Retail Buying & Category Management

Session: 1 & 2

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Merchandise Planning

This process of Merchandise Planning begins with the formulation of objectives, setting of policies and implementation of procedures necessary to carry out dept. / store objectives. It includes both Cash planning in terms of Merchandise budgets Unit planning in terms of Merchandise lists

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Six-month merchandise plan Successful retail working requires the right merchandise assortment. To achieve this, the following variables must be planned at least 6 months in advance. Receipt Plans Sales Plan Mark-up Plans Mark-down Plans Inventory shortages EOM Stock levels Weeks Supply

Gross Margins Profits

This plan is called the merchandise budget & it forecasts specific merchandising activities for a dept. or store for a specified period of time. This merchandise budget is also referred to as the six-month merchandise plan.

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WHY IS PLANNING IMPORTANT??

Complex business environment Stock-out Loss of Sale Overstocking Dead stock

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The Planning Process

Planning is based on 3 components:

Objectives : the goal towards which the management activities of the business establishment are directed. Policies: provide management with a frame of reference for decision making that is consistent with planned objectives they provide guidelines for dealing consistently with problems & issues.

Procedures: are necessary steps that must be followed to execute a given policy. Management must emphasize if the procedure is a rule / guide.
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Variables of record-keeping
Cash Disbursements Cash Receipts Credit

Expenses
oDirect: paid out directly for the dept.s benefit. E.g. salary, advertising, promotions, special events. oIndirect: that serve the whole store. E.g. electricity, rent, taxes, insurance etc.

Dept. Sales
COGS Total Direct Expenses Total

20,000
- 14000 6000 -4000 2000(indirect ex + profit)
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Sales Purchases Stocks & Inventories Profit & Loss Statement / Income Statement / Operating Statement

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Key factors P & L

Net Sales
Total Cost of Purchases

= Gross Sales =
Op. Inventory (cost)

Returns & Adjustments

Purchase (cost)

Shipping (cost)

Net Cost of Goods Sold

Total Cost of Purchases

Closing Inventory (Cost)

Gross COGS

Cash Discount

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Gross Margin

Net Sales

Net COGS

Total Operating Expenses

Direct Expenses

Indirect Expenses

Net Profit

Gross Margin

Total Operating Expenses

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The Planning Process

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Operations Budget

It is defined as a forecast of expected sales along with expected costs for a specified time period.

It is also referred to as the revenue and expense budget.

It is usually made one year in advance though estimates may be for 3-5 yrs also. Close monitoring of Sales analysis, inventory turnover etc. is done to determine if sales figures are in line with the goals. However, internal & external factors may also affect the goals.

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Cash Budget
It is an estimate of the cash receipts & cash disbursements for a specified period of time. It tells management the amount of cash required in the future period under consideration. Cash budgets may extend over one year with cash receipts & disbursements estimated on a daily basis.

Capital Budget
It plans for the investment of assets that will last longer than one year.
It contains a list of future investment projects with a justification for each proposal mentioned against it. It takes into account an analysis of the geographical region, income level, competition etc. It is prepared by the store research division. However, the buyer has the responsibility of merchandising each new branch.
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Merchandise Management

Managing Merchandise Assortments

Buying Merchandise

Merchandise Planning Systems

Retail Pricing

Retail Communication Mix

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Merchandise Budget
It is a plan that forecasts specific merchandising activities for a department or store for a specific period of time. The buyer works with other department executives to develop the plan that will guide him through various phases of merchandising activities.

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Merchandise Mix Definition: The breadth and depth of the products carried by retailers. Also Known As: Product Assortment Product Breadth

Definition: The variety of product lines offered. Also Known As: Product Assortment Width, Merchandise Breadth.
Product Depth Definition: The number of each item or particular style of a product. Also Known As: Product Assortment, Merchandise Depth. SKU Definition: A number assigned to a product by a retail store to identify the price, product options and manufacturer of the merchandise.
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Steps In The Retail Merchandising Process

1. 2. 3. 4. 5. Develop the merchandise mix and establish the merchandise budget. Build the logistic system for procuring the merchandise mix. Price the merchandise offering. Organize the customer support service and manage the personal selling effort. Create the retailers advertising, sales incentive and publicity programs.

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Retail merchandising requires management of the merchandise mix including:

1. 2. 3. 4. 5.

Planning Merchandise Variety Controlling Merchandise Variety Planning Merchandise Assortment Controlling Merchandise Assortment Merchandise Mix Strategies

Developing the merchandise mix allows the retailer to segment the market and appeal to a select group of consumers!!

