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

2. 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?

3. 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

4. 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

5. Merchandise Classifications and Organization

6. 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?

7. 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

8. 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?

9. 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

10. 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?

11. 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

12. 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

13. 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…

14. …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

15. 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)

16. 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

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

18. 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

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

20. 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

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

22. 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

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

24. 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.

25. 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

26. 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.

27. Assortment Plan for Girls’ Jeans

28. 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

29. 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

30. Model Stock Plans

31. 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
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