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Introduction • See PPT 13-3 The actual management of a retail inventory on a daily basis is quite complex. Retailers employ computer-based information and planning support systems to assist buyers in this challenging management task. These systems help buyers, planner, and assorters determine when and how much to buy and what adjustments might be needed in the pricing and allocation of merchandise to specific stores. Retailers use two distinct types of buying systems, one for staple merchandise categories and the other for fashion merchandise categories. Some retailers have developed their own merchandise planning systems while others use software systems developed by companies such as Marketmax, Retek, JDA and GERS. In some retail firms these merchandise planning systems are part of the firm’s enterprise resource planning (ERP) system, which integrates merchandise planning with systems for managing supply chains and other business activities.
I. Staple Merchandise Management Systems • Staple merchandise buying systems are used for merchandise that follows a predictable order-receipt-order cycle. Most merchandise fits this criterion. Staple merchandise planning systems manage inventory at the level of the SKU. Inventory that goes up and down due to the replenishment process is called cycle stock, or base stock. The retailer would like to reduce the base stock inventory to keep its inventory investment low. Sales of the SKU and receipts of orders from
PPT 13-4, 13-5, and 13-6 1 illustrate the function of a staple merchandise management system.
Ask students for examples to review typical staple merchandise categories.
the vendor cannot be predicted with perfect accuracy. Therefore, the retailer has to carry backup stock, also known as safety stock or buffer stock. • Several factors determine the level of backup stock required: (1) the product availability the retailer wants to provide, (2) fluctuation in demand (greater fluctuation requires more backup stock), (3) the lead time (amount of time between recognition that an order needs to be placed and the point at which the merchandise arrives in the store and ready for sale) from the vendor, (4) fluctuations in lead time (retailers using collaborative supply chain management systems typically require their vendors to deliver within a very narrow window to reduce fluctuations in lead time), and (5) the vendor’s product availability. Staple merchandise planning systems provide the information neeeded to determine how much to order and when to place orders for SKUs. These systems assist buyers by performing three functions: (1) monitoring and measuring current SKU sales, (2) forecasting future SKU demand, and (3) developing ordering decision rules for optimum restocking.
Factors determining backup stock are shown in 13-7.
See PPT 13-8, 13-9, and 13-10
A. The Inventory Management Report • The inventory management report provides information on sales velocity, inventory availability, the amount on order, inventory turnover, sales forecast, and, most important, the quantity that should be ordered for each SKU. The combination of having a prespecified schedule based on the trade-off between inventory carrying and ordering costs, and the flexiblity to react to demand fluctions, helps to ensure a profitable ordering strategy. 1. Order point • See PPT 13-12 and 13-13 The order point is the amount of inventory below which the quantity available should
PPT 13-11 shows a retailer’s sample inventory management report.
not go or the item will be out of stock before the next shipment arrives.
Order point =
See example on PPT 13-14
Sales/Day x (Lead time + Review time) + Backup stock
This number tells the buyer that when the inventory level drops to this point, additional merchandise should be ordered. Lead time is the time between recognition that an order needs to be placed and the receipt of merchandise in stores ready for sale. Review time is the maximum time between reviews of the SKU. 2. Order Quantity
When inventory reaches the order point, the buyer needs to order enough units so the stock isn’t depleted and sales dip into backup stock before the next order arrives. This order quantity is the difference between the quantity available and the order point. Using this system to calculate order points and order quantities for staple merchandise SKUs, orders can be transmitted directly to vendors using EDI without needing to involve the buyer.
e. See PPT 13-15. Can derive using a weighted average from past years. The buyer must include special sales that did not occur in the past in the percent distribution of sales by month. PPT 13-16. Fashion Merchandise Management System • The merchandise budget plan specifies the planned inventory investment in dollars in a fashion merchandise category over time. The "Monthly Additions to Stock” tells the buyer how much merchandise in retail dollars he or she needs to have arriving in the stores and available for sales each month for the retailer’s financial goals to be met. Monthly sales for April = $27.300 (i. Most merchandise has some seasonality. The percentage of total sales in a particular month doesn’t vary appreciably from year to year. then adjusting for current trends • See PPT 13-18.II. Even toilet paper -. Also called a seasonality index. and PPT 13-17 • • • A.fancy styles sell better during the holiday season when people have lots of guests in their houses. Monthly Sales (Line 2) • Monthly sales equal the forecast total sales for the six month period (last column) multiplied by each sales percentage by month (line 1). The buyer needs to plan how much merchandise should be delivered in each month to achieve the financial goals for the period. Monthly Sales Percent Distribution To Season (Line 1) • Line 1 of the plan projects what percentage of the total sales is expected to be sold in each month.000 X 21%) See PPT 13-19 • 354 . The “Monthly Additions to Stock” is derived by the following method. • B. The plan specifies how much money should be spent each month to support sales and achieve turnover and GMROI objectives. $130. so historical records are used to derive monthly percentages..
