1. 16 Chapter 16 Financial Merchandise Management

2. Chapter Objectives  To explain the determination of inventory needed in dollar merchandise planning  To investigate the determination of Open- to-Buy  To examine the organization of merchandise planning and buying --- Concentrate on pages 477-484 ---  To explain the determination of inventory needed in dollar merchandise planning  To investigate the determination of Open- to-Buy  To examine the organization of merchandise planning and buying --- Concentrate on pages 477-484 ---

3. Financial Merchandise Management A retailer specifies which products are purchased, when products are purchased, and how many products are purchased –Dollar control involves planning and monitoring a retailer’s investment in merchandise over a stated period –Unit control relates to the quantities of goods a retailer handles during a stated period A retailer specifies which products are purchased, when products are purchased, and how many products are purchased –Dollar control involves planning and monitoring a retailer’s investment in merchandise over a stated period –Unit control relates to the quantities of goods a retailer handles during a stated period Benefits of Financial Merchandise Plans The value and amount of inventory in each department and/or store unit during a given period are delineated The amount of merchandise a buyer can purchase during a given period is stipulated The inventory investment in relation to planned and actual revenues is studied The retailer’s space requirements are partly determined by estimating beginning-of- month and end-of-month inventory levels The value and amount of inventory in each department and/or store unit during a given period are delineated The amount of merchandise a buyer can purchase during a given period is stipulated The inventory investment in relation to planned and actual revenues is studied The retailer’s space requirements are partly determined by estimating beginning-of- month and end-of-month inventory levels A buyer’s performance is rated. Measures may be used to set standards Stock shortages are determined and bookkeeping errors and pilferage are uncovered Slow-moving items are classified – leading to increased sales efforts or markdowns A proper balance between inventory and out-of-stock conditions is maintained A buyer’s performance is rated. Measures may be used to set standards Stock shortages are determined and bookkeeping errors and pilferage are uncovered Slow-moving items are classified – leading to increased sales efforts or markdowns A proper balance between inventory and out-of-stock conditions is maintained

4. Forecasted Sales Inventory Needed Open-to-Buy Merchandise Planning Forecasted Sales Inventory Needed Open-to-Buy Merchandise Planning

5. Table 16-7: Handy Hardware Store Sales Forecast Using Product Control Units Product Control UnitsActual Sales 2006 ($) Projected Growth/ Decline (%) Sales Forecast 2007 ($) Lawn movers/snow blowers 200,000+10.0220,000 Paint and supplies128,000+ 3.0131,840 Hardware supplies108,000+8.0116,640 Plumbing supplies88,000-4.084,480 Power tools88,000+6.093,280 Garden supplies/chemicals68,000+4.070,720 Housewares48,000-6.045,120 Electrical supplies40,000+4.041,600 Ladders36,000+6.038,160 Hand tools36,000+9.039,240 Total year840,000+4.9881,080

6. Inventory Needed Basic Stock Method The inventory needed at the beginning of the period (e.g., month) equals the anticipated sales for the month (forecast) plus any desired safety stock/cushion, i.e., basic stock. Inventory needed = Forecasted Sales + Basic Stock For example, if you wanted to have a cushion of 10% of the average forecasted month’s sales to guard against stockouts, delayed deliveries, shrinkage, etc., you’d add that 10% of average forecasted month’s sales to the forecast of sales for the coming month. As a simple illustration, if a small shop’s total forecasted annual sales for the year was $120,000, that means an average of $10,000 in sales per month. If management wanted a 10% cushion, that means the basic stock would be 10% of $10,000, or $1,000. The inventory needed at the beginning of any given month, then, would be the safety stock of $1,000 plus the forecast sales for the month. If the forecast for the month was $11,800, then the inventory needed would be $11,800 + $1,000, or $12,800.

7. Inventory Needed (continued) Percentage Variation Method The inventory needed at the beginning of a month equals the planned average monthly stock level adjusted by a factor depending on the forecasted sales of a coming month compared to that of the average month. This adjustment factor is half of the % difference between the average month and the planned month. Inventory needed = Planned stock x 1/2 (% forecasted sales deviation from average. month sales) For example, if that small shop with $12,000 average forecasted sales per month was forecasting $12,960 for the next month, that would represent a +8% difference from the average month (12,980/12,000). If that shop further plans $13,000 of average monthly stock, then that average monthly stock would be adjusted by 1/2 the percentage difference between forecasted and average sales, i.e., half of +8%. Therefore, the inventory needed using this method would be $13,000 + 4% of $13,000, or $13,000 x 1.04 = $13,520

8. Inventory Needed (continued) Weeks’ Supply Method This method requires no adjustment to planned stocks or anticipated sales, as it assumes inventory needed is in direct proportion to sales. Therefore, the beginning month inventory is simply the sum of the forecasted sales for a given number of weeks. Inventory needed = Average forecasted weekly sales x # of weeks Using the small shop as the example, if the shop wanted to carry a quarter’s worth of merchandise (13 weeks in a quarter of a year), and the forecast for the average week was $2,600, then using this method the inventory needed at the beginning of the month would be $2,600/wk x 13 weeks, or $33,800. Stock-to-Sales Method If a retailer wants to maintain a given of goods on hand to forecasted sales, a ratio obtained through trade sources or internally generated is applied to forecasted sales. For the small shop example, if a ratio of 1.25 is desired and the forecasted sales are $11,800, then the inventory needed would be $11,800 x 1.25, or $14,750.