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Retail merchandising requires management of the merchandise budget including:

1. 2. 3. 4. 5.

Planning And Controlling Retail Sales Planning And Controlling Inventory Levels Planning And Controlling Retail Reductions Planning And Controlling Purchases Planning And Controlling Profit Margins

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THE COMPONENTS OF THE MERCHANDISE MIX

Merchandise Variety
(# of product lines)

Merchandise Assortment
(# of product items)

Merchandise Support
(#of product units)

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Planning Merchandise Variety Involves Planning Merchandise Variety Involves Planning And Controlling Product Lines Planning And Controlling Product Lines
Retailers MANY factors to evaluate product lines!! Retailers use use MANY factors to evaluate product lines!!

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FACTORS USED TO EVALUATE PRODUCT LINES

1. The compatibility among product lines. Must Consider: Product substitutes Product complements Unrelated products

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FACTORS USED TO EVALUATE PRODUCT LINES

2. The physical attributes of each product line. Must Consider: Product standardization Product service levels Product selling methods

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FACTORS USED TO EVALUATE PRODUCT LINES

3. The product lines potential profitability. Must Consider: Direct and indirect contribution to profitability Calculations of gross margin % and $$

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FACTORS USED TO EVALUATE PRODUCT LINES

4.

The role branding plays in the success of the product line. Must Consider: How brands can distinguish a retailer from competitors How brands can build store loyalty The advantages and disadvantages of offering different types of brands no names, vendor brands, store brands (private labels) and licensed merchandise

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FACTORS USED TO EVALUATE PRODUCT LINES

5. The age of each product within the product lifecycle Must Consider:

What stage a product is in to judge future sales potential The number of products offered at different stages

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FACTORS USED TO EVALUATE PRODUCT LINES

6. The fashionable nature of each product line. Must Consider:

Use of unique designer fashions as part of the stores strategy The above average risk of fashion merchandise ( But also note: high margin items with above average profitability)

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FACTORS USED TO EVALUATE PRODUCT LINES

7)

The market appropriateness of each product line. Must Consider: How well the product matches consumption patterns and buying needs of targeted consumers The relative advantage, affinity, trialability, observability and complexity of new product introductions Market trends provide products the market wants!!

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FACTORS USED TO EVALUATE PRODUCT LINES

8.

The impact of lifestyle on product line acceptance. Must Consider: Targeted customers activities, interests, and opinions The match between consumers lifestyle and retailers image Usefulness of trade shows to identify product lines for targeted consumers lifestyles

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FACTORS USED TO EVALUATE PRODUCT LINES

9. The competitive threat facing each product. Must Consider:

Competitive conditions under which the product line is available intensive, selective or exclusive distribution Is the product line available to direct (intra type) competitors or indirect (inter type) competitors, or both

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FACTORS USED TO EVALUATE PRODUCT LINES

10. The conditions under which each product line will be procurable. Must Consider:

Availability and reliability of various suppliers Terms and conditions under which the product will be made available

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CONTROLLING MERCHANDISE VARIETY

I.

II.

Is an art and a science No rules for what should be included in the merchandise mix and what should be excluded Two useful management methods Category Management: each product managed as a business unit at the store level ABC Analysis: each product line is rank ordered based on performance levels

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PLANNING MERCHANDISE ASSORTMENT AND SUPPORT

Must organize the merchandise mix as to the number of different product lines carried Must decide on: Brands Sizes Colors Material Styles Price points

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PLANNING MERCHANDISE ASSORTMENT AND SUPPORT

Goal is to ensure that product choice meets targeted consumer needs Must carefully plan the number of units to have on hand to meet the expected sales for the brand, size, color combinations Must develop merchandise lists 1. Basic Stock List (staple items) 2. Model Stock List (fashion items) 3. Never Out List (key items and best sellers)

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CONTROLLING MERCHANDISE ASSORTMENT AND SUPPORT

Involves monitoring and adjusting the types of product lines that are added and dropped from the merchandise mix Two widely used methods to control assortment and support: 1. Inventory turnover: rate at which the retailer depletes and replenishes stock 2. Open-to-buy:amount of new merchandise a retailer can buy during a specific time period without exceeding planned purchases for the period

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Merchandise Mix Strategies Different optimal variety and assortment strategies possible!!

