MERCHANDISING II

Smitu Malhotra
 MERCHANDISE PLANNING PROCESS

• FORECASTING SALES
• DEVELOP AN ASSORTMENT PLAN
• DETERMINE APPROPRIATE INVENTORY LEVELS
• DEVELOPING A CONTROL SYSTEM FOR MANAGING INVENTORY
• ALLOCATE MERCHANDISE TO STORES
• BUY MERCHANDISE
• MONITOR AND EVALUATE PERFORMANCE
FORECAST CATEGORY SALES
 TYPES
Staple Merchandise Fashion Merchandise
Predictable Demand Unpredictable Demand
History of Past Sales Limited Sales History
Relatively Accurate Forecasts Difficult to Forecast Sales
 TYPES OF MERCHANDISE

• Staple merchandise
• Assortment merchandise
• Fashion merchandise
• Seasonal merchandise
• Fad merchandise
 STAPLE MERCHANDISE

• Regular products carried by a retailer

• Grocery store staple examples
• Milk
• Bread
• Canned soup
• Basic stock lists specify inventory level, color, brand, style, category, size,
package, etc.
 ASSORTMENT MERCHANDISE

• Apparel, furniture, auto, and other products for which the retailer must carry a
variety of products in order to give customers a proper selection
• Decisions on Assortment
• Product lines, styles, designs, and colors are projected
• Model stock plan
 FASHION AND SEASONAL
MERCHANDISE

• Fashion Merchandise: Products that may have cyclical sales due to changing
tastes and life-styles
• Seasonal Merchandise: Products that sell well over nonconsecutive time
periods
 FORECAST CATEGORY SALES

• FOR STAPLE MERCHANDISE

• HISTORICAL SALES
• ADJUSTMENTS FOR CONTROLLABLE FACTORS
 FORECAST CATEGORY SALES

• FOR FASHION MERCHANDISE

• CATEGORY LIFE CYCLE

• PREVIOUS SALES DATA
• VENDOR INFORMATION
• MARKET RESEARCH
 HANDY HARDWARE S TORE,
A SIMP LE SALES F ORECAST US ING
PRODUCT CONTROL UNITS

Product Control Units Actual Sales Projected Growth/ Sales Forecast

2018 ($) Decline (%) 2019($)
Lawn movers/ snow blowers 200,000 +10.0 220,000
Paint and supplies 128,000 + 3.0 131,840
Hardware supplies 108,000 +8.0 116,640
Plumbing supplies 88,000 -4.0 84,480
Power tools 88,000 +6.0 93,280
Garden supplies/ chemicals 68,000 +4.0 70,720
Housewares 48,000 -6.0 45,120
Electrical supplies 40,000 +4.0 41,600
Ladders 36,000 +6.0 38,160
Hand tools 36,000 +9.0 39,240
Total year 840,000 +4.9 881,080
HANDY HARDWARE STORE, 2018 SALES BY
MONTH
Month Monthly Actual Sales ($) Sales Index
January 46,800 67
February 40,864 58
March 48,000 69
April 65,600 94
May 112,196 160
June 103,800 148
July 104,560 149
August 62,800 90
September 46,904 67
October 46,800 67
November 66,884 96
December 94,792 135
Total yearly sales 840,000
Average monthly sales 70,000
Average monthly index 100
HANDY HARDWARE STORE, 2019 SALES FORECAST
BY MONTH

Month Actual Sales Monthly Sales Index Monthly Sales Forecast 2017
2016 ($)
January 46,800 67 73,423 * .67 = 49,193
February 40,864 58 73,423 * .58 = 42,585
March 48,000 69 73,423 * .69 = 50,662
April 6,600 94 73,423 * .94 = 69,018
May 112,196 160 73,423 * 1.60 = 117,477
June 103,800 148 73,423 * 1.48 = 108,666
July 104,560 149 73,423 * 1.49 = 109,400
August 62,800 90 73,423 * .90 = 66,081
September 46,904 67 73,423 * .67 = 49,193
October 46,800 67 73,423 * .67 = 49,193
November 66,884 96 73,423 * .96 = 70,486
December 94,792 135 73,423 * 1.35 = 99,121
Total Sales 840,000 Total sales forecast 881,080
Average monthly sales 70,000 Average monthly forecast 73,423
ASSORTMENT PLANNING
 ASSORTMENT PLAN

