Presentation on theme: "Merchandise Planning Systems"— Presentation transcript:
1 Merchandise Planning Systems Chapter 13Merchandise Planning Systems
2 Merchandise Management Managing Merchandise AssortmentsChapter 12Buying MerchandiseChapter 14Merchandise Planning Systems Chapter 13Retail PricingChapter 15Retail Communication Mix Chapter 16
3 Questions How does a staple merchandise buying system operate? What are a merchandise budget plan and open-to-buy systems, and how are they developed?How do multi-store retailers allocate merchandise to stores?How do retailers evaluate their merchandising performance?
4 Types of Merchandise Management Systems Staple MerchandisePredictable DemandRelatively Accurate ForecastsContinuous ReplenishmentFashion MerchandiseUnpredictable DemandDifficult to Forecast SalesMerchandise Budget PlanOpen-to-BuyThe McGraw-Hill Companies, Inc./Lars A. Niki, photographerThe McGraw-Hill Companies Inc./Ken Cavanagh Photographer
5 Staple Merchandise Planning Buyer Determines:Basic Stock or Assortment PlanLevel of Backup InventorySystem:Monitors Inventory levelsAutomatically reorders when inventory gets below a specified level
6 Inventory Levels for Staple Merchandise Cycle (base) stock: inventory that goes up and down due to the replenishment processBackup (buffer, safety) stockInventory needed to avoid stockout
7 Inventory Levels for Staple Merchandise Retailers try to reduce the stock level to keepInventory Investment low by reordering and receiving merchandise often but without increasedadministrative and transportation costs with frequentreorders
8 Basic Stock Indicates the Desired Inventory Level for Each SKU Lost Sale Due to StockoutCost of Carrying Inventory
9 Factors Determining Backup Stock Higher product availability (service level) retailer wishes to provide to customersGreater the fluctuation in demandLonger lead time from the vendorMore fluctuations in lead timeLower vendor’s Fill rate (% of complete orders received from a vendor)MoreBackup StocksNeededwith
10 Product Availability (Percent) Relationship between Inventory Investment and Product AvailabilityProduct Availability (Percent)600500400300200100
11 Staple Merchandise Management Systems Staple merchandise planning systems provide information needed to assist buyers by performing three functions:Monitoring and measuring current sales for items at the SKU levelForecasting future SKU demand with allowances made for seasonal variations and changes in trendDeveloping ordering decision rules for optimum restocking
12 Staple Merchandise Management Most merchandise at home improvement centers are staples.Ryan McVay/Getty Images
14 Order Pointthe point at which inventory available should not go below or else we will run out of stock before the next order arrivesOrder point = sales/day (lead time + review time) + buffer stockAssume Lead time = 3 weeks, review time = 1 week, demand = 100 units per weekOrder point = 100 (3+1) = 400Assume Buffer stock = 50 units, thenOrder point = 100 (3+1) + 50 = 450We will order something when order point gets below 450 units.
15 Calculating the Order Point Avocado Bath MatIn a situation in which the lead time is two weeks, the buyer reviews the SKU once a week, 18 units of backup stock are needed to maintain the product availability desired, and the sales rate for the next four weeks is 5.43 per day. Order Point?Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock132 units = [5.43 units x ( days)] + 18 unitsSo Buyer Places Order When Inventory in Stock Drops Below 132 units
16 Order QuantityWhen inventory reaches the order point, the buyer needs to order enough units so the cycle stock isn’t depleted and sales dip into backup stock before the next order arrives.Order Quantity = Order Point – Quantity Available
17 Inventory Management Report for Rubbermaid SKUs Avocado Bath MatQuantity available = Quantity on Hand + Quantity on Order = 90Order Quantity = Order Point – Quantity AvailableOrder Quantity = 132 – 90 = 42
18 Fashion Merchandise Management Systems The system for managing fashion merchandise categories is typically called a Merchandise Budget Plan
19 Merchandise Budget Plan Plan for the financial aspects of a merchandise categorySpecifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectivesNot a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantitiesRoyalty-Free/CORBIS
20 Steps in Developing a Merchandise Budget Plan Set margin and inventory turn goalsSeasonal sales forecast for categoryBreakdown sales forecast by monthPlan reductions – markdowns, inventory lossDetermine stock needed to support forecasted salesDetermine “open to buy” for each month
21 Six Month Merchandise Plan for Men’s Casual Slacks
22 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%The percentage distribution of sales by month is based onHistorical dataSpecial promotion plans
23 Monthly Sales Percent Distribution to Season (Line 1) Continued Retail sales are very seasonal. The Christmas season often accounts for more than 40% of a retailer’s annual sales.