Beginning of Month Stock-to-Sales Ratio (Line 5) • The stock-to-sales ratio specifies the amount of inventory that should be on hand at the beginning of the month to support the sales forecast and maintain the inventory Like % distribution of sales by month. but sales drop off quickly. Monthly Reductions Percent Distribution to Season (Line 3) • To have enough merchandise every month to support the monthly sales forecast. so in May. See PPT 13-20 • See PPT 13-21 • D. 355 . But in July. by merchandise being misplaced or damaged. and discounts to employees. The buyer measures shrinkage by taking the difference between (1) the inventory's recorded value based on merchandise bought and received and (2) physical inventory in stores and distribution centers. Apart from sales. Markdowns can be forecast fairly accurately from historical records. they will run out of stock by the amount of merchandise that is put on sale or stolen. See PPT 13-22 • E.C. but sales don’t take off until May. $16. so stock-to-sales ratio decreases. if you put something on sale or if something is stolen. April reductions = $6. stock and sales are both increasing.e. In other words. monthly stock-to-sales ratios fluctuate by month. Tell them that they work in the same direction as sales. Total reductions are multiplied by each percentage in line 3. shrinkages.. Retailers have to not only buy enough to support their sales. the buyer must consider factors that reduce the inventory level. Cost of the employee discount is tied fairly closely to the sales level and number of employees and can be forecast fairly accurately from historical records. If they don't.600 (i. they also have to buy enough to support their reductions. • • Reductions are often difficult for students to understand. Shrinkage varies by department and season and typically also varies directly with sales.500 X 40%). Bathing suits start arriving in March. but sales are increasing faster. or by poor bookkeeping. but in opposite direction of sales. the value of the inventory is also reduced by markdowns. stores still have inventory. Shrinkage is caused by shoplifting by employees or customers. consider reductions. it reduces the value of the inventory at retail. Monthly Reductions (Line 4) • Monthly reductions are calculated the same way monthly sales are calculated.
turnover objective. It can be easily confused with the sales-tostock ratio. whereas inventory turnover either defines both sales and inventory at retail or at cost. Inventory turnover = Sales-to-stock ratio X (1 Gross margin %/100) • This adjustment is necessary since the salesto-stock ratio defines sales at retail and inventory at cost. 4. • • • The monthly stock-to-sales ratios in line 5 must average the BOM stock-to-sales ratio calculated above to achieve the planned inventory turnover. both the numerator and denominator can be either at cost or retail. resulting in an increase in stock-to-sales ratio. Step 1: Calculate sales-to-stock ratio. 3. 356 . • Average stock-to-sales ratio = 6 months ÷ Inventory turnover As with inventory turnover. As stated in chapter 12. • • The GMROI is broken down into gross margin and sales-to-stock ratio. GMROI = Gross margin % X Sales-tostock ratio 2. Step 4: Calculate monthly stockto-sales ratios. Step 2: Convert the sales-to-stock ratio to inventory turnover. See PPT 13-23 1. but one isn’t the inverse of the other. Step 3: Calculate average stock-tosales ratio.
Sales X (stock/sales) = stock. Adjustments are also made for changes in the current environment. In months when sales increase. BOM (Beginning of Month) Stock (Line 6) • The amount of inventory planned for the beginning of month (BOM) equals See PPT 13-24 Monthly sales (line 2) X BOM stock-to-sales ratio (line 5). to derive line 7. in months when sales are larger. EOM (End of Month) Stock (Line 7) • The BOM stock from the current month is the same as the EOM (end of month) stock in the previous month. monthly stock-to-sales ratios vary in the opposite direction of sales. That is. The merchandise buyer must consider the seasonal pattern for a classification in determining the monthly stock-to-sales ratios. That is. See PPT 13-25 357 . simply move BOM stock in line 6 down one box and to the left. Then the buyer makes minor corrections to adjust for previous imbalance in inventory levels. sales drops out of the equation. When doing a merchandise budget plan for a classification that has accumulated history. Caution: Monthly stock-to-sales ratios don’t change by the same percentage as the percent distribution of sales by month is changing.• Generally. the buyer examines previous stock-to-sales ratios. the inventory should be the same the next morning when the store opens at the beginning of the month. but at a slower rate. When a retailer closes for business at the end of the month. such as a promotion that has never been done before. • • • • F. So. G. stock-tosales ratios are smaller. stock-to-sales ratios decrease. and vice versa.
BOM inventory (line 6) The difference between EOM stock if nothing is purchased (BOM stock . Evaluating the Merchandise Budget Plan • GMROI. given turnover and sales objectives. After the selling season.sales reductions) and the forecast EOM stock is the additions to stock.H. however. and historical sales patterns. Additions to stock = Sales (line 2) + Reductions (line 4) + EOM inventory (line 7) . inventory turnover goals. Several additional questions must be answered to evaluate the buyer's performance. and the sales forecast are used for both planning and control. The previous sections have described how they all fit together in planning the merchandise budget. inventory turnover. • • 358 . Emphasize: Retailer should purchases amounts indicated in line 8 which is based on sales forecasts. Monthly Additions to Stock (line 8) • The monthly additions to stock is the amount to be ordered for delivery in each month. No performance evaluation should be based on any one of these measures. • See PPT 13-26 • I. it is important to determine how well the classification actually performed compared to the plan for control purposes.
