PPT 13-1 5 th Edition
Chapter 13 Buying Systems PPT McGraw-Hill/Irwin 13-2 Levy/Weitz: Retailing Management, 5/e Copyright 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Merchandise Management Retail Communication Mix Planning Merchandise Assortments Buying Systems Buying Merchandise Pricing PPT 13-3
PPT 13-4 Merchandise Management Issues
Types of Buying Systems Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales PPT 13-5
Staple Merchandise Buying System Forecast SKU Sales Order Merchandise Monitor Sales and Inventory Compare Inventory to Basic Stock List PPT 13-6
Considerations in Determining Basic Stock Plan Present Inventory Merchandise on Order Sales Forecast How Much to Order Rate of Sales of SKU (Velocity) Seasonality PPT 13-7
Inventory Management Report for Rubbermaid Merchandise PPT 13-8
Basic Stock List Indicates the Desired Inventory Level for Each SKU Amount of Stock Desired Cost of Carrying Inventory Lost Sale Due to Stockout PPT 13-9
Inventory investment Dollars Relationship between Inventory Investment and Product Availability 600 500 400 300 200 100 0 80 85 90 95 100 Product Availability (Percent) PPT 13-10
Units Available Cycle and Buffer Stock 150 - Order 96 100 - Cycle Stock 50 - Buffer Stock 0-1 2 3 4 Weeks PPT 13-11
Buffer Stock We need it so we won t loose sales, complementary sales, and customers Buffer stock is dependent on: -Forecast interval variance (Forecast interval = lead time + review time) -Variation in Demand (actual demand - forecasted demand) -Time to Get Product from Supplier -Time to Get Product from Distribution Center - Product availability requested of IM systems PPT 13-12
Forecasting Demand Forecasting -- extrapolating the past into future using statistical and mathematical methods Objectives: Ignore random fluctuations in demand But be responsive to real change PPT 13-13
Forecasting Sales Tradeoff Recent Sales Against Past History of Sales Recognize Recent Trends, But Don t Over Weight Recent Experience Exponential Smoothing Old = Old + ά x (Recent Old) Forecast Forecast Demand Forecast 84 = 96 +.5 x (72 96) ά ranges for 0 to 1 Higher ά Weighs Recent Sales More PPT 13-14
Order Point Order point = the point at which inventory available should not go below or else we will run out of stock before the next order arrives. Assume Lead time = 0, Order point = 0 Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week Order point = demand (lead time + review time) + buffer stock Order point = 100 (3+1) = 400 PPT 13-15
Order Point continued Assume Buffer stock = 50 units, then Order point = 100 (3+1) + 50 = 450 We will order something when order point gets below 450 units. PPT 13-16
Calculating the Order Point Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock 167 units = (7 units x (14 + 7 days) + 20 units So Buyer Places Order When Inventory in Stock Drops Below 167 units PPT 13-17
Merchandise Budget Plan Plan for the financial aspects of a merchandise category Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives. Not a complete buying plan--doesn t indicate what specific SKUs to buy or in what quantities. PPT 13-18
PPT 13-19 Six-Month Merchandise Budget Plan for Men s Tailored Suits
Steps in Preparing Plan Forecast Six Month Sales for Category Breakdown Total Sales Forecast into Forecast for each Month (lines 1, 2) Plan Reductions for Each Month (lines 3, 4) Determine Beginning of the Month (BOM) Stock to Sales Ratio (line 5) Calculate BOM Inventory (line 6) Calculate EOM Inventory (line 7) Calculate Monthly Additions to Stock (line 8) PPT 13-20
Open to Buy Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend PPT 13-21
PPT 13-22 Six Month Open to Buy
Open-to-buy for Past Periods Projected EOM stock = actual EOM stock Open-to-buy = 0 There is no point in buying merchandise for a month that is already over. PPT 13-23
Open-to-Buy for Current Period (I) Projected EOM stock = Actual BOM stock + Actual monthly additions to stock (what was actually received) + Actual on order (what is on order for the month) - Plan monthly sales - Plan reductions for the month PPT 13-24
Open-to-Buy for Current Period (II) Open-to-buy = Planned EOM stock (from merchandise budget plan) Projected EOM stock (based on what is really happening) PPT 13-25
Allocating Merchandise to Stores Fewer Sales, More Sales, More Inventory Less Inventory Percentage of total sales 1 1.5 2.5 3.5 4 6 8 12 Percentage of total inventory 1.5 2 3 4 4 4 6 10 PPT 13-26
