Chapter 13
Merchandise Planning
McGraw-Hill/Irwin
Retailing Management, 6/e
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
13-2
Merchandise Management
Planning
Merchandise
Assortments
Retail
Communication
Mix
Merchandise
Planning
Systems
Buying
Merchandise
Pricing
13-3
Types of Buying Systems
The McGraw-Hill Companies Inc./Ken Cavanagh Photographer
Fashion Merchandise
Unpredictable Demand
Limited Sales History
Difficult to Forecast Sales
The McGraw-Hill Companies, Inc./Lars A. Niki,
photographer
Staple Merchandise
Predictable Demand
History of Past Sales
Relatively Accurate
Forecasts
13-4
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
SKU level
•Forecasting future SKU demand with allowances made for
seasonal variations and changes in trend
•Developing ordering decision rules for optimum restocking
13-5
Staple Merchandise Planning
Most merchandise
at home
improvement
centers are
staples.
Ryan McVay/Getty Images
13-6
Inventory Levels for Staple Merchandise
13-7
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
Relationship between Inventory
Investment and Product Availability
600
500
400
300
200
100
0
80
85
90
95
Product Availability (Percent)
100
13-8
13-9
Cycle and Backup Stock
Units Available
150 -
Order 96
Cycle
Stock
100 Buffer
Stock
50 -
0-
1
2
3
Weeks
4
13-10
Basic Stock List
•
Indicates the Desired Inventory Level for
Each SKU
– Amount of Stock Desired
Lost Sale Due
to Stockout
Cost of Carrying
Inventory
Inventory Management Report for
Rubbermaid Merchandise
13-11
13-12
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.
• 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
13-13
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.
13-14
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
Merchandise Planning for
Fashionable Merchandise
• Steps in Developing a Merchandise Budget
Plan
• 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
13-15
13-16
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
13-17
13-18
Monthly sales percent Distribution to Season
(Line 1)
Sales % Dist. to
1. Month
6 mo. data
100.00%
April
21.00%
May
12.00%
June
12.00%
July
19.00%
Aug
21.00%
Sept
15.00%
13-19
Monthly sales (Line 2)
Sales % Dist. to
1. Month
6 mo. data
April
May
100.00%
21.00% 12.00%
2. Mo. Sales $130,000
$27,300 $15,600
June
July
Aug
12.00% 19.00% 21.00%
$15,600 $24,700 $27,300
Sept
15.00%
$19,500
13-20
Monthly Reductions Percent Distribution
(Line 3)
Reduction % Distribution to
3. Month
6 mo. data
100.00%
April
40.00%
May
14.00%
June
16.00%
July
12.00%
Aug
10.00%
Sept
8.00%
13-21
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
13-22
Monthly Reductions
Reduction % Distribution to
3. Month
6 mo. data
April
100.00%
40.00%
4. mo.
reductions $16,500
$6,600
May
14.00%
$2,310
June
16.00%
$2,640
July
12.00%
$1,980
Aug
10.00%
$1,650
Sept
8.00%
$1,320
Beginning of Month Stock to sales ratio
(Line 5)
5. BOM Stock to Sales Ratio
6 mo. data
April
4.0
3.6
May
4.4
June
4.4
July
4.0
Aug
3.6
Sept
4.0
13-23
13-24
BOM Stock (Line 6)
6. BOM Inventory
6 mo. data
98280
April
98280
May
68460
June
68640
July
98800
Aug
98280
Sept
78000
13-25
EOM Stock (Line 7)
7. EOM Inventory
6 mo. data
85600
April
68640
May
68460
June
275080
July
98280
Aug
78000
Sept
65600
13-26
Monthly Additions to Stock (Line 8)
8. Monthly additions to stock
6 mo. data April
113820
4260
May
17910
June
48406
July
26180
Aug
8670
Sept
8420
13-27
Open to Buy
Monitors Merchandise Flow
Determines How Much Was Spent and
How Much is Left to Spend
PhotoLink/Getty Images
PhotoLink/Getty Images
13-28
Six Month Open to Buy
13-29
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
13-30
Allocation Based on Sales Volume
13-31
Different Geodemographic Segments
13-32
Apparel Size Difference Across Stores
13-33
Sales of Capri Pants by Region
13-34
Analyzing Merchandise Management
Performance
Three types of analyses related to the
monitoring and adjustment step are:
• Sell through analysis
• ABC analysis
• Multiattribute analysis of vendors
13-35
Sell Through Analysis Evaluating Merchandise Plan
A sell-through analysis compares actual and planned sales to
determine whether more merchandise is needed to satisfy demand or
whether price reductions are required.
13-36
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.
ABC Analysis Rank Merchandise
By Performance Measures
13-37
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria
Ryan McVay/Getty Images
13-38
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
13-39
Multiattribute Method for Evaluating Vendors
Performance Evaluation of Individual
Brands Across Issues
Issues
Importance
Evaluation
of Issues (I)
(1)
Vendor reputation
Service
Meets delivery dates
Merchandise quality
Markup opportunity
Country of origin
Product fashionability
Selling history
Promotional assistance
n
Overall evaluation =
(2)
9
8
6
5
5
6
7
3
4
I *P
j
i 1
ij
Brand A Brand B Brand C Brand D
(Pa)
(Pb)
(Pc)
(Pd)
(3)
5
6
5
5
5
5
6
5
5
290
(4)
9
6
7
4
4
3
6
5
3
298
(5)
4
4
4
6
4
3
3
5
4
212
(6)
8
6
4
5
5
8
8
5
7
341
Evaluating a Vendor:
A Weighted Average Approach
n

I j * P ij
= Sum of the expression
i1
Ij
= Importance weight assigned
to the ith dimension
Pi
= Performance evaluation for
jth brand alternative on the
jth issue
1
= Not important
10
= Very important
13-40
13-41
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
13-42
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.
13-43
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)
13-44
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
13-45
• 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.
13-46
Disadvantages of RIM
System that uses average markup.
Record keeping process involved is
burdensome.
13-47
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
13-48
Retail Inventory Method Example
Total Goods Handled
Cost
Beginning inventory
Retail
$ 60,000
$ 84,000
Purchases
50,000
70,000
- Return to vendor
(11,000)
(15,400)
Net Purchases
39,000
54,600
Additional markups
4,000
- Markup cancellations
(2,000)
Net markups
2,000
Additional Transport.
Transfers in
- Transfers out
Net Transfers
Total Goods Handled
1,000
1,428
2,000
(714)
(1,000)
714
(1,000)
$100,714
$141,600
13-49
Retail Inventory Method Example
Total Goods Handled
Cost
Retail
Gross Sales
$ 82,000
- Consumer Returns & Allowances
( 4,000)
Net Sales
$ 78,000
Markdowns
6,000
- Markdown Cancellation
(3,000)
Net Markdown
3,000
Employee Discounts
3,000
Discounts to Customers
Estimated Shrinkage
Total Reductions
500
1,500
$ 86,000
13-50
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
13-51
Calculate Retail Reductions
Record net sales
Calculate markdowns
Record discounts to employees and customers
Record estimated shrinkage
The sum is the total reductions
13-52
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
13-53
Determine Ending Book Inventory at Cost and Retail
Ending book = Total goods handled at retail inventory at retail – total
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