Merchandise Planning Chapter 12 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Questions What is merchandise management and what are the basic processes involved? What is the basic structure of the buying organization? Why do the merchandise management processes differ for staple and fashion merchandise? How do retailers evaluate the performance of their merchandise management decisions? How do retailers forecast sales for merchandise categories? How do retailers plan their assortments and determine the appropriate inventory levels? What trade-offs must buyers make in developing merchandise assortments?

Merchandise Management The process by which a retailer attempts to offer the right quantity of the right merchandise in the right place at the right time while meeting the company’s financial goals. Primarily undertaken by retail buyers Sense market trends Analyze sales data Make appropriate adjustments in prices and inventory levels c) image100/PunchStock

The Buying Organization Combination of merchandise departments. Each merchandise group is managed by a general merchandise manager (GMM) Merchandise Group Departments are managed by a divisional merchandise manager (DMM), Department A group of items targeting the same customer type (example, girls sizes 4-6) . A buyer is responsible for a merchandise classification Classification A category is made up of an assortment of items the consumer sees as substitutes for one another (example, size 4-6 dresses) Category The smallest unit available for inventory control Size, color, style, brand SKU

Merchandise Classifications and Organization

Merchandise Category – The Planning Unit A merchandise category is an assortment of items that customers see as substitutes for each other. The merchandise category is the basic unit of analysis for making merchandising management decisions. For example, buyers make sales forecasts and develop budgets at the category level. Why is the merchandise category the basic unit of analysis?

ROA and GMROI Asset Productivity Measures Strategic Corporate Level Return on Assets = Net Profit Total Assets Merchandise Management Level GMROI = Gross Margin Avg. Inventory at Cost

Evaluating Merchandise Management Performance - GMROI 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 Real estate Other fixed assets SO HOW ARE MERCHANTS EVALUATED?

GMROI Productivity Measures Gross Margin Inventory Input Output A measurement of how many gross margin dollars are earned on every dollar of inventory investment made by the buyer

GMROI Gross Margin Return on Investment avg. inventory at cost Why is average inventory valued at cost and not retail? How is average inventory calculated?

Inventory Turnover Inventory turnover = Cost of goods sold (at cost) Average inventory at cost How many times, on average, the inventory cycles through the store during the year. Inventory Turnover helps assess the buyer’s performance in managing an asset (merchandise inventory) Buyers need to consider the trade-offs associated with managing Inventory turnover

Advantages of Rapid Turnover Increased sales volume Less risk of obsolescence and markdowns Improved salesperson morale More resources to take advantage of new buying opportunities

Approaches for Improving Inventory Turnover Reduce number of categories Reduce number of SKUs within a category Reduce number of items in a SKU This reduces average inventory investment BUT if a customer can’t find their size or color or brand, patronage and sales decrease! another approach…

…another approach To improve inventory turnover Buy merchandise more often Buy in smaller quantities which should reduce average inventory without reducing sales BUT by buying smaller quantities Buyers can’t take advantage of quantity discounts so Gross margin decreases Buyers need to spend more time placing orders and monitoring deliveries

Merchandise Management Process Forecast category sales (chapter 12) Develop an assortment plan for the category (chapter 12) Determine desired product availability levels (chapter 12) Develop a merchandise budget (chapter 13) Negotiate with vendors and buy merchandise (chapter 14)

Types of Merchandise Management Planning Processes Two distinct types of merchandise management systems for managing Staple (Basic) Merchandise Categories Continuous demand over an extended time period Hosiery, most grocer store items, housewares Sales are relatively stable from day to day Easy to forecast demand Continuous replenishment Fashion Merchandise Categories In demand for a relatively short period of time Continuous introductions of new products, making existing products obsolete Athletic shoes, women’s apparel, some consumer electronics Forecasting demand is more challenging

Step 1: Forecasting Sales: The Category Life Cycle Knowing where a category is in its life cycle is useful for predicting sales

Variations in Category Life Cycles Fads Merchandise category that generates a lot of sales for a relatively short time Often less than one season Short life cycle Must recognize fad in its earliest stages, get distribution rights, know when to bail out Fashion Merchandise category that typically lasts several seasons Sales can vary dramatically from one season to the next Moderate life cycle Staple merchandise Merchandise category that has continuous demand over an extended period of time. Extended life cycle

Forecasting Staple Merchandise Based on extrapolating historical sales because sales are constant from year to year

Forecasting Staple Merchandise Forecast sales for 2009: Lodge frying pan 2009 annual sales = 1.036(3.6% growth) x 118,963 (2008 annual sales) = 123,245 The estimated quarterly sales: First-quarter sales = 123,245 x .21 = 25, 881 Second-quarter sales = 123,245 x .26 = 32,044 Third-quarter sales = 123,245 x .18 = 22,184 fourth-quarter sales = 123,245 x .35 = 43,136

Forecasting Fashion Merchandise Categories Retailers develop fashion forecasts by relying on: Previous sales data Personal awareness Fashion and trend services Vendors Market research

Personal Awareness Must be aware of trends that can affect the category’s sales. How do fashion buyers know the trends? Internet chat rooms Look in closets Go to the movies Go to rock concerts Go to nightclubs Ryan McVay/Getty Images SCAN Shop the retail stores, Web sites and catalogs of competitors as a customer would Converse with consumers, sales clerks, and neighbors Act like your customer Notice

Fashion and Trend Services Buyers subscribe to forecasting services and fashion publications Trendzine (www.FashionInformation.com) Doneger Creative Services (www. Doneger.com/web ) Fashion Snoops (www. fashionsnoops.com) Women’s Wear Daily (WWD) Home Furnishings News (HFN)

Work with Vendors Vendors have proprietary information about their marketing plans (i.e., new product launches, special promotions Can have a significant effect on product sales.

Market Research Ask customers about merchandise offerings through surveys or focus groups Measure customer reactions through sales tests (market testing) Talk to retail sales people Maintain a customer want list

Step 2: Developing Assortment Plans Assortment plan is a list of the SKUs that a retailer will offer in a merchandise category and reflects the variety and assortment that the retailer plans to offer in a merchandise category Variety (breadth) is the number of different types of merchandise within a category Assortment (depth) is the number of SKUs per type.

Assortment Plan for Girls’ Jeans

Step 3: Determine Product Availability Level The percentage of demand for a particular SKU that is satisfied The backup (buffer) stock is the additional stock carried as a safety cushion so the store doesn’t run out before the next order arrives The higher the product availability level, the higher the amount of backup stock necessary to ensure that the retailer won’t be out of stock on a particular SKU when consumers demand it

Importance of Backup (Buffer) Stock Choosing an appropriate amount of backup stock is critical to successful assortment planning If the backup stock is too low  loose sales and customers If the backup stock is too high  scare financial resources will be wasted on needless inventory that could be more profitably invested in more variety or assortment

Model Stock Plans

Determining Variety, Assortment, and Product Availability Levels Buyers consider Retail strategy The number of SKUs to offer in a merchandise category is a strategic decision GMROI of the merchandise mix 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 Physical characteristics of the store PhotoLink/Getty Images