MERCHANDISE PLANNING

& MANAGEMENT
Chapters 12 & 13
by Levy & Weitz
Buying Decision Process
What to Buy? How much to When to
buy? buy?
From whom
to buy?
Store Image

Satisfy Cust.
Wants
Type of Merchandise
Control Systems

Merchandise
Policies
Financial Obj. Open-to-buy
Mdse.
Budget
Sales
Reductions
Inventories
Purchases
Shortages
Estimated
Sales

Beginning Inv.

Ending Inv.
Suppliers

The Market

Negotiations

Unit
Price
Terms
Merchandise Management
The planning and control of merchandise
inventories to meet desired sales and
product-related objectives.
Also includes the planning of the size and
composition of the merchandise
inventories, as well as a variety of
functions dealing with the purchase,
display, pricing, promotion, and sale of
merchandise.
Merchandise Planning
Involves those activities which are needed
to ensure a balance between inventories
and sales.
Marketing the right merchandise at the
right place at the right time in the right
quantities at the right price.
Management of the product component of
the marketing mix.
Essential Terms
Product: what retailer is
selling (or service)
Product line: all
products/services offered
by retail firm
Category: assortment of
items that the customer
sees as reasonable
substitutes for each other

Assortment: range of
choices/selection in a
given product line (#
of SKUs in a
category)
Inventory turnover:
# of times the avg.
inventory of an item
or SKU is sold, usually
in annual terms
Category Management at Borders
LO3
In early 2001 Borders group reorganized to emphasize
category management. As a result, Borders has
broken down its business into specialized categorizes
of books, childrens, multimedia, gifts and stationary,
periodicals, calendars and caf. Before the change,
sales, marketing and
merchandising functions
were aligned by type of
outlet, i.e., Borders, Walden
and Borders.com.
Merchandise Assortment
Width (Breadth): refers to assortment
factors necessary to meet needs of target
market and competition
Brand of Beer Types Sizes
Coors reg., light 6-pk, 12-pk
Miller
Budweiser
Michelob
SKUs = 16
Assortment contd.
Support (Depth): Determination of how
many units of merchandise are needed to
support expected sales of each
assortment factor (e.g. brand, type, size,
color, etc.)
Rely on customer needs, past sales trends,
image of department and store, etc.
Why plan stock levels?
Meet sales expectations
Avoid out-of-stock conditions
Guard against overstock
Keep inventory investment at acceptable
level
Merchandise Planning
Objective
Ensure that both the customers
merchandise needs and the retailers
financial requirements are satisfied by
creating an acceptable balance between
merchandise inventories and sales
Merchandise Budgeting
Planning Annual Sales
Annual sales estimates
time series
judgmental forecasting
Make monthly sales estimates
Forecasting Sales
Staples: demand year-round (appliances,
hardware, etc.). Consider sales trends,
profitability, quantity discounts
Seasonal Merchandise: use past
knowledge, info. from vendors, length of
season, planned sales, selling price
Style and perishable items
How much to order?
Lead time: length of time between order
placement and receipt of goods
Importance of safety or cushion stock:
protection against strikes, delays
Base or cycle stock: amount sufficient to
accomodate regular sales
Lead time + Safety stock + Basic stock =
Inventory Level
Example
Als Party Shop wants to maintain a 3-
week supply of domestic beer in inventory
and average sales of Miller Lite beer are
500 6-packs per week. The order point is
1500 (500 X 3 weeks). When inventory
drops below 1500, more beer should be
ordered.
Example contd.
Suppose the order interval is 2 weeks.
We must consider to include stock to
maintain during the order interval and add
to our order point -- in order to determine
our order ceiling. Order ceiling=Order
point+Order interval sales.
1500 + (500 X 2) = 2500
Example contd.
We can then determine our order quantity
by subtracting stock on hand from order
ceiling.
Order Quantity = Order ceiling - stock on
hand
Inventory Turnover
Turnover @ retail
Retail sales/Avg. inv. in retail $
Turnover @ cost
Cost of goods sold/avg. inv. at cost
Total $ Available for Sale= BI + Purchases
COGS=Total $ available for sale - Ending
inventory
Turnover based in units
# of units sold/Avg. inv. in units
Determining Stock-to-Sales
Ratio
Divide the turnover figure into 12 (months
in year) to determine the number of times
of merchandise needed to support the
desired sales based on turnover
Examples:
Turnover = 4; Stock-to-sales = 3.0
Turnover = 2.8; Stock-to-sales = 4.28
Turnover = 10; Stock-to-sales = 1.2
Lower the turnover, the higher the stock-to-sales
ratio
Calculating BOM Stock-to-
Sales Ratios
Step 1: Calculate sales-to-stock ratio
GMROI=gross margin% * sales-to-stock ratio
Step 2: Convert sales-to-stock ratio to
inventory turnover
Inventory turnover = sales-to-stock ratio * (100% -
Gross margin %, expressed as decimal)
Calculate average stock-to-sales ratio
Average stock-to-sales ratio = # months/inventory
turnover
Calculate monthly stock-to-sales ratios
Stock ratios
considerations
Dont confuse stock-to-sales ratio with the sales-
to-stock ratio
Sales are the same in both ratios
Stock in the sales-to-stock ratio is the average
inventory at cost over all days in the period
Stock in the average stock-to-sales ratio is the
average BOM inventory at retail
BOM stock-to-sales ratio is an average for all
months
Determining Planned
Purchases
BOM stock = monthly sales * BOM stock-
to-sales ratio
EOM stock (BOM stock for current period
is the same as the end-of-month for the
previous period)
Monthly Additions to stock = Sales +
Reductions + EOM inventory - BOM
inventory
GMROI & Sales-to-Stock
GMROI = gross margin return on
inventory investment measures how many
gross margin dollars are earned on every
dollar of inventory investment
Sales-to-stock ratio = net sales/avg. inv.
GMROI = gross margin/avg. inv.
GMROI combines the effects of profits
and turnover
Calculating Open-to-Buy
for Current Period
Calculate Projected EOM stock
Actual BOM stock + monthly additions +
order amount - Planned monthly sales -
planned monthly reductions
Open-to-buy = Planned EOM stock -
Projected EOM stock
Calculating Open-to-Buy
for Future Periods
Calculate projected EOM stock
Projected BOM stock + actual order -
monthly sales - planned reductions
Open-to-buy = Planned EOM stock -
Projected EOM stock
Analyzing Merchandise
Performance
ABC Analysis
Rank order merchandise categories (SKUs)
by some performance measure
Contribution margin
Sales Dollars/Units
Gross margin
Gross margin return on investment
Sales or gross margin per square foot
Determine optimal stocking formulas based
on performance measures
Analyzing Performance
continued
Sell-Through Analysis
Comparison between actual and planned
sales to determine whether early markdowns
are required or whether more merchandise is
needed to satisfy demand
Multiple-Attribute Method
Used to evaluate vendors using a weighted
average score for each vendor (current or
proposed).