Chapter 7 : Planning Merchandise Assortments

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2 Learning Objectives Understand concept of Open to buy and its advantages Learn about factors that affect assortment plans Develop the range plans and model stock plan Tools used for merchandise planning 2

3 The Concept of OTB OTB is buyer s buying plan to have the right amount of inventory to support the retailer s sales plans. It tracks the present inventory level, sales made and delivery schedule of ordered merchandise. OTB maintains a record of how much is actually spent purchasing merchandise per month and how much is left to spend. Goal is to ensure the correct inventory level. 3

4 Elements of OTB Formulae Open-to-buy for a month = Planned EOM inventory projected EOM inventory Projected EOM inventory = actual BOM + actual monthly additions (new merchandise received) + on order (to be delivered) sales plan (actual sold) planned monthly reductions 4

5 Elements of OTB If OTB is positive, buyer has money left in the budget to purchase merchandise for that month. If it is negative, shows the buyer has overbought and spent more than the budget. 5

6 Elements of OTB Inventory level related concepts are : Basic stock list -assortment plan for staple merchandise which is continuously maintained in stock as they have stable sales. It specifies the inventory level, color, brand, size, package for every staple item. Planning stock depth or the quantity that is on hand in the store to achieve the planned sales. 6

7 Elements of OTB Never-out list - products whose absence from the inventory even for a day will lower sales volume and cause customer to return unhappy. They should never be out of stock. Safety stock - amount of merchandise required to be on hand to prevent stockouts until the reorder can be received. It is added to the basic buying stock to account for variability in demand and delivery period. 7

8 Elements of OTB Operating level stock - inventory required for safety stock plus buying period under normal conditions. Buying period consists of review period and the delivery period. The review period is the time lapse between two consecutive reviews of a product to determine whether additional order should be placed. 8

9 Advantages of OTB Helps ensure adequate inventory to support planned sales. Able to estimate cash required to be invested in inventory. The merchandise buying can be adjusted in response to the sales and the reductions. The planned stock to sales ratio can be maintained. An effective OTB will help reduce such markdowns. OTB helps maintain the purchases within planned budgets. An effective OTB prevents loss of sales due to unavailability of required stock. Keeps a fresh flow of new merchandise coming into the store through season which keeps the customer interested. 9

10 Assortment Planning Assortment Planning is process of deciding what to buy and how much quantity to buy. Process whereby products are selected and planned to maximize sales and profit Is the set of SKUs that a retailer offers in a merchandise category It breaks down the quantities to be purchased into specific products, lines, sizes and colors. 10

11 Need for Assortment Planning A good merchandise assortment plan : Is a useful tool for buying merchandise and as a document for store management. Gives an indication of the width and depth in each category that is on offer at the retail store. Offers a balanced assortment to satisfy customers and meet the merchandising goals. Enhances the company image while following and executing the merchandise strategy. Satisfying customers needs is the main focus of merchandise planning. 11

12 Types of Wide and deep assortment A broad spectrum of goods in large number of styles are offered. Wide and shallow assortment -- wide spectrum of products is in limited numbers per product line. Narrow and deep assortment small number of styles in high volume. Product range is narrow but with large variety in each line, depth and specialisation. Narrow and shallow limited number of products lines with little variety in each line. This format requires low investment and has high turnover. 12

13 Factors affecting Assortment Plans Buyer considers various factors that may affect the assortment plans : type of merchandise retail strategy effect of assortments on GMROI complementarities between categories effects of assortment on buying behaviour physical characteristics of the store. 13

14 Factors affecting Assortment Plans Type of merchandise Basic Product Identical product will be delivered over many seasons. Product rarely changes. Sales and inventory are managed through replenishment system. Utilizes the process of category management. Inventory levels have to be determined. Fashion Product Lifecycle is short with a single selling season. Change frequently thus need for assortment planning is even greater. Product mix has to be developed. 14

15 Factors affecting Assortment Plans Retail strategy Variety or number of SKUs to be carried by the retailer is a strategic decision and impact the retailer s brand image. Other aspects of retail strategy are the approach to value and pricing, vendor programs, promotional philosophy 15

16 Factors affecting Assortment Plans Effect of assortments on GMROI Retailer has to balance the width and depth with the inventory required. Increased investment in inventory reduces inventory turnover and GMROI 16

17 Factors affecting Assortment Plans Complementarities between categories have to be borne in mind to raise transaction values. Eg; A grocery store selling pasta should stock pasta sauces also. 17

18 Factors affecting Assortment Plans Effects of assortment on buying behaviour - larger assortments or more SKUs satisfy consumer s needs better. They provide a more stimulating and fulfilling experience to shoppers. Flip side - consumer purchase decisions become more complicated and time consuming. 18

19 Factors affecting Assortment Plans Physical characteristics of the store like space available for each category is a limiting factor. Larger stores can have higher number of categories and variety. Amount of shelf space allocated to a category usually depends on the sales. Display fixtures have to be appropriate for the product category. 19

20 Range Planning A range is the total product offering expressed in terms of width and depth. The aim of range planning is to create a varied and balanced range of products in each category. 20

21 Range Planning A good range plan should : Should limit overbuying as well as under buying. Ensure sufficient quantities of the merchandise should be available at all stores in various locations. Leads to customer satisfaction with the variety. 21

22 Developing Range Plans Developing a range plan may consist of the following steps : Step 1 Research and design Step 2 Buyers and merchandisers of the retailer review the sales data of the past few years. Step 3 The product is developed and the range is built considering various attributes that will affect the final sales. Step 4 Product range is evaluated and order quantities finalised. 22

23 Developing Model Stock Plan Model stock plan is the number of SKUs in the assortment plan that the buyer wants to offer in the store. It helps buyer determine quantities of specific items. Purpose is to balance assortment factors relative to demand. 23

24 Tools for Merchandise Planning Common tools retailers use for merchandise planning are : Basic Excel spreadsheets Custom developed packages Merchandise planning software like JDA, Arthur Planning and Marker Max. The tools depend on the type of retail organisation and level of maturity in terms of usage of technology. 24