Lecture Retailing management (6/e): Chapter 13 - Levy Weitz

Lecture Retailing management (6/e): Chapter 13 - Merchandise planning. This chapter presents the following content: Types of buying systems, factors determining backup stock, basic stock list, order point, calculating the order point, shrinkage,...

Retailing Management, 6/e Copyright © 2007 by The McGraw­Hill Companies, Inc. All rights reserved.

Chapter 13 Merchandise Planning

Planning

Merchandise Assortments

Buying

The McGraw-Hill Companies Inc./Ken Cavanagh Photographer T

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

Staple Merchandise Planning

Ryan McVay/Getty Images

Most merchandise

at home improvement centers are staples

Inventory Levels for Staple Merchandise

Factors Determining Backup Stock

• Level of backup depends on product availability retailer

wishes to provide

• The greater the fluctuation in demand, the more backup

stock is needed

• The amount of backup stock needed is also affected by

the lead time from the vendor

• Fluctuations in lead time affect the amount of backup

stock

• Vendor’s product availability affects retailers’ backup

stock requirements

Investment and Product Availability

Product Availability (Percent)

Buffer Stock

Basic Stock List

• Indicates the Desired Inventory Level for Each SKU

– Amount of Stock Desired

Cost of Carrying

Inventory

Lost Sale Due

to Stockout

Inventory Management Report for

Rubbermaid Merchandise

Order Point

available should not go below or else we will

run out of stock before the next order arrives

• Assume Lead time = 0, Order point = 0

• Assume Lead time = 3 weeks, review time =

1 week, demand = 100 units per week

• Order point = demand (lead time + review

time) + buffer stock

• Order point = 100 (3+1) = 400

Order Point continued

• Assume Buffer stock = 50 units, then

• Order point = 100 (3+1) + 50 = 450

• We will order something when order point gets below 450 units.

Calculating the Order Point

Order Point = (Demand/Day) x (Lead Time

+Review Time) + Backup Stock

167 units = (7 units x (14 + 7 days) + 20 units

So Buyer Places Order When Inventory in Stock

Drops Below 167 units

• Set margin and inventory turn goals

• Seasonal sales forecast for category

• Breakdown sales forecast by month

• Plan reductions – markdowns, inventory loss

• Determine stock needed to support forecasted

sales

• Determine “open to buy” for each money

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,

inventory turnover, and

GMROI objectives

• Not a complete buying

plan doesn’t indicate what

specific SKUs to buy or in

what quantities Royalty-Free/CORBIS

Six Month Merchandise Plan for

Women’s Casual Slacks

(Line 1)

Sales % Dist to

1 Month 6 mo data April May June July Aug Sept 100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%

Shrinkage

Inventory loss caused by shoplifting, employee

theft, merchandise being misplaced or damaged and poor bookkeeping

Retailers measure shrinkage by taking the

difference between

1 The inventory recorded value based on

merchandise bought and received

2 The physical inventory actually in stores and

distribution centers

Beginning of Month Stock to sales ratio

(Line 5)

5 BOM Stock to Sales Ratio

6 mo data April May June July Aug Sept 4.0 3.6 4.4 4.4 4.0 3.6 4.0

BOM Stock (Line 6)

6 BOM Inventory

6 mo data April May June July Aug Sept

98280 98280 68460 68640 98800 98280 78000

Monthly Additions to Stock (Line 8)

8 Monthly additions to stock

6 mo data April May June July Aug Sept

113820 4260 17910 48406 26180 8670 8420

Open to Buy

Monitors Merchandise Flow

Determines How Much Was Spent and

How Much is Left to Spend

Six Month Open to Buy

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

Different Geodemographic Segments

Apparel Size Difference Across Stores

Sales of Capri Pants by Region

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

determine whether more merchandise is needed to satisfy demand or

whether price reductions are required.

ABC Analysis

An ABC analysis identifies the performance of individual

SKUs in the assortment plan.

Rank - orders merchandise by some performance

measure determine which items:

– should never be out of stock.

– should be allowed to be out of stock

occasionally.

– should be deleted from the stock selection.

Use more than one criteria

Ryan McVay/Getty Images

Multiattribute Method for Evaluating Vendors

The multiattribute method for

evaluating vendors uses a

weighted average score for

each vendor The score is

based on the importance of

various issues and the vendor’s

performance on those issues.

C Squared Studios/Getty Images

Multiattribute Method for Evaluating Vendors

Performance Evaluation of Individual

Brands Across Issues

Importance Evaluation Brand A Brand B Brand C Brand D Issues of Issues (I) (P a ) (P b ) (P c ) (P d)

(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 = I j * 290 298 212 341

A Weighted Average Approach

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 GMM (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

Retail Inventory Method: The Problem

Retailers generally think of their inventory at retail price

levels rather than at cost When retailers compare their

prices to competitors’, they compare their retail prices The

problem is that when retailers design their financial plans,

evaluate performance and prepare financial statements,

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)

Advantages of RIM

The retailer doesn't have to “cost” each

time.

Follows the accepted accounting practice

of valuing assets at cost or market,

whichever is lower.

Advantages of RIM cont’d

• Amounts and percentages 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 Example

Total Goods Handled Cost Retail

Retail Inventory Method Example

Total Goods Handled Cost Retail

Calculate Total Goods Handled at Cost and Retail

Record beginning inventory at cost and at retail

Calculate net purchases

Calculate net additional markups

Record transportation expenses

Calculate net transfers

The sum is the total goods handled

(c) Stockbyte/PunchStock

Calculate Retail Reductions

Record net sales

Calculate markdowns

Record discounts to employees and customers

Record estimated shrinkage

The sum is the total reductions

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

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