchStock

13-*Calculate Retail ReductionsRecord net salesCalculate markdownsRecord discounts to employees and customersRecord estimated shrinkageThe sum is the total reductions

13-*Calculate the Cumulative Markup and Cost MultiplierCumulative 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-*Determine Ending Book Inventory at Cost and RetailEnding 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