1. 5th Edition

2. Chapter 13 Buying Systems McGraw-Hill/Irwin
Levy/Weitz: Retailing Management, 5/e
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Merchandise Management
Planning Merchandise Assortments
Retail Communication Mix
Buying Systems
Buying Merchandise
Pricing

4. Merchandise Management Issues

5. Types of Buying Systems
Staple Merchandise
Predictable Demand
History of Past Sales
Relatively Accurate Forecasts
Fashion Merchandise
Unpredictable Demand
Limited Sales History
Difficult to Forecast Sales

6. Staple Merchandise Buying System
Compare Inventory to Basic Stock List
Forecast SKU Sales
Monitor Sales and Inventory
Order Merchandise

7. Considerations in Determining How Much to Order
Basic Stock Plan
Present Inventory
Merchandise on Order
Sales Forecast
Rate of Sales of SKU (Velocity)
Seasonality

8. Inventory Management Report for Rubbermaid Merchandise

9. Basic Stock List Indicates the Desired Inventory Level for Each SKU
Amount of Stock Desired
Lost Sale Due to Stockout
Cost of Carrying Inventory

10. Product Availability (Percent)
Relationship between Inventory Investment and Product Availability
Product Availability (Percent)
600
500
400
300
200
100
Inventory investment Dollars

11. Cycle and Buffer Stock 150 - 100 - Units Available 50 - 0 - 1 2 3 4
Weeks
150 -
100 -
50 -
0 -
Order 96
Cycle Stock
Buffer Stock

12. Buffer Stock
We need it so we won’t loose sales, complementary sales, and customers
Buffer stock is dependent on:
-Forecast interval variance (Forecast interval = lead time + review time)
-Variation in Demand (actual demand - forecasted demand)
-Time to Get Product from Supplier
-Time to Get Product from Distribution Center
- Product availability requested of IM systems

13. Forecasting Demand
Forecasting -- extrapolating the past into future using statistical and mathematical methods
Objectives:
Ignore random fluctuations in demand
But be responsive to real change

14. Forecasting Sales Tradeoff Recent Sales Against Past History of Sales
Recognize Recent Trends, But Don’t Over Weight Recent Experience
Exponential Smoothing
Old = Old ά x (Recent – Old) Forecast Forecast Demand Forecast
= x ( – 96)
ά ranges for 0 to 1
Higher ά Weighs Recent Sales More

15. 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

16. Order Point continued Assume Buffer stock = 50 units, then
We will order something when order point gets below 450 units.

17. Calculating the Order Point
Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock
167 units = (7 units x ( days) + 20 units
So Buyer Places Order When Inventory in Stock Drops Below 167 units

18. 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.

19. Six-Month Merchandise Budget Plan for Men’s Tailored Suits

20. Steps in Preparing Plan
Forecast Six Month Sales for Category
Breakdown Total Sales Forecast into Forecast for each Month (lines 1, 2)
Plan Reductions for Each Month (lines 3, 4)
Determine Beginning of the Month (BOM) Stock to Sales Ratio (line 5)
Calculate BOM Inventory (line 6)
Calculate EOM Inventory (line 7)
Calculate Monthly Additions to Stock (line 8)

21. Open to Buy Monitors Merchandise Flow
Determines How Much Was Spent and How Much is Left to Spend

22. Six Month Open to Buy

23. Open-to-buy for Past Periods
Projected EOM stock = actual EOM stock
Open-to-buy = 0
There is no point in buying merchandise for a month that is already over.

24. Open-to-Buy for Current Period (I)
Projected EOM stock =
Actual BOM stock
+ Actual monthly additions to stock (what was actually received)
+ Actual on order (what is on order for the month)
- Plan monthly sales
- Plan reductions for the month

25. Open-to-Buy for Current Period (II)
Planned EOM stock (from merchandise budget plan)
Projected EOM stock (based on what is really happening)

26. Allocating Merchandise to Stores
Percentage of total sales
Percentage of total inventory
Fewer Sales, More Sales, More Inventory Less Inventory

27. Breakdown by Store of Traditional $35 Denim Jeans in Light Blue
(1)
TYPE OF STORE
(2)
NUMBER OF STORES A B C
Total sales $150,000 4 3 8
10.0%
6.7
5.0
$15,000
10,000
7,500
60,000
30,000
429
286
214
(3)
% OF TOTAL SALES, EACH STORE
(4)
SALES PER STORE (TOTAL SALES X COL. 3)
(5)
SALES PER STORE TYPE (COL. 2 X COL. 4)
(6)
UNIT SALES PER STORE (COL. 4/$35)
Source: Banner Distributing Company, Denver, Colorado; used with permission.

28. ABC Analysis should never be out of stock.
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.

29. Analyzing Merchandise Management
Merchandise Performance
ABC Analysis
Sell Through Analysis
Vendor Analysis
Multiattribute Method

30. ABC Analysis Rank Merchandise By Performance Measures
Contribution Margin
Sales Dollars
Sales in Units
Gross Margin
GMROI
Use more than one criteria

31. ABC Analysis for Dress Shirts
Percentage of Sales Dollars
Percentage of Items
No Sales
100 90 80 70 60 50 40 30 20 10 C
10% B
20% A
70%
A B C D
5% 10% 65% %
Sales

32. Sell-through Analysis for Blouses
Week Week 2
Stock Actual-to-Plan Actual-to-Plan
Number Description Plan Actual Percent. Plan Actual Percent.
1011 -Sm White silk V-neck
1011 -Med White Silk V-neck
1011 -Lg White Silk V-neck
1012 -Sm Blue Silk V-neck
1012 -Med Blue Silk V-neck
1012 -Lg Blue Silk V-neck

33. A Weighted Average Approach
Evaluating a Vendor:
A Weighted Average Approach
= Sum of the expression
= Importance weight assigned to the ith dimension
= Performance evaluation for jth brand alternative on the jth issue 1
= Not important 10
= Very important

34. A Weighted Average Approach
Evaluating a Vendor:
A Weighted Average Approach
Performance Evaluation of Individual
Brands Across Issues
Importance
Evaluation Brand A Brand B Brand C Brand D
Issues of Issues (I) (Pa) (Pb) (Pc) (Pd)
(1) (2) (3) (4) (5) (6)
Vendor reputation
Service
Meets delivery dates
Merchandise quality
Markup opportunity
Country of origin
Product fashionability
Selling history
Promotional assistance
Overall evaluation =

35. 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.

36. 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.

37. Advantages of RIM cont’d
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.

38. Disadvantages of RIM System that uses average markup.
Record keeping process involved is burdensome.

39. 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

40. Retail Inventory Method
Cumulative Markon = (total retail - total cost) / total retail: ($290,000 - $160,000) / $290,000 = 44.8%
The Cost Multiplier = cumulative markon (100% - cumulative markon%) = 55.2%
Ending book = total goods handled at retail - total
inventory at retail reductions: $290,000 - $208,000 = $82,000
Ending book = ending book inventory at retail x cost
inventory at cost multiplier: $82,000 x 55.2% = 45,264

41. Retail Inventory Method Example
Total Goods Handled Cost Retail
Beginning inventory $ 60, $ 84,000
Purchases , ,000
- Return to vendor (11,000) (15,400)
Net Purchases , ,600
Additional markups ,000
- Markup cancellations (2,000)
Net markups ,000
Additional Transport ,000
Transfers in , ,000
- Transfers out (714) (1,000)
Net Transfers (1,000)
Total Goods Handled $100, $141,600

42. Retail Inventory Method Example
Total Goods Handled Cost Retail
Gross Sales $ 82,000
- Consumer Returns & Allowances ( 4,000)
Net Sales $ 78,000
Markdowns ,000
- Markdown Cancellation (3,000)
Net Markdown ,000
Employee Discounts ,000
Discounts to Customers
Estimated Shrinkage ,500
Total Reductions $ 86,000