Breakdown by Store of Traditional $35 Denim Jeans in Light Blue (1) (2) (3) (4) (5) (6) TYPE OF STORE NUMBER OF STORES % OF TOTAL SALES, EACH STORE SALES PER STORE (TOTAL SALES X COL. 3) SALES PER STORE TYPE (COL. 2 X COL. 4) UNIT SALES PER STORE (COL. 4/$35) A 4 10.0% $15,000 60,000 429 B 3 6.7 10,000 30,000 286 C 8 5.0 7,500 60,000 214 Total sales $150,000 Source: Banner Distributing Company, Denver, Colorado; used with permission. PPT 13-27
ABC Analysis Rank - orders merchandise by some performance measure determine which items: should never be out of stock. should be allowed to be out of stock occasionally. should be deleted from the stock selection. PPT 13-28
Analyzing Merchandise Management Merchandise Performance ABC Analysis Sell Through Analysis Vendor Analysis Multiattribute Method PPT 13-29
ABC Analysis Rank Merchandise By Performance Measures Contribution Margin Sales Dollars Sales in Units Gross Margin GMROI Use more than one criteria PPT 13-30
Percentage of Sales Dollars ABC Analysis for Dress Shirts C 10% B 20% 100 90 80 70 Sales 60 A 50 70% 40 30 20 10 No Sales 0 10 20 30 40 50 60 70 80 90 100 A B C D 5% 10% 65% 20% Percentage of Items PPT 13-31
Sell-through Analysis for Blouses Week 1 Week 2 Stock Actual-to-Plan Actual-to-Plan Number Description Plan Actual Percent. Plan Actual Percent. 1011 -Sm White silk V-neck 20 15-25 20 10-50 1011 -Med White Silk V-neck 30 25-16.6 30 20-33 1011 -Lg White Silk V-neck 20 16-20 20 16-20 1012 -Sm Blue Silk V-neck 25 26 4 25 27 8 1012 -Med Blue Silk V-neck 35 45 29 35 40 14 1012 -Lg Blue Silk V-neck 25 25 0 25 30 20 PPT 13-32
Evaluating a Vendor: A Weighted Average Approach n I * P j ij = Sum of the expression i 1 I j P i = Importance weight assigned to the ith dimension = Performance evaluation for jth brand alternative on the jth issue 1 = Not important PPT 13-33 10 = Very important
Evaluating a Vendor: A Weighted Average Approach Performance Evaluation of Individual Brands Across Issues Importance Evaluation Brand A Brand B Brand C Brand D Issues of Issues (I) (P a ) (P b ) (P c ) (P d ) (1) (2) (3) (4) (5) (6) Vendor reputation 9 5 9 4 8 Service 8 6 6 4 6 Meets delivery dates 6 5 7 4 4 Merchandise quality 5 5 4 6 5 Markup opportunity 5 5 4 4 5 Country of origin 6 5 3 3 8 Product fashionability 7 6 6 3 8 Selling history 3 5 5 5 5 Promotional assistance 4 5 3 4 7 n Overall evaluation = 290 298 212 341 i 1 Ij * P ij PPT 13-34
Retail Inventory Method (RIM) Two Objectives: To maintain a perpetual or book inventory of retail dollar amounts. To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory. PPT 13-35
Advantages of RIM The retailer doesn't have to cost each time. Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower. PPT 13-36
Advantages of RIM cont d Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage can be compared with historical records or industry norms. Useful for determining shrinkage. Can be used in an insurance claim case of a loss. PPT 13-37
Disadvantages of RIM System that uses average markup. Record keeping process involved is burdensome. PPT 13-38
Steps in RIM Calculate Total Merchandise Handled at Cost and Retail Calculate Retail Reductions Calculate Cumulative Markup and Cost Multiplier Determine Book Inventory at Cost and Retail PPT 13-39
Retail Inventory Method Cumulative Markon = (total retail - total cost) / total retail: ($290,000 - $160,000) / $290,000 = 44.8% The Cost Multiplier = cumulative markon (100% - cumulative markon%) = 55.2% Ending book = total goods handled at retail - total inventory at retail reductions: $290,000 - $208,000 = $82,000 Ending book = ending book inventory at retail x cost inventory at cost multiplier: $82,000 x 55.2% = 45,264 PPT 13-40
Retail Inventory Method Example Total Goods Handled Cost Retail Beginning inventory $ 60,000 $ 84,000 Purchases 50,000 70,000 - Return to vendor (11,000) (15,400) Net Purchases 39,000 54,600 Additional markups 4,000 - Markup cancellations (2,000) Net markups 2,000 Additional Transport. 1,000 Transfers in 1,428 2,000 - Transfers out (714) (1,000) Net Transfers 714 (1,000) Total Goods Handled $100,714 $141,600 PPT 13-41
Retail Inventory Method Example Total Goods Handled Cost Retail Gross Sales $ 82,000 - Consumer Returns & Allowances ( 4,000) Net Sales $ 78,000 Markdowns 6,000 - Markdown Cancellation (3,000) Net Markdown 3,000 Employee Discounts 3,000 Discounts to Customers 500 Estimated Shrinkage 1,500 Total Reductions $ 86,000 PPT 13-42