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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

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

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

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. inventory of an item or SKU is sold, usually in annual terms

Category Management at Borders

In early 2001 Borders group reorganized to emphasize category management. As a result, Borders has broken down its business into specialized categorizes of books, childrens, multimedia, gifts and stationary, periodicals, calendars and caf. Before the change, sales, marketing and merchandising functions were aligned by type of outlet, i.e., Borders, Walden and


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, 12-pk

SKUs = 16

Assortment contd.
Support (Depth): Determination of how many units of merchandise are needed to support expected sales of each assortment factor (e.g. brand, type, size, color, etc.)
Rely on customer needs, past sales trends, image of department and store, 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 customers merchandise needs and the retailers 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

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

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, delays Base or cycle stock: amount sufficient to accomodate regular sales Lead time + Safety stock + Basic stock = Inventory Level

Als 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. The order point is 1500 (500 X 3 weeks). When inventory drops below 1500, more beer should be ordered.

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

Example contd.
We can then determine our order quantity by subtracting stock on hand from order ceiling.
Order Quantity = Order ceiling - stock on hand

Inventory Turnover
Turnover @ retail
Retail sales/Avg. inv. in retail $

Turnover @ cost
Cost of goods sold/avg. inv. at cost
Total $ Available for Sale= BI + Purchases COGS=Total $ available for sale - Ending inventory

Turnover based in units

# of units sold/Avg. inv. in units

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
Turnover = 4; Stock-to-sales = 3.0 Turnover = 2.8; Stock-to-sales = 4.28 Turnover = 10; Stock-to-sales = 1.2 Lower the turnover, the higher the stock-to-sales ratio

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 %, expressed as decimal)

Calculate average stock-to-sales ratio

Average stock-to-sales ratio = # months/inventory turnover

Calculate monthly stock-to-sales ratios

Stock ratios considerations

Dont 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

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 - BOM 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. inv. GMROI = gross margin/avg. inv. GMROI combines the effects of profits and turnover

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

Calculating Open-to-Buy for Future Periods

Calculate projected EOM stock
Projected BOM stock + actual order monthly sales - planned reductions

Open-to-buy = Planned EOM stock Projected EOM stock

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).