• An Assortment Plan indicates on general terms what the retailer wants to

carry in a particular merchandise category

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 Assortment Plan for Girls’ Jeans
Styles T R A D I T I O N
A L
Price levels $20 $20 $35 $35 $45
$45
Fabric Reg denim Stone- Reg denim Stone- Reg denim
Stone-
composition washed washed
washed
Colors Light blue Light blue Light blue Light blue Light blue
Light blue

B O O T C U T
Price levels $25 $25 $40 $40
Fabric Reg denim Stone- Reg denim Stone-
composition washed washed
Colors Light blue Light blue Light blue Light blue
Indigo Indigo Indigo Indigo 17
Black Black Black Black
 Model stock plan –
Size Distribution for Traditional $20
Denim Jeans in Light Blue for a Large Store
Length/SIZE
1 2 4 5 6 8 10 12 14

Short 2 4 7 6 8 5 7 4 2 %
9 17 30 26 34 21 30 17 9 units

Medium 2 4 7 5 8 4 6 3 2 %
9 17 30 21 34 17 26 12 9 units

Long 0 2 2 2 3 2 2 1 0 %

0 9 9 9 12 9 9 4 0 units
Total 100%
429 units
• An assortment plan indicates that a buyer can purchase 1,000 units of
fashion wristwatches. The buyer must choose between buying 20 styles of
50 units each or 5 styles of 200 units each. In terms of the store’s
philosophy toward risk and space utilization, how does the buyer make
this decision?
• The buyer must understand the corporate philosophy toward risk
and space. If the philosophy is to take less risk and/or if there is
plenty of space, then the buyer will want to select the 20 styles
of 50 units each, because the general rule of thumb is that a
retailer will have less risk of large losses if the assortment is
diversified. Also a diversified assortment requires more space to
be devoted to it. If, on the other hand, the corporate philosophy
is to encourage risk and/or there is limited space, then the buyer
will probably want to choose 5 styles of 200 units.
INVENTORY PLANNING
• Inventory levels are planned for a time period. The level must be sufficient to
meet sales expectations, allowing a margin for error
• The objective is to manage flow of merchandise into the stores so that the
amount of inventory is minimized but the merchandize is still available for
customers.
 FOR STAPLE MERCHANDISE

• How the orders, deliveries ,inventory levels and merchandise sales will evolve
over time ?
• So control system to manage the flow of merchandise
• – for staple good – automatic continuous replenishment control system
 INVENTORY PLANNING

• Basic stock (at retail) = Average monthly stock at retail – Average monthly sales
• BOM = Planned sales at retail + Basic stock
• The weeks’ supply method forecasts average sales weekly, so beginning inventory equals
several weeks’ expected sales:
 
Beginning-of-month inventory = Plan sales x Number of weeks to
be stocked

• the stock-to-sales method, a retailer wants to maintain a specified ratio of goods on hand
to sales.
• A ratio of 1.3 means If sales are 69018 – then inventory shd be 89723 at retail .
 MONTH PLAN SALES -$