Narrow Variety/Shallow Assortment Vending machines Newsstands Door-to-door Wide Variety/Shallow Assortment Variety Stores General Stores Discount Stores Narrow Variety/Deep Assortment Specialty Stores Wide Variety/Deep Assortment Full-line Department Stores

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MERCHANDISE BUDGET MANAGEMENT

Financial management tool used to plan and control the total amount (in dollars) of inventory carried in stock at any time Determines how much a retailer should invest in inventory during a specified period Remember: Merchandise Budget controls dollars; Merchandise Mix controls product units

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Methods used for Planning

Top-down: Planning of overall sales based on
economic trends, external conditions & changes in store policies. The sales goals thus set are further broken down for departments.

Bottom-up: initial planning is done by people responsible for actually implementing the plans.

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Questions
How does a staple merchandise buying system operate? What are a merchandise budget plan and opento-buy systems, and how are they developed? How do multi-store retailers allocate merchandise to stores? How do retailers evaluate their merchandising performance?

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Types of Merchandise Management Systems

Staple Merchandise Predictable Demand Relatively Accurate Forecasts Continuous Replenishment Fashion Merchandise Unpredictable Demand Difficult to Forecast Sales Merchandise Budget Plan Open-to-Buy
The McGraw-Hill Companies, Inc./Lars A. Niki, photographer The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

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Staple Merchandise Planning

Buyer Determines:

Basic Stock or Assortment Plan Level of Backup Inventory

System:

Monitors Inventory levels Automatically reorders when inventory gets below a specified level
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Inventory Levels for Staple Merchandise

Cycle (base) stock: inventory that goes up and down due to the replenishment process

Backup (buffer, safety) stock Inventory needed to avoid stockout

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Inventory Levels for Staple Merchandise

Retailers try to reduce the stock level to keep Inventory Investment low by reordering and receiving merchandise often but without increased administrative and transportation costs with frequent reorders

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Basic Stock
Indicates the Desired Inventory Level for Each SKU

Lost Sale Due to Stockout Cost of Carrying Inventory

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Factors Determining Backup Stock

Higher product availability (service level) retailer wishes to provide to customers Greater the fluctuation in demand Longer lead time from the vendor More fluctuations in lead time Lower vendors Fill rate (% of complete orders received from a vendor)
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More Backup Stocks Needed with

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 level Forecasting future SKU demand with allowances made for seasonal variations and changes in trend

Developing ordering decision rules for optimum restocking

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Staple Merchandise Management

Most merchandise at home improvement centers are staples.

Ryan McVay/Getty Images

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Inventory Management Report for Rubbermaid Merchandise

Inventory available sales rate

desired product availability Backup stock for desired product availability Sales forecasts
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Performance measures

Appropriate ordering decisions

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
Order point = sales/day (lead time + review time) + buffer stock Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week Order point = 100 (3+1) = 400 Assume Buffer stock = 50 units, then Order point = 100 (3+1) + 50 = 450 We will order something when order point gets below 450 units.
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Calculating the Order Point

Avocado Bath Mat In 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 Stock

132 units = [5.43 units x (14 + 7 days)] + 18 units So Buyer Places Order When Inventory in Stock Drops Below 132 units
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Order Quantity
When inventory reaches the order point, the buyer needs to order enough units so the cycle stock isnt depleted and sales dip into backup stock before the next order arrives. Order Quantity = Order Point Quantity Available

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Inventory Management Report for Rubbermaid SKUs

Avocado Bath Mat Quantity available = Quantity on Hand + Quantity on Order = 90 Order Quantity = Order Point Quantity Available Order Quantity = 132 90 = 42

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Fashion Merchandise Management Systems

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

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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-doesnt indicate what specific SKUs to buy or in what quantities

Royalty-Free/CORBIS

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Steps in Developing a Merchandise Budget Plan

Set margin and inventory turn goals Seasonal sales forecast for category Breakdown sales forecast by month Plan reductions markdowns, inventory loss Determine stock needed to support forecasted sales Determine open to buy for each month

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Stock Turnover or Inventory Turnover

Stock turn is the rate at which stock is disposed of or depleted & replaced in a given period of time.

It helps in more profitable use of capital investment/control inventory/maximize profits.

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Computation of Stock Turnover or Inventory Turnover

1 Stock Turn = Retail Basis
Avg. Stk at Retail Price

Net Sales

Stock Turn = Cost Basis

Cost of Goods Sold

Avg. COGS

Stock Turn = Unit Basis

No. of Units Sold

Avg. No. of units in stock

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Methods to increase Stock Turnover

Reducing the no. of price lines carried. Limiting the no. of brands carried. Reducing duplicate styles. Carrying smaller reserve stocks. Avoiding accumulation of unsaleable goods. Eliminating unsaleable goods. Closely following the buying plan.

