Chapter 13 Merchandise Planning
Merchandise Management Retail Communication Mix Merchandise Planning Systems Planning Merchandise Assortments Buying Merch...
Types of Buying Systems <ul><li>Staple Merchandise </li></ul><ul><li>Predictable Demand </li></ul><ul><li>History of Past ...
Staple Merchandise Planning <ul><li>Staple merchandise planning systems provide information needed to assist buyers by per...
Staple Merchandise Planning Ryan McVay/Getty Images Most merchandise at home improvement centers are staples.
Inventory Levels for Staple Merchandise
Factors Determining Backup Stock <ul><li>Level of backup depends on product availability retailer wishes to provide </li><...
Relationship between Inventory  Investment and Product Availability Product Availability (Percent) 600 500 400 300 200 100...
Cycle and Backup Stock Units Available Weeks 150 - 100 - 50 - 0 - 1    2   3   4 Order 96 Cycle Stock Buffer Stock
Basic Stock List <ul><li>Indicates the Desired Inventory Level for Each SKU </li></ul><ul><ul><li>Amount of Stock Desired ...
Inventory Management Report for Rubbermaid Merchandise
Order Point <ul><li>Order point  = the point at which inventory available should not go below or else we will run out of s...
Order Point continued <ul><li>Assume Buffer stock = 50 units, then </li></ul><ul><li>Order point = 100 (3+1) + 50 = 450 </...
Calculating the Order Point <ul><li>Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock </li></ul><ul><li...
Merchandise Planning for  Fashionable Merchandise <ul><li>Steps in Developing a Merchandise Budget Plan </li></ul><ul><li>...
Merchandise Budget Plan <ul><li>Plan for the financial aspects of a merchandise category </li></ul><ul><li>Specifies how m...
Six Month Merchandise Plan for Women’s Casual Slacks
Monthly sales percent Distribution to Season (Line 1) Sales % Dist.  to  1. Month  6 mo. data   April   May   June    July...
Monthly sales (Line 2) <ul><li>Sales % Dist.  to  </li></ul><ul><li>Month  6 mo. data   April   May   June  July  Aug  Sep...
Monthly Reductions Percent Distribution (Line 3) Reduction % Distribution to 3. Month  6 mo. data   April   May   June  Ju...
Shrinkage <ul><li>Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bo...
Monthly Reductions Reduction % Distribution to 3. Month    6 mo. data  April   May   June  July  Aug  Sept     100.00%  40...
Beginning of Month Stock to sales ratio (Line 5) 5. BOM Stock to Sales Ratio 6 mo. data  April  May   June  July  Aug  Sep...
BOM Stock (Line 6) 6. BOM Inventory 6 mo. data  April  May  June  July  Aug  Sept 98280  98280  68460  68640  98800  98280...
EOM Stock (Line 7) 7. EOM Inventory 6 mo. data  April  May  June  July  Aug  Sept 85600  68640  68460  275080  98280  7800...
Monthly Additions to Stock (Line 8) 8. Monthly additions to stock 6 mo. data  April  May  June  July  Aug  Sept 113820  42...
Open to Buy <ul><li>Monitors Merchandise Flow </li></ul><ul><li>Determines How Much Was Spent and How Much is Left to Spen...
Six Month Open to Buy
Allocating Merchandise to Stores <ul><li>Allocating merchandise to stores involves three decisions: </li></ul><ul><li>how ...
Allocation Based on Sales Volume
Different Geodemographic Segments
Apparel Size Difference Across Stores
Sales of Capri Pants by Region
Analyzing Merchandise Management Performance <ul><li>Three types of analyses related to the monitoring and adjustment step...
Sell Through Analysis Evaluating Merchandise Plan A  sell-through analysis  compares actual and planned sales to determine...
ABC Analysis <ul><li>An  ABC analysis  identifies the performance of individual SKUs in the assortment plan. </li></ul><ul...
ABC Analysis Rank Merchandise  By Performance Measures Contribution Margin Sales Dollars Sales in Units Gross Margin GMROI...
