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M312 Chapter 12: Managing the Merchandise Planning Process

The Merchandise Management Function
-The Retailer offers:
-the right merchandise
-in the right place
-at the right time
-in the right quantity
-for the right price
-in order for the Retailer to meet its financial goals
-Involves the ability of the Retailer to:
-Sense market trends
-Analyze sales data
-Make appropriate adjustments in its prices and inventory levels
Viewing Merchandise Management as Investment Portfolio Management
A different view of “Main Street versus Wall” Street
-Dollars to invest in inventory
-Invest in “hot” merchandise
-Save a little for opportunities (open to buy)
-Monitor portfolio of merchandise (stocks)
-Sell losers (markdowns)
Traders on the stock exchange floor manage a portfolio of stocks, and retail buyers manage a portfolio of merchandise inventory. Both continuously assess the risks associated with their purchase decisions.
The Merchandise Buying Organization: Levels
Merchandise Group
Merchandise Category
Stock Keeping Unit (SKU)

Refers to both levels of management and of merchandise

Merchandise Category – The Planning Unit
-A Merchandise Category = assortment of merchandise items customers view as substitutes
-Retailers and Vendors may categorize the same merchandise item differently:
-Vendors might assign products to different categories based on
differences in product attributes
-Retailers might assign two products to the same category
based upon common consumers and buying behavior
Category Management
Category Management = Process of managing a retail business with the objective of maximizing the sales and profits of a category
-Objective is to maximize the sales and profits of the entire
category, not just a particular brand
-Buyers for nonfood retailers specialize by categories
-Buyers for food retailers specialize by brand or vendor
Category Management and the Category Captain
Category Captain = Retailer “outsources” category management to a vendor in the category ~ Target relies on P&G to manage the personal cleaning products category

-Potential Upside (for retailer):
-Vendors frequently have more information and analytical skills
about the category in which they compete than retailers
-Helps retailer understand consumer behavior
-Creates assortments that satisfy the customer
-Improves profitability of category
-Potential Downside (for retailer):
-Vendor category captain may have different goals than retailer

Evaluating Merchandise Management Performance
Gross Margin Return on Investment (GMROI) “jim roy”
-Merchandise Managers have control over:
-The merchandise they buy
-The price at which the merchandise is sold
-The cost of the merchandise
-Merchandise Managers do not have control over:
-Operating expenses
-Human resources
-Real estate
-Supply chain management
-Information systems
Gross Margin Return on Investment (GMROI)
-See slide 11 for equation
-Sales-to-stock ratio is used because GMROI is a type of ROI
measure, so the investment in inventory is expressed at cost.
-Inventory Turnover =
= (1 – Gross Margin Percentage) x Sales-to-Stock Ratio
ROA and GMROI ~ Asset Productivity Measures
Strategic Corporate Level:
Return on Assets = Net Profit
Total Assets

Merchandise Management Level:
GMROI = Gross Margin
Average Inventory at Cost

Measuring the Retailer’s Stock-to-Stock Ratio
-Rather than rely on inventory estimates (old school) for Sales-to-
Stock Ratio calculations, use retail information system (new
school) to capture daily inventory levels

-Estimation of average inventory
-Use information system: averaging the inventory in stores and
distribution centers at the end of each day

Managing Inventory Turnover
-Inventory Turnover helps assess the Merchandise Buyer’s
performance in managing an asset (merchandise inventory)
-But focusing on increasing inventory turnover can actually
decrease GMROI
-Buyers need to consider the trade-offs associated with managing
Inventory Turnover
-See equation on slide 14
7 Steps in Merchandise Planning Process
1. Forecast category sales
2. Develop an assortment plan
3. Determine appropriate inventory level and product availability
4. Develop a plan for managing inventory
5. Allocate merchandise for stores
6. Buy merchandise
7. Monitor and evaluate performance and made adjustments
Two Types of Merchandise Management Planning Processes
Staple (Basic)
-Continuous demand over an extended time period
-Limited number of new product introductions
-Examples: hosiery, basic casual apparel
-Easy to forecast demand
-Use Continuous Replenishment
-In demand for a relatively short period of time
-Continuous introductions of new products, making existing
products obsolete
-Examples: athletic shoes, laptop computers, women’s apparel

