McGraw-Hill/Irwin

Retailing Management, 7/e

2008 by The McGraw-Hill Companies, All rights reserved.
Chapter 13
Merchandise Planning Systems
13-2
Merchandise Management
Retail
Pricing
Chapter 15
Retail
Communication
Mix
Chapter 16
Merchandise
Planning
Systems
Chapter 13
Managing
Merchandise
Assortments
Chapter 12
Buying
Merchandise

Chapter 14
13-3
Questions
How does a staple merchandise buying system
operate?
What are a merchandise budget plan and open-
to-buy systems, and how are they developed?
How do multi-store retailers allocate
merchandise to stores?
How do retailers evaluate their merchandising
performance?
13-4
Types of Merchandise Management Systems
Staple Merchandise
Predictable Demand
Relatively Accurate Forecasts
Continuous Replenishment
Fashion Merchandise
Unpredictable Demand
Difficult to Forecast Sales
Merchandise Budget Plan
Open-to-Buy
The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

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13-5
Staple Merchandise Planning


Buyer Determines:
Basic Stock or Assortment Plan
Level of Backup Inventory

System:
Monitors Inventory levels
Automatically reorders when inventory gets
below a specified level

13-6
Inventory Levels for Staple Merchandise
Cycle (base) stock: inventory
that goes up and down due to
the replenishment process
Backup (buffer, safety) stock
Inventory needed to avoid stockout

13-7
Inventory Levels for Staple Merchandise
Retailers try to reduce the stock level to keep
Inventory Investment low by reordering and receiving
merchandise often but without increased
administrative and transportation costs with frequent
reorders
13-8
Basic Stock
Indicates the Desired Inventory Level for Each SKU

Cost of Carrying
Inventory
Lost Sale Due
to Stockout
13-9
Factors Determining Backup Stock
Higher product availability (service
level) retailer wishes to provide to
customers
Greater the fluctuation in demand
Longer lead time from the vendor
More fluctuations in lead time
Lower vendors Fill rate (% of
complete orders received from a
vendor)
More
Backup
Stocks
Needed
with
13-10
Relationship between Inventory
Investment and Product Availability
Product Availability (Percent)
600
500
400
300
200
100
0
80 85 90 95 100
13-11
Staple Merchandise Management Systems
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


13-12
Staple Merchandise Management
Ryan McVay/Getty Images

Most merchandise
at home
improvement
centers are
staples.
13-13
Inventory Management Report
for Rubbermaid Merchandise
Inventory available
sales rate
Performance measures
Backup stock for desired product availability
desired product availability
Sales forecasts
Appropriate ordering decisions
13-14
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

Order point = sales/day (lead time + review time) + buffer stock

Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units
per week

Order point = 100 (3+1) = 400

Assume Buffer stock = 50 units, then

Order point = 100 (3+1) + 50 = 450
We will order something when order point gets below 450 units.

13-15
Calculating the Order Point
Avocado Bath Mat
In a situation in which the lead time is two
weeks, the buyer reviews the SKU once
a week, 18 units of backup stock are
needed to maintain the product
availability desired, and the sales rate for
the next four weeks is 5.43 per day.
Order Point?
Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock

132 units = [5.43 units x (14 + 7 days)] + 18 units
So Buyer Places Order When Inventory in Stock Drops Below 132 units

13-16
Order Quantity
When inventory reaches the order point, the buyer
needs to order enough units so the cycle stock
isnt depleted and sales dip into backup stock
before the next order arrives.

Order Quantity = Order Point Quantity Available



13-17
Inventory Management Report for
Rubbermaid SKUs
Avocado Bath Mat
Quantity available = Quantity on Hand + Quantity on Order = 90
Order Quantity = Order Point Quantity Available
Order Quantity = 132 90 = 42
13-18
Fashion Merchandise Management Systems
The system for managing fashion
merchandise categories is typically called
a Merchandise Budget Plan
13-19
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--
doesnt indicate what specific
SKUs to buy or in what
quantities

Royalty-Free/CORBIS

13-20
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 month
13-21
Six Month Merchandise Plan
for Mens Casual Slacks
13-22
Monthly Sales Percent Distribution to Season
(Line 1)
1. Sales % Distribution to Season
6 mo. data April May June July Aug Sept
100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%
The percentage distribution of sales by month is based on
Historical data
Special promotion plans
13-23
Monthly Sales Percent Distribution to
Season (Line 1) Continued
Retail sales are very seasonal. The Christmas season
often accounts for more than 40% of a retailers annual
sales.
13-24
Monthly Sales
(Line 2)
Sales % Distribution
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
Monthly sales =
the forecasted total season for the six-month period x monthly sales %
13-25
Monthly Reductions Percent Distribution
(Line 3)
3. Reduction % Distribution to Season

6 mo. data April May June July Aug Sept
100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%

To have enough merchandise every month to support the
monthly sales forecast, buyers need to consider factors
that reduce the inventory level in addition to sales made
to customers
Markdowns
Shrinkage
Discounts to Employees

13-26
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

Shrinkage % = $ shrinkage
$ net sales

13-27
Monthly Reductions
(Line 4)
Reduction % Distribution
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

