1. Merchandise Management 11.1 Key Issues Stores as products Merchandise planning decisions Developing a successful merchandise plan What makes shoppers tick Assortment, depth issues Mechanics of merchandise management Inventory-level planning

2. Merchandise Management 11.2 Are Stores Products? Stores as products new product development product positioning target marketing product life cycle Note the kinds of products that characterize... Upscale department stores Discounters

3. Merchandise Management 11.3 Two Aspects to Merchandise Mgmt Merchandise Selection Decisions Merchandise Planning Decisions

4. Merchandise Management 11.4 Objectives of Merchandise Planning To meet corporate objectives To meet corporate objectives To define managements responsibilities To define managements responsibilities To establish timing guidelines for merchandise To establish timing guidelines for merchandise To forecast budgetary needs for merchandise Objective of good merchandise planning: improved customer service, leading to more loyalty and repeat business, which eventually leads to more new business and greater profits. The retailer wants to … To forecast budgetary needs for merchandise Objective of good merchandise planning: improved customer service, leading to more loyalty and repeat business, which eventually leads to more new business and greater profits. The retailer wants to … - get the right product - to the right stores - at the right time - to satisfy customers

5. Merchandise Management 11.5 Merchandising Organization Assistant Buyer Associate Buyer Buyer Divisional Merchandising Manager (DMM) General Merchandising Manager (GMM)

6. Merchandise Management 11.6 Merchandising Organization Girls Levi jeans, sz 5, stone washed blue, straight leg SKU Chairman Sr. vice pres merch mgr Womens ready- to-wear Sr. vice pres merch mgr Mens, childs, intimate apparel Sr. vice pres merch mgr Cosmet, shoes, jewelry, access. Sr. vice pres merch mgr Soft home furn., kitchen Div. merch manager Mens suits, slacks, dress shirts Div. merch manager Mens sports- wear, Polo Div. merch manager Young mens, boys apparel Div. merch manager Childrens apparel Div. merch manager Intimate apparel Buyer Preteen accessories Buyer Girls Size 7-14 Buyer Girls Size 4-6 Buyer Toddlers Buyer Infants Buyer Little boys SportswearDressesSwimwearOuterwear Merchandise Group Department Classification Category V.P. Planning Div Dir. Planning Mgr. Planning Planning Group

7. Merchandise Management 11.7 Developing a Successful Mdse Plan What Makes Retail Shoppers TickMerchandisePlan Innovativeness Brands Timing Forecasts Allocation Assortments

8. Merchandise Management 11.8 Staple Merchandise Assortment Merchandise Product Lines etc. Model Stock Plan Fashion Merchandise Seasonal Merchandise Fad Merchandise What Makes Shoppers Tick Forecasts Fashion Trends Retailers Image Competition Customer Segments Investment Costs Profitability Risk Innovativeness Vertical A designer trend which will change as it filters down to other mkts Horizontal A trend accepted by a wide no. of people on its introduction Fashion Trends AssortmentAssortment Types Manufacturer (National) Private Label (Dealer) Brands Product Quality Width Depth Considerations: Sales & Profit Space Requirements Inventory Turnover Cannibalization Width Depth WideNarrow Deep Shallow

9. Merchandise Management 11.9 Assortment Width & Depth Width Depth WideNarrow Deep Shallow Aimed at Convenience Customers Least Costly High Turnover of Items BUT Broad Market High Customer Traffic Emphasis on Conven. Shoppers Less Costly Than Wide and Deep One-Stop Shopping BUT Special Image Good Selection in Category(ies) Specialized Personnel Customer Loyalty No Disappointed Customers Lower Cost than Wide and Deep BUT Broad Market High Level of Customer Traffic Customer Loyalty One-Stop Shopping No Disappointed Customers BUT

10. Merchandise Management 11.10 General Merchandising Forecasting Innovativeness Assortment Allocation Category Management Software Available for All of These

11. Merchandise Management 11.11 Implementing Mdse Plans 1. Gathering Information about customer demand 2. Selecting & Interacting with Vendors 3. Evaluation of Mdse & Vendor 4. Negotiation of Price & Terms 5. Concluding Purchases 6. Receiving & Stocking Merchandise 8. Reevaluation of Mdse & Vendor 7. Reordering Establish a Formal or Informal Buying Organization Make Mdise Plans: What to Stock, How Much, When, Where in Store

12. Merchandise Management 11.12 Basic Mdse Mgmt Issues Knowing how much to buy in dollars The merchandise budget in dollars Open to buy The assortment plan Unit control systems Knowing what to buy in units and dollars Discounts and terms of sale Retailing/Vendor relationships Knowing how to make the buy

13. Merchandise Management 11.13 Mechanics of Merchandise Management: Dollars View Stock Balance Assortment Planning Variety $ Planning Turnover PurchasePlan ReductionPlanStockPlanSalesPlan Initial Markup Plan Retail $ Control Cost OTB Dollars Dollars Units Units 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Width. Which products, & the number of merchandise categories in a store or department. This is the Buyers decision. Depth or support. The number of SKUs within a category, & the inventory depth. Most often the invty control analysts decision

14. Merchandise Management 11.14 Mechanics of Merchandise Management: Units View Stock Balance Assortment Planning Variety $ Planning Turnover Purchase Plan Reduction Plan Stock Plan Sales Plan Initial Markup Plan Retail $ Control Cost OTB 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Width. Which products, & the number of merchandise categories in a store or department. This is the Buyers decision. Depth or support. The number of SKUs within a category, & the inventory depth. Most often the invty control analysts decision Dollars Units

15. Merchandise Management 11.15 Typical Sales Variations of Levis Fall sales --- typically 40 percent of annual sales Spring/Summer --- typically 15 percent of annual sales Winter sales --- typically 30 percent of annual sales.