Multiattribute Method for Evaluating Vendors The  multiattribute method  for evaluating vendors uses a weighted average sc...
Multiattribute Method for Evaluating Vendors Performance Evaluation of Individual   Brands Across Issues Importance Evalua...
Evaluating a Vendor:  A Weighted Average Approach = Sum of the expression = Importance weight assigned    to the  i th   d...
Evaluating Vendors <ul><li>A buyer can evaluate vendors by using the following five steps: </li></ul><ul><li>Develop a lis...
Retail Inventory Method (RIM) <ul><li>Two Objectives: </li></ul><ul><ul><li>To maintain a perpetual or book inventory of r...
Retail Inventory Method: The Problem Retailers generally think of their inventory at retail price levels rather than at co...
Advantages of RIM  <ul><li>The retailer doesn't have to “cost” each time. </li></ul><ul><li>Follows the accepted accountin...
Advantages of RIM cont’d <ul><li>Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage ...
Disadvantages of RIM  <ul><li>System that uses average markup. </li></ul><ul><li>Record keeping process involved is burden...
Steps in RIM <ul><li>Calculate Total Merchandise Handled at Cost and Retail </li></ul><ul><li>Calculate Retail Reductions ...
Retail Inventory Method Example Total Goods Handled Cost   Retail Beginning inventory $  60,000   $  84,000 Purchases   50...
Retail Inventory Method Example Total Goods Handled Cost   Retail Gross Sales $ 82,000 - Consumer Returns & Allowances  ( ...
Calculate Total Goods Handled at Cost and Retail <ul><li>Record beginning inventory at cost and at retail </li></ul><ul><l...
Calculate Retail Reductions <ul><li>Record net sales </li></ul><ul><li>Calculate markdowns </li></ul><ul><li>Record discou...
Calculate the Cumulative Markup and Cost Multiplier Cumulative markup =  total retail – total cost total retail If the cum...
Determine Ending Book Inventory at Cost and Retail Ending book  = Total goods handled at retail inventory at retail – tota...
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Merchandise Planning

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Transcript of "Merchandise Planning"

  1. 1. Chapter 13 Merchandise Planning
  2. 2. Merchandise Management Retail Communication Mix Merchandise Planning Systems Planning Merchandise Assortments Buying Merchandise Pricing
  3. 3. Types of Buying Systems <ul><li>Staple Merchandise </li></ul><ul><li>Predictable Demand </li></ul><ul><li>History of Past Sales </li></ul><ul><li>Relatively Accurate Forecasts </li></ul>Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales The McGraw-Hill Companies Inc./Ken Cavanagh Photographer The McGraw-Hill Companies, Inc./Lars A. Niki, photographer
  4. 4. Staple Merchandise Planning <ul><li>Staple merchandise planning systems provide information needed to assist buyers by performing three functions: </li></ul><ul><li>Monitoring and measuring current sales for items at the SKU level </li></ul><ul><li>Forecasting future SKU demand with allowances made for seasonal variations and changes in trend </li></ul><ul><li>Developing ordering decision rules for optimum restocking </li></ul>
  5. 5. Staple Merchandise Planning Ryan McVay/Getty Images Most merchandise at home improvement centers are staples.
