PURCHASING SYSTEMS (SEM-3, CH-9,RM)

Retailers use two types of purchasing systems: Fashion merchandise purchasing systems Staple merchandise purchasing systems PURCHASING SYSTEMS FOR FASHION MERCHANDISE: Two kinds of systems are used to manage fashion merchandise : Merchandise budget plan : -- Helps the category manager to determine the quantity of each product -- Based on the sales forecasts ,inventory turnover & gross margin return on investment (GMROI) -- It helps the category manager identify if merchandise is: ----Selling well & is to be replenished ---- not selling well & is to be marked down, & repositioned -- it helps retailers establish merchandise objectives & plan financial issues of the business in terms of merchandise -- it doesn't talk about the kind or quantity of merchandise to be purchased

-- It only determines how much money nto be spent every month , to support the sales activity & accomplish the objectives of inventory turnover & GMROI -- The money to be spent needs (purchaser should have through knowledge): ---- Monthly sales percentage distribution to season ---- Monthly sales ---- Monthly reductions percentage distribution to season ---- Monthly reductions ---- Beginning of the month inventory to sales ratio ---- Inventory at beginning of the month ---- Inventory at the end of the month ---- Monthly additions to stock

Beginning of monthly inventory to sales ratio: 4 steps are required: 1. Calculate sales to inventory ratio: GMROI = GROSS MARGIN(%)*SALES TO INVENTORY RATIO (for the season) Therefore, sales to inventory ratio=GMROI/Gross Margin(%) 2. Represents sales to inventory ratio in terms of inventory turnover Inventory turnover=sales to inventory ratio*cost of goods sold% Inventory turnover= sales to inventory ratio* (100%gross margin%)

3. Calculate average inventory to sales ratio: Average inventory to sales ratio=6 months/inventory turnover 4. Calculate monthly inventory to sales ratio: -- Usually, mthly inventory to sales ratio is inversely proportional to the sales -- A merchandise planner should thoroughly evaluate the past inventory to sales ratio while developing a merchandise budget plan for a category 5. Beginning of the month (BOM) inventory: Monthly sales* BOM inventory to sales ratio

End of the Month (EOM) inventory: Monthly additions to inventory: Monthly sales+ reductions+ EOM inventory-BOM inventory EVALUATING THE MERCHANDISE BUDGET PLAN: --- Sales forecasting, inventory turnover & GMROI , helps retailer to plan & control the merchandise activities of a retail store. --- Depends on the planning process involved, topdown/ bottom-up. --- If the actual sales, inventory turnover & the GMROI figures exceed the forecasted figures in the plan, then the performance is said to be better than expected.

Cont fashion merchandise OPEN-TO-BUY: -- Helps the category manager to adjust the inventories according to the fluctuations in the actual sales ( from the planned sales) -- OTB is calculated on a monthly basis -- PROFITS maximization ,if the actual sales exceed the planned sales -- minimizing the markdowns (if the actual sales are less than the planned sales) OTM = Projected EOM INVENTORY+ Projected sales=projected markdowns- inventory on orderprojected BOM inventory

PURCHASING SYSTEMS FOR STAPLE MERCHANDISE: -- Form a typical order-receipt-order cycle -- use past sales records to forecast future sales unlike the fashion merchandise (on stock keeping units) -- Several inventory mgt systems are applicable for staple merchandise categories Such as, JDA & the IBMS INVENTORY FORECASTING & REPLENISHMENT MODULES. --- Number of programmed modules are available to determine how much to order & when to order

Inventory Management Reports: -- Helps the merchandise planner by providing information on sales frequency, availability of inventory, inventory on order, inventory turnover, sales forecasts & the quality on order for each keeping unit

-- The basic inventory list provides information on aspects like inventory number, description of the item, quantity on hand , quantity on order & the sales figures for the last 3 months

-- It also depend on the retailers FINANCIAL PLAN ,like merchandiser budget plan -- Significant managerial judgment is required and the retailer always insists on buffer stock -- Techniques like, EXPONENTIAL SMOOTHING (ANALYSING THE PREVIOUS SALES TO FORECAST THE FUTURE SALES) New sales forecasts=old sales forecasts + (Actual demand-Old Sales forecasts) Where, is a constant that lies between 0-1 & measures the impact of actual demand on the new sales forecast

2 types of reordering systems available for the retailer to determine the reorder point: 1. The perpetual (means, continuing for a long period of time without stopping):---- In this the inventory levels are tracked perpetually & predetermined quantity of inventory known as Economic Order Quality (EOQ) is ordered 2. The periodic :Here the review time is constant, but the quantity being ordered can fluctuate. No need to review each product line every day. ORDER POINT = [DEMAND per day* (lead time+ review time)] + buffer stock

Assigning merchandise to stores Analyzing the merchandise performance 3 different types of procedures that are usually adopted by the retailers to analyze the performance of their merchandise: 1. ABC analysis: -- Determines the items which should never be out of stock, items that can go out of stock occasionally & the merchandise on the basis of some performance parameters. -- Can be done at any level of merchandise classification, starting from SKUs . -- It is based on 80-20 principle. -- I STEP : To rank the SKUs using one or more parameters [contribution margin eg. Contribution margin= net sales cost of goods sold- other variable expenses (such as commission on sales) ] -- retailer should conduct an ABC analysis using multi performance measures, like amount of sales, sales units , gross margins & GMROI. -- II STEP: To measure sales or gross margin per square foot (taking into consideration the lines of merchandise) -- III STEP: To develop a criteria to sort items based on their levels of profits or volumes.

1. 2.

Sell through analysis Multi attribute method