Chapter 13Merchandise Planning Systems

13-*Merchandise ManagementRetail Pricing Chapter 15Retail Communication Mix Chapter 16Merchandise Planning Systems Chapter 13Managing Merchandise AssortmentsChapter 12Buying Merchandise

Chapter 14

13-*QuestionsHow does a staple merchandise buying system operate?What are a merchandise budget plan and open-to-buy systems, and how are they developed?How do multi-store retailers allocate merchandise to stores?How do retailers evaluate their merchandising performance?

13-* Types of Merchandise Management SystemsStaple MerchandisePredictable DemandRelatively Accurate ForecastsContinuous ReplenishmentFashion MerchandiseUnpredictable DemandDifficult to Forecast SalesMerchandise Budget PlanOpen-to-BuyThe McGraw-Hill Companies Inc./Ken Cavanagh Photographer The McGraw-Hill Companies, Inc./Lars A. Niki, photographer

13-*Staple Merchandise Planning

Buyer Determines: Basic Stock or Assortment Plan Level of Backup Inventory

System: Monitors Inventory levelsAutomatically reorders when inventory gets below a specified level

13-*Inventory Levels for Staple MerchandiseCycle (base) stock: inventory that goes up and down due to the replenishment processBackup (buffer, safety) stockInventory needed to avoid stockout

13-*Inventory Levels for Staple MerchandiseRetailers try to reduce the stock level to keep Inventory Investment low by reordering and receiving merchandise often but without increasedadministrative and transportation costs with frequent reorders

13-*Basic Stock Indicates the Desired Inventory Level for Each SKU

Cost of Carrying Inventory Lost Sale Due to Stockout

13-*Factors Determining Backup StockHigher product availability (service level) retailer wishes to provide to customersGreater the fluctuation in demandLonger lead time from the vendorMore fluctuations in lead time Lower vendors Fill rate (% of complete orders received from a vendor)MoreBackup StocksNeeded with

13-*Relationship between Inventory Investment and Product Availability

13-*Staple Merchandise Management SystemsStaple 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 ManagementRyan McVay/Getty Images Most merchandise at home improvement centers are staples.

13-*Inventory Management Report for Rubbermaid MerchandiseInventory availablesales ratePerformance measuresBackup stock for desired product availabilitydesired product availabilitySales forecastsAppropriate ordering decisions

13-*Order Pointthe point at which inventory available should not go below or else we will run out of stock before the next order arrives

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

Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week Order point = 100 (3+1) = 400

Assume Buffer stock = 50 units, then

Order point = 100 (3+1) + 50 = 450We will order something when order point gets below 450 units.

13-*Calculating the Order PointAvocado Bath MatIn a situation in which the lead time is two weeks, the buyer reviews the SKU once a week, 18 units of backup stock are needed to maintain the product availability desired, and the sales rate for the next four weeks is 5.43 per day. Order Point?Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock

132 units = [5.43 units x (14 + 7 days)] + 18 unitsSo Buyer Places Order When Inventory in Stock Drops Below 132 units

13-*Order QuantityWhen inventory reaches the order point, the buyer needs to order enough units so the cycle stock isnt depleted and sales dip into backup stock before the next order arrives.

Order Quantity = Order Point Quantity Available

13-*Inventory Management Report for Rubbermaid SKUsAvocado Bath MatQuantity available = Quantity on Hand + Quantity on Order = 90Order Quantity = Order Point Quantity AvailableOrder Quantity = 132 90 = 42

13-*Fashion Merchandise Management SystemsThe system for managing fashion merchandise categories is typically called a Merchandise Budget Plan

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 objectivesNot a complete buying plan--doesnt indicate what specific SKUs to buy or in what quantities

Royalty-Free/CORBIS

13-*Steps 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 month

13-*Six Month Merchandise Plan for Mens Casual Slacks

13-*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%The percentage distribution of sales by month is based on Historical data Special promotion plans

13-*Monthly Sales Percent Distribution to Season (Line 1) ContinuedRetail sales are very seasonal. The Christmas season often accounts for more than 40% of a retailers annual sales.