sales might be greater than expected. Specifically. and the EOM projected inventory is calculated as follows: Projected EOM inventory = • actual BOM inventory + monthly additions 359 . meet the sales. See PPT 13-27 Now that buyer knows how much to spend in each month (based on merchandise budget plan). Shipments might not arrive on time. • • A. the buyer attempts to buy merchandise in quantities and with delivery dates such that the actual EOM (end of month) stock for a month will be the same as the projected or forecasted EOM stock. The open-to-buy system keeps track of merchandise flows while they are occurring. buyer must keep track of spending using open-to-buy. and/or reductions might be less than expected.e. and GMROI goals for a category). open-to-buy system record how much is spent each month.. These plans might be inaccurate.III. and therefore how much is left to spend. For the merchandise budget plan to be successful (i. The open-to-buy is the difference between the projected EOM inventory and the planned EOM inventory. Open-to-buy for a month = See PPT 13-28 • • • Actual EOM planned inventory – Projected EOM inventory • The EOM planned inventory is taken from the merchandise budget plan. Calculating Open-to-buy for the Current Period • Buyers develop plans indicating how much inventory for the merchandise category will be available at the end of the month. Open-to-Buy • The open-to-buy system starts after the merchandise is purchased using the merchandise budget plan or staple merchandising system. inventory turnover.
if a store represents 10 percent of a merchandise category’s sales. In other words. the next step in the merchandise management process is to allocate the merchandise purchased and received to the retailer’s stores.actual (received new merchandise) + on order (merchandise to be delivered) – sales plan (merchandise sold) – monthly reductions plan. • Thus the projected EOM inventory will be less than the planned EOM inventory if sales or reductions are greater than the merchandise budget plan or less merchandise is delivered than planned. • 360 . Amount of Merchandise to be Allocated to Each Store • One approach for allocating the amount of merchandise to stores is to make the allocation proportional to the forecasted sales for each store. Allocating Merchandise to Stores • After developing a plan for managing merchandise inventory in a category. that store is allocated 10 percent of the merchandise inventory. IV. See PPT 13-30 See PPT 13-29 • • A. (2) what type of merchandise to allocate. and (3) when to allocate the merchandise to different stores. Allocating merchandise to stores involves three decisions: (1) how much merchandise to allocate to each store. Many retailers have a created a position called either “allocators” or “planners” to specialize in making store allocation decisions.
Sell-Through Analysis See PPT 13-34 • • • • 361 . The third approach is a method for evaluating vendors using the multiattribute model. See PPT 13-31. The second procedure. Analyze Merchandise Performance • The next step in the merchandise management process is to analyze the performance of the process and make adjustments as necessary. is a method of rank-ordering merchandise to make inventory stocking decisions. Timing of Merchandise Allocation to Stores • Differences in the timing of category purchases across stores also need to be considered.B. Three procedures are used for analyzing merchandise management performance. The first. Buyers need to recognize regional differences and arrange for merchandise to be shipped to the appropriate regions when customers are ready to buy to increase inventory turnover in the category. A. compares actual and planned sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand. retailers classify stores according to the characteristics of the stores’ trading area. and 13-33 for illustrations of merchandise allocation decisions. known as ABC analysis. Store trade area geodemographics are used to develop merchandise assortments for specific stores. Type of Merchandise Allocated to Stores • In addition to classifying stores on the basis of their size and sales volume. • V. 13-32. a sell-through analysis. • C.
B. • • • ABC analysis identifies the performance of individual SKUs in the assortment plan. sales in units. and other merchandising issues.g. whether the merchandise is scheduled to be featured in advertising. 80% of a store's sales are generated by 20% of its sales force or 20% of its space.• A sell-through analysis is a comparison between actual and planned sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand. B items represent 10 percent of the SKUs and an additional 20 percent of sales. • • • • • • . The first step in the ABC analysis is to rank-order SKUs using one or more performance measures. The next step is to classify the items. Then. Measures commonly used in ABC analysis are sales dollars. ABC uses the general 80-20 principle that implies that approximately 80 percent of a retailer's sales or profits come from 20 percent of the products. on the basis of the classification. The store should pay close attention to the B 362 See PPT 13-36 and 13-37 Ask students to think of other instances where the 80-20 principle seems to work. whether the vendor can reduce the buyer's risk by providing markdown money. These items should never be out of stock. ABC Analysis See PPT 13-35 Ask students what action should be taken with the white and blue silk blouses Exhibit in PPT 13-31. what level of product availability to offer. e. The decision depends on experience with the merchandise in the past. A items account for 5 percent of items and represent 70 percent of sales.. and GMROI (gross margin return on investment). gross margin. determine whether to maintain the item in the assortment plan and if so. It is used to determine what SKUs should be in the plan and how much backup stock and resulting produce availability is provided for each SKU in the plan.