16. Merchandise Management 11.16 Distributing Seasonal Sales Plans % of BusinessSeasonsPlanned Monthin 6 mos.Sales ForecastSales February10%$52,000$5,200 March10% 5,200 April25% 13,000 May15% 7,800 June30% 15,600 July10% 5,200 TOTAL100%$52,000$52,000

17. Merchandise Management 11.17 Reduction Planning Planned Planned Amount of MonthSalesReduction*Reduction February$5,20030%$1,248 March5,200---- April13,000---- May7,800---- June15,60030%1,248 July5,20040%1,664 TOTAL$52,000100%$4,160 * Percent of season total

18. Merchandise Management 11.18 Recall the Strategic Profit Model Return on Investment = x Net Profit Net Worth Asset Turnover Net Sales Total Assets Leverage Ratio Total Assets Net Worth Net Profit Margin Net Profit Net Sales x The Financial Objective The Financial Program (The SPM) Rate of Return on Assets

19. Merchandise Management 11.19 ROA vs GMROI x Asset Turnover Net Sales. Avg. Total Assets Net Profit Margin Net Profit Dollars Net Sales Rate of Return on Assets x Inventory Turnover Gross Profit Margin Net Sales. Avg. Inventory Gross Profit Dollars Net Sales Gross Margin Return on Inventory Investment The ROA measure is used by corporate management It can control G,S,&A & therefore net profit It can control total investment & therefore total assets

20. Merchandise Management 11.20 So … GMROI: GMROI = Gross Margin $ (@ Retail or Cost) Average Invty $ (@ Retail or Cost) x Inventory Turnover Gross Profit Margin Net Sales. Avg. Inventory Gross Margin Dollars Net Sales Gross Margin Return on Inventory Investment x GMROI = Gross Margin Avg Inventory = =

21. Merchandise Management 11.21 GMROI Examples GMROI= Gross Marg $X Net Sales = Gross Margin. Net Sales Average inventory Average Inventory Milk GMROI= $2,000 X $150,000 = $ 2,000 $150,000 1,000 1,000 =1.33%X 150 = 200% Caviar GMROI= $150,000 X $300,000 = $300,000 $300,000 75,000 150,000 =50%X 4 = 200% Milk Caviar Gross Margin$ 2,000$150,000 Sales 150,000 300,000 Average Inventory 1,000 75,000 Inventory Turnover Gross Profit Margin Gross Margin Avg Inventory

22. Merchandise Management 11.22 Discounts & Terms of Sale Terms of Sale: Conditions under which retailers must make payment to vendors. Trade discounts: A price reduction granted to retailers or wholesalers for performing services. Quantity discounts: Discounts from the invoice offered to retailers who purchase a specific quantity. Cumulative quantity discount: The values of all orders in a period are added together for the calculation of quantity discounts. Invoice: A bill sent by suppliers calling for payment. Invoice: A bill sent by suppliers calling for payment. Seasonal discounts: Discounts retailers earn by ordering or taking delivery of merchandise before the normal selling period is done. Terms of Payment: Conditions under which retailers must make payment to vendors. Cash discounts: Deductions in price given by suppliers for prompt payment of invoice.

23. Merchandise Management 11.23 Payment Requirements Shipping terms F.O.B. (Free on board): Merchandise is placed on board a truck, railroad car or airplane with title to goods passing from seller to buyer at the F.O.B. point. F.A.S. (Free alongside ship): At a named port the seller quotes a price for the goods including charges for delivery and loading alongside a vessel. C.I.F. (Cost, insurance, and freight): The seller quotes the price including transportation, insurance, and miscellaneous expenses. C.O.D. (Cash on delivery): The seller requires that the buyer pay for the goods at time of delivery. Advanced dating Vendors offer retailers more time in which to pay their bill in order to entice them to purchase their goods. Extra dating: One type of advanced dating which lengthens the time that retailers have to take advantage of cash discounts. EOM (End of month) dating: Under EOM dating, the ordinary period does not begin until the end of the month of the date shown on the invoice. ROG (Receipt of goods)dating: Under ROG dating, the terms of the discount do not begin until the date that goods are received in the store. Anticipation discount: Discounts given by some vendors as an inventive for early payment in the form of a percentage rate per year.

24. Merchandise Management 11.24 Inventory Level Planning Methods Basic stock method: The retailer buys an amount equal to planned sales plus a basic stock E.g., BOM invty = planned sales + basic stock Percentage variation method: Recommended when stock turnover is > 6 times per yr. Actual stock on hand in any month is allowed to vary by only half of the months variation from avg. estimated monthly sales E.g., if we expect a month to have a sales increase of 14% over the avg. month, invty for that month is increased by only 7% E.g., if avg invty = $100k, sales = $70K/mo. & planned sales = $80K, then BOM invty = $100K x ½(1 + $80K/$70K) = $107K Weeks supply method: Assumes stock is carried in proportion to sales -- stock on hand equals several weeks sales E.g., BOM invty = avg weekly sales x # weeks Stock-to-sales ratio method: Assumes the retailer wants to keep a specified ratio of mdse to sales. E.g., a ratio of 3 means that an expected $10K month must be supported by $30K invty