Chapter 13

Merchandise Planning

McGraw-Hill/Irwin
Retailing Management,

Copyright 2007 by The McGraw-Hill Companies, Inc. All

rights reserved.

13-2

Merchandise Management
Planning
Merchandise
Assortments

Retail
Communication
Mix
Merchandise
Planning
Systems

Buying
Merchandise

Pricing

13-3

Types of Buying Systems

The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

Fashion Merchandise
Unpredictable Demand
Limited Sales History
Difficult to Forecast Sales
The McGraw-Hill Companies, Inc./Lars A. Niki,
photographer

Staple Merchandise
Predictable Demand
History of Past Sales
Relatively Accurate
Forecasts

13-4

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

13-5

Staple Merchandise Planning

Most merchandise
at home
improvement
centers are
staples.

Ryan McVay/Getty Images

13-6

Inventory Levels for Staple Merchandise

13-7

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
Vendors product availability affects retailers backup
stock requirements

Relationship between Inventory

Investment and Product Availability
600
500
400
300
200
100
0
80

85

90

95

Product Availability (Percent)

100

13-8

13-9

Cycle and Backup Stock

Units Available

150 -

Order 96
Cycle
Stock

100 Buffer
Stock

50 -

0-

3
Weeks

13-10

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

13-11

13-12

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

13-13

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.

13-14

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

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

13-15

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--doesnt indicate what
specific SKUs to buy or in
what quantities.

13-16

Royalty-Free/CORBIS

Six Month Merchandise Plan for

Womens Casual Slacks

13-17

13-18

Monthly sales percent Distribution to Season

(Line 1)
Sales % Dist. to
1. Month
6 mo. data
April
100.00%

May
21.00%

June
12.00%

July
12.00%

Aug
19.00%

Sept
21.00%

15.00%

13-19

Monthly sales (Line 2)

Sales % Dist. to
1. Month
6 mo. data
April
100.00%
15.00%
2. Mo. Sales $130,000
$27,300

May
21.00%

June
12.00%

July
12.00%

Aug
19.00%

$15,600

$15,600 $24,700 $27,300

Sept
21.00%
$19,500

13-20

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%

13-21

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

13-22

Monthly Reductions
Reduction % Distribution to
3. Month
6 mo. data
April
100.00%
40.00%
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

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

13-23

13-24

BOM Stock (Line 6)

6. BOM Inventory
6 mo. data
98280

April
98280

May
68460

June
68640

July
98800

Aug
98280

Sept
78000

13-25

EOM Stock (Line 7)

7. EOM Inventory
6 mo. data
85600

April
68640

May
68460

June
275080

July
98280

Aug
78000

Sept
65600

13-26

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

13-27

Open to Buy
Monitors Merchandise Flow
Determines How Much Was Spent and
How Much is Left to Spend

PhotoLink/Getty Images

PhotoLink/Getty Images

13-28

Six Month Open to Buy

13-29

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

13-30

Allocation Based on Sales Volume

13-31

Different Geodemographic Segments

13-32

Apparel Size Difference Across Stores

13-33

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

13-34

13-35

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.

13-36

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

13-37

Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
Ryan McVay/Getty Images

13-38

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 vendors
performance on those issues.

C Squared Studios/Getty Images

13-39

Multiattribute Method for Evaluating Vendors

Performance Evaluation of Individual
Brands Across Issues

Issues

Importance
Evaluation
of Issues (I)

(1)
(2)
Vendor reputation
9
Service
8
Meets delivery dates
6
Merchandise quality
5
Markup opportunity
5
Country of origin
6
Product fashionability 7
Selling history
3
n 4
Promotional assistance
Ij *Pij
Overall evaluation =

i 1

Brand A Brand B Brand C Brand D

(Pa) (Pb) (Pc) (Pd)
(3)
5
6
5
5
5
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
n

*Pij

= Sum of the expression

i 1

Ij

= Importance weight assigned

to the ith dimension

Pi

= Performance evaluation for

jth brand alternative on the
jth issue

= Not important

10

= Very important

13-40

13-41

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 brands 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

13-42

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.

13-43

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)

13-44

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.

13-45

Advantages of RIM contd

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.

13-46

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

13-47

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

13-48

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.
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

13-49

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

13-50

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/PunchStock

13-51

Calculate Retail Reductions

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

13-52

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

13-53

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