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

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 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

4. 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

5. 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

6. 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

7. 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

8. 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.

9. Order Quantity
Tells 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 quantities
Royalty-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 Season
6 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 month
Based on:
Historical data
Special promotion plans

14. Monthly Sales (Line 2) Monthly sales =
Sales % Distribution
Month mo. data April May June July Aug Sept % % % % % % %
Mo. Sales $130,000 $27,300 $15, $15,600 $24, $27, $19,500
Monthly 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 Season
6 mo. data April May June July Aug Sept
100.00% % % % % % %
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

16. 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

17. Monthly Reductions (Line 4)
Reduction % Distribution
3. Month % mo. data April May June July Aug Sept
100.00% % % % % % %
4. mo.
reductions $16, $6, $2, $2, $1, $1, $1,320
Monthly 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 Sept
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

19. BOM Stock (Line 6)
6. BOM Inventory
6 mo. data April May June July Aug Sept
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

20. End-of-Month (EOM) Stock (Line 7)
7. EOM Inventory
6 mo. data April May June July Aug Sept
The 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 Sept
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

22. 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