Merchandising Session 5 Retail Management Prayas/CBS corebusinessschool.org

Contents Merchandise management Mark up and mark down GMROI WISSI Prayas/CBS

Category A category is an assortment of items that the customer sees as reasonable substitutes for each other: girls’ apparel, laundry detergents, soup, DVD players. In merchandise management, we do everything at the category level. The category can mean different things to different retailers. Prayas/CBS

Category Management Category management is the 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. – One person managing the entire category and responsible for its success or failure. Prayas/CBS

Category Captain Selected vendor responsible for managing assortment of merchandise in a category Vendors frequently have more information and analytical skills about the category in which they compete than retailers Works with category Mgr ---Promotion, pricing, brand & product placement on shelves. Problems – Vendor category captain may have different goals than retailer Prayas/CBS

GMROI Productivity Measures Prayas/CBS Inventory Gross Margin InputOutput

GMROI Inventory Productivity Measures Prayas/CBS Combine Gross Margin % and Inventory Turnover (sort of) Gross Margin% Inventory Turn GMROI = Gross Margin x Net Sales Net Sales Avg cost GMROI = Gross Margin Avg Inventory cost) Output (Margin Generated by Sales) Input (Inventory Investment in Inventory)

ROI and GMROI Asset Productivity Measures Prayas/CBS Strategic Corporate Level Return on Assets = Net Profit Total Assets Merchandise Management Level GMROI = Gross Margin Avg cost

Illustration on GMROI Prayas/CBS

Calculating Inventory Turnover Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Cost of goods sold Average inventory at cost Average inventory = Month1 + Month2 + Month 3 +… Number of months

Inventory Turnover and Sales-to-Stock Ratio Prayas/CBS Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Cost of goods sold Average inventory at cost Stock-to-Sales Ratio = Net Sales Average cost of inventory

Advantages of Rapid Turnover Increased sales volume Less risk of obsolescence and markdowns Improved salesperson morale Money for market opportunities Decreased operating expenses Increased asset turnover Prayas/CBS

Disadvantages of Rapid Rate of Turnover Lowered sales volume Increased cost of goods sold Increased buying and ordering time Prayas/CBS

The Category Product Life Cycle Total Retail Sales Introduction Growth Maturity Decline Time Maturity

Prayas/CBS Factors Affecting Sales Projections Controllable Promotions Store Locations Merchandise Placement Cannabalization Uncontrollable Seasonality Weather Competitive Activity Product Availability Economic Conditions

Prayas/CBS Collaboration, Planning, Forecasting, and Replenishment Systems (CPFR) Systems used by retailers and vendors to work together to insure that the right merchandise is at the right place at the right time. Benefits both retailers and vendors Increases fill rate, reduces stockouts, increases inventory turns

Prayas/CBS Assortment Planning Variety is the number of different merchandising categories within a store or department Assortment is the number of SKUs within a category. Product availability defines the percentage of demand for a particular SKU that is satisfied.

Prayas/CBS Determining Variety and Assortment Profitability of Merchandise Mix Corporate Philosophy Toward Assortment Physical Characteristics of Store Complementary Merchandise

Prayas/CBS Types of Buying Systems Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales

Prayas/CBS Staple Merchandise Buying System Forecast SKU Sales Order Merchandise Monitor Sales and Inventory Compare Inventory to Basic Stock List

Prayas/CBS Considerations in Determining How Much to Order Basic Stock Plan Present Inventory Merchandise on Order Sales Forecast – Rate of Sales of SKU (Velocity) – Seasonality

Prayas/CBS Buffer Stock We need it so we won’t loose sales, complementary sales, and customers Buffer stock is dependent on: -Forecast interval variance (Forecast interval = lead time + review time) -Variation in Demand (actual demand - forecasted demand) -Time to Get Product from Supplier -Time to Get Product from Distribution Center - Product availability requested of IM systems

Prayas/CBS Forecasting Demand Forecasting -- extrapolating the past into future using statistical and mathematical methods Objectives: – Ignore random fluctuations in demand – But be responsive to real change

Prayas/CBS Order Point Order point = the point at which inventory available should not go below or else we will run out of stock before the next order arrives. Assume Lead time = 0, Order point = 0 Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week Order point = demand (lead time + review time) + buffer stock Order point = 100 (3+1) = 400

Prayas/CBS Order Point continued Assume Buffer stock = 50 units, then Order point = 100 (3+1) + 50 = 450 We will order something when order point gets below 450 units.

Prayas/CBS Calculating the Order Point Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock 167 units = (7 units x ( days) + 20 units So Buyer Places Order When Inventory in Stock Drops Below 167 units

Prayas/CBS Merchandise Budget Plan Plan for the 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--doesn’t indicate what specific SKUs to buy or in what quantities.

Prayas/CBS Open to Buy Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend

Prayas/CBS

ABC Analysis Rank - orders merchandise by some performance measure determine which items: – should never be out of stock. – should be allowed to be out of stock occasionally. – should be deleted from the stock selection.

Prayas/CBS Analyzing Merchandise Management Merchandise Performance – ABC Analysis – Sell Through Analysis Vendor Analysis – Multiattribute Method

Prayas/CBS ABC Analysis Rank Merchandise By Performance Measures Contribution Margin Sales Dollars Sales in Units Gross Margin GMROI Use more than one criteria

Prayas/CBS Retail Inventory Method (RIM) 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.

Prayas/CBS Advantages of RIM The retailer doesn't have to “cost” each time. Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower.

Prayas/CBS Advantages of RIM cont’d 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.

Prayas/CBS Disadvantages of RIM System that uses average markup. Record keeping process involved is burdensome.