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Merchandise planning
This document provides an overview of different buying systems and inventory management techniques used by retailers. It discusses staple and fashion merchandise buying systems, considerations for determining order quantities, forecasting demand, calculating order points, open-to-buy planning, allocating merchandise to stores, vendor evaluation, and the retail inventory method. Key aspects covered include basic stock lists, buffer stock, exponential smoothing, ABC analysis, sell-through analysis, weighted vendor evaluations, and the steps to use the retail inventory method to determine inventory value.
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Merchandise planning
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- 2. PPT 13-2 Chapter 13 BuyingSystemsBuying Systems McGraw-Hill/Irwin Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
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- 5. PPT 13-5 Types ofBuying Systems Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales
- 6. PPT 13-6 Staple MerchandiseBuying System Forecast SKU Sales Order Merchandi se Monitor Sales and Inventory Compare Inventory to Basic Stock List
- 7. PPT 13-7 Considerations inDetermining How Much to Order • Basic Stock Plan • Present Inventory • Merchandise on Order • Sales Forecast – Rate of Sales of SKU (Velocity) – Seasonality
- 8. PPT 13-8 Inventory ManagementReport for Rubbermaid Merchandise
- 9. PPT 13-9 Basic StockList Indicates the Desired Inventory Level for Each SKU – Amount of Stock Desired Cost of Carrying Inventory Lost Sale Due to Stockout
- 10. PPT 13-10 Relationship betweenInventory Investment and Product Availability InventoryinvestmentDollars Product Availability (Percent) 600 500 400 300 200 100 0 80 85 90 95 100
- 11. PPT 13-11 Cycle andBuffer Stock UnitsAvailable Weeks 150 - 100 - 50 - 0 - 1 2 3 4 Order 96 Cycle Stock Buffer Stock
- 12. PPT 13-12 Buffer Stock Weneed it so we won’t 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
- 13. PPT 13-13 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
- 14. PPT 13-14 Forecasting Sales •Tradeoff Recent Sales Against Past History of Sales – Recognize Recent Trends, But Don’t Over Weight Recent Experience • Exponential Smoothing Old = Old + ά x (Recent – Old) Forecast Forecast Demand Forecast 84 = 96 + .5 x (72 – 96) • ά ranges for 0 to 1 – Higher ά Weighs Recent Sales More
- 15. PPT 13-15 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
- 16. PPT 13-16 Order Pointcontinued • Assume Buffer stock = 50 units, then • Order point = 100 (3+1) + 50 = 450 • We will order something when order point gets below 450 units.
- 17. PPT 13-17 Calculating theOrder 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
- 18. PPT 13-18 Merchandise BudgetPlan • 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.
- 19. PPT 13-19 Six-Month Merchandise BudgetPlan for Men’s Tailored Suits
- 20. PPT 13-20 Steps inPreparing 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)
- 21. PPT 13-21 Open toBuy • Monitors Merchandise Flow • Determines How Much Was Spent and How Much is Left to Spend
- 22. PPT 13-22 Six MonthOpen to Buy
- 23. PPT 13-23 Open-to-buy forPast 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.
- 24. PPT 13-24 Open-to-Buy for CurrentPeriod (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
- 25. PPT 13-25 Open-to-Buy for CurrentPeriod (II) • Open-to-buy = • Planned EOM stock (from merchandise budget plan) – Projected EOM stock (based on what is really happening)
- 26. PPT 13-26 Allocating Merchandise toStores Percentage of total sales 1 1.5 2.5 3.5 4 6 8 12 Percentage of total inventory 1.5 2 3 4 4 4 6 10 Fewer Sales, More Sales, More Inventory Less Inventory
- 27. PPT 13-27 Breakdown byStore of Traditional $35 Denim Jeans in Light Blue Source: Banner Distributing Company, Denver, Colorado; used with permission. (1) TYPE OF STORE (2) NUMBER OF STORES A B C Total sales $150,000 4 3 8 10.0% 6.7 5.0 $15,000 10,000 7,500 60,000 30,000 60,000 429 286 214 (3) % OF TOTAL SALES, EACH STORE (4) SALES PER STORE (TOTAL SALES X COL. 3) (5) SALES PER STORE TYPE (COL. 2 X COL. 4) (6) UNIT SALES PER STORE (COL. 4/$35)
- 28. PPT 13-28 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.
- 29. PPT 13-29 Analyzing MerchandiseManagement Merchandise Performance – ABC Analysis – Sell Through Analysis Vendor Analysis – Multiattribute Method
- 30. PPT 13-30 ABC AnalysisRank Merchandise By Performance Measures • Contribution Margin • Sales Dollars • Sales in Units • Gross Margin • GMROI • Use more than one criteria
- 31. PPT 13-31 ABC Analysisfor Dress ShirtsPercentageofSalesDollars 10 20 30 40 50 60 70 80 90 100 Percentage of Items No Sales 100 90 80 70 60 50 40 30 20 10 0 C 10% B 20% A 70% A B C D 5% 10% 65% 20% Sales
- 32. PPT 13-32 Sell-through Analysisfor Blouses Week 1 Week 2 Stock Actual-to-Plan Actual-to-Plan Number Description Plan Actual Percent. Plan Actual Percent. 1011 -Sm 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 4 25 27 8 1012 -Med Blue Silk V-neck 35 45 29 35 40 14 1012 -Lg Blue Silk V-neck 25 25 0 25 30 20
- 33. PPT 13-33 Ij * i1 n P = ∑ ij = Sum of the expression Ij = Importance weight assigned to the ith dimension Pi = Performance evaluation for jth brand alternative on the jth issue 1 = Not important 10 = Very important Evaluating a Vendor: A Weighted Average Approach
- 34. PPT 13-34 Evaluating aVendor: A Weighted Average Approach 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 Overall evaluation = 290 298 212 341 Ij * i n P = ∑1 ij
- 35. PPT 13-35 Retail InventoryMethod (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.
- 36. PPT 13-36 Advantages ofRIM • The retailer doesn't have to “cost” each time. • Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower.
- 37. PPT 13-37 Advantages ofRIM 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.
- 38. PPT 13-38 Disadvantages ofRIM • System that uses average markup. • Record keeping process involved is burdensome.
- 39. PPT 13-39 Steps inRIM Calculate Total Merchandise Handled at Cost and Retail Calculate Retail Reductions Calculate Cumulative Markup and Cost Multiplier Determine Book Inventory at Cost and Retail
- 40. PPT 13-40 Retail InventoryMethod 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% Ending book = total goods handled at retail - total inventory at retail reductions: $290,000 - $208,000 = $82,000 Ending book = ending book inventory at retail x cost inventory at cost multiplier: $82,000 x 55.2% = 45,264
- 41. PPT 13-41 Retail InventoryMethod 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
- 42. PPT 13-42 Total GoodsHandled 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 Retail Inventory Method Example