JAN 30,000

FEB 60,000
BASIC STOCK METHOD MAR 90,000

APRIL 60,000

MAY 60,000

• CALCULATE BOM INVENTORY JUN 30,000

• GIVEN INVENTORY TURNOVER OF JULY 30,000

4.0
AUG 60,000
• BASIC STOCK = AVG INVENTORY –
SEPT 60,000
AVG SALES
OCT 90,000

NOV 120,000

DEC 30,000

TOTAL 720,000
• TURNOVER = NET SALES/AVG
INVENTORY
• 4= 720000/X
• AVG INVENTORY = 720,000/4=180,000
• AVG SALES = 720,000/12=60,000
• BASIC STOCK = AVG INVENTORY –
AVG SALES
• =180,000-60,000=120,000
 • WEEKS SUPPLY METHOD
• WEEKS OF SUPPLY = 52/ TURNOVER

INVENTORY • IF TURNOVER =6 THEN WEEKS SUPPLY =

PLANNING 52/6=8.7
• PLAN INVENTORY = PLAN SALES X WEEKS OF
SUPPLY
• = $5000 x 8.7 = $43,500
 • Reorder points are based on three factors.
• Order lead time is the period from the date an order is
placed by a retailer to the date merchandise is ready for
sale.
• Usage rate refers to average sales per day, in units, of
WHEN TO REORDER merchandise.
• Safety stock is the extra inventory that protects against
out-of-stock conditions due to unexpected demand and
delays in delivery.
• Reorder point = Usage rate x Lead time + Safety stock
FOR FASHION MERCHANDISE
 Six-Month Merchandise
Budget Plan for Men’s Tailored Suits
 • Forecast Six Month Sales for Category
• Breakdown Total Sales Forecast into Forecast for
each Month (lines 1, 2)
• Plan Reductions for Each Month (lines 3, 4)

STEPS IN • Determine Beginning of the Month (BOM) Stock to

PREPARING PLAN Sales Ratio (line 5)
• Calculate BOM Inventory (line 6)
• Calculate EOM Inventory (line 7)
• Calculate Monthly Additions to Stock (line 8)
 OPEN TO BUY

• Monitors Merchandise Flow

• Determines How Much Was Spent and

How Much is Left to Spend
SIX MONTH OPEN TO BUY
 • Projected EOM stock =
• Actual BOM stock
• + Actual monthly additions to stock (what was
OPEN-TO-BUY FOR actually received)
CURRENT PERIOD
• + Actual on order (what is on order for the
(I) month)
• - Plan monthly sales
• - Plan reductions for the month
 • Open-to-buy =
OPEN-TO-BUY FOR
• Planned EOM stock (from merchandise budget plan)
CURRENT PERIOD
(II) • Minus Projected EOM stock (based on what is really
happening)
ALLOCATING MERCHANDISE TO
STORES
 •Allocating merchandise to stores involves three
decisions:

• how much merchandise to allocate to each store

• ALLOCATION BASED ON SALES VOLUME
ALLOCATING
MERCHANDISE TO
• what type of merchandise to allocate
STORES
• STORE TRADE AREA GEODEMOGRAPHICS

• when to allocate the merchandise to different stores

• SEASONALITY AND CONSUMER DEMAND
LEVELS
 Breakdown by Store of
Traditional $35 Denim Jeans in Light Blue

(1) (2) (3) (4) (5) (6)

TYPE OF NUMBER OF % OF TOTAL SALES PER SALES PER UNIT SALES
STORE STORES SALES, EACH STORE (TOTAL STORE TYPE PER STORE
STORE SALES X COL. 3) (COL. 2 X COL. 4) (COL. 4/$35)

A 4 10.0% $15,000 60,000 429

B 3 6.7 10,000 30,000 286
C 8 5.0 7,500 60,000 214

Total sales $150,000

Source: Banner Distributing Company, Denver, Colorado; used with permission.

