2 Questions How does a staple merchandise buying system operate? What is a merchandise budget plan and how is it developed?What is an open-to-buy system?
3 The actual management of a retailer’s inventory on a daily basis is quite complex. Example: Walmart 100,000 SKUMultiple items per SKURetailers use computer-based merchandise planning systems to assist with this challengeTwo Distinct types:One for staple merchandiseOne for fashion merchandise
4 Types of Merchandise Management Systems Staple MerchandisePredictable DemandRelatively Accurate ForecastsContinuous ReplenishmentManages Inventory at the SKUlevelFashion MerchandiseUnpredictable DemandDifficult to Forecast SalesMerchandise Budget PlanManages Inventory at the category levelThe McGraw-Hill Companies, Inc./Lars A. Niki, photographerThe McGraw-Hill Companies Inc./Ken Cavanagh Photographer
5 Staple Merchandise Management Systems Staple merchandise planning systems perform three primary functions :Monitor and measure current SKU salesForecast future SKU demand with allowances made for seasonal variations and changes in trendDevelop ordering decision rules to determine when and how much to reorder
7 Backup StockExtra stock the retailer keeps on hand as a cushion so it doesn’t stock out before the next order arrives.Also called safety stock or buffer stock
8 Order PointThe amount of inventory below which the quantity available should not go or the item will be out of stock before the next order arrives.Tells the buyer that when the inventory level drops to this point, additional merchandise should be orderedOrder point = sales/day (lead time + review time) + backup stockAssume Lead time = 14 days, review time = 7 days, demand = 10 units per dayAssume backup stock = 50 units, thenOrder point = (10 x 21) + 50 = 260We will order something when order point gets below 260 units.
9 Order QuantityTells the buyer how much to order when inventory reaches the order point.
10 Fashion Merchandise Management Systems The system for managing fashion merchandise categories is typically called a Merchandise Budget Plan
11 Merchandise Budget Plan Specifies the planned inventory investment in dollars in a fashion 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 quantitiesRoyalty-Free/CORBIS
12 Six Month Merchandise Budget Plan for Men’s Casual Slacks Goal – trying to calculate “Monthly Additions to Stock”Tells the buyer how much merchandise in retail dollars he or she needs to have arriving in the stores and available for sale each month
13 Monthly Sales Percent Distribution to Season (Line 1) 1. Sales % Distribution to Season6 mo. data April May June July Aug Sept % 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%Projects what percentage of the total sales for the season is expected to be sold in each monthBased on:Historical dataSpecial promotion plans
14 Monthly Sales (Line 2) Monthly sales = Sales % DistributionMonth mo. data April May June July Aug Sept % % % % % % %Mo. Sales $130,000 $27,300 $15, $15,600 $24, $27, $19,500Monthly sales =the forecasted total sales for the six-month period x monthly sales %$27,000 = $130,000 x 21%
15 Monthly Reductions Percent Distribution (Line 3) 3. Reduction % Distribution to Season6 mo. data April May June July Aug Sept100.00% % % % % % %To have enough merchandise every month to support the monthly sales forecast, buyers need to consider factors that reduce the inventory level in addition to sales made to customersMarkdownsShrinkage Discounts to Employees
16 ShrinkageInventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping.Retailers measure shrinkage by taking the difference betweenThe inventory recorded value based on merchandise bought and receivedThe physical inventory actually in stores and distribution centers
17 Monthly Reductions (Line 4) Reduction % Distribution3. Month % mo. data April May June July Aug Sept100.00% % % % % % %4. mo.reductions $16, $6, $2, $2, $1, $1, $1,320Monthly Reductions = Total reductions x Monthly reduction %$6,600 = $16,500 x 40%
18 Beginning of Month (BOM) Stock-to-Sales Ratio (Line 5) 6 mo. data April May June July Aug SeptStock-to-Sales Ratio specifies the amount of inventory (in retail dollars) that should be on hand at the beginning of the month to support the sales forecast and maintain the inventory turnover objective for the category
19 BOM Stock (Line 6)6. BOM Inventory6 mo. data April May June July Aug SeptBOM Stock – the amount of inventory planned for the beginning of the month= monthly sales (line 2) x BOM stock-to-sale ratio (line 5)= $27,300 x 3.6= $98,280
20 End-of-Month (EOM) Stock (Line 7) 7. EOM Inventory6 mo. data April May June July Aug SeptThe BOM stock for the current month = the EOM stock in the previous month
21 Monthly Additions to Stock (Line 8) 6 mo. data April May June July Aug SeptMonthly additions to stock – the amount to be ordered for delivery in each month given turnover and sales objectives= Sales (line 2) + Reductions (line 4) + EOM Stock (line 7) – BOM Stock (line 6)Additions to stock (April)= $27,300 + $6,600 + $68,640 - $98,280 = $4,260
22 Open-to-Buy SystemThe OTB system is used after the merchandise is purchasedMonitors Merchandise FlowDetermines How Much Was Spent and How Much is Left to SpendPhotoLink/Getty ImagesPhotoLink/Getty Images
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