retail merchandise budget plan nng
DESCRIPTION
StudyTRANSCRIPT
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Chapter 13
Merchandise Planning Systems
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Merchandise Management
Retail
PricingChapter 15
Retail
Communication Mix
Chapter 16Merchandise Planning Systems
Chapter 13Managing Merchandise Assortments
Chapter 12
Buying Merchandise
Chapter 14
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Questions
How does a staple merchandise buying system operate?What are a merchandise budget plan and open-to-buy systems, and how are they developed?How do multi-store retailers allocate merchandise to stores?How do retailers evaluate their merchandising performance? -
Types of Merchandise Management Systems
Staple Merchandise
Predictable Demand
Relatively Accurate Forecasts
Continuous Replenishment
Fashion Merchandise
Unpredictable Demand
Difficult to Forecast Sales
Merchandise Budget Plan
Open-to-Buy
The McGraw-Hill Companies Inc./Ken Cavanagh Photographer
The McGraw-Hill Companies, Inc./Lars A. Niki, photographer
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Staple Merchandise Planning
Buyer Determines:Basic Stock or Assortment Plan
Level of Backup Inventory
System:Monitors Inventory levels
Automatically reorders when inventory gets below a specified level
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Inventory Levels for Staple Merchandise
Cycle (base) stock: inventory
that goes up and down due to
the replenishment processBackup (buffer, safety) stock
Inventory needed to avoid stockout
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Inventory Levels for Staple Merchandise
Retailers try to reduce the stock level to keep
Inventory Investment low by reordering and receiving
merchandise often but without increasedadministrative and transportation costs with frequent
reorders
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Basic Stock
Indicates the Desired Inventory Level for Each SKU
Cost of Carrying
InventoryLost Sale Due
to Stockout -
Factors Determining Backup Stock
Higher product availability (service level) retailer wishes to provide to customersGreater the fluctuation in demandLonger lead time from the vendorMore fluctuations in lead time Lower vendors Fill rate (% of complete orders received from a vendor)More
Backup
StocksNeeded
with
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Relationship between Inventory
Investment and Product AvailabilityProduct Availability (Percent)
600
500
400
300
200
100
0
80859095100
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Staple Merchandise Management Systems
Staple merchandise planning systems provide information needed to assist buyers by performing three functions:
Monitoring and measuring current sales for items at the SKU levelForecasting future SKU demand with allowances made for seasonal variations and changes in trendDeveloping ordering decision rules for optimum restocking -
Staple Merchandise Management
Ryan McVay/Getty Images
Most merchandise at home improvement centers are staples.
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Inventory Management Report
for Rubbermaid MerchandiseInventory available
sales rate
Performance measures
Backup stock for desired product availability
desired product availability
Sales forecasts
Appropriate ordering decisions
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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
Order point = sales/day (lead time + review time) + buffer stock
Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per weekOrder point = 100 (3+1) = 400
Assume Buffer stock = 50 units, thenOrder point = 100 (3+1) + 50 = 450
We will order something when order point gets below 450 units.
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Calculating the Order Point
Avocado Bath Mat
In a situation in which the lead time is two weeks, the buyer reviews the SKU once a week, 18 units of backup stock are needed to maintain the product availability desired, and the sales rate for the next four weeks is 5.43 per day. Order Point?
Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock
132 units = [5.43 units x (14 + 7 days)] + 18 units
So Buyer Places Order When Inventory in Stock Drops Below 132 units
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Order Quantity
When inventory reaches the order point, the buyer needs to order enough units so the cycle stock isnt depleted and sales dip into backup stock before the next order arrives.
Order Quantity = Order Point Quantity Available
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Inventory Management Report for Rubbermaid SKUs
Avocado Bath Mat
Quantity available = Quantity on Hand + Quantity on Order = 90
Order Quantity = Order Point Quantity Available
Order Quantity = 132 90 = 42
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Fashion Merchandise Management Systems
The system for managing fashion merchandise categories is typically called a Merchandise Budget Plan
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Merchandise Budget Plan
Plan for the financial aspects of a merchandise categorySpecifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectivesNot a complete buying plan--doesnt indicate what specific SKUs to buy or in what quantitiesRoyalty-Free/CORBIS
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Steps in Developing a Merchandise Budget Plan
Set margin and inventory turn goalsSeasonal sales forecast for categoryBreakdown sales forecast by monthPlan reductions markdowns, inventory lossDetermine stock needed to support forecasted salesDetermine open to buy for each month -
Six Month Merchandise Plan
for Mens Casual Slacks -
Monthly Sales Percent Distribution to Season (Line 1)
1. Sales % Distribution to Season
6 mo. data April May June July Aug Sept 100.00%21.00%12.00%12.00%19.00%21.00%15.00%
The percentage distribution of sales by month is based on
Historical data Special promotion plans -
Monthly Sales Percent Distribution to Season (Line 1) Continued
Retail sales are very seasonal. The Christmas season often accounts for more than 40% of a retailers annual sales.
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Monthly Sales
(Line 2)Sales % Distribution
Month 6 mo. data April May June July Aug Sept 100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%Mo. Sales $130,000$27,300 $15,600 $15,600 $24,700 $27,300 $19,500Monthly sales =
the forecasted total season for the six-month period x monthly sales %
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Monthly Reductions Percent Distribution (Line 3)
To have enough merchandise every month to support the monthly sales forecast, buyers need to consider factors that reduce the inventory level in addition to sales made to customers
Markdowns
Shrinkage
Discounts to Employees3. Reduction % Distribution to Season
6 mo. data April May June July Aug Sept
100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%
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Shrinkage
Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping.