13-*Monthly Sales (Line 2)Sales % Distribution 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 $19,500Monthly sales = the forecasted total season for the six-month period x monthly sales %

13-*Monthly Reductions Percent Distribution (Line 3)3. Reduction % Distribution to Season6 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

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

Shrinkage % = $ shrinkage$ net sales

13-*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 %

13-*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 4.0Stock-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

Retails often use a related measure, Weeks of Inventory

13-*Steps in Determining the Stock-to-Sales Ratio Step 1: Calculate Sales-to-Stock Ratio

GMROI = Gross margin% x Sales-to-stock ratioSales-to-Stock Ratio = GMROI/Gross margin %

Assume that the buyers target GMROI for the category is 123%, and the buyer feels the category will produce a gross margin of 45%.Sales-to-Stock Ratio = 123/45 = 2.73

13-*Steps in Determining the Stock-to-Sales Ratio ContinuedStep 2: Convert the Sales-to-Stock Ratio to Inventory Turnover

Inventory Turnover = Sales-to-stock ratio x (1 GM%/100)

Inventory Turnover =2.73 x (1 45/100) = 1.50

13-*Steps in Determining the Stock-to-Sales Ratio ContinuedStep 3: Calculate Average Stock-to-Sales Ratio

Average Stock-to-Sales Ratio = 6 months/Inventory turnover= 6/1.5 = 4

13-*Steps in Determining the Stock-to-Sales Ratio ContinuedStep 4: Calculate Monthly Stock-to-Sales Ratio

Monthly stock-to-sales ratios vary in the opposite direction of salesTo make this adjustment, the buyer considers the seasonal pattern, previous years stock-to-sales ratios

13-*BOM Stock (Line 6)6. BOM Inventory 6 mo. data April May June July Aug Sept 98280 98280 68460 68640 98800 98280 8000BOM Stock = monthly sales (line 2) x BOM stock-to-sale ratio (line 5)= $27,300 x 3.6= $98,280

13-*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 65600The BOM stock for the current month = the EOM stock in the previous month

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 8420Additions to stock= 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

13-*Evaluating the Merchandise Budget PlanInventory turnover GMROI, sales forecast are used for both planning and controlAfter the selling season, the actual performance is compared with the planWhy did performance exceed or fall short of the plan?Was the deviation from the plan due to something under the buyers control?Did the buyer react quickly to changes in demand by either purchasing more or having a sale?

13-*Open-to-Buy SystemThe OTB system is used after the merchandise is purchased 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-*Inventory Allocation Based on Sales Volume and Stock-to-Sales RatiosSmaller stores require a proportionally higher inventory allocation than larger stores because the depth of the assortment or the level of product availability is too small, customers will perceive it as being inferior.

13-*Type of Merchandise Allocated to StoresRetailers classify stores according to the characteristics of the stores trading areaThe assortment offered in a ready-to-eat cereal aisle should matchthe demands of the demographics of shoppers in a local area

13-*Type of Merchandise Allocated to StorescontinuedEven the sales of different apparel sizes can vary dramatically from store to store in the same chain.

13-*Sales of Capri Pants by RegionTiming of Merchandise Allocation to StoresSeasonality differences and consumer demand differences

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

Sell through analysis ABC analysis of assortments 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 occasionallyshould be deleted from the stock selection.

A items: 5% of SKUs, represent 70% of salesB items: 10% of SKUs, represent 20% of salesC items: 65% of SKUs, represent 10% of salesD items: 20% of SKUs, represent 10% of sales

13-*ABC Analysis Rank Merchandise By Performance MeasuresContribution MarginSales DollarsSales in UnitsGross MarginGMROIUse more than one criteria

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 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 of each issue by the performance of each brand or its vendorDetermine a vendors overall rating, add the products for each brand for all issues

13-*Home Depots Vendor EvaluationHome Depot take vendor evaluations seriously. Home Depots vendor analysis scorecard gives everyone a quick view of how the vendor is doing. Green is good, but red isnt.

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