-Seasonal Merchandise
-demand fluctuates significantly depending on time of year
-Manage as Fashion Merchandise
-Examples: back-to-school supplies, Valentine’s Day gifts

Step 1- Forecast Category Sales
-Understand the nature of the product life cycle
-Collect data on sales of product and comparable products
-Use statistical techniques to project sales
-Work with vendors to coordinate manufacturing and merchandise
delivery with forecasted demand – Collaborative Planning, —
Forecasting, and Replenishment
Step 1- Forecast Category Sales: Staple
-Predictable Demand
-History of Past Sales
-Relatively Accurate Forecasts
Step 1- Forecast Category Sales: Fashion
-Unpredictable Demand
-Limited Sales History
-Difficult to Forecast Sales
Step 1- Forcast Category Sales: Factors Affecting Sales Projections
-Store Locations
-Merchandise Placement
-Competitive Activity
-Product Availability
-Economic Conditions
Step 1- Forecasting Fashion Merchandise Categories
-Previous Sales Data
-Market Research
-Fashion and Trend Services
Previous Sales Data
Many items in a fashion category are often similar to items sold in previous years.
Market Research
Research methods range from informal, qualitative research about trends affecting the category to more formal experiments and surveys.
Fashion and Trend Services
Firms which specialize in offering various services that buyers can subscribe to that forecast the latest fashions, colors, and styles.
have their own (proprietary) information about their marketing plans and tend to be very knowledgeable about market trends
Step 1- Forecasting Sales for Service Retailers
-Due to the perishable nature of services, service retailers face
more challenges than fashion retailers.
-Offerings perishes at the end of the day, or sooner, not at the end
of the season (or lasts for a very long time).
-Must devise approaches for managing demand so that it meets,
but does not exceed capacity.
Step 2- Develop an Assortment Plan
-Assortment Plan
-list of SKUs that retailer plans to offer in a merchandise
category; reflects planned variety and assortment for a
merchandise category
-Variety (breadth) ~ number of different merchandise categories
within a store or department
-Assortment (depth) ~ number of SKUs within a category
-Product Availability ~ defines the percentage of demand for a
particular SKU that is satisfied.
-Editing the Assortment
Step 2- Develop an Assortment Plan: Determining Variety and Assortment
Merchandise Buyer needs to consider:
-Retail Strategy ~ strategic decision affecting number of SKUs to
offer in a merchandise category
-GMROI of the Merchandise Mix
-Complementary Merchandise – relationship to other
-Trade-off between too much versus too little assortment
-Increasing sales by offering more breadth and depth can
potentially reduce inventory turnover and GMROI by stocking
more SKUs
-Breaking Sizes
-SKU Rationalization Program
-Physical characteristics of the store
Step 3 – Determine Appropriate Inventory Level and Product Availability
-Retailer’s Planned Level of Inventory
-Model Stock Plan
-Retailer’s Planned Availability of Product
-Product Availability
-Backup (Buffer or Safety) Stock
-The higher product availability, the higher the amount of backup stock necessary to ensure retailer won’t be out of stock on a particular SKU when consumers demand it
Model Stock Plan
specification quantity of each SKU in a store
Product Availabiity
-Percentage of demand for a particular SKU that is satisfied
-Also known as level of support or service level
Backup (Buffer or Safety) Stock
Extra inventory to avoid unmet demand for the product
Step 3- Importance of Backup (Buffer of Safety) Stock
Choosing an appropriate amount of backup stock is critical to successful assortment planning
-If the backup stock is too low –> lose sales and customers
-If the backup stock is too high –> scare financial resources will
be wasted on unneeded inventory that could be more profitably
invested in more variety or assortment
Availability and Inventory Investment are not a linear relationship
Step 4- Develop Merchandise Inventory Control System
Factors considered to determine the appropriate level of buffer stock and thus the product availability for each SKU
-ABC Classification of merchandise inventory [see p. 344]
-A – higher product availability
-B – medium product availability
-C – lower product availability is acceptable
-Fluctuations in demand
-Lead Time
-for ordering and delivery from the vendor
-Frequency of store deliveries
Step 4 – Develop Inventory Control System: Managing Staple Merchandise Inventory
The Merchandise Buyer Determines:
-Assortment Plan
-Cycle Stock or Base Stock
-Level of Backup Stock