Retailers measure shrinkage by taking the difference between
The inventory recorded value based on merchandise bought and received
The physical inventory actually in stores and distribution centers
Shrinkage % = $ shrinkage
$ net sales
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Monthly Reductions
(Line 4)Reduction % Distribution
3. Month % 6 mo. data April May June July Aug Sept
100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%
4. mo.
reductions $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320
Monthly Reductions = Total reductions x Monthly reduction %
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Beginning of Month (BOM) Stock-to-Sales Ratio (Line 5)
Stock-to-Sales Ratio specifies the amount of inventory (in retail dollars) that should be on hand at the beginning of the month to support the sales forecast and maintain the inventory turnover objective for the category
Retails often use a related measure, Weeks of Inventory
5. BOM Stock to Sales Ratio
6 mo. data April May June July Aug Sept
4.0 3.6 4.4 4.4 4.0 3.6 4.0
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Steps in Determining
the Stock-to-Sales RatioStep 1: Calculate Sales-to-Stock Ratio
GMROI = Gross margin% x Sales-to-stock ratio
Sales-to-Stock Ratio = GMROI/Gross margin %
Assume that the buyers target GMROI for the category is 123%, and the buyer feels the category will produce a gross margin of 45%.Sales-to-Stock Ratio = 123/45 = 2.73
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Steps in Determining
the Stock-to-Sales Ratio ContinuedStep 2: Convert the Sales-to-Stock Ratio to Inventory Turnover
Inventory Turnover = Sales-to-stock ratio x (1 GM%/100)
Inventory Turnover =2.73 x (1 45/100) = 1.50
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Steps in Determining
the Stock-to-Sales Ratio ContinuedStep 3: Calculate Average Stock-to-Sales Ratio
Average Stock-to-Sales Ratio = 6 months/Inventory turnover
= 6/1.5 = 4
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Steps in Determining
the Stock-to-Sales Ratio ContinuedStep 4: Calculate Monthly Stock-to-Sales Ratio
Monthly stock-to-sales ratios vary in the opposite direction of sales
To make this adjustment, the buyer considers the seasonal pattern, previous years stock-to-sales ratios
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BOM Stock
(Line 6)BOM Stock
= monthly sales (line 2) x BOM stock-to-sale ratio (line 5)
= $27,300 x 3.6
= $98,280
6. BOM Inventory
6 mo. data April May June July Aug Sept
98280 98280 68460 68640 98800 98280 8000
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End-of-Month (EOM) Stock
(Line 7)The BOM stock for the current month = the EOM stock in the previous month
7. EOM Inventory
6 mo. data April May June July Aug Sept
85600 68640 68460 275080 98280 78000 65600
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Monthly Additions to Stock
(Line 8)Additions to stock
= Sales (line 2) + Reductions (line 4) + EOM Stock (line 7) BOM Stock (line 6)
Additions to stock (April)
= $27,300 + $6,600 + $68,640 - $98,280 = $4,260
8. Monthly additions to stock
6 mo. data April May June July Aug Sept
113820 4260 17910 48406 26180 8670 8420
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Evaluating the Merchandise Budget Plan
Inventory turnover GMROI, sales forecast are used for both planning and controlAfter the selling season, the actual performance is compared with the planWhy did performance exceed or fall short of the plan?
Was the deviation from the plan due to something under the buyers control?
Did the buyer react quickly to changes in demand by either purchasing more or having a sale?
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Open-to-Buy System
The OTB system is used after the merchandise is purchased
Monitors Merchandise Flow
Determines How Much Was Spent and How Much is Left to Spend
PhotoLink/Getty Images
PhotoLink/Getty Images
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Six Month Open-to-Buy
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Allocating Merchandise to Stores
Allocating merchandise to stores involves three decisions:
how much merchandise to allocate to each store what type of merchandise to allocate when to allocate the merchandise to different stores -
Inventory Allocation Based on Sales Volume and Stock-to-Sales Ratios
Smaller stores require a proportionally higher inventory allocation than larger stores because the depth of the assortment or the level of product availability is too small, customers will perceive it as being inferior.
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Type of Merchandise Allocated to Stores
Retailers classify stores according to the characteristics of the stores trading area
The assortment offered in a ready-to-eat cereal aisle should match
the demands of the demographics of shoppers in a local area
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Type of Merchandise Allocated to Stores
continuedEven the sales of different apparel sizes can vary dramatically from store to store in the same chain.
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Sales of Capri Pants by Region
Timing of Merchandise Allocation to Stores
Seasonality differences and consumer demand differences
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Analyzing Merchandise Management Performance
Three types of analyses related to the monitoring and adjustment step are:
Sell through analysis ABC analysis of assortments Multiattribute analysis of vendors -
Sell Through Analysis
Evaluating Merchandise PlanA sell-through analysis compares actual and planned sales to determine whether more merchandise is needed to satisfy demand or whether price reductions are required.
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ABC Analysis
An ABC analysis identifies the performance of individual SKUs in the assortment plan.
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.
A items: 5% of SKUs, represent 70% of salesB items: 10% of SKUs, represent 20% of salesC items: 65% of SKUs, represent 10% of salesD items: 20% of SKUs, represent 10% of sales -
ABC Analysis Rank Merchandise
Contribution MarginSales DollarsSales in UnitsGross MarginGMROIUse more than one criteria
By Performance Measures -
Multiattribute Method for Evaluating Vendors
The multiattribute method for evaluating vendors uses a weighted average score for each vendor. The score is based on the importance of various issues and the vendors performance on those issues.
C Squared Studios/Getty Images
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Multiattribute Method for Evaluating Vendors
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Evaluating Vendors
A buyer can evaluate vendors by using the following five steps:
Develop a list of issues to consider in the evaluation (column