 Merchandise Performance
ANALYZING • ABC Analysis
MERCHANDISE • Sell Through Analysis
MANAGEMENT Vendor Analysis
• Multiattribute Method
 • Rank - orders merchandise by some performance
measure determine which items:
• should never be out of stock.
ABC ANALYSIS
• 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 Value
• Sales in Units
• Gross Margin
• GMROI
Use more than one criteria
 ABC Analysis for Dress Shirts
C 100
10% Sales
B
90
20% 80
Percentage of Sales Dollars 70
60
A 50
70% 40
30
20
10
0

No Sales

10 20 30 40 50 60 70 80 90 100
A 10%
5% B 65% C D
20%

Percentage of Items
 Sell-through Analysis for Blouses

Week 1 Week 2
Stock Actual-to-Plan Actual-to-Plan
Number Description Plan Actual Percent. Plan Actual Percent.
1011 -Sm White silk V-neck 20 15 -25 20 10 -50

1011 -Med White Silk V-neck 30 25 -16.6 30 20 -33

1011 -Lg White Silk V-neck 20 16 -20 20 16 -20

1012 -Sm Blue Silk V-neck 25 26 4 25 27 8

1012 -Med Blue Silk V-neck 35 45 29 35 40 14

1012 -Lg Blue Silk V-neck 25 25 0 25 30 20

EVALUATING A VENDOR
 Evaluating a Vendor:
A Weighted Average Approach

= Sum of the expression

= Importance weight assigned

to the ith dimension

= Performance evaluation for

jth brand alternative on the
jth issue

1 = Not important

10 = Very important
 Evaluating a Vendor:
A Weighted Average Approach
Performance Evaluation of Individual
Brands Across Issues
Importance
Evaluation Brand A Brand B Brand C Brand D
Issues of Issues (I) (Pa) (Pb) (Pc) (Pd)
(1) (2) (3) (4) (5) (6)
Vendor reputation 9 5 9 4 8
Service 8 6 6 4 6
Meets delivery dates 6 5 7 4 4
Merchandise quality 5 5 4 6 5
Markup opportunity 5 5 4 4 5
Country of origin 6 5 3 3 8
Product fashionability 7 6 6 3 8
Selling history 3 5 5 5 5
Promotional assistance 4 5 3 4 7
Overall evaluation = 290 298 212 341
 • INTEGRATING DOLLAR AND UNIT CONTROLS
FINANCIAL
INVENTORY
• Stock turnover
CONTROL
• GMROI
 ILLUSTRATION

BREAD READY TO
EAT FOODS
SALES $150,000 $300,000

GROSS 1.33% 50%

MARGIN
 ILLUSTRATION

BREAD READY TO
EAT FOODS
SALES $150,000 $300,000

GROSS 1.33% 50%

MARGIN
AVERAGE $1000 $75,000
INVENTORY

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 • The buyer / merchandiser has control over the
merchandise they buy (inventory), cost of the said
E VA L U AT I N G merchandise and the price at which it is sold
ME R C H A N D I S E
MA N A G E ME N T • The financial ratio that is important to plan and
P E R F O R MA N C E measure merchandising performance is a return on
investment measure called gross margin return on
inventory investment (GMROI)

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 • It measures how many gross margin dollars are
earned on every dollar of inventory investment.
E VA L U AT I N G
ME R C H A N D I S E • GMROI is a very similar concept to return on assets,
MA N A G E ME N T only its components are under the control of the buyer
P E R F O R MA N C E / merchandiser rather than higher level executives.

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 GMROI

Combine Gross Margin% X sales to stock ratio

GMROI = Gross Margin x Net Sales
Net Sales Avg Inventory @ cost
GMROI = Gross Margin
Avg Inventory (@ cost)

Output (Margin Generated by Sales)

Input (Inventory Investment in Inventory)
 • Measure of productivity and performance of
Inventory.

GMROI • Deciding on credit terms with vendor.

