This document provides an overview of different buying systems and inventory management techniques used by retailers. It discusses staple and fashion merchandise buying systems, considerations for determining order quantities, forecasting demand, calculating order points, open-to-buy planning, allocating merchandise to stores, vendor evaluation, and the retail inventory method. Key aspects covered include basic stock lists, buffer stock, exponential smoothing, ABC analysis, sell-through analysis, weighted vendor evaluations, and the steps to use the retail inventory method to determine inventory value.

1. PPT 13-1
5th
Edition

2. PPT 13-2
Chapter 13
Buying SystemsBuying Systems
McGraw-Hill/Irwin
Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

3. PPT 13-3
Merchandise Management
Buying
Systems
Planning
Merchandise
Assortments
Buying
Merchandise
Pricing
Retail
Communication
Mix

4. PPT 13-4
Merchandise Management Issues

5. PPT 13-5
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

6. PPT 13-6
Staple Merchandise Buying System
Forecast
SKU
Sales
Order
Merchandi
se
Monitor
Sales and
Inventory
Compare
Inventory
to Basic
Stock
List

7. PPT 13-7
Considerations in Determining
How Much to Order
• Basic Stock Plan
• Present Inventory
• Merchandise on
Order
• Sales Forecast
– Rate of Sales of
SKU (Velocity)
– Seasonality

8. PPT 13-8
Inventory Management Report for
Rubbermaid Merchandise

9. PPT 13-9
Basic Stock List
Indicates the Desired Inventory Level for Each SKU
– Amount of Stock Desired
Cost of Carrying
Inventory
Lost Sale Due
to Stockout

10. PPT 13-10
Relationship between Inventory
Investment and Product Availability
InventoryinvestmentDollars
Product Availability (Percent)
600
500
400
300
200
100
0
80 85 90 95 100

11. PPT 13-11
Cycle and Buffer Stock
UnitsAvailable
Weeks
150 -
100 -
50 -
0 -
1 2 3 4
Order 96
Cycle
Stock
Buffer
Stock

12. PPT 13-12
Buffer Stock
We need it so we won’t loose sales, complementary sales, and customers
Buffer stock is dependent on:
-Forecast interval variance (Forecast interval = lead
time + review time)
-Variation in Demand (actual demand - forecasted
demand)
-Time to Get Product from Supplier
-Time to Get Product from Distribution
Center
- Product availability requested of IM systems

13. PPT 13-13
Forecasting Demand
Forecasting -- extrapolating
the past into future using
statistical and mathematical
methods
Objectives:
– Ignore random
fluctuations in demand
– But be responsive to real
change

14. PPT 13-14
Forecasting Sales
• Tradeoff Recent Sales Against Past History of Sales
– Recognize Recent Trends, But Don’t Over Weight Recent
Experience
• Exponential Smoothing
Old = Old + ά x (Recent – Old)
Forecast Forecast Demand Forecast
84 = 96 + .5 x (72 – 96)
• ά ranges for 0 to 1
– Higher ά Weighs Recent Sales More

15. PPT 13-15
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

16. PPT 13-16
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.

17. PPT 13-17
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

18. PPT 13-18
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.

19. PPT 13-19
Six-Month Merchandise
Budget Plan for Men’s Tailored Suits

20. PPT 13-20
Steps in Preparing Plan
• Forecast Six Month Sales for Category
• Breakdown Total Sales Forecast into Forecast for each
Month (lines 1, 2)
• Plan Reductions for Each Month (lines 3, 4)
• Determine Beginning of the Month (BOM) Stock to
Sales Ratio (line 5)
• Calculate BOM Inventory (line 6)
• Calculate EOM Inventory (line 7)
• Calculate Monthly Additions to Stock (line 8)

21. PPT 13-21
Open to Buy
• Monitors Merchandise Flow
• Determines How Much Was Spent
and How Much is Left to Spend

22. PPT 13-22
Six Month Open to Buy

23. PPT 13-23
Open-to-buy for Past Periods
• Projected EOM stock = actual EOM stock
• Open-to-buy = 0
• There is no point in buying merchandise
for a month that is already over.

