2 Chapter Objectives To define operations management To discuss profit planningTo describe asset management, including the strategic profit model, other key business ratios, and financial trends in retailingTo look at retail budgetingTo examine resource allocation
3 Operations Management Operations management involves the efficient and effective implementation of the policies and tasks necessary to satisfy the firm’s customers, employees, and management (and stockholders, if a public company).This has a major impact on both sales and profits.
4 Profit Planning Profit-and-loss (income) statement Summary of a retailer’s revenues and expenses over a given period of timeReview of overall and specific revenues and costs for similar periods and profitability
5 Major Components of a Profit-and-Loss Statement—Donna’s Gift Shop 2012 Net SalesCost of Goods SoldGross Profit (Margin)Operating ExpensesTaxesNet Profit After TaxesNet Sales$330,000CGS$180,000Gross Profit$150,000Operating Expenses$ 95,250Other Costs$ 20,000Total Costs$115,250Net Profit before Taxes$ 34,750Taxes$ 15,500Net Profit after Taxes$ 19,250
6 Percent Profit & Loss Statement: Donna’s Gift Shop 2012 Net salesCost of Goods SoldGross ProfitOperating ExpensesNet profit Before taxNet SalesCGSGross ProfitOperating ExpensesOther CostsTotal CostsNet Profit before TaxTaxesNet Profit after Taxes
7 Asset Management The Balance Sheet Assets Liabilities Net Worth Net Profit MarginAsset TurnoverReturn on AssetsFinancial Leverage
10 Increasing Profit Margins Increase sales of private label brandsCentralize buying to increase bargaining powerReduce SKUs in each category to increase bargaining powerReduce operating expenses via self-service operations, and through “buy on line, pick up in-store” to reduce delivery costsIncrease Web salesReduce labor expenses through increased use of part-time help, better scheduling
11 Increasing Asset Turnover 24/7 operationsOutsource delivery and credit operationsLease instead of own assets (virtual corporation owns few assets)Reduce inventory levels through quick response, through reducing product proliferation, and through drop shippingUtilize second-use locations to reduce store renovation expensesUtilize inexpensive fixtures—pipe rack, cut case displays
12 Other Key Business Ratios Quick ratio—cash plus accounts receivable divided by total current liabilities (due within one year).Current ratio—total current assets (including inventory) divided by total current liabilities.Collection period—accounts receivable divided by net sales and then multiplied by 365. (Aging accounts receivable).Accounts payable to net sales—accounts payable divided by annual net sales.Overall gross profit—net sales minus the cost of goods sold and then divided by net sales.
13 Financial Trends in Retailing Slow growth in U.S. economyFunding sourcesMergers, consolidations, spinoffsBankruptcies and liquidationsQuestionable accounting and financial reporting practices
14 Funding Sources Mortgage refinance (due to low interest rates) REIT (retail-estate investment trust) to fund constructionCompany dedicated to owning and operating income-producing real estateInitial public offering (IPO)
18 Benefits of BudgetingExpenditures are related to expected performance.Costs can be adjusted as goals are revised.Resources are allocated to the right areas.Spending is coordinated.Planning is structured and integrated.Cost standards are set.Expenditures are monitored during a budget cycle.Planned budgets versus actual budgets can be compared.Costs/performance can be compared with industry averages.
19 Preliminary Budgeting Decisions Specify budgeting authorityDefine time frameDetermine budgeting frequencyEstablish cost categoriesSet level of detailPrescribe budget flexibility
20 Cost ClassificationsCapital expenditures—long term investments (can be leased, often depreciatedFixed costs– constant over range of salesDirect costs—can be traced to departments, stores, productsNatural account expenses—classified by name such as salariesOperating expenses—short run expensesVariable costs-based on sales levelsIndirect expenses-general overhead that can be allocated to cost centersFunctional account expenses-classified by purpose or activity, such as cashiers, customer service personnel;
21 Bad Costs Bad costs are costs incurred for customer services that: Customers do not value (will pay not additional prices for)Are not required by customers
22 Causes and Examples of Bad Costs Over-centralizing stores operationsCommon hours of operation and services regardless of location needsReducing all expenses on a proportionate basisSome services are more highly valued like low waiting lines or custom-made sandwichesTrading-up to capture more affluent customersAlienating existing customers and not attracting more affluent ones
23 Causes and Examples of Bad Costs (cont) Not responding to changes in consumer behavior due to technologyIgnoring Web– order on-line and pick up in-store; using catalogs versus WebNot responding to competitionNot understanding low-cost competition, unbundled pricing opportunities
24 Ongoing Budgeting Process Set goalsSpecify performance standardsPlan expenditures in terms of performance goalsMake actual expendituresMonitor resultsAdjust budget
25 Cash FlowCash flow relates the amount and timing of revenues received to the amount and timing of expenditures for a specific time.In cash flow management, the usual intention is to make sure revenues are received before expenditures are made.If cash flow is weak, short-term loans may be needed or profits may be tied up in inventory and other expenses.For seasonal retailers, erratic cash flow may be unavoidable.
27 Resource Allocation Capital Expenditures Operating Expenditures Long-term investments in fixed assetsOperating ExpendituresShort-term selling and administrative costs in running a business
28 Enhancing Productivity A firm can improve employee performance, sales per foot of space, and other factors by better matching employee workloads to store traffic patters, upgrading training programs, increasing advertising, evaluating item profitability and turnover, etc.It can reduce costs by automating, having suppliers perform certain tasks, etc.
29 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.