24 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 season for the six-month period x monthly sales %
25 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
26 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 centersShrinkage % = $ shrinkage$ net sales
27 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 %
28 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 categoryRetails often use a related measure, Weeks of Inventory
29 Steps in Determining the Stock-to-Sales Ratio Step 1: Calculate Sales-to-Stock RatioGMROI = Gross margin% x Sales-to-stock ratioSales-to-Stock Ratio = GMROI/Gross margin %Assume that the buyer’s target GMROI for the category is 123%, and the buyer feels the category will produce a gross margin of 45%.Sales-to-Stock Ratio = 123/45 = 2.73
30 Steps in Determining the Stock-to-Sales Ratio Continued Step 2: Convert the Sales-to-Stock Ratio to Inventory TurnoverInventory Turnover = Sales-to-stock ratio x (1 – GM%/100)Inventory Turnover =2.73 x (1 – 45/100) = 1.50
31 Steps in Determining the Stock-to-Sales Ratio Continued Step 3: Calculate Average Stock-to-Sales RatioAverage Stock-to-Sales Ratio = 6 months/Inventory turnover= 6/1.5 = 4
32 Steps in Determining the Stock-to-Sales Ratio Continued Step 4: Calculate Monthly Stock-to-Sales RatioMonthly stock-to-sales ratios vary in the opposite direction of salesTo make this adjustment, the buyer considers the seasonal pattern, previous years’ stock-to-sales ratios
33 BOM Stock (Line 6) BOM Stock 6. BOM Inventory6 mo. data April May June July Aug SeptBOM Stock= monthly sales (line 2) x BOM stock-to-sale ratio (line 5)= $27,300 x 3.6= $98,280
34 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
35 Monthly Additions to Stock (Line 8) 6 mo. data April May June July Aug SeptAdditions to stock= 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
36 Evaluating the Merchandise Budget Plan Inventory turnover GMROI, sales forecast are used for both planning and controlAfter the selling season, the actual performance is compared with the planWhy did performance exceed or fall short of the plan?Was the deviation from the plan due to something under the buyer’s control?Did the buyer react quickly to changes in demand by either purchasing more or having a sale?
37 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
39 Allocating Merchandise to Stores Allocating merchandise to stores involves three decisions:how much merchandise to allocate to each storewhat type of merchandise to allocatewhen to allocate the merchandise to different stores
40 Inventory Allocation Based on Sales Volume and Stock-to-Sales Ratios Smaller stores require a proportionally higher inventory allocation than larger stores because the depth of the assortment or the level of product availability is too small, customers will perceive it as being inferior.
41 Type of Merchandise Allocated to Stores Retailers classify stores according to the characteristics of the stores’ trading areaThe assortment offered in a ready-to-eat cereal aisle should matchthe demands of the demographics of shoppers in a local area
42 Type of Merchandise Allocated to Stores continued Even the sales of different apparel sizes can vary dramatically from store to store in the same chain.
43 Sales of Capri Pants by Region Timing of Merchandise Allocation to StoresSeasonality differences and consumer demand differencesSales of Capri Pants by Region
44 Analyzing Merchandise Management Performance Three types of analyses related to the monitoring and adjustment step are:Sell through analysisABC analysis of assortmentsMultiattribute analysis of vendors
45 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.
46 ABC AnalysisAn 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 stockshould be allowed to be out of stock occasionallyshould be deleted from the stock selection.A items: 5% of SKUs, represent 70% of salesB items: 10% of SKUs, represent 20% of salesC items: 65% of SKUs, represent 10% of salesD items: 20% of SKUs, represent 10% of sales
47 ABC Analysis Rank Merchandise By Performance Measures Contribution MarginSales DollarsSales in UnitsGross MarginGMROIUse more than one criteria
48 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
50 Evaluating VendorsA 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 of each issue by the performance of each brand or its vendorDetermine a vendor’s overall rating, add the products for each brand for all issues
51 Home Depot’s Vendor Evaluation Home Depot take vendor evaluations seriously. Home Depot’s vendor analysis scorecard gives everyone a quick view of how the vendor is doing.Green is good, but red isn’t.