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Merchandise Management

Merchandise Management

Retail Planning
Communication Merchandise
Mix Assortments

Merchandise
Planning
Systems

Buying
Pricing
Merchandise
Types of Buying Systems

Staple Merchandise Fashion Merchandise


Predictable Demand Unpredictable Demand
History of Past Sales Limited Sales History
Relatively Accurate Difficult to Forecast Sales
Forecasts
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


Inventory Levels for Staple
Merchandise
Factors Determining Backup
• Backup Level: Stock
• Level of backup depends on product availability retailer
wishes to provide
• Fluctuation in demand:
• The greater the fluctuation in demand, the more backup
stock is needed
• Lead time:
• The amount of backup stock needed is also affected by
the lead time from the vendor
• Fluctuations in lead time :
• Fluctuations in lead time affect the amount of backup
stock
• Product Availability:
• Vendor’s product availability affects retailers’ backup
stock requirements
Relationship between Inventory
Investment and Product Availability

600

500

400

300

200

100

0
80 85 90 95 100
Product Availability (Percent)
Cycle and Backup Stock

150 -
Order 96
Cycle
Stock
Units Available

100 -

Buffer
Stock
50 -

0-
1 2 3 4
Weeks
Basic Stock List

• Indicates the Desired Inventory Level for


Each SKU
– Amount of Stock Desired

Lost Sale Due


to Stockout

Cost of Carrying
Inventory
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.
• Order point = demand (lead time +
review time) + buffer stock
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 BOM stock needed to support
forecasted sales
• Determine “open to buy” for each $
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.
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
Open to Buy

Monitors Merchandise Flow

Determines How Much Was Spent


and How Much is Left to Spend
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


Allocation Based on Sales
Volume
Type of merchandise
allocated to stores
• A detailed analysis is carried out on
performance of various stores in the
chain
• Basis factors like location, type of
format and the geodemographics,
the stores in the chain are
replenished to cater to the target
segment
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
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.
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
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
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 vendor’s performance
on those issues.
Multiattribute Method for Evaluating
Vendors
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
n
Overall evaluation =
∑ Ij *Pij
i =1
290 298 212 341
Evaluating a Vendor:
Weighted Average Approach
n

∑I
i =1
j *Pij = Sum of the expression

= Importance weight assigned


Ij to the ith dimension

Pi
= Performance evaluation for
jth brand alternative on the
jth issue

1 = Not important

10 = Very important
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 Merchandise Head (column 2)

• Make judgments about each individual brand’s 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
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.
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 Another way is to use


physical inventories – time the Retail Inventory
consuming and costly! Method (RIM)
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.
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
Disadvantages of RIM

System that uses average markup.

Record keeping process involved is


burdensome
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
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
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 500
Estimated Shrinkage 1,500

Total Reductions $ 86,000


Calculate Total Goods Handled at Cost and
Retail

1. Record beginning inventory at cost and at


retail
2. Calculate net purchases
3. Calculate net additional markups
4. Record transportation expenses
5. Calculate net transfers
6. The sum is the total goods handled
Calculate Retail Reductions
1. Record net sales
2. Calculate markdowns
3. Record discounts to employees and customers
4. Record estimated shrinkage
5. The sum is the total reductions
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
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

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