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Chapters 12 & 13 by Levy & Weitz

Buying Decision Process
What to Buy? How much to buy? When to buy? From whom to buy?

Store Image

Satisfy Cust. Wants
Type of Merchandise Control Systems Merchandise Policies

Financial Obj.


Suppliers The Market

Mdse. Budget Sales Reductions Inventories Purchases Shortages

Negotiations Estimated Sales Beginning Inv. Ending Inv.

Unit Price Terms

pricing. and sale of merchandise.Merchandise Management The planning and control of merchandise inventories to meet desired sales and product-related objectives. promotion. as well as a variety of functions dealing with the purchase. display. Also includes the planning of the size and composition of the merchandise inventories. .

Management of the product component of the marketing mix. . Marketing the right merchandise at the right place at the right time in the right quantities at the right price.Merchandise Planning Involves those activities which are needed to ensure a balance between inventories and sales.

inventory of an item or SKU is sold.Essential Terms  Product: what retailer is selling (or service)  Product line: all products/services offered by retail firm  Category: assortment of items that the customer sees as reasonable substitutes for each other  Assortment: range of choices/selection in a given product line (# of SKUs in a category)  Inventory turnover: # of times the avg. usually in annual terms .

com. gifts and stationary. marketing and merchandising functions were aligned by type of outlet. Borders. LO3 .. sales. periodicals.e. Walden and Borders. Borders has broken down its business into specialized categorizes of books. children’s. multimedia.Category Management at Borders In early 2001 Borders group reorganized to emphasize category management. i. As a result. Before the change. calendars and café.

12-pk  SKUs = 16 ..Merchandise Assortment Width (Breadth): refers to assortment factors necessary to meet needs of target market and competition Brand of Beer Types Sizes Coors Miller Budweiser Michelob reg. light 6-pk.

) Rely on customer needs. Support (Depth): Determination of how many units of merchandise are needed to support expected sales of each assortment factor (e. etc.Assortment cont’d. image of department and store. color. past sales trends. . size. brand. type.g. etc.

Why plan stock levels? Meet sales expectations Avoid out-of-stock conditions Guard against overstock Keep inventory investment at acceptable level .

Merchandise Planning Objective Ensure that both the customer’s merchandise needs and the retailer’s financial requirements are satisfied by creating an acceptable balance between merchandise inventories and sales .

Merchandise Budgeting Planning Annual Sales Annual sales estimates time series judgmental forecasting Make monthly sales estimates .

selling price Style and perishable items . Consider sales trends. profitability.). quantity discounts Seasonal Merchandise: use past knowledge. from vendors. etc. hardware. info.Forecasting Sales Staples: demand year-round (appliances. length of season. planned sales.

delays Base or cycle stock: amount sufficient to accomodate regular sales Lead time + Safety stock + Basic stock = Inventory Level .How much to order? Lead time: length of time between order placement and receipt of goods Importance of safety or cushion stock: protection against strikes.

Example Al’s Party Shop wants to maintain a 3week supply of domestic beer in inventory and average sales of Miller Lite beer are 500 6-packs per week. When inventory drops below 1500. . The order point is 1500 (500 X 3 weeks). more beer should be ordered.

Example cont’d. We must consider to include stock to maintain during the order interval and add to our order point order to determine our order ceiling. Suppose the order interval is 2 weeks. Order ceiling=Order point+Order interval sales. 1500 + (500 X 2) = 2500 .

Example cont’d. We can then determine our order quantity by subtracting stock on hand from order ceiling. Order Quantity = Order ceiling .stock on hand .

inv. at cost Total $ Available for Sale= BI + Purchases COGS=Total $ available for sale . inv. in retail $ Turnover @ cost Cost of goods sold/avg.Ending inventory Turnover based in units # of units sold/Avg. in units .Inventory Turnover Turnover @ retail Retail sales/Avg. inv.

the higher the stock-to-sales ratio . Stock-to-sales = 4.2 Lower the turnover. Stock-to-sales = 1.Determining Stock-to-Sales Ratio Divide the turnover figure into 12 (months in year) to determine the number of times of merchandise needed to support the desired sales based on turnover Examples: Turnover = 4. Stock-to-sales = 3.0 Turnover = 2.28 Turnover = 10.8.

expressed as decimal)  Calculate average stock-to-sales ratio Average stock-to-sales ratio = # months/inventory turnover  Calculate monthly stock-to-sales ratios .Calculating BOM Stock-toSales Ratios  Step 1: Calculate sales-to-stock ratio GMROI=gross margin% * sales-to-stock ratio  Step 2: Convert sales-to-stock ratio to inventory turnover Inventory turnover = sales-to-stock ratio * (100% Gross margin %.

Stock ratios considerations  Don’t confuse stock-to-sales ratio with the salesto-stock ratio  Sales are the same in both ratios  Stock in the sales-to-stock ratio is the average inventory at cost over all days in the period  Stock in the average stock-to-sales ratio is the average BOM inventory at retail  BOM stock-to-sales ratio is an average for all months .

BOM inventory .Determining Planned Purchases BOM stock = monthly sales * BOM stockto-sales ratio EOM stock (BOM stock for current period is the same as the end-of-month for the previous period) Monthly Additions to stock = Sales + Reductions + EOM inventory .

GMROI & Sales-to-Stock GMROI = gross margin return on inventory investment measures how many gross margin dollars are earned on every dollar of inventory investment Sales-to-stock ratio = net sales/avg. GMROI = gross margin/avg. GMROI combines the effects of profits and turnover . inv. inv.

Calculating Open-to-Buy for Current Period Calculate Projected EOM stock Actual BOM stock + monthly additions + order amount .Planned monthly sales planned monthly reductions Open-to-buy = Planned EOM stock Projected EOM stock .

planned reductions Open-to-buy = Planned EOM stock Projected EOM stock .Calculating Open-to-Buy for Future Periods Calculate projected EOM stock Projected BOM stock + actual order monthly sales .

Analyzing Merchandise Performance ABC Analysis Rank order merchandise categories (SKUs) by some performance measure Contribution margin Sales Dollars/Units Gross margin Gross margin return on investment Sales or gross margin per square foot Determine optimal stocking formulas based on performance measures .

Analyzing Performance continued Sell-Through Analysis Comparison between actual and planned sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand Multiple-Attribute Method Used to evaluate vendors using a weighted average score for each vendor (current or proposed). .