Merchandising Planning Section Two Merchandising Planning

Planning and Controlling Merchandise Budgets Chapter Seven Planning and Controlling Merchandise Budgets

©2010 Fairchild Books, A Division of Condé Nast Publications. Learning Objectives Introduce the retail method of accounting Practice the mechanics of fundamental merchandise budgets Examine the integrated relationships among the components of merchandise budgets Develop the components of dynamic, expanded, merchandise budgets Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Components of Merchandise Budgets Merchandise plans Merchandise budgets Applications of pricing strategies Assortment plans Delivery plans Retail merchandise budgets use retail method of accounting for inventory value of inventory determined by retail prices Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Mechanics of Fundamental Merchandise Budgets Components of a fundamental merchandise budget Last year’s sales Planned % increase or decrease in sales Planned sales Planned reductions Merchandise to receive First price Number of units Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Planning Sales Planned sales foundation of a merchandise budget just as net sales are the foundation of an income statement based on forecasting process that determines the percent increase or decrease Goal is to “make plan” planned sales is the sales goal for the selling period Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Time Frame for Planning Sales Sales can be planned for Merchandising Cycle Selling periods Months Weeks Days Based on last year’s percent of sales for same category/class Same time frame last year Forecasts help determine percent increase or decrease Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning Sales Based on Space Productivity Based on sales per square foot: Consider annual sales per square foot being generated by competing stores for same classes Industry-wide annual sales per square foot generated by merchandise classification Determine the number of square feet allocated to the classification Decide on a reasonable estimate of sales per square foot based on your research related to merchandise class and retail channel Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Table 7.5 Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Planning Reductions Reductions Factors other than sales that reduce the value of inventory Markdowns for sales promotions or inventory clearance Employee discounts Inventory shortage due to shoplifting employee theft damaged merchandise recordkeeping errors Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning Merchandise to Receive Because of reductions, must sell more merchandise than indicated by planned sales alone Only way to achieve planned sales is to cover value of reductions Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

©2010 Fairchild Books, A Division of Condé Nast Publications. Table 7.6 Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning First Price, Allowable Cost, and Number of Units to Receive Determine average first price last year for a merchandise category, class, subclass, or group determine first price of each style multiply the price of each style by the number of units add together the total value of the styles divide by the total number of units Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning First Price, Allowable Cost, and Number of Units to Receive Allowable cost can be determined either for total merchandise to receive or for a single unit Allowable cost = average first price x % merchandise cost Units to Receive Divide merchandise to receive by allowable cost Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications. 14

Developing an Expanded Merchandise Budget Dynamic Forecast-based Can be used for fashion/seasonal goods or basic/staple goods When computerized, allows immediate comparison Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning Inventory and Purchases During the Selling Period Fulfill sales goals Avoid stockouts Prevent overstocks Minimize inventory investment (Lewison, 1994) Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning Inventory and Purchases During the Selling Period Merchandise classifications Sector 1: Fashion/Seasonal Goods inventory-to-sales ratio = total inventory for the period ÷ sales for the same period Sector 2: Basic/Staple Goods maximum inventory = (lead time × rate of sale) + reserve stock Sector 3: Basic/Seasonal and Sector 4: Fashion/Staple Goods planned FOM stock = average inventory × 1/2 [1 + (planned sales for the month ÷ average monthly sales)] Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning Purchases, Merchandise On Order, and Open-to-Buy Determine planned purchases, followed by planned merchandise on order, and then planned open-to-buy How much merchandise do you plan to receive (planned sales + reductions)? How much do you want to have on hand at the end of the period? How much do you plan to have at the beginning of the first of the period? Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.

Planning Initial Markup Initial markup is the difference between merchandise cost and first price Must cover reductions expenses profit Kunz Chapter 7 ©2010 Fairchild Books, A Division of Condé Nast Publications.