CHAPTER 6 PRODUCT QUANTITY DECISIONS AND STOCK MANAGEMENT

LEARNING OBJECTIVES Introduce the objectives and principles of stock management Understand the risks associated with getting buying quantities wrong Appreciate that different stock control approaches are applicable in various retail contexts Understand the relationship between sales, stock levels and ordering quantities Account for influences on product quantity requirement

STOCK (INVENTORY) MANAGEMENT PRINCIPLES How much?  By store, region, whole organisation  For a day, week or whole season Not enough?  Stock out, lost sale, lost complementary sale, lost customer, poor image Too much?  Additional costs: stock investment, maintenance, use of space, reduced margin to clear The Ideal? - one product sold, one taken into stock?

STOCK MANAGEMENT PRINCIPLES (2) Stock management includes:  stock control (controlling flow of physical product in line with sales)  financial control (managing finance tied up in product)  consideration of supply factors: discounts for large quantities, delivery quantities, lead times (time between order and delivery) and minimum quantities

STOCK MANAGEMENT FOR STAPLE ITEMS Consistent demand Relatively straightforward Many systems based on the principles of the periodic review  easy to administer  adjustments can be made to ensure stock-out is avoided  review time can be varied between products, according to lead times

PERIODIC REVIEW Insert Figure 6.1

ECONOMIC ORDER QUANTITY (EOQ) Order quantities can be:  large, placed infrequently  small, placed frequently EOQ determines the most cost effective quantity to order, based on costs of ordering and possession Useful in conjunction with periodic review type system

PRINCIPLES OF EOQ Costs of acquiring a product:  ordering administration  supplier search and selection  expediting  inspection  increase with frequency of order (smaller quantity) Costs of possessing a product:  finance tied in stock  handling costs  maintenance costs EOQ is where total buying cost is lowest, or where cost of acquisition = cost of possession

EOQ Insert figure 6.4

LIMITATIONS OF EOQ Only applicable to non-perishable products with staple demand Ignores delivery quantities and discounts Assumes storage space is unlimited Assumes retailer controls delivery scheduling Cost structures have changed, e.g. ordering costs reduced by e-commerce, stock is seen as a liability not asset

THE NEED FOR STOCK INVESTMENT Stock service level is (along with width and depth) a dimension of the retailer’s product assortment offer High stock service  maximises sales opportunities  high stock investment (money and space)  risk of too much stock Variety requirement  varies according to product (see Figure 6.5)

FIGURE 6.5 THE NEED FOR VARIETY

STOCK MANAGEMENT SYSTEMS Used in most large retailers by merchandisers to  give overview of stock position by item  calculate buying quantities  observe sales patterns  provide information for forecasting

SALES FORECASTING Necessary for all products, but more challenging for those with fashion and seasonal influences EPOS data is the starting point for sales forecasting Factors that influence a sales forecast:  seasonality  fashion  product endorsements  price changes  availability of product substitute  sales of complementary products  promotional activity

SALES FORECASTING TECHNIQUES Moving Average Exponential Smoothing Base upwards forecasting Top-down forecasting Using DC (distribution centre)

THE MERCHANDISE BUDGET PLAN (MBP) Concerned with financial side of merchandise planning Aims to balance:  money flowing out for supplies  money flowing in from sales Aims to provide flexibility taking into account:  the need to pre-order for some stock  variation between forecast and actual sales

ILLUSTRATION OF MBP STOCK LEVEL VARIATION Insert figure 6.7

Add Table 6.6

MBP: STOCK TO SALES RATIO Depends on: lead times, likelihood of product selling out, importance of keeping in stock, variety requirement. Generally, when sales are low, stock to sales ratio rises, when sales are high, stock to sales ratio falls Average stock to sales ratio can be varied through season to build and run down stock

MBP: OPEN-TO-BUY Planned purchases represents value of stock at retail OTB is value at cost available to spend with suppliers OTB rises when actual sales exceed forecast, and falls when actual sales are below forecast Some of OTB will be already committed to forward orders, remainder and any OTB generated is available for spending

MBP: REDUCTIONS Account for reduction in stock value other than sales  external theft  internal pilferage  shop soiling and damage  mark-downs  customer discounts  staff discount In effect a retailer has to buy extra stock to compensate for reductions