Chapter 13 Merchandise Planning Mc GrawHillIrwin Retailing Management

Chapter 13 Merchandise Planning Mc. Graw-Hill/Irwin Retailing Management, 6/e Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

2 Merchandise Management Planning Merchandise Assortments Retail Communication Mix Merchandise Planning Systems Buying Merchandise Pricing

3 Types of Buying Systems The Mc. Graw-Hill Companies Inc. /Ken Cavanagh Photographer Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales The Mc. Graw-Hill Companies, Inc. /Lars A. Niki, photographer Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts

4 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

5 Staple Merchandise Planning Most merchandise at home improvement centers are staples. Ryan Mc. Vay/Getty Images

6 Inventory Levels for Staple Merchandise

7 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

8 Relationship between Inventory Investment and Product Availability 600 500 400 300 200 100 0 80 85 90 95 Product Availability (Percent) 100

9 Cycle and Backup Stock Units Available 150 - Order 96 Cycle Stock 100 Buffer Stock 50 - 0 - 1 2 3 Weeks 4

10 Basic Stock List • Indicates the Desired Inventory Level for Each SKU – Amount of Stock Desired Lost Sale Due to Stockout Cost of Carrying Inventory

Inventory Management Report for Rubbermaid Merchandise 11

12 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

13 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.

14 Calculating the 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

Merchandise 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 15

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. 16 Royalty-Free/CORBIS

Six Month Merchandise Plan for Women’s Casual Slacks 17

18 Monthly sales percent Distribution to Season (Line 1) Sales % Dist. to 1. Month 6 mo. data 100. 00% April 21. 00% May 12. 00% June 12. 00% July 19. 00% Aug 21. 00% Sept 15. 00%

19 Monthly sales (Line 2) Sales % Dist. to 1. Month 6 mo. data 100. 00% 2. Mo. Sales $130, 000 April May 21. 00% 12. 00% $27, 300 $15, 600 June July Aug 12. 00% 19. 00% 21. 00% $15, 600 $24, 700 $27, 300 Sept 15. 00% $19, 500

20 Monthly Reductions Percent Distribution (Line 3) Reduction % Distribution to 3. Month 6 mo. data 100. 00% April 40. 00% May 14. 00% June 16. 00% July 12. 00% Aug 10. 00% Sept 8. 00%

21 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

22 Monthly Reductions Reduction % Distribution to 3. Month 6 mo. data April 100. 00% 4. mo. reductions $16, 500 $6, 600 May 14. 00% $2, 310 June 16. 00% $2, 640 July 12. 00% $1, 980 Aug 10. 00% $1, 650 Sept 8. 00% $1, 320

23 Beginning of Month Stock to sales ratio (Line 5) 5. BOM Stock to Sales Ratio 6 mo. data April 4. 0 3. 6 May 4. 4 June 4. 4 July 4. 0 Aug 3. 6 Sept 4. 0

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

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

26 Monthly Additions to Stock (Line 8) 8. Monthly additions to stock 6 mo. data April 113820 4260 May 17910 June 48406 July 26180 Aug 8670 Sept 8420

27 Open to Buy Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend Photo. Link/Getty Images

28 Six Month Open to Buy

29 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

30 Allocation Based on Sales Volume

31 Different Geodemographic Segments

32 Apparel Size Difference Across Stores

33 Sales of Capri Pants by Region

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 34

35 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.

36 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.

ABC Analysis Rank Merchandise By Performance Measures 37 Contribution Margin Sales Dollars Sales in Units Gross Margin GMROI Use more than one criteria Ryan Mc. Vay/Getty Images

38 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

39 Multiattribute Method for Evaluating Vendors Performance Evaluation of Individual Brands Across Issues Importance Evaluation of Issues (I) (1) Vendor reputation Service Meets delivery dates Merchandise quality Markup opportunity Country of origin Product fashionability Selling history Promotional assistance Overall evaluation = (2) 9 8 6 5 5 6 7 3 4 Brand A Brand B Brand C Brand D (Pa) (Pb) (Pc) (Pd) (3) 5 6 5 5 290 (4) 9 6 7 4 4 3 6 5 3 298 (5) 4 4 4 6 4 3 3 5 4 212 (6) 8 6 4 5 5 8 8 5 7 341

Evaluating a Vendor: A Weighted Average Approach = Sum of the expression = Importance weight assigned to the ith dimension = Performance evaluation for jth brand alternative on the jth issue 1 10 = Not important = Very important 40

41 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

42 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.

43 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)

44 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.

Advantages of RIM cont’d 45 • 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.

46 Disadvantages of RIM System that uses average markup. Record keeping process involved is burdensome.

47 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

48 Retail Inventory Method Example Total Goods Handled Cost Beginning inventory Retail $ 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. Transfers in - Transfers out Net Transfers Total Goods Handled 1, 000 1, 428 2, 000 (714) (1, 000) 714 (1, 000) $100, 714 $141, 600

49 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 Estimated Shrinkage Total Reductions 500 1, 500 $ 86, 000

50 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/Punch. Stock

51 Calculate Retail Reductions Record net sales Calculate markdowns Record discounts to employees and customers Record estimated shrinkage The sum is the total reductions

52 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

53 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