9. Basic Stock Method w/15% Basic Stock: ($73,423 x.15) +$48,000 = $58,500 Percentage Variation Method w/$80,000 Planned Stock: $80,000 x (1/2 x + (1 + (50,662/73,423))) $80,000 x (1/2 x (1 +.69)) $80,000 x (1/2 x 1.69) $80,000 x.845 = $67,600 MonthActual Sales 2006 ($) Monthly Sales IndexMonthly Sales Forecast 2007 January46,800 6773,423 *.67 = 49,193 February40,864 5873,423 *.58 = 42,585 March48,000 6973,423 *.69 = 50,662 April6,600 9473,423 *.94 = 69,018 May112,19616073,423 * 1.60 = 117,477 June103,80014873,423 * 1.48 = 108,666 July104,56014973,423 * 1.49 = 109,400 August62,800 9073,423 *.90 = 66,081 September46,904 6773,423 *.67 = 49,193 October46,800 6773,423 *.67 = 49,193 November66,884 9673,423 *.96 = 70,486 December94,79213573,423 * 1.35 = 99,121 Total Sales840,000Total sales forecast 881,080 Average monthly sales 70,000Average monthly forecast 73,423 Table 16-9: Handy Hardware Store, 2007 Sales Forecast by Month Beginning Inventory for March? Weeks’ Supply Method e.g., for 13 weeks: ($881,080/52) x 13 $16,944 x 13 $220,272 Stock-to-Sales Method where ratio = 1.25 $50,662 x 1.25 $63,328

10. Planned Purchases and Open-to-Buy Planned purchases reflect the amount you need minus the amount you have. The amount you need has to cover the anticipated sales for the month and the amount of inventory with which you plan to end the month. Also, you need to cover any planned reductions (shrinkage, discounts, etc.). So if you plan to sell 100, and want to end with 200, you’d need to buy 300. If there are going to be shrinkage, discount, and other reduction amounts totalling 20, the total amount you’d need to cover projected sales, planned ending inventory, and anticipated reductions is 320. But you don’t have to obtain all 320 if you’ve already got some on hand (beginning inventory) and/or have some on the way to be soon delivered (planned delivery). If you have 140 already in inventory and are anticipating receiving 10 soon, that means of the 320 needed, you already have 150, meaning that you only need to get 170 more to get to the 320 needed. This 170 represents the “Open-to-Buy.”

11. Merchandise Planning/Buying (see 416-417) In planning for merchandise buying, there are some basic organization tools: The “Basic Stock List” is best for planning staple goods and those items with relatively stable demand. In these cases, fairly specific descriptions of merchandise needs may be made (brand, color, etc.), and is central in keeping track of inventory for these relatively demand-stable items. The “Model Stock List” is best for planning items with unstable demand, such as fashion, seasonal, and fad merchandise. As detailed demand for specific items is difficult to predict, the model stock list plans by category and often builds around core categories (popular sizes, styles, colors, etc.). The “Never Out List” is best for planning best sellers and assortment-critical items, i.e., things that should always be in inventory.

12. Basic Stock List Most basic stock lists will also keep track of (perpetual) inventory: e.g. 7/318/319/3010/31 On Hand14110317 O./R. / /20/ /20 Sales 6 3 8 6

13. Table 16-2: Handy Hardware Store Perpetual Inventory System DateBeginning-of-Month Inventory Net Monthly Purchases Monthly SalesEnd-of-Month Inventory 7/1/06 $90,500 $40,000$ 62,400$68,100 8/1/06 68,100 28,000 38,400 57,700 9/1/06 57,700 27,600 28,800 56,500 10/1/06 56,500 44,000 28,800 71,700 11/1/06 71,700 50,400 40,800 81,300 12/1/06 81,300 15,900 61,200 36,000 TOTAL$205,900$260,400(as of 12/31/06)

14. Model Stock Plan There are at least three strategic errors in the model stock plan for cardigans presented here. Can you find them? MaterialPrice (at cost)UnitsDollars Synthetic (50%) $14-15170$2,500 16-17365 6,000 18-19 80 1,500 61510,000 Wool (40%) $16-19115$2,000 20-26210 4,800 27-33 40 1,200 365 8,000 Cashmere (10%) $20-29 20$ 500 30-39 35 1,200 40-50 7 300 62 2,000 Total (100%) 1,042 $20,000 Never Out List Discussion Questions: Chapter 14: 6 Chapter 16: 11