Monthly Reductions = Total reductions x Monthly reduction %
13-28
Beginning of Month (BOM) 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
Stock-to-Sales Ratio specifies the amount of inventory (in retail
dollars) that should be on hand at the beginning of the month to
support the sales forecast and maintain the inventory turnover
objective for the category

Retails often use a related measure, Weeks of Inventory

13-29
Steps in Determining
the Stock-to-Sales Ratio
Step 1: Calculate Sales-to-Stock Ratio

GMROI = Gross margin% x Sales-to-stock ratio
Sales-to-Stock Ratio = GMROI/Gross margin %

Assume that the buyers target GMROI for the
category is 123%, and the buyer feels the
category will produce a gross margin of 45%.
Sales-to-Stock Ratio = 123/45 = 2.73

13-30
Steps in Determining
the Stock-to-Sales Ratio Continued
Step 2: Convert the Sales-to-Stock Ratio to
Inventory Turnover

Inventory Turnover = Sales-to-stock ratio x (1 GM%/100)

Inventory Turnover =2.73 x (1 45/100) = 1.50



13-31
Steps in Determining
the Stock-to-Sales Ratio Continued
Step 3: Calculate Average Stock-to-Sales Ratio

Average Stock-to-Sales Ratio = 6 months/Inventory turnover
= 6/1.5 = 4


13-32
Steps in Determining
the Stock-to-Sales Ratio Continued
Step 4: Calculate Monthly Stock-to-Sales Ratio

Monthly stock-to-sales ratios vary in the opposite direction
of sales
To make this adjustment, the buyer considers the
seasonal pattern, previous years stock-to-sales ratios

13-33
BOM Stock
(Line 6)
6. BOM Inventory
6 mo. data April May June July Aug Sept
98280 98280 68460 68640 98800 98280 8000
BOM Stock
= monthly sales (line 2) x BOM stock-to-sale ratio (line 5)
= $27,300 x 3.6
= $98,280
13-34
End-of-Month (EOM) Stock
(Line 7)
7. EOM Inventory
6 mo. data April May June July Aug Sept
85600 68640 68460 275080 98280 78000 65600
The BOM stock for the current month = the EOM stock in
the previous month
13-35
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
Additions to stock
= Sales (line 2) + Reductions (line 4) + EOM Stock (line 7)
BOM Stock (line 6)
Additions to stock (April)
= $27,300 + $6,600 + $68,640 - $98,280 = $4,260

13-36
Evaluating the Merchandise Budget Plan
Inventory turnover GMROI, sales forecast are
used for both planning and control
After the selling season, the actual performance
is compared with the plan
Why did performance exceed or fall short of the plan?
Was the deviation from the plan due to something
under the buyers control?
Did the buyer react quickly to changes in demand by
either purchasing more or having a sale?

13-37
Open-to-Buy System
The OTB system is used after the merchandise is
purchased
Monitors Merchandise Flow

Determines How Much Was Spent and How
Much is Left to Spend
PhotoLink/Getty Images

PhotoLink/Getty Images

13-38
Six Month Open-to-Buy
13-39
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
13-40
Inventory Allocation Based on Sales
Volume and Stock-to-Sales Ratios
Smaller stores require a proportionally higher inventory
allocation than larger stores because the depth of the
assortment or the level of product availability is too
small, customers will perceive it as being inferior.
13-41
Type of Merchandise Allocated to Stores
Retailers classify stores according to the characteristics of
the stores trading area
The assortment offered in a ready-to-eat cereal aisle should match
the demands of the demographics of shoppers in a local area
13-42
Type of Merchandise Allocated to Stores
continued
Even the sales of different apparel sizes can vary
dramatically from store to store in the same chain.
13-43
Sales of Capri Pants by Region
Timing of Merchandise Allocation to
Stores
Seasonality differences and consumer demand differences
13-44
Analyzing Merchandise Management
Performance
Three types of analyses related to the
monitoring and adjustment step are:

Sell through analysis
ABC analysis of assortments
Multiattribute analysis of vendors

13-45
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.
13-46
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.

A items: 5% of SKUs, represent 70% of sales
B items: 10% of SKUs, represent 20% of sales
C items: 65% of SKUs, represent 10% of sales
D items: 20% of SKUs, represent 10% of sales

13-47
ABC Analysis Rank Merchandise
By Performance Measures
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
13-48
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 vendors
performance on those issues.
C Squared Studios/Getty Images

13-49
Multiattribute Method for Evaluating
Vendors
13-50
Evaluating Vendors
A buyer can evaluate vendors by using the following five steps:
1. Develop a list of issues to consider in the evaluation
(column 1)
2. Importance weights for each issue in column 1 are
determined by the buyer/planner in conjunction with the
GMM (column 2)
3. Make judgments about each individual brands
performance on each issue (the remaining columns)
4. Develop an overall score by multiplying the importance of
each issue by the performance of each brand or its vendor
5. Determine a vendors overall rating, add the products for
each brand for all issues

13-51
Home Depots Vendor Evaluation
Home Depot take vendor evaluations seriously. Home Depots vendor
analysis scorecard gives everyone a quick view of how the vendor is doing.
Green is good, but red isnt.