Merchandise Planning Systems Chapter 13 Merchandise Planning Systems McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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?

The actual management of a retailer’s inventory on a daily basis is quite complex. Example: Walmart 100,000 SKU Multiple items per SKU Retailers use computer-based merchandise planning systems to assist with this challenge Two Distinct types: One for staple merchandise One for fashion merchandise

Types of Merchandise Management Systems Staple Merchandise Predictable Demand Relatively Accurate Forecasts Continuous Replenishment Manages Inventory at the SKU level Fashion Merchandise Unpredictable Demand Difficult to Forecast Sales Merchandise Budget Plan Manages Inventory at the category level The McGraw-Hill Companies, Inc./Lars A. Niki, photographer The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

Staple Merchandise Management Systems Staple merchandise planning systems perform three primary functions : Monitor and measure current SKU sales Forecast future SKU demand with allowances made for seasonal variations and changes in trend Develop ordering decision rules to determine when and how much to reorder

Inventory Management Report for Rubbermaid Merchandise Inventory available desired product availability sales rate Backup stock for desired product availability Performance measures Sales forecasts Appropriate ordering decisions

Backup Stock Extra 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

Order Point The 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 ordered Order point = sales/day (lead time + review time) + backup stock Assume Lead time = 14 days, review time = 7 days, demand = 10 units per day Assume backup stock = 50 units, then Order point = (10 x 21) + 50 = 260 We will order something when order point gets below 260 units.

Order Quantity Tells the buyer how much to order when inventory reaches the order point.

Fashion Merchandise Management Systems The system for managing fashion merchandise categories is typically called a Merchandise Budget Plan

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 quantities Royalty-Free/CORBIS

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

Monthly Sales Percent Distribution to Season (Line 1) 1. Sales % Distribution to Season 6 mo. data April May June July Aug Sept 100.00% 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 month Based on: Historical data Special promotion plans

Monthly Sales (Line 2) Monthly sales = Sales % Distribution Month 6 mo. data April May June July Aug Sept 100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00% Mo. Sales $130,000 $27,300 $15,600 $15,600 $24,700 $27,300 $19,500 Monthly sales = the forecasted total sales for the six-month period x monthly sales % $27,000 = $130,000 x 21%

Monthly Reductions Percent Distribution (Line 3) 3. Reduction % Distribution to Season 6 mo. data April May June July Aug Sept 100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00% 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 customers Markdowns Shrinkage Discounts to Employees

Shrinkage Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping. Retailers measure shrinkage by taking the difference between The inventory recorded value based on merchandise bought and received The physical inventory actually in stores and distribution centers

Monthly Reductions (Line 4) Reduction % Distribution 3. Month % 6 mo. data April May June July Aug Sept 100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00% 4. mo. reductions $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320 Monthly Reductions = Total reductions x Monthly reduction % $6,600 = $16,500 x 40%

Beginning of Month (BOM) Stock-to-Sales Ratio (Line 5) 6 mo. data April May June July Aug Sept 4.0 3.6 4.4 4.4 4.0 3.6 4.0 Stock-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

BOM Stock (Line 6) 6. BOM Inventory 6 mo. data April May June July Aug Sept 98280 98280 68460 68640 98800 98280 8000 BOM 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

End-of-Month (EOM) Stock (Line 7) 7. EOM Inventory 6 mo. data April May June July Aug Sept 85600 68640 68460 275080 98280 78000 65600 The BOM stock for the current month = the EOM stock in the previous month

Monthly Additions to Stock (Line 8) 6 mo. data April May June July Aug Sept 113820 4260 17910 48406 26180 8670 8420 Monthly 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

Open-to-Buy System The OTB system is used after the merchandise is purchased Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend PhotoLink/Getty Images PhotoLink/Getty Images