24. PPT 13-24
Open-to-Buy for
Current Period (I)
• Projected EOM stock =
• Actual BOM stock
• + Actual monthly additions to stock (what was
actually received)
• + Actual on order (what is on order for the
month)
• - Plan monthly sales
• - Plan reductions for the month

25. PPT 13-25
Open-to-Buy for
Current Period (II)
• Open-to-buy =
• Planned EOM stock (from merchandise budget
plan)
– Projected EOM stock (based on what is really
happening)

26. PPT 13-26
Allocating
Merchandise to Stores
Percentage of total sales 1 1.5 2.5 3.5 4 6 8 12
Percentage of total inventory 1.5 2 3 4 4 4 6 10
Fewer Sales, More Sales,
More Inventory Less Inventory

27. PPT 13-27
Breakdown by Store of
Traditional $35 Denim Jeans in Light Blue
Source: Banner Distributing Company, Denver, Colorado; used with
permission.
(1)
TYPE OF
STORE
(2)
NUMBER OF
STORES
A
B
C
Total sales $150,000
4
3
8
10.0%
6.7
5.0
$15,000
10,000
7,500
60,000
30,000
60,000
429
286
214
(3)
% OF TOTAL
SALES, EACH
STORE
(4)
SALES PER
STORE (TOTAL
SALES X COL. 3)
(5)
SALES PER
STORE TYPE
(COL. 2 X COL. 4)
(6)
UNIT SALES
PER STORE
(COL. 4/$35)

28. PPT 13-28
ABC Analysis
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.

29. PPT 13-29
Analyzing Merchandise Management
Merchandise Performance
– ABC Analysis
– Sell Through Analysis
Vendor Analysis
– Multiattribute Method

30. PPT 13-30
ABC Analysis Rank Merchandise
By Performance Measures
• Contribution Margin
• Sales Dollars
• Sales in Units
• Gross Margin
• GMROI
• Use more than one criteria

31. PPT 13-31
ABC Analysis for Dress ShirtsPercentageofSalesDollars
10 20 30 40 50 60 70 80 90 100
Percentage of Items
No Sales
100
90
80
70
60
50
40
30
20
10
0
C
10%
B
20%
A
70%
A B C D
5% 10% 65% 20%
Sales

32. PPT 13-32
Sell-through Analysis for Blouses
Week 1 Week 2
Stock Actual-to-Plan Actual-to-Plan
Number Description Plan Actual Percent. Plan Actual Percent.
1011 -Sm White silk V-neck 20 15 -25 20 10 -50
1011 -Med White Silk V-neck 30 25 -16.6 30 20 -33
1011 -Lg White Silk V-neck 20 16 -20 20 16 -20
1012 -Sm Blue Silk V-neck 25 26 4 25 27 8
1012 -Med Blue Silk V-neck 35 45 29 35 40 14
1012 -Lg Blue Silk V-neck 25 25 0 25 30 20

33. PPT 13-33
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
Evaluating a Vendor:
A Weighted Average Approach

34. PPT 13-34
Evaluating a Vendor:
A Weighted Average Approach
Performance Evaluation of Individual
Brands Across Issues
Importance
Evaluation 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 = 290 298 212 341
Ij *
i
n
P
=
∑1
ij

35. PPT 13-35
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.

36. PPT 13-36
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.

37. PPT 13-37
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.

38. PPT 13-38
Disadvantages of RIM
• System that uses average markup.
• Record keeping process involved is burdensome.

39. PPT 13-39
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

40. PPT 13-40
Retail Inventory Method
Cumulative Markon = (total retail - total cost) / total retail:
($290,000 - $160,000) / $290,000 = 44.8%
The Cost Multiplier = cumulative markon
(100% - cumulative markon%) = 55.2%
Ending book = total goods handled at retail - total
inventory at retail reductions: $290,000 - $208,000 = $82,000
Ending book = ending book inventory at retail x cost
inventory at cost multiplier: $82,000 x 55.2% = 45,264

41. PPT 13-41
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

42. PPT 13-42
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
Retail Inventory Method
Example