5th Edition

PPT 13-1

Chapter 13

Buying Systems

McGraw-Hill/Irwin
PPT
13-2
Levy/Weitz: Retailing Management, 5/e

Copyright 2004 by The McGraw-Hill Companies, Inc. All rights

Merchandise Management

Planning
Merchandise
Assortments

Retail
Communication
Mix

Buying
Systems
Buying
Merchandise

PPT 13-3

Pricing

Merchandise Management Issues

PPT 13-4

Types of Buying Systems

Staple Merchandise

Fashion Merchandise

Predictable Demand

Unpredictable Demand

History of Past Sales

Limited Sales History

Relatively Accurate Forecasts

Difficult to Forecast Sales

PPT 13-5

Staple Merchandise Buying System

Forecas
t SKU
Sales

PPT 13-6

Order
Merchand
ise

Monitor
Sales
and
Inventor
y

Compare
Inventor
y to
Basic
Stock
List

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

Inventory Management Report for

Rubbermaid Merchandise

PPT 13-8

Basic Stock List

Indicates the Desired Inventory Level for Each SKU
Amount of Stock Desired

Lost Sale Due

to Stockout
Cost of Carrying
Inventory
PPT 13-9

Relationship between Inventory

Investment and Product Availability
Inventory investment Dollars

600
500
400
300
200
100
0

80

85

90

95

Product Availability (Percent)

PPT 13-10

100

Cycle and Buffer Stock

Units Available

150 -

Order 96
Cycle
Stock

100 Buffer
Stock

50 -

0-

3
Weeks

PPT 13-11

Buffer Stock
We need it so we wont 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

PPT 13-12

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

PPT 13-13

Forecasting Sales

Tradeoff Recent Sales Against Past History of Sales

Exponential Smoothing
Old
Forecast

84

Old
Forecast
96

x (Recent Old)
Demand Forecast

.5 x (72

ranges for 0 to 1

PPT 13-14

Recognize Recent Trends, But Dont Over Weight Recent

Experience

Higher Weighs Recent Sales More

96)

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
PPT 13-15

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.

PPT 13-16

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
PPT 13-17

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.

PPT 13-18

Six-Month Merchandise
Budget Plan for Mens Tailored Suits

PPT 13-19

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)
PPT 13-20

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

PPT 13-21

Six Month Open to Buy

PPT 13-22

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.

PPT 13-23

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
PPT 13-24

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)

PPT 13-25

Allocating
Merchandise to Stores

Fewer Sales,
More Inventory

More Sales,
Less Inventory

Percentage of total sales

1.5

2.5

3.5

12

Percentage of total inventory

1.5

10

PPT 13-26

Breakdown by Store of
Traditional $35 Denim Jeans in Light Blue
(1)

(2)

(3)

TYPE OF
STORE

NUMBER OF
STORES

% OF TOTAL
SALES, EACH
STORE

10.0%

(4)

(5)

(6)

SALES PER
SALES PER
UNIT SALES
STORE (TOTAL
STORE TYPE
PER STORE
SALES X COL. 3) (COL. 2 X COL. 4) (COL. 4/$35)

$15,000

60,000

429

6.7

10,000

30,000

286

5.0

7,500

60,000

214

Total sales $150,000

Source: Banner Distributing Company, Denver, Colorado; used with
permission.

PPT 13-27

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.

PPT 13-28

Analyzing Merchandise Management

Merchandise Performance
ABC Analysis
Sell Through Analysis

Vendor Analysis
Multiattribute Method

PPT 13-29

ABC Analysis Rank Merchandise

By Performance Measures
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
PPT 13-30

Percentage of Sales Dollars

ABC Analysis for Dress Shirts

C

100

10%

90

B
20%

Sales

80
70
60

50

70%

40
30
20

No Sales

10
0

10
A
5%

PPT 13-31

B
10%

20

30

40

50
C
65%

60

70

Percentage of Items

80

90
D
20%

100

Sell-through Analysis for Blouses

Stock
Number
1011 -Sm

Description

Week 1
Week 2
Actual-to-Plan
Actual-to-Plan
Plan Actual Percent. Plan Actual Percent.

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

25

27

1012 -Med Blue Silk V-neck

35

45

29

35

40

14

1012 -Lg

25

25

25

30

20

PPT 13-32

Blue Silk V-neck

Evaluating a Vendor:
A Weighted Average Approach
n

*Pij

= Sum of the expression

i 1

PPT 13-33

Ij

= Importance weight assigned

to the ith dimension

Pi

= Performance evaluation for

jth brand alternative on the
jth issue

= Not important

10

= Very important

Evaluating a Vendor:
A Weighted Average Approach
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
Promotional assistance
n 4
Overall evaluation =
Ij *Pij

i 1

PPT 13-34

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

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.

PPT 13-35

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.

PPT 13-36

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.

PPT 13-37

Disadvantages of RIM

System that uses average markup.

Record keeping process involved is burdensome.

PPT 13-38

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

PPT 13-39

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%

PPT 13-40

Ending book
inventory at retail

= total goods handled at retail - total

reductions: $290,000 - $208,000 = $82,000

Ending book
inventory at cost

= ending book inventory at retail x cost

multiplier: $82,000 x 55.2% = 45,264

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
PPT 13-41

1,000
1,428

2,000

(714)

(1,000)
714

(1,000)

$100,714

$141,600

Retail Inventory Method

Example
Total Goods Handled

Cost

Retail

Gross Sales

$ 82,000

- Consumer Returns & Allowances

( 4,000)

Net Sales
Markdowns

6,000

- Markdown Cancellation

(3,000)

Net Markdown

3,000

Employee Discounts

3,000

Discounts to Customers
Estimated Shrinkage
Total Reductions
PPT 13-42

$ 78,000

500
1,500
$ 86,000