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Factors affecting rate of Stock Turn

Different lines of merchandise have different rates of stock turn. E.g. Food Vs Apparel Type of Retail Institution. E.g. Discount Store Vs Premium EBO

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Planned Reductions
Allowance for the difference between the original retail value & actual final sales value of the merchandise.

It consists of 3 factors: Merchandise Shortage/Overages Employee Discount Markdowns

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Merchandise Shortage
It is the diff. between the book inventory & the physical inventory when the book inventory is larger. Special attention should be paid while inwarding stocks or transferring stocks.
Merchandise Overage
It is the diff. between the book inventory & the physical inventory when the physical inventory is larger. This is generally due to error in physical count.
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Employee Discounts & Discounts for Other Special Groups It is the price reduction granted to store employees. They are also granted to some groups like charitable institutions / bulk corporate orders etc.
Markdown & Markdown %
Reduction in price from original retail price is called Markdown. Markdown = Original Retail Price Markdown Price Markdown % = Net Markdown Net Sales

100
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Why Markdowns are needed?

To clear slow selling merchandise. To attract customers to the stores which ultimately results in sale of regular merchandise.

Errors are generally of two types: Buying errors Pricing errors

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Markups
Buyer sells merchandise at a price that will cover the cost of goods & the expenses incurred for acquiring the goods & thereby also yield profit. Markup = Retail Price Cost Price Foll. Information is crucial for planning mark-ups:
Total amount of sales for the season Planned expenses Planned reductions Profit goal for the season

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Markups
Initial Markups & Maintained Markups For planning initial markups the buyer must consider the foll:
Covering costs & expenses & making profits Consumer demand Store clientele Kind of merchandise Type of Retail Competition

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Markups
Markup = Retail Price Cost Price Markup% at Retail = Markup/ Retail Price

Initial Markup = Retail Price Cost Price

Maintained Markup = Final Retail Price Cost Price

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Methods used to plan Needed Stocks

1
Basic Stock Method (BOM)

Planned Sales for Month

Avg. Stock at Retail

Avg. Monthly Sales

% Variation/ Deviation Method

Avg. yearly sales/ Turnover

[1/2 (1+

Sales for Month

Avg. Monthly Sales

)]

Weeks Supply Method

52 Weeks

Desired Stock Turn

Stock-Sales Ratio Method

Beginning Stock

Months Sales

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Six Month Merchandise Plan for Mens Casual Slacks

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Monthly Sales Percent Distribution to Season (Line 1)

1. Sales % Distribution to Season

6 mo. data 100.00% April 21.00% May 12.00% June 12.00% July 19.00% Aug 21.00% Sept 15.00%

The percentage distribution of sales by month is based on Historical data Special promotion plans

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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 retailers annual sales.
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Monthly Sales (Line 2)

Sales % Distribution 1. Month 6 mo. data April May 100.00% 21.00% 12.00% 2. Mo. Sales $130,000 $27,300 $15,600

June July Aug 12.00% 19.00% 21.00% $15,600 $24,700 $27,300

Sept 15.00% $19,500

Monthly sales = the forecasted total season for the six-month period x monthly sales %

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Monthly Reductions Percent Distribution (Line 3)

3. Reduction % Distribution to Season

6 mo. data 100.00% April 40.00% May 14.00% June 16.00% July 12.00% Aug 10.00% Sept 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
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Shrinkage
Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping. Retailers measure shrinkage by taking the difference between 1. The inventory recorded value based on merchandise bought and received 2. The physical inventory actually in stores and distribution centers Shrinkage % = $ shrinkage $ net sales

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Monthly Reductions (Line 4)

Reduction % Distribution 3. Month % 6 mo. data April 100.00% 40.00% 4. mo. reductions $16,500 $6,600

May 14.00% $2,310

June 16.00% $2,640

July 12.00% $1,980

Aug 10.00% $1,650

Sept 8.00% $1,320

Monthly Reductions = Total reductions x Monthly reduction %

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Beginning of Month (BOM) Stock-to-Sales Ratio (Line 5)

5. BOM Stock to Sales Ratio 6 mo. data April May 4.0 3.6 4.4

June 4.4

July 4.0

Aug 3.6

Sept 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 Retails often use a related measure, Weeks of Inventory
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Steps in Determining the Stock-to-Sales Ratio

Step 1: Calculate Sales-to-Stock Ratio GMROI = Gross margin% x Sales-to-stock ratio Sales-to-Stock Ratio = GMROI/Gross margin % Assume that the buyers 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
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Steps in Determining the Stock-to-Sales Ratio Continued

Step 2: Convert the Sales-to-Stock Ratio to Inventory Turnover
Inventory Turnover = Sales-to-stock ratio x (1 GM%/100) Inventory Turnover =2.73 x (1 45/100) = 1.50