• Stocks on the shelf.
• Margins for category basis inventory

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 • NO. OF UNITS SOLD / AVG NO. OF UNITS
CARRIED
• COGS/COST OF AVG INVENTORY
STOCK TURNOVER
• NET SALES / AVG INVENTORY @ RETAIL
• NET SALES / COST OF AVG INVENTORY=
SALES TO STOCK RATIO
 INVENTORY TURNOVER CONCEPT

• IT = sales / avg inventory

• Average inventory = BOM 1+ BOM2+BOM3….+BOM12+EOM 12/13

• EXAMPLE
• A JEWELLER SELLS 600 WATCHES EACH YEAR- EXACTLY SELLING
50 WATCHES A MONTH
• BUYS 600 WATCHES AT THE BEGINNING OF THE MONTH …….
• CALCULATE HIS TURNOVER ASSUMING HE SELLS ALL THE
WATCHES?
• 600+550+500+450+400+350+300+250+200+150+100+50+0/13 = 3900/13
=300
• IT= 600/300 = 2
• Scenario 2
• Jeweller buys 50 watches each month
• Therefore – avg inventory = 50+50+50+50+50+…….+0/13 = 600/13= 46
• IT = 600/46 =13
 • LOW TURNOVER
• MERCHANDISE APPEARS OLD
• SHOPWORN
• MONEY BLOCKED

HIGH VS LOW • HIGH TURNOVER – DESIRABLE BUT

TURNOVER • CAN LEAD TO STOCK OUTS/ CUSTOMERS MAY
FEEL TOO LITTLE CHOICE
• SMALL QUANTITIES – INCREASES ORDER
PROCESSING COSTS
• HAVE TO FORGO QUANTITY DISCOUNTS
Assume Sears is planning a special promotion for the upcoming holiday
season. It has purchased 2.5 million Santa Bears, a stuffed Teddy bear
dressed like Santa Claus, from a vendor in Taiwan. The GMROI for the
bears are expected to be 144% (gross margin = 24% and sales-to-stock ratio
= 6), about average for a seasonal promotion. Besides the invoice cost of the
bears, Sears will incur import fees, transportation costs from Taiwan to
distribution centers and then to stores, and distribution center and store
costs such as marking and handling. Since the bears arrived early in April,
additional storage facilities are needed until they are shipped to the stores
the first week of October. Is GMROI an adequate measure for evaluating
the performance of Santa Bears? Explain your answer.
• GMROI is not an adequate measure for evaluating the performance of
Santa Bears. GMROI only deals with Gross Margin, which in turn only
accounts for expenses found in Cost of Goods Sold. These expenses
only include the transportation costs and the import fees. However, the
distribution costs and more importantly, the carrying costs are not
included. Because the Bears arrived early in April and are not being
sold until October, there is money invested in the bears just sitting in
storage that could have been invested elsewhere. This is called the
opportunity cost of capital. Because the bears are being stored for 6
months, the carrying costs may be substantial, which will greatly affect
the bears net profit performance.
• Since GMROI ignores expenses, it is impossible to say
whether a 100.0% GMROI for this SKU is good, bad or
ugly. If the cost of selling, handling and processing the
SKU are 25.0% of sales, then a gross margin of 20.0%
leading to a 100.0% GMROI is woefully insufficient.
However, if said costs are 15.0% of sales, then the 100.0%
GMROI is wonderful.
• First, SKUs with very similar expense structures (all within a narrowly-defined
merchandise category, for example) can be compared directly on the basis of
their GMROI.

• Second, year-to-year changes can be evaluated with some degree of

confidence. If the 100.0% GMROI SKU achieves a 150.0% GMROI during the
next year, then things are getting better. The firm will not know when the SKU
stops being terrible and becomes simply bad or even graduates to good or
excellent. Higher is better than lower is all you get.
 CATEGORY ROLE MATRIX – CRM-

• Tool for analysis

• Helps in assortment -range rationalization

• Identify potential SKU’s to maximize sales and margins

 CRM

CATEGORY ROLE MATRIX: It is a two by three grid

which enables us to determine the position of the SKU
in the sub category. It works on margins and sales
While the earlier category definitions were from the
consumers perspective the CRM matrix is from the
point of the retailer and a tool for decision making.
CATEGORY ROLE MATRIX