  6. 6. Inventory Levels for Staple Merchandise
  7. 7. Factors Determining Backup Stock <ul><li>Level of backup depends on product availability retailer wishes to provide </li></ul><ul><li>The greater the fluctuation in demand, the more backup stock is needed </li></ul><ul><li>The amount of backup stock needed is also affected by the lead time from the vendor </li></ul><ul><li>Fluctuations in lead time affect the amount of backup stock </li></ul><ul><li>Vendor’s product availability affects retailers’ backup stock requirements </li></ul>
  8. 8. Relationship between Inventory Investment and Product Availability Product Availability (Percent) 600 500 400 300 200 100 0 80 85 90 95 100
  9. 9. Cycle and Backup Stock Units Available Weeks 150 - 100 - 50 - 0 - 1 2 3 4 Order 96 Cycle Stock Buffer Stock
  10. 10. Basic Stock List <ul><li>Indicates the Desired Inventory Level for Each SKU </li></ul><ul><ul><li>Amount of Stock Desired </li></ul></ul>Cost of Carrying Inventory Lost Sale Due to Stockout
  11. 11. Inventory Management Report for Rubbermaid Merchandise
  12. 12. Order Point <ul><li>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. </li></ul><ul><li>Assume Lead time = 0, Order point = 0 </li></ul><ul><li>Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week </li></ul><ul><li>Order point = demand (lead time + review time) + buffer stock </li></ul><ul><li>Order point = 100 (3+1) = 400 </li></ul>
  13. 13. Order Point continued <ul><li>Assume Buffer stock = 50 units, then </li></ul><ul><li>Order point = 100 (3+1) + 50 = 450 </li></ul><ul><li>We will order something when order point gets below 450 units. </li></ul>
  14. 14. Calculating the Order Point <ul><li>Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock </li></ul><ul><li>167 units = (7 units x (14 + 7 days) + 20 units </li></ul><ul><li>So Buyer Places Order When Inventory in Stock Drops Below 167 units </li></ul>
  15. 15. Merchandise Planning for Fashionable Merchandise <ul><li>Steps in Developing a Merchandise Budget Plan </li></ul><ul><li>Set margin and inventory turn goals </li></ul><ul><li>Seasonal sales forecast for category </li></ul><ul><li>Breakdown sales forecast by month </li></ul><ul><li>Plan reductions – markdowns, inventory loss </li></ul><ul><li>Determine stock needed to support forecasted sales </li></ul><ul><li>Determine “open to buy” for each money </li></ul>
  16. 16. Merchandise Budget Plan <ul><li>Plan for the financial aspects of a merchandise category </li></ul><ul><li>Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives. </li></ul><ul><li>Not a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantities. </li></ul>Royalty-Free/CORBIS
  17. 17. Six Month Merchandise Plan for Women’s Casual Slacks
  18. 18. 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%
  19. 19. Monthly sales (Line 2) <ul><li>Sales % Dist. to </li></ul><ul><li>Month 6 mo. data April May June July Aug Sept 100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00% </li></ul><ul><li>Mo. Sales $130,000 $27,300 $15,600 $15,600 $24,700 $27,300 $19,500 </li></ul>
  20. 20. Monthly Reductions Percent Distribution (Line 3) Reduction % Distribution to 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%
  21. 21. Shrinkage <ul><li>Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping. </li></ul><ul><li>Retailers measure shrinkage by taking the difference between </li></ul><ul><li>The inventory recorded value based on merchandise bought and received </li></ul><ul><li>The physical inventory actually in stores and distribution centers </li></ul>
  22. 22. Monthly Reductions Reduction % Distribution to 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
  23. 23. 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
  24. 24. BOM Stock (Line 6) 6. BOM Inventory 6 mo. data April May June July Aug Sept 98280 98280 68460 68640 98800 98280 78000
  25. 25. EOM Stock (Line 7) 7. EOM Inventory 6 mo. data April May June July Aug Sept 85600 68640 68460 275080 98280 78000 65600
  26. 26. 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
  27. 27. Open to Buy <ul><li>Monitors Merchandise Flow </li></ul><ul><li>Determines How Much Was Spent and How Much is Left to Spend </li></ul>PhotoLink/Getty Images PhotoLink/Getty Images
  28. 28. Six Month Open to Buy
  29. 29. Allocating Merchandise to Stores <ul><li>Allocating merchandise to stores involves three decisions: </li></ul><ul><li>how much merchandise to allocate to each store </li></ul><ul><li>what type of merchandise to allocate </li></ul><ul><li>when to allocate the merchandise to different stores </li></ul>
