MERCHANDISE PLANNING & MANAGEMENT

1
MERCHANDISE PLANNING MANAGEMENT

• Chapters 12 13
• by Levy Weitz

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Buying Decision Process
From whom to buy?
What to Buy?
How much to When to buy?
buy?
Store Image Satisfy Cust. Wants
Suppliers The Market Negotiations Unit
Price Terms
Financial Obj.
Open-to-buy
Type of Merchandise
Mdse. Budget
Estimated Sales Beginning Inv. Ending
Inv.
Control Systems
Sales
Reductions
Merchandise
Inventories
Policies
Purchases
Shortages
3
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.

4
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.

5
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

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Category Management at Borders
LO3
In early 2001 Borders group reorganized to
emphasize category management. As a result,
Borders has broken down its business into
specialized categorizes of books, childrens,
multimedia, gifts and stationary, periodicals,
calendars and café. Before the change, sales,
marketing and merchandising functions were
aligned by type of outlet, i.e., Borders,
Walden and Borders.com.
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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

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Assortment contd.

• 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.

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Why plan stock levels?

• Meet sales expectations
• Avoid out-of-stock conditions
• Guard against overstock
• Keep inventory investment at acceptable level

10
Merchandise Planning Objective

• Ensure that both the customers merchandise needs
  and the retailers financial requirements are
  satisfied by creating an acceptable balance
  between merchandise inventories and sales

11
Merchandise Budgeting

• Planning Annual Sales
• Annual sales estimates
• time series
• judgmental forecasting
• Make monthly sales estimates

12
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

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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

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Example

• Als 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.

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Example contd.

• 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
  ceilingOrder pointOrder interval sales.
• 1500 (500 X 2) 2500

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Example contd.

• We can then determine our order quantity by
  subtracting stock on hand from order ceiling.
• Order Quantity Order ceiling - stock on hand

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Inventory Turnover

• Turnover _at_ retail
• Retail sales/Avg. inv. in retail
• Turnover _at_ cost
• Cost of goods sold/avg. inv. at cost
• Total Available for Sale BI Purchases
• COGSTotal available for sale - Ending
  inventory
• Turnover based in units
• of units sold/Avg. inv. in units

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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 3.0
• Turnover 2.8 Stock-to-sales 4.28
• Turnover 10 Stock-to-sales 1.2
• Lower the turnover, the higher the stock-to-sales
  ratio

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Calculating BOM Stock-to-Sales Ratios

• Step 1 Calculate sales-to-stock ratio
• GMROIgross margin sales-to-stock ratio
• Step 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

20
Stock ratios considerations

• Dont confuse stock-to-sales ratio with the
  sales-to-stock ratio
• Sales are the same in both ratios
• Stock 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

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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

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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

23
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

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Calculating Open-to-Buy for Future Periods

• Calculate projected EOM stock
• Projected BOM stock actual order - monthly
  sales - planned reductions
• Open-to-buy Planned EOM stock - Projected EOM
  stock

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Analyzing Merchandise Performance

• ABC Analysis
• Rank order merchandise categories (SKUs) by some
  performance measure
• Contribution margin
• Sales Dollars/Units
• Gross margin
• Gross margin return on investment
• Sales or gross margin per square foot
• Determine optimal stocking formulas based on
  performance measures

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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).