merchandise planning
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McGraw-Hill/IrwinRetailing Management, 6/e
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 13
Merchandise Planning
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13-2
Merchandise Management
RetailCommunication
Mix
Merchandise PlanningSystems
PlanningMerchandiseAssortments
BuyingMerchandise
Pricing
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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
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Staple Merchandise Planning
Staple 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
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13-5
Staple Merchandise Planning
Ryan McVay/Getty Images
Most merchandise at home improvement centers are staples.
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Inventory Levels for Staple Merchandise
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Factors Determining Backup Stock
• Level of backup depends on product availability retailer wishes to provide
• The greater the fluctuation in demand, the more backup stock is needed
• The amount of backup stock needed is also affected by the lead time from the vendor
• Fluctuations in lead time affect the amount of backup stock
• Vendor’s product availability affects retailers’ backup stock requirements
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Relationship between Inventory Investment and Product Availability
Product Availability (Percent)
600
500
400
300
200
100
080 85 90 95 100
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Cycle and Backup StockU
nit
s A
vail
able
Weeks
150 -
100 -
50 -
0 - 1 2 3 4
Order 96
Cycle Stock
Buffer Stock
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Basic Stock List
• Indicates the Desired Inventory Level for Each SKU– Amount of Stock Desired
Cost of CarryingInventory
Lost Sale Due to Stockout
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13-11Inventory Management Report for Rubbermaid Merchandise
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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
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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.
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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
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13-15Merchandise Planning for Fashionable Merchandise
• Steps in Developing a Merchandise Budget Plan
• Set margin and inventory turn goals• Seasonal sales forecast for category• Breakdown sales forecast by month• Plan reductions – markdowns, inventory loss• Determine stock needed to support forecasted
sales• Determine “open to buy” for each money
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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.
Royalty-Free/CORBIS
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Six Month Merchandise Plan for Women’s Casual Slacks
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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%
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Monthly sales (Line 2)
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%
2. Mo. Sales $130,000 $27,300 $15,600 $15,600 $24,700 $27,300 $19,500
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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%
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Shrinkage
Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping.
Retailers measure shrinkage by taking the difference between
1. The inventory recorded value based on merchandise bought and received
2. The physical inventory actually in stores and distribution centers
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Monthly Reductions
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% 4. mo. reductions $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320
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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
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BOM Stock (Line 6)
6. BOM Inventory 6 mo. data April May June July Aug Sept 98280 98280 68460 68640 98800 98280 78000
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EOM Stock (Line 7)
7. EOM Inventory 6 mo. data April May June July Aug Sept 85600 68640 68460 275080 98280 78000 65600
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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
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Open to Buy
Monitors Merchandise Flow
Determines How Much Was Spent and How Much is Left to Spend
PhotoLink/Getty Images PhotoLink/Getty Images
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Six Month Open to Buy
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Allocating Merchandise to Stores
Allocating 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
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Allocation Based on Sales Volume
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Different Geodemographic Segments
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Apparel Size Difference Across Stores
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Sales of Capri Pants by Region
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Analyzing Merchandise Management Performance
Three types of analyses related to the monitoring and adjustment step are:
• Sell through analysis• ABC analysis• Multiattribute analysis of vendors
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Sell Through Analysis Evaluating Merchandise Plan
A sell-through analysis compares actual and planned sales to determine whether more merchandise is needed to satisfy demand or whether price reductions are required.
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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.
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13-37ABC Analysis Rank Merchandise By Performance Measures
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
Ryan McVay/Getty Images
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Multiattribute Method for Evaluating Vendors
The 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 vendor’s performance on those issues.
C Squared Studios/Getty Images
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Multiattribute Method for Evaluating Vendors
Performance Evaluation of Individual Brands Across Issues
ImportanceEvaluation 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
P1
ij
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Evaluating a Vendor: A Weighted Average Approach
Ij *i 1
n
P ij = Sum of the expression
Ij = Importance weight assigned to the ith dimension
Pi= Performance evaluation for jth brand alternative on the jth issue
1 = Not important
10 = Very important
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Evaluating Vendors
A 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 brand’s 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
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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.
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Retail Inventory Method: The Problem
Retailers 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)
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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.
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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.
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Disadvantages of RIM
System that uses average markup.
Record keeping process involved is burdensome.
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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
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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
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Retail Inventory Method Example
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
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Calculate Total Goods Handled at Cost and Retail
Record beginning inventory at cost and at retail
Calculate net purchases
Calculate net additional markups
Record transportation expenses
Calculate net transfers
The sum is the total goods handled
(c) Stockbyte/PunchStock
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Calculate Retail Reductions
Record net sales
Calculate markdowns
Record discounts to employees and customers
Record estimated shrinkage
The sum is the total reductions
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Calculate the Cumulative Markup and Cost Multiplier
Cumulative markup = total retail – total cost total retail
If the cumulative markup is higher than the planned, then the category is doing better than planned
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Determine Ending Book Inventory at Cost and Retail
Ending 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