Merchandise Management

Merchandise Management
Planning
Merchandise
Assortments

Retail
Communication
Mix
Merchandise
Planning
Systems
Buying
Merchandise

Pricing

Types of Buying Systems

Staple Merchandise
Predictable Demand
History of Past Sales
Relatively Accurate
Forecasts

Fashion Merchandise
Unpredictable Demand
Limited Sales History
Difficult to Forecast Sales

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

Stock
Backup Level:
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:
Vendors 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

Product Availability (Percent)

100

Cycle and Backup Stock

Units Available

150 -

Order 96
Cycle
Stock

100 Buffer
Stock

50 -

0-

3
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--doesnt
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 vendors performance
on those issues.

Multiattribute Method for Evaluating

Vendors
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
n 4
Promotional assistance
Ij *Pij
Overall evaluation =

i 1

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

Evaluating a Vendor:
Weighted Average Approach
n

*Pij

= Sum of the expression

i 1

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 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 brands 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
physical inventories time
consuming and costly!

Another way is to use

the Retail Inventory
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 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

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.
Transfers in
- Transfers out
Net Transfers
Total Goods Handled

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

$ 78,000

Markdowns

6,000

- Markdown Cancellation

(3,000)

Net Markdown

3,000

Employee Discounts

3,000

Discounts to Customers
Estimated Shrinkage
Total Reductions

500
1,500
$ 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.
2.
3.
4.
5.

Record net sales

Calculate markdowns
Record discounts to employees and customers
Record estimated shrinkage
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