  30. 30. Allocation Based on Sales Volume
  31. 31. Different Geodemographic Segments
  32. 32. Apparel Size Difference Across Stores
  33. 33. Sales of Capri Pants by Region
  34. 34. Analyzing Merchandise Management Performance <ul><li>Three types of analyses related to the monitoring and adjustment step are: </li></ul><ul><li>Sell through analysis </li></ul><ul><li>ABC analysis </li></ul><ul><li>Multiattribute analysis of vendors </li></ul>
  35. 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. 36. ABC Analysis <ul><li>An ABC analysis identifies the performance of individual SKUs in the assortment plan. </li></ul><ul><li>Rank - orders merchandise by some performance measure determine which items: </li></ul><ul><ul><li>should never be out of stock. </li></ul></ul><ul><ul><li>should be allowed to be out of stock occasionally. </li></ul></ul><ul><ul><li>should be deleted from the stock selection. </li></ul></ul>
  37. 37. ABC 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
  38. 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. 39. Multiattribute Method for Evaluating Vendors Performance Evaluation of Individual Brands Across Issues Importance Evaluation Brand A Brand B Brand C Brand D Issues of Issues ( I ) ( P a ) ( P b ) ( P c ) ( P d ) (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 = 290 298 212 341
  40. 40. Evaluating a Vendor: A Weighted Average Approach = Sum of the expression = Importance weight assigned to the i th dimension = Performance evaluation for j th brand alternative on the j th issue 1 = Not important 10 = Very important
  41. 41. Evaluating Vendors <ul><li>A buyer can evaluate vendors by using the following five steps: </li></ul><ul><li>Develop a list of issues to consider in the evaluation (column 1) </li></ul><ul><li>Importance weights for each issue in column 1 are determined by the </li></ul><ul><li>buyer/planner in conjunction with the GMM (column 2) </li></ul><ul><li>Make judgments about each individual brand’s performance on each issue </li></ul><ul><li>(the remaining columns) </li></ul><ul><li>Develop an overall score by multiplying the importance for each issue the </li></ul><ul><li>performance for each brand or its vendor </li></ul>
  42. 42. Retail Inventory Method (RIM) <ul><li>Two Objectives: </li></ul><ul><ul><li>To maintain a perpetual or book inventory of retail dollar amounts. </li></ul></ul><ul><ul><li>To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory. </li></ul></ul>
  43. 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. 44. Advantages of RIM <ul><li>The retailer doesn't have to “cost” each time. </li></ul><ul><li>Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower. </li></ul>
  45. 45. Advantages of RIM cont’d <ul><li>Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage can be compared with historical records or industry norms. </li></ul><ul><li>Useful for determining shrinkage. </li></ul><ul><li>Can be used in an insurance claim case of a loss. </li></ul>
  46. 46. Disadvantages of RIM <ul><li>System that uses average markup. </li></ul><ul><li>Record keeping process involved is burdensome. </li></ul>
  47. 47. Steps in RIM <ul><li>Calculate Total Merchandise Handled at Cost and Retail </li></ul><ul><li>Calculate Retail Reductions </li></ul><ul><li>Calculate Cumulative Markup and Cost Multiplier </li></ul><ul><li>Determine Book Inventory at Cost and Retail </li></ul>
  48. 48. 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
  49. 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 500 Estimated Shrinkage 1,500 Total Reductions $ 86,000
  50. 50. Calculate Total Goods Handled at Cost and Retail <ul><li>Record beginning inventory at cost and at retail </li></ul><ul><li>Calculate net purchases </li></ul><ul><li>Calculate net additional markups </li></ul><ul><li>Record transportation expenses </li></ul><ul><li>Calculate net transfers </li></ul><ul><li>The sum is the total goods handled </li></ul>(c) Stockbyte/PunchStock
  51. 51. Calculate Retail Reductions <ul><li>Record net sales </li></ul><ul><li>Calculate markdowns </li></ul><ul><li>Record discounts to employees and customers </li></ul><ul><li>Record estimated shrinkage </li></ul><ul><li>The sum is the total reductions </li></ul>
  52. 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. 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
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