Merchandise Management

Merchandise Management
Retail Communication Mix Merchandise Planning Systems Buying Merchandise Planning Merchandise Assortments

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: • 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 Product Availability (Percent) 100 .

Cycle and Backup Stock 150 - Order 96 Cycle Stock Units Available 100 Buffer Stock 50 - 0- 1 2 Weeks 3 4 .

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 = demand (lead time + review time) + buffer stock .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.

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 $ .

and GMROI objectives. inventory turnover.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. . • Not a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantities.

merchandise being misplaced or damaged and poor bookkeeping.Shrinkage Inventory loss caused by shoplifting. The physical inventory actually in stores and distribution centers . Retailers measure shrinkage by taking the difference between 1. The inventory recorded value based on merchandise bought and received 2. employee theft.

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 format and the geodemographics. the stores in the chain are replenished to cater to the target segment .Type of merchandise allocated to stores • A detailed analysis is carried out on performance of various stores in the chain • Basis factors like location.

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. .

– should be deleted from the stock selection . – should be allowed to be out of stock occasionally.orders merchandise by some performance measure determine which items: – should never be out of stock.ABC Analysis An ABC analysis identifies the performance of individual SKUs in the assortment plan. Rank .

ABC Analysis Rank Merchandise By Performance Measures Contribution Margin Sales Dollars Sales in Units Gross Margin GMROI Use more than one criteria .

. •The score is based on the importance of various issues and the vendor’s performance on those issues.Multiattribute Method for Evaluating Vendors •The multiattribute method for evaluating vendors uses a weighted average score for each vendor.

Multiattribute Method for Evaluating Vendors Performance Evaluation of Individual Brands Across Issues Importance Evaluation of Issues (I) 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 Issues (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 Promotional assistance 4 n Overall evaluation = Ij *Pij ∑ i =1 .

Evaluating a Vendor: Weighted Average Approach ∑I i =1 n j *Pij = Sum of the expression Ij = Importance weight assigned to the ith dimension = Performance evaluation for jth brand alternative on the jth issue = Not important Pi 1 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. .

evaluate performance and prepare financial statements. The problem is that when retailers design their financial plans. they compare their retail prices. When retailers compare their prices to competitors’. 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) .Retail Inventory Method: The Problem Retailers generally think of their inventory at retail price levels rather than at cost.

Advantages of RIM The retailer doesn't have to “cost” each time. whichever is lower. Follows the accepted accounting practice of valuing assets at cost or market. .

• Can be used in an insurance claim case of a loss . • Useful for determining shrinkage. additional markups. markdowns. and shrinkage can be compared with historical records or industry norms.Advantages of RIM cont’d • Amounts and percentages of initial markups.

Record keeping process involved is burdensome .Disadvantages of RIM System that uses average markup.

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 .

Transfers out Net Transfers Total Goods Handled Retail Inventory Method Example Cost Retail $ 60.000 50.600 $ 84.Return to vendor Net Purchases Additional markups .428 (714) 714 $100.400) 54.000 .000 4.000) 2.000 (2.000 1.000 (11.000 (15.000 (1.714 2.600 70. Transfers in .000) (1.000) 39.Markup cancellations Net markups Additional Transport.Total Goods Handled Beginning inventory Purchases .000 1.000) $141.

000 .000 ( 4.000 (3.Markdown Cancellation Net Markdown Employee Discounts Discounts to Customers Estimated Shrinkage Total Reductions 6.500 $ 86.000 3.000 Cost Retail $ 82.000 500 1.Consumer Returns & Allowances Net Sales Markdowns .Retail Inventory Method Example Total Goods Handled Gross Sales .000) 3.000) $ 78.

Calculate net additional markups 4. Calculate net transfers 6. Calculate net purchases 3. The sum is the total goods handled . Record beginning inventory at cost and at retail 2. Record transportation expenses 5.Calculate Total Goods Handled at Cost and Retail 1.

4. 2. 3. 5. Record net sales Calculate markdowns Record discounts to employees and customers Record estimated shrinkage The sum is the total reductions .Calculate Retail Reductions 1.

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 .