• 1. Develop a list of issues to consider in the decision. They might argue that the ratings and the importance weights are arbitrary. 3. See PPT 13-38 through 13-41 Students may find this a little too “academic. Multiattribute Method • The multiattribute analysis method for evaluating vendors uses a weighted average score for each vendor. Determine the vendors’ overall rating by summing the product for each brand for all issues to compute an overall rating.items. but get red of it. Most retailers with excess merchandise should have a simple decision strategy: Mark it down or give it away. Importance weights for each issue should be determined by the buyer/planner in conjunction with the merchandise manager. • • C items account for 65% of SKUs but contribute only 10 percent of sales. 5. Combine the importance and performance scores by multiplying the importance for each issue by the performance for each brand or its vendor. VI. ask them to consider how difficult it was to choose a college. A buyer can evaluate vendors by using five steps. A scale of 1 – 10. 2. But they really aren’t. A balance should be made between too short or too comprehensive a list of issues. These items had no sales whatsoever during the past season. but it may run out of some SKUs in the B category. Make judgments about each individual brand's performance on each issue. There are also D items. Doing a multiattribute model may have made their ultimate choice seem more rational. C. These represent excess inventory. with 1 being least important and 10 being most important. then you have to buy into the result. Summary Appendix 13A: Retail Inventory Method 363 . 4. having become out of date or shopworn. since it's not carrying the same amount of backup stock as for A items. If you buy into the weights and the ratings.” To make it a little more palatable. can be used.
Disadvantages of RIM • One disadvantage of RIM is based on the system’s use of average markup. they need to know the cost value of their inventory. RIM is useful for determining shrinkage. the amounts and percentages of initial markups. and shrinkage can be identified. whichever is lower. A. and prepare financial statements. Advantages of RIM • • • RIM has five advantages over a system of evaluating inventory at cost: The retailer doesn't have to "cost each item. C. and so forth as a percentage of retail. markdowns. As a by-product of RIM. evaluate performance. The Problem • Retailers generally think of their inventory at retail price levels. They take their initial markups. B. The book inventory determined by RIM can be used in an insurance claim in the case of a loss such as a fire.(RIM) • The first objective is to maintain a perpetual or book inventory in terms of retail dollar amounts. markdowns. The problem is that when retailers design their financial plans. rather than at cost. additional markups.” RIM follows the accepted accounting practice of valuing assets at cost or market. The second objective is to maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory. When markup percentages change substantially See PPT 13-46 See PPT 13-43 See PPT 13-42 • • See PPT 13-44 and 13-45 • • • 364 .
2. b. e. Record net sales. D. • Another disadvantage is that the recordkeeping process involved in RIM is burdensome. b. c. Calculate Total Goods Handled at Cost and Retail • • a. the cost figure could be distorted. Steps in RIM 1. Calculate net purchases by recording gross purchases and adjusting for returned merchandise to vendor. See PPT 13-47 through 13-43 for an illustration of the steps in RIM process. Calculate Retail Reductions • Reductions are the transactions that reduce the value of inventory at retail (except additional markup cancellations which were included as part of the total goods handled). Calculate net transfers by recording the amount of transfers in and out. Calculate markdowns. Record estimated shrinkage. or when inventory on hand is different from total goods. d. a. Record transportation expenses. The sum is the total goods handled. Record discounts to employees and customers. f. d. • • • • • • • • 365 . Record beginning inventory at cost and at retail.during a period. c. Calculate net additional markups by adjusting gross additional markups by any additional markup cancellations.
Total cost Total retail • The cumulative markup can be used as a comparison against the planned initial markup.• e.total reductions. The sum is the total reductions. The cost multiplier = (100% Cumulative markup%) or = Total cost Total retail • 4. 3. The cost multiplier is similar to the cost complement. The ending book inventory at cost is determined the same way that retail has been changed to cost in other situations: Ending book inventory at retail = ending book inventory at retail X cost multiplier • 366 . Calculate the Cumulative Markup and Cost Multiplier • The cumulative markup is the average percentage markup for the period. It is calculated the same way the markup for an item is calculated: Cumulative markup = Total retail . Determine Ending Book Inventory at Cost and Retail • • ending book inventory at retail = total goods handled at retail .
Reductions reduce the value of the inventory in the same way that a sale does. The merchandise budget plan measures shrinkage in monthly reductions along with markdowns and discounts. then the retailer needs to buy enough to cover reductions. How does the merchandise budget planning process account for inventory shrinkage? Shrinkage is caused by shoplifting by employees and/or customers.25 Stock-to-Sales = 2.75 X (1-. by merchandise being misplaced or damaged. or by poor bookkeeping. Using the following information.ANSWERS TO DISCUSSION QUESTIONS AND ANSWERS 1.75 Stock-to-Sales Inventory Turnover = 3.40 X Stock-to-Sales = 3.25 Stock-to-Sales = 6months / 2. is a very important part of the planning that is involved in the merchandise budget plan. Inventory shrinkage can be a problem for many retailers. If a retailer wants to have enough merchandise to satisfy the sales forecast and inventory turnover goals.66 367 . 40) Inventory Turnover = 2.000 Planned purchases = 34. 2.000 .000 Planned purchases = EOM + Sales .000 $90.000 + 24.000 $80. calculate additions to stock: Sales EOM stock BOM stock • • $24.000 3. Using the following information. calculate the average BOM stock-to-sales ratio for a sixmonth merchandise budget plan: GMROI 150% Gross Margin 40% • GMROI = GM% * Stock-to-Sales 150% • • • • = .80. Accounting for shrinkage then.BOM Planned purchases = 90.
