1. 5th Edition

2. Planning Merchandise Assortments
Chapter 12
Planning Merchandise Assortments
McGraw-Hill/Irwin
Levy/Weitz: Retailing Management, 5/e
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Merchandise Management
Retail Communication Mix
Buying Systems
Planning Merchandise Assortments
Buying Merchandise
Pricing

4. Merchandise Management Issues

5. The 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.

6. 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.
Breakfast cereal category vs. Kellogg Corn Flake
Men’s knitted shirts vs. Polo shirts
One person managing the entire category and responsible for its success or failure.

7. 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
Problems
Vendor category captain may have different goals than retailer

8. Standard Merchandise Classification Scheme and Organizational Chart

9. The Buying Organization
Merchandise Group…………Men’s wear
Department………….……….Young Men’s wear
Classification………….……..Pants
Category……………………..Jeans
Stock Keeping Unit (SKU)….Levi, 501, size waist, 32 inseam

10. GMROI Productivity Measures
Gross Margin
Inventory
Input
Output

11. GMROI Inventory Productivity Measures
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)

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

13. Illustration of GMROI

14. Gross Margin %, Inventory Turnover,& GMROI for Selected Department in Discount Stores

15. 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

16. Inventory Turnover Month Retail Value of Inventory EOM January $22,000
EOM February 33,000
EOM March 38,000
Total Inventory $93,000
Average inventory = $93,000 ÷ 3 = $31,000

17. Inventory Turnover and Sales-to-Stock Ratio
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

18. 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

19. Disadvantages of Rapid Rate of Turnover
Lowered sales volume
Increased cost of goods sold
Increased buying and ordering time

20. Developing a Sales Forecast
Understanding the nature of the product life cycle
Collecting data on sales of product and comparable products
Using statistical techniques to project sales
Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand (CPFR)

21. The Category Product Life Cycle
Total Retail Sales
Introduction
Growth
Maturity
Decline
Time
Strategy variable
Target market High-income Middle-income Mass market Low-income
Innovators adapters and laggards
Variety One basic Some variety Greater variety Less variety
offering
Distribution Limited or More retailers More retailers Fewer
Intensity extensive retailers
Price Penetrating Wide range Lower prices Lower prices
or skimming
Promotion Informative Persuasive Competitive Limited

22. Variations of the Category Life Cycle
Fad Fashion Staple Seasonal
Sales over many seasons No Yes Yes Yes
Sales of a specific style No No Yes Yes over many seasons
Sales vary dramatically No Yes No Yes from one season to the next
Illustration
(Sales against Time)
SALES
TIME

23. Data Sources for Developing Sales Forecasts
Previous Sales History
Published Sources - Buying Power Index (BPI), Monthly Retail Trade Report, InfoScan, Claritas, general retail trade publications like Stores, WWD and Chain Store Age
Customer Information
Vendors and Resident Buying Offices

24. Sales for Levi Jeans at Trendsetters Department Store
Spring & summer sales
Winter sales
SALES ($000) DOLLARS
Fall sales
YEAR

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

26. 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

27. 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.

28. Assortment Plan for Girls’ Jeans
Styles T R A D I T I O N A L
Price levels $ $ $ $ $ $45
Fabric Reg denim Stone- Reg denim Stone Reg denim Stone-
composition washed washed washed
Colors Light blue Light blue Light blue Light blue Light blue Light blue
B O O T C U T
Price levels $ $ $ $40
Fabric Reg denim Stone- Reg denim Stone-
composition washed washed
Colors Light blue Light blue Light blue Light blue
Indigo Indigo Indigo Indigo
Black Black Black Black

29. Size Distribution for Traditional $20 Denim Jeans in Light Blue for a Large Store
Length
Short %
units
Medium %
units
Long %
units
Total %
429 units

30. Is This Store Heavy on Variety? On Assortment?

31. Determining Variety and Assortment
Profitability of Merchandise Mix
Corporate Philosophy Toward Assortment
Physical Characteristics of Store
Complementary Merchandise

32. Product Availability (Percent)
Relationship between Inventory Investment and Product Availability
Product Availability (Percent)
600
500
400
300
200
100
Inventory investment Dollars

33. Cycle and Backup Stock 150 - 100 - Units Available 50 - 0 - 1 2 3 4
Weeks
150 -
100 -
50 -
0 -
Order 96
Cycle Stock
Buffer Stock