Lecture Retailing management (6/e): Chapter 13 - Merchandise planning. This chapter presents the following content: Types of buying systems, factors determining backup stock, basic stock list, order point, calculating the order point, shrinkage,...
Chapter 13 Merchandise Planning McGrawHill/Irwin Retailing Management, 6/e Copyright © 2007 by The McGrawHill Companies, Inc. All rights reserved 13- Merchandise Management Planning Merchandise Assortments Retail Communication Mix Merchandise Planning Systems Buying Merchandise Pricing Types of Buying Systems The McGraw-Hill Companies Inc./Ken Cavanagh Photographer Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales The McGraw-Hill Companies, Inc./Lars A Niki, photographer Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts 13- 13- Staple Merchandise Planning 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 13- Staple Merchandise Planning Most merchandise at home improvement centers are staples Ryan McVay/Getty Images 136 Inventory Levels for Staple Merchandise 137 Factors Determining Backup Stock • Level of backup depends on product availability retailer wishes to provide • The greater the fluctuation in demand, the more backup stock is needed • The amount of backup stock needed is also affected by the lead time from the vendor • Fluctuations in lead time affect the amount of backup stock • Vendor’s product availability affects retailers’ backup stock requirements Relationship between Inventory Investment and Product Availability 600 500 400 300 200 100 80 85 90 95 Product Availability (Percent) 100 13- 13- Cycle and Backup Stock Units Available 150 - Order 96 Cycle Stock 100 Buffer Stock 50 - 0- Weeks Basic Stock List • 1310 Indicates the Desired Inventory Level for Each SKU – Amount of Stock Desired Lost Sale Due to Stockout Cost of Carrying Inventory 1339 Multiattribute Method for Evaluating Vendors Performance Evaluation of Individual Brands Across Issues Issues Importance Evaluation of Issues (I) (1) (2) Vendor reputation Service Meets delivery dates Merchandise quality Markup opportunity Country of origin Product fashionability Selling history Promotional assistance n Overall evaluation = Ij *Pij i Brand A Brand B Brand C Brand D (Pa) (Pb) (Pc) (Pd) (3) 5 5 5 290 (4) 4 298 (5) 4 3 212 (6) 5 8 341 Evaluating a Vendor: A Weighted Average Approach n i Ij *Pij = Sum of the expression Ij = Importance weight assigned to the ith dimension Pi = Performance evaluation for jth brand alternative on the jth issue = Not important 10 = Very important 1340 13- Evaluating Vendors 41 A buyer can evaluate vendors by using the following five steps: • Develop a list of issues to consider in the evaluation (column 1) • Importance weights for each issue in column are determined by the buyer/planner in conjunction with the GMM (column 2) • Make judgments about each individual brand’s performance on each issue (the remaining columns) • Develop an overall score by multiplying the importance for each issue the performance for each brand or its vendor Retail Inventory Method (RIM) 1342 Two Objectives: – To maintain a perpetual or book inventory of retail dollar amounts – To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory 1343 Retail Inventory Method: The Problem Retailers generally think of their inventory at retail price levels rather than at cost When retailers compare their prices to competitors’, they compare their retail prices The problem is that when retailers design their financial plans, evaluate performance and prepare financial statements, they need to know the cost value of their inventory One way to this is to take physical inventories – time consuming and costly! Another way is to use the Retail Inventory Method (RIM) 13- Advantages of RIM 44 The retailer doesn't have to “cost” each time Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower Advantages of RIM cont’d 1345 • Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage can be compared with historical records or industry norms • Useful for determining shrinkage • Can be used in an insurance claim case of a loss 13- Disadvantages of RIM System that uses average markup Record keeping process involved is burdensome 46 13- Steps in RIM 47 • Calculate Total Merchandise Handled at Cost and Retail • Calculate Retail Reductions • Calculate Cumulative Markup and Cost Multiplier • Determine Book Inventory at Cost and Retail 1348 Retail Inventory Method Example Total Goods Handled Cost Beginning inventory Retail $ 60,000 $ 84,000 Purchases 50,000 70,000 - Return to vendor (11,000) (15,400) Net Purchases 39,000 54,600 Additional markups 4,000 - Markup cancellations (2,000) Net markups 2,000 Additional Transport Transfers in - Transfers out Net Transfers Total Goods Handled 1,000 1,428 2,000 (714) (1,000) 714 (1,000) $100,714 $141,600 1349 Retail Inventory Method Example Total Goods Handled Cost Retail Gross Sales $ 82,000 - Consumer Returns & Allowances ( 4,000) Net Sales $ 78,000 Markdowns 6,000 - Markdown Cancellation (3,000) Net Markdown 3,000 Employee Discounts 3,000 Discounts to Customers Estimated Shrinkage Total Reductions 500 1,500 $ 86,000 1350 Calculate Total Goods Handled at Cost and Retail Record beginning inventory at cost and at retail Calculate net purchases Calculate net additional markups Record transportation expenses Calculate net transfers The sum is the total goods handled (c) Stockbyte/PunchStock 13- Calculate Retail Reductions Record net sales Calculate markdowns Record discounts to employees and customers Record estimated shrinkage The sum is the total reductions 51 1352 Calculate the Cumulative Markup and Cost Multiplier Cumulative markup = total retail – total cost total retail If the cumulative markup is higher than the planned, then the category is doing better than planned 1353 Determine Ending Book Inventory at Cost and Retail Ending book = Total goods handled at retail inventory at retail – total reductions The ending book inventory at cost is determined in the same way that retail has been changed to cost in other situations – multiply the retail times (100% - gross margin percentage) Ending book = Ending book inventory x cost multiplier ... Product Availability (Percent) 100 1 3- 1 3- Cycle and Backup Stock Units Available 150 - Order 96 Cycle Stock 100 Buffer Stock 50 - 0- Weeks Basic Stock List • 131 0 Indicates the Desired Inventory... stores 29 133 0 Allocation Based on Sales Volume 133 1 Different Geodemographic Segments 133 2 Apparel Size Difference Across Stores 1 3- Sales of Capri Pants by Region 33 Analyzing Merchandise Management. .. Forecast Sales The McGraw-Hill Companies, Inc./Lars A Niki, photographer Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts 1 3- 1 3- Staple Merchandise Planning