Projected EOM stock = Projected BOM stock +Monthly additions actual -Planned Sales -Planned Markdowns Projected EOM Stock = $65.000 $25.000 Open-to-Buy = Planned EOM stock – Projected EOM stock Open-to-Buy = $65. $50.000 $5.000 -$30.000 Calculate the open-to-buy and explain what the number means to you.000 +$10.000 -$5.000 $50.000 * The buyer has $15.000 Open-to-Buy = $15.000 left to spend for merchandise for delivery in July. A buyer is attempting to assess his current open-to-buy given the following information: Actual BOM stock Monthly additions actual Merchandise on order to be delivered Planned monthly sales Planned reductions Planned EOM stock What is the open-to-buy on July 19? What does this number mean to you? Projected EOM stock = BOM stock +Monthly additions actual +Merchandise on order -Planned Sales -Planned Reductions Projected EOM Stock = $50.4.000 $50.000 $30.000 $50.000 -$20.000 $30.000 368 .000 $65.000 5. Now it is July 31. Today is July 19.000 $40.000 $5.$50.000 $10.000 -$5.000 +$25. and we need to calculate the open-to-buy for August given the following information: Planned monthly sales Monthly additions actual Planned markdowns Projected BOM stock Planned EOM stock $20.000 .000 +$40.
Open-to-Buy = Planned EOM stock – Projected EOM stock Open-to-Buy = $30. This ranking system is known as the ABC Analysis. however inversely proportional to the increase in sales because extreme increases in inventory is not needed to support higher levels of sales. which maintains that 80% of a retailer’s sales or profits come from 20% of the products. the buyer should expect to sell about 100 units in the first month.$65. the buyer should consider any environmental factors such as a particularly warm autumn. If the markdown strategy is chosen. “B”. What issues should the buyer consider in evaluating the selling season’s progress? Using a sell-through analysis.units on hand Units to be ordered = 156 . the buyer still has 375 parkas left. since a proportionate increase in inventory is not needed to support the increase in sales. the buyer should take drastic action. 8. Typically. Essentially. 10-day review time. the buyer should try to obtain markdown money from the vendor. Before deciding whether or not the merchandise is really selling significantly slower than it should be. If the weather is normal. or “C” categories depending upon the importance of each item. 9.65 Units to be ordered = 91 A buyer at a sporting goods store in Denver receives a shipment of 400 ski parkas on October 1 and expects to sell out by 31. August school supply sales are relatively low. 369 . sales increase tremendously. The retailer should make sure that the store has these items all the time. 7.000 more than he/she had planned. What is the order point and how many units should be reordered if a food retailer has an item with a 7-day lead-time. Using the 80-20 principle.000 Open-to-Buy = (-$35.000 . if the selling season is supposed to be four months. In September. such as marking down the parkas or promoting them. On November 1. The “C” category items are not that important and the retailer should try to only special order these items for specific customer orders. the retailer should divide the inventory into “A”. and daily demand of 8 units? Say 65 units are on hand and the retailer must maintain a backup stock of 20 units to maintain a 95 percent service level? Order point = daily demand (lead time + review period) + backup stock Order point = 8 (7 + 10) + 20 Order point = 156 Units to be ordered = Order point . The “B” category items are important but the retailer can afford to be out of these items once in a while. How does the September stock-to-sales ratio differ from the August ratio? As sales increase the stock/sales ratio should decrease. how can a retailer make certain it has enough inventory of fastselling merchandise and a minimal amount of slow-selling merchandise? Retailers should rank products by the 80-20 principle. 6.000) * The buyer has purchased $35. The decrease is not. The “A” category items are those that are most important.
or approximately 60 days of stock on hand at the beginning of the month. the stock-to-sales ratio of 2 implies 8 weeks of supply. Weeks of supply is simply the months of supply times four weeks. 11.10. A buyer is trying to decide from which vendor to buy a certain item. how many months of supply do you have? How many weeks of supply? A stock-to-sales ratio of 2 means we have two months of inventory. 370 . Therefore. VENDOR PERFORMANCE Issues Reputation for collaboration Service Meets delivery dates Merchandise quality Gross margin Brand name recognition Promotional assistance Importance Weight 8 7 9 7 6 5 3 Vendor A 9 8 7 8 4 7 8 Vendor B 8 x 8 = 64 7 x 7 = 49 9 x 8 = 72 7 x 4 = 28 6 x 8 = 48 5 x 5 = 25 3 x 8 = 24 310 Vendor B 8 7 8 4 8 5 8 Vendor A 8 x 9= 72 7 x 8 = 56 9 x 7 = 63 7 x 8 = 56 6 x 4 = 24 5 x 7 = 35 3 x 8 = 24 330 Therefore the buyer should choose Vendor A. If you have a stock-to-sales ratio of 2. determine from which vendor the buyer should buy. Using the following information.