The Inventory Control System:
-Monitors Inventory levels
-Automatically reorders when inventory gets below a specified

Step 4 – Inventory Management for Staple Merchandise
Cycle (or Base) Stock:
-Inventory that goes up and down due to demand and the
replenishment process

Backup (Buffer, Safety) Stock
-Inventory needed to avoid stockout

Step 4 – Inventory Trade-Off:Base Stock
Indicates the Desired Inventory Level for Each SKU

Cost of carrying inventory / Lost sale due to stockout (suppose to be a teter totter)

Step 4- Determining the Level of 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 vendor’s Fill Rate
-(percent of complete orders received from a vendor)
Step 4- Calculation of Order Point
The point at which inventory available should not go below or else retailer will run out of stock before the next order arrives

Order point= sales/day x (lead time + review time) + buffer stock

Step 4- Inventory Management for Fashion Inventory
Merchandise Budget Plan
-system for managing fashion merchandise categories
plan for 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—does not indicate what specific
SKUs to buy or in what quantities
Step 4- Managing Evaluating Merchandise Budget Plan
-Inventory Turnover, GMROI, and sales forecast are also used for
control, not just for planning
-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
merchandise buyer’s control?
-Did the merchandise buyer react quickly to changes in
demand by either purchasing more or having a sale?
Step 4- Fashion Merchandise Management: Open-to-Buy System (OTB)
-used after the merchandise is purchased
-Monitors Merchandise Flow
-Determines How Much Was Spent and How Much is Left to
Step 5- Allocate Merchandise to Stores
Allocating merchandise to stores involves three decisions:
1. How much merchandise to allocate to each store?
2. What type of merchandise to allocate to each store?
3. When to allocate the merchandise to different stores?
Step 5- Type of Merchandise Allocated to Each Store
-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
Step 5- Timing of Merchandise Allocation to Stores by Region
Seasonality differences and consumer demand differences
by region
Step 6 – Buying Merchandise
In Chapter 13
Step 7 – Analyzing Merchandise Management Performance
Three types of Analyses related to Step 7 (monitoring and making adjustments) are:
1. Sell-Through Analysis
2. ABC Analysis of Assortments
3. Multiattribute Analysis of Vendors
Step 7 – Sell Through Analysis Evaluating Merchandise Plan
-A Sell-Through Analysis
-actual sales versus planned sales
-need to order more merchandise or reduce the price reductions
-Markdown Money
Step 7 – Evaluation of Assortment Plan: ABC Analysis
ABC Analysis
-assess inventory performance of individual SKUs
-Ranks merchandise by some performance measure determine
which SKUs:
-should never be out of stock
-should be allowed to be out of stock occasionally
-should be deleted from the stock selection
-A items: 5% of SKUs, represent 70% of sales
-B items: 10% of SKUs, represent 20% of sales
-C items: 65% of SKUs, represent 10% of sales
-D items: 20% of SKUs, represent 10% of sales
Step 7 – Evaluation of Vendors : Multiattribute Analysis
Multiattribute Analysis Method
-evaluate vendors
-weighted average score
-importance to retailer of various matters
-vendor’s performance on those matters
See List of Five Steps

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