Merchandise Management Systems

Factors to consider for Ordering

Basic stock plan Present inventory Merchandise on order Sales forecast

Rate of sales of SKU (Velocity) Seasonality

Typical Inventory Report

Qty on hand Bath Mat-Avacado Bath Mat-Blue Bath Mat-Gold Bath Mat-Pink 30 36 41 10 Qty on order 60 36 72 12 Sales last 4 weeks 72 56 117 15 Sales last 12 weeks 215 130 325 41 Foreca st next 4 weeks 152 115 243 13 Foreca st next 8 weeks 229 173 355 25 Produc t availab ility 99 95 99 90 Back up stock 18 12 35 3 Turnov er planne d 12 10 13 7 Turnov er Actual 11 10 13 7 Order point 132 98 217 13 Order qty 42 26 104 0

Typical Inventory Report

Qty available = Qty on hand + Qty on order Sales forecasts for the next 4 weeks and 8 weeks are determined by a statistical model Product availability is the variable set by the retailer to take out of stock chance

Inventory turnover: a decision variable set by the retailer based on financial goals

Forecasting Sales
Tradeoff Recent Sales Against Past History of Sales
Recognize Recent Trends, But Dont Over Weight Recent Experience

Exponential Smoothing Forecast = Old Demand + x (Recent Old) Demand 84 = 96 + 0.5 x (72 96) ranges for 0 to 1
Higher Weighs Recent Sales More

Basic Stock List

Indicates desired level for each SKU

Loss of sale due To Stock-out

Cost of carrying Inventory

Cycle and Buffer Stock

Units Available 150 100 50 0Buffer Stock

Order

Cycle Stock

3 Weeks

Buffer Stock

Depends on:

Forecast interval variance

Forecast interval =lead time + review time

Variance in demand = Actual demand forecasted demand Time to get product from supplier Time to get product from distribution center Product availability requested of Inventory Management systems

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 Assume:
Lead time = 14 days, review time = 7 days Demand = 7 units per day Buffer stock (Back up stock) = 20 units

Order point = 7 (14+7) + 20= 167 units

Typical 6-month Merchandise Budget Plan

Steps in Preparing Plan

Forecast Six Month Sales for Category Breakdown Total Sales Forecast into Forecast for each Month Plan Reductions for Each Month Determine Beginning of the Month (BOM) Stock to Sales Ratio Calculate BOM (beginning of month) Inventory Calculate EOM (end of month) Inventory Calculate Monthly Additions to Stock

Open to Buy (OTB)

Monitors merchandise flow Determines how much was spent and how much is left to spend OTB=(Projected Actual) EOM stock If OTB is zero, there is no need to buy the merchandise for the month that is already over

ABC Analysis

Rank merchandise by appropriate performance measures to determine items:

should never be out of stock Should be allowed to be out of stock occasionally Should be deleted from the stock selection

Performance Measures for ABC Analysis

Contribution margin Sales Rs/$ Sales in units Gross margin GMROI Use more than one criterion

Evaluating Vendors
Performance Evaluation of Individual Brands Across Issues
Issues (1) Importance Evaluation Brand A Brand B Brand C Brand D of Issues (I) (Pa) (Pb) (Pc) (Pd) (2) (3) (4) (5) (6)

Vendor reputation
Service Meets delivery dates Merchandise quality Markup opportunity Country of origin Product fashionability Selling history Promotional assistance Overall evaluation =
n

9
8 6 5 5 6 7 3 4

5
6 5 5 5 5 6 5 5 290

9
6 7 4 4 3 6 5 3 298

4
4 4 6 4 3 3 5 4 212

8
6 4 5 5 8 8 5 7 341

Ij *Pij
i 1

Retail Inventory Method (RIM)

Two objectives:

To maintain a perpetual or book inventory of retail rupee (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

Advantages of RIM
The retailer does not have to cost each time Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower Amounts % 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

Cumulative Markon = (total retail - total cost) / total retail: ($290,000 - $160,000) / $290,000 = 44.8% The Cost Multiplier = cumulative markon (100% - cumulative markon%) = 55.2% Ending book = total goods handled at retail - total inventory at retail reductions: $290,000 - $208,000 = $82,000 = ending book inventory at retail x cost

Ending book

inventory at cost multiplier $82,000 x 55.2% = 45,264

RIM Example - Part1

Total Goods Handled
Beginning inventory Purchases - Return to vendor Net Purchases Additional markups - Markup cancellations Net markups Additional Transport. Transfers in - Transfers out Net Transfers Total Goods Handled 1,428 (714) 714 $100,714 1,000 2,000 (1,000) 1,000 $141,600 50,000 (11,000) 39,000 4,000 (2,000) 2,000

Cost
$ 60,000

Retail
$ 84,000 70,000 (15,400) 54,600

RIM Example Part 2

Total Goods Handled (Reductions) Gross Sales Retail $ 82,000

- Consumer Returns & Allowances

Net Sales Markdowns

( 4,000)
$ 78,000 6,000

- Markdown Cancellation
Net Markdown Employee Discounts Discounts to Customers Estimated Shrinkage Total Reductions

(3,000)
3,000 3,000 500 1,500 $ 86,000

RIM Example Part 3

Cumulative markup = Total retail - Total cost Total retail = 141600 100714 = 28.87% 141600 If the cumulative markup is higher than planned, the category is doing better than planned. Cost Multiplier = (100-cumulative markup)% = (100- 28.87) = 71.13% Cost multiplier is used to determine the ending book inventory at retail.

RIM Example Part 4

Ending Book Inventory at Retail and cost Ending book inventory at retail value = Total goods handled Total reductions =$141600 $86000 = $55600 Ending book inventory at cost = Ending book inventory at retail x cost multiplier = $55600 x 71.13% = $39548