200 12.21. merchandise requirements consist only of planned ending inventory (beginning inventory for next month) and sales.800 19. daily demand of 18 units. Planned sales for the period are $5.000 21. What is the reorder point.000 8. For this problem.000 + 2. How should she adjust the alpha in her exponential smoothing formula? The reason that she is constantly out of stock is because the exponential smoothing formula is not reacting quickly enough to changes in demand. She is using an SKU based inventory system similar to INFOREN. To correct this situation the buyer should experiment with increasing alpha. A buyer notices that she is constantly out of stock on Eveready AAA Batteries. a review time of 15 days.400 5.8.000 Open-to-buy = Planned purchases – Monthly additions actual -Merchandise on order + Sales adjustment + Unused open-to-buy Open-to-buy = 32. Merchandise budget planning. 3.000 + 750 = 5. So we can determine open-to-buy as follows: Merchandise requirements: Planned ending inventory Planned sales Merchandise requirements Merchandise available: Beginning inventory Open-to-buy $13. What is the difference between open-to-buy and merchandise budget planning? Open-to-buy keeps track of how much you’ve spent—the “buyer’s” checkbook. is driven by two factors: sales forecast and inventory turnover. and there 371 .000 .” It is a simple record-keeping function.000 $7. on the other hand.000 and planned ending inventory of $13. Using the following information.200 4.800.ADDITIONAL DISCUSSION QUESTIONS AND PROBLEMS 1. and how many units should be reordered if a retailer has an item that has a lead time of 10 days.000 2. calculate the March open-to-buy: Planned purchases (March) Monthly additions actual Merchandise on order (March) Open-to-buy unused (February) $32.000 .750 2. A retailer is expecting a good month and is adjusting the sales forecast upward by $750.400. Calculate the open-to-buy for the month. 5. The Sports Shop has beginning inventory of $12.
Last year's sales for this department reached $312.are 82 units on hand and the retailer must maintain a backup stock of 27 units to maintain a 95% service level? Reorder point = Daily demand (Lead time + Review period) + Backup stock Reorder point = 18 (10 + 15) + 27 Reorder point = (18 x 25) + 27 Reorder point = 450 + 27 Reorder point = 477 Units to be ordered = Reorder point . ------------------------------------------------The situation For years. maintaining a Gross Margin of 55%. In the recent past.units on hand Units to be ordered = 477 . Department 007 happens to be the most profitable department in the store. 372 .000. The highest sales period in the early football season in September when much sports equipment is sold for high school and college football teams.000 for the July through December season.000. Last year's sales volume was $45. Its basic merchandise is sporting goods and equipment.82 Units to be ordered = 395 ANCILLARY LECTURES AND EXERCISES EXERCISE # 13-1: JENNING'S DEPARTMENT STORE: THE PREPARATION OF A MERCHANDISE BUDGET PLAN ------------------------------------------------Instructor’s Note: This is an exercise in which students have the opportunity to prepare a merchandise budget plan. however Jenning's has been losing market share to competition in the area. Instructors might want to use this lecture as a stimulus to a class discussion on the topic. Jenning's is planning to enforce a strong promotional advertising campaign which will increase sales by 5% for the coming year. To counteract this problem. This exercise can be given as a homework assignment or may be used as a class exercise. Jenning's has catered to the middle and upper income groups by consistently carrying products of extremely high quality.
2 4. prepare a month by month merchandise plan for this 6 month season.0 For the first time.9 9.4 Aug.3 Nov.5 Nov. 7.3 11. 2. an "After-Thanksgiving" sale has been planned in an attempt to counter-balance the slackened sales period that inevitably follows in the later months.1 Sept. The GMROI was based on the target Return on Owners Equity and the current Strategic Profit Model.4 Oct.9 Dec. July 2.9 7. On the basis of this information. Additional information is available on the historical stock-sales ratio for this type of department figured on the basis of BOM inventories. Forecasted ending stock level is $58. Give reasoning for your judgment.0 5. 2.4 5. 8. The Solution The solution to this case begins with forecasting next year's sales for the department.000.2 8.By month the percentage of annual sales for Department 007 within this 6 month period has been distributed as follows: 1977 1978 1979 1980 July 5. 6.5 11. The manager anticipates that this event will increase December's percentage of annual sales to 25% above what it would be without the sale. 3.9 Oct. This information is taken from a similar department in another store that happens to have a lower inventory turnover.4 7. 1. 9.9 This is the information that the manager of Department 007 has available for the preparation of this merchandise plan.1 6.6 8. 373 .9 6. Top management has approved the proposal.3 Aug. and insists that the department maintains a Gross Margin Return on Investment of 44%.0 Dec 1.2 5.8 7. 11.2 9.0 Sept.1 8. The department manager has chosen to include basketball and hockey equipment for the sale along with the late summer and early fall merchandise.4 11.0 8.
Step 2 Step 3 Step 4 Step 5 December's original percentage of annual sales: 9.O. calculate the originally planned percentage distribution of annual sales for December and adjust accordingly from that figure.M. Step 6.05% = $327. Next.412 The overall sales forecast must be increased by this amount: $327.250 ÷ 335.1.44) Inventory cost = $75. Sales Forecast for Dept.O.412 = 335. we determine the percentage of annual sales for the rest of the months in a manner similar to the one used to determine this percentage for December. 1989=0. Use formula given to determine inventory turnover: Inventory turnover = (Net sales ÷ Inventory cost) x (100% . 244% = (184.Gross margin) Inventory turnover = (335.600 + 7.648 Management expects a 25% increase in December's sales: $29.M.9(0.O. Stock-to-sales ratio = 3 Next.2(0. 1990=0.) Stock-to-Sales Ratio must be altered to reflect the six month schedule of this particular case. In order to do this we must first determine the gross margin for the department in dollars. 007: $312. Gross margin for Dept.250 ÷ 2.000 x 1. Use a weighted average for this purpose.600 x 9. The weights will be as follows: 1988=0. 007: $335.Step 1.M.05% December's sales in dollars: $327.3.250 We then use the formula given on the worksheet and the figures we have already calculated (along with those given) to determine the Inventory Cost.4. Stock-to-Sales Ratio: B.000 ÷ Inventory cost) Inventory cost) Inventory cost = (184. In order to do this.000) x (335.2.000 ÷ 75.600 The forecast is not complete because we must account for the expected increase in sales in December.648 x 25% = $7. the weighted average.3) +9.05% = $29. 374 .O.4) = 9.55%) Inventory turnover = 2 The formula for the Beginning of Month (B.M.512) x (100% .012 or approx. and 1991=0. 335. Step 7 Calculate inventory cost: Planned GMROI = (Gross margin ÷ Net sales) x (Net sales ÷ Inventory cost).1(0.1) + 8.000.M. due to the planned sale.000 x 55% = $184. Stock-to-sales ratio = 6 ÷ 2 B.512 Step 8.2) + 9.O. Step 9 Use formula to determine the B.0(0. Stock-to sales-ratio = # of months ÷ Inventory turnover B. we wish to do all the calculations necessary to complete the top portion of the Merchandise Budget worksheet.
(2.175. and December = 22.84.3(0.0(0. October = 16.1) + 6.58.2(0.0) = (2.24 7.13 -> 3.2) + 11.1) + 11.01.51%.47%.48 -> 2. set up another ratio to determine the figures needed.2(0.65%.13 Therefore: July = 3.1) + 7.61%. September = 22.208 Therefore: July = $35. November = 3.6(0.41 8.000 x 10.3) + 5.95%.26 ÷ new % New % = 10.Since December's sales were increased.0).4 ÷ July) July = 3.2) + 5.4) = 7. Stock-to-Sales Ratio.4) = 5.2) + 5.4 + 2. Next.51 Therefore: July = 10.9) ÷ 6 Average stock-to-sales ratio = 2.36. September = $76.0(0. so ignore them. It may be calculated to be 1. August = $40.74 -> 2.03 ÷ 100 = 5.98 11.413.26 -> 3.5 (which was distributed evenly to insure that the average remained 3.3 ÷ 3.3(0.M.3(0. and December = $75.2) + 8. determine Beginning of Month Stock-to-Sales Ratios (BOM Stock/Sales). November = $52.0(0. To do this.427. 375 .4(0.98.1 + 1.98. set up the final ratio: Step 14 (Other store average ÷ Jenning’s average) = (Other store monthly ÷ Jenning’s monthly).4) = 8.03 ÷ 100 = current % ÷ new % 50.3) + 6.4) = 11.3) + 8.81%. September = 2.9(0. Multiplying these percentages by the total sales. its stock-to-sales ratio must decrease.2(0. November = 15.5 + 3.Step 10 July Aug Sept Oct Nov 5.0 + 1. Beginning of Month Stock is determined by multiplying monthly sales by its respective B.3 Next. In this case.O.4(0. Step 13.208.31 50.23.9(0. we obtain the monthly dollar sales: Step 12 $335.1) + 8. reductions are not a consideration. a decrease of 0.9(0. October = $55. August = 2.91 -> 4.744.8(0.03 Now set up the following ratio to adjust the monthly percentage of sales so they will equal 100%: Step 11 50.4(0. Average stock-to-sales ratio = (2.3) + 11.3) + 7.26 5. First. October = 3.5(0.033. August = 11.83 11.4) = 6.2) + 7.* Note* .1) + 5.1(0.4(0.9 + 2. and December = 2.48 -> 1.51% = $35. determine the average for the stock-to-sales ratios from the other store that is considered to be similar to Jenning's.
000 4.200 4. EXERCISE # 13-2: DETERMING ENDING INVENTORY USING THE RETAIL INVENTORY METHOD Instructor’s Note: This is an exercise in which students have the opportunity to determine the ending inventory at retail and cost using the retail inventory method of accounting. Instructors might want to use this lecture as a stimulus to a class discussion on the topic. Monthly Additions to Stock is then computed by adding Monthly Sales to EOM Stock and subtracting BOM Stock.000 144.000 9. The Situation Use the retail inventory method of accounting to determine the ending inventory at retail and cost.400 400 220. This exercise can be given as a homework assignment or may be used as a class exercise.000 2.000 6.000 3. Beginning Inventory Gross Purchases .000 376 .e.000 1.000 60.000 230.000 RETAIL $70.400 3.000 20.000 2.000 2. EOM January = BOM February).800 3.Purchase Returns & Allowances Transfers In Transfers Out Freight In Additional Markup Additional Markup Cancellation Gross Sales Customer Return & Allowances Gross Markdowns Markdown Cancellations Employee Discounts Cash Discounts on Purchases Workroom Costs Operating Expenses COST $20.000 1.Then. End of Month Stock is equal to the Beginning of Month Stock for the following month (i.000 9.
000 9.000) ÷ $290.000) 138.000 (6.Returns Net Purchases Transfer In .000 (3.2% Ending book inventory at retail = total goods handled at retail .Consumer Returns & Allowanc Net Sales Markdowns .$160.000 (11.400 (400) 1.000 208.The Solution RETAIL INVENTORY METHOD COST Beginning inventory Purchases .000 .$208.000 (2.000) 7.000 RETAIL $70.8% The Cost Multiplier = cumulative markon (100% .200 (4.Markdown Cancellation Net Markdown Employee Discounts Total Reductions $20.000) 200.000 .000 Cumulative Markon = (total retail .2% = $45.000 160.000 1.000) 219.000 = $82.000 = 44.264 377 .000 220.000 2.total cost) ÷ total retail: ($290.total reductions: $290.cumulative markon %) = 55.Transfer Out Net Transfers Freight in Markups Markup Cancellations Net Markups Total Goods Handled Gross Sales .000 290.000 Ending book inventory at cost = ending book inventory at retail x cost multiplier: $82.000 1.000 144.000 3.800) (1600) 230.000 (20.000) (1000) 3.000 x 55.
” and reductions as total “outs. The ending book inventory at retail is simply the total “ins” minus the total “outs. The cost multiplier is very similar to the cost complement. Getting the ending book inventory at cost from the ending book inventory at retail is similar to getting from retail to cost—just multiply by the cost multiplier (the “kinda” cost complement). It can even be called a “kinda” gross margin because it is calculated the same way. it is the inventory you start with. plus what you purchase.Hints on Retail Method of Inventory • • • • • • • • • • • • Think of total goods handled as total “ins. it is always part of total goods handled.” In other words. The “ins” are basically what you start with (beginning inventory) . It can even be called a “kinda” cost complement because it is calculated from the cumulative markon in the same way that the cost complement is calculated from the gross margin. minus all the reductions to your inventory like sales and markdowns. plus what you purchase. plus or minus adjustments.” So. total “ins” minus total “outs” equal ending inventory. but it is over the entire inventory rather than just one item. Think of the cumulative markon as similar to the maintain markup or the gross margin. 378 . Reductions are only at retail. plus or minus adjustments If it is at both cost and retail.
How should retail buyers respond to these trends to manage these categories. maximize sales. 2004.” MMR. February 23.” MMR. and candy. “The jury’s still out on low-carb diets. Be prepared to discuss in class. 2. and meet the diverse set of consumer needs? 379 . June 28. 2004. February 23. “Low-carb craze is fueled by the affluent. 2004. decadent in demand.ADDITIONAL EXERCISE Exercise 13-1 Buying Merchandise to Match Consumer Trends Please read the following articles and answer the questions below. “Nutritious snacks are on the horizon. “Healthy. 2004. Describe the consumer trends impacting the following three merchandise categories: food. snacks.” MMR. May 31.” MMR. 1.
“Nutritious snacks are on the horizon. “Low-carb craze is fueled by the affluent.5B on low-carb foods last year 380 .” MMR.ADDITIONAL EXERCISE Exercise 13-1 with Answers Buying Merchandise to Match Consumer Trends Please read the following articles and answer the questions below. educated. snacks. fewer children. they want both healthy and decadent luxury candy brands People who buy low-carb foods are wealthy. 2004.” MMR.” MMR. February 23. and candy. February 23. HHI > $75K. snacks and candies are available and many new lowcarb product introductions are expected Hefty prices charged for low-carb versions Legal issues – labeling requirements/regulations will likely change for identifying carbohydrate content Regular snacks are selling well Snack bars and cereal bars have shown solid growth in sales More restaurants are offering a low-carb menu Consumers are bipolar on candy. 2004. 1. well traveled. decadent in demand. 2004. June 28. Be prepared to discuss in class. physically active. May 31. “The jury’s still out on low-carb diets. and use less coupons 32M carb-conscious Americas spent $2.” MMR. “Healthy. Describe the consumer trends impacting the following three merchandise categories: food. - Americans are overweight and concerned with obesity Heightened interest in health and nutrition Is the low-carb diet a fad or a trend? 17% to 19% of households have a family member on a low-carb diet This diet is hard to stay on long-term More low-carb versions of food. 2004.
Example: candy for kids that tie in with Harry Potter books and movies Add low-carb merchandise in wealthier zip codes Stock well known brands 381 .2. Example: have chips in the snack aisle and near the deli counter Offer private label brands Plan shelf space carefully so consumers can find desired merchandise License popular characters and brands. How should retail buyers respond to these trends to manage these categories. the higher price Work with vendors to have the best merchandise available Place merchandise in more than one store location. sugar free. low-carb and regular/original - Heavily promote these categories Educate consumers on the benefits of these healthy choices vs. maximize sales. and meet the diverse set of consumer needs? Offer consumers a lot of choices: fat-free.