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Steps in Determining the Stock-to-Sales Ratio Continued

Step 3: Calculate Average Stock-to-Sales Ratio
Average Stock-to-Sales Ratio = 6 months/Inventory turnover = 6/1.5 = 4

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Steps in Determining the Stock-to-Sales Ratio Continued

Step 4: Calculate Monthly Stock-to-Sales Ratio
Monthly stock-to-sales ratios vary in the opposite direction of sales To make this adjustment, the buyer considers the seasonal pattern, previous years stock-to-sales ratios

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BOM Stock (Line 6)

6. BOM Inventory 6 mo. data 98280

April 98280

May 68460

June 68640

July 98800

Aug 98280

Sept 8000

BOM Stock
= monthly sales (line 2) x BOM stock-to-sale ratio (line 5) = $27,300 x 3.6 = $98,280

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End-of-Month (EOM) Stock (Line 7)

7. EOM Inventory 6 mo. data 85600

April 68640

May 68460

June 275080

July 98280

Aug 78000

Sept 65600

The BOM stock for the current month = the EOM stock in the previous month

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Monthly Additions to Stock (Line 8)

8. Monthly additions to stock 6 mo. data April May 113820 4260 17910

June 48406

July 26180

Aug 8670

Sept 8420

Additions 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
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Evaluating the Merchandise Budget Plan

Inventory turnover GMROI, sales forecast are used for both planning and control After the selling season, the actual performance is compared with the plan

Why did performance exceed or fall short of the plan? Was the deviation from the plan due to something under the buyers control? Did the buyer react quickly to changes in demand by either purchasing more or having a sale?

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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

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What Is Open To Buy Planning?

The goal of good inventory management is to maintain an appropriate level of inventory for the amount of sales that you are generating. You want to have adequate assortments when sales are slow so that you dont miss possible sales, but not so much that you drain your cash flow. When sales pick up, you want to increase your inventory levels to support the increased sales, but be careful not to over buy

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Open-to-Buy System

The Right Amount Of the Right Stuff At the Right Time This is where Open To Buy planning comes into play.

It helps the buyer to decide how much inventory should be on hand at the beginning of any given month and how much new merchandise should be received during the month to maintain your optimum inventory levels.
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Open-to-Buy System

There are four basic steps to creating a simple, effective open to buy system.
The first three steps are usually done once a year and, when completed, gives the buyer/planner a complete open to buy plan for the upcoming year. The final step is to use the open to buy plan thus created to adjust for monthly merchandise flow.

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Open-to-Buy System
Step 1. Plan annual sales and markdowns. This is probably the most important step in the process since the stock levels are derived from the planned sales. Step 2. Plan your average stock, turn, and Beginning Of Month stocks. This step is the more difficult step. This determines what stock levels and turnover rates are appropriate for the business. Turns that are too slow will give stock levels that are too high - high markdowns and low cash flow. If turns are too fast, the planned stock levels will be too low - youll miss sales and give poor customer service due to out of stocks.

Step 3. Calculate an Open To Buy plan for every month. Once sales and stocks are planned, calculate how much merchandise to receive (how much you have open to buy) each month.

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Open-to-Buy System
Start with the beginning of month stock plan (stocks at retail dollars) and subtract sales (sales decrease stock levels), and subtract markdown dollars (the amount you take in markdowns also decreases stock levels). Compare the result to your planned end of month stock levels. The difference is how much merchandise you should receive during that month.

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Open-to-Buy System
What does the monthly plan look like and how does it work?

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Open-to-Buy System
Step 4. Adjust monthly using OTB projections. The last step is to use the plan to monitor sales, stock levels, and purchases. For example, if sales slow down, stock levels are likely to increase. In order to stay on plan, buy has to be less the next month, or take additional markdowns, or cancel orders, or a combination of these. If sales are increasing, buy more in order to stay on stock plan. Adjusting monthly lets the buyer keep stock levels at the optimum levels for business.
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Six Month Open-to-Buy

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Allocating Merchandise to Stores

Allocating merchandise to stores involves three decisions: how much merchandise to allocate to each store what type of merchandise to allocate when to allocate the merchandise to different stores
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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.
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Type of Merchandise Allocated to Stores

Retailers classify stores according to the characteristics of the stores trading area

The assortment offered in a ready-to-eat cereal aisle should match the demands of the demographics of shoppers in a local area
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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.

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Timing of Merchandise Allocation to Stores

Seasonality differences and consumer demand differences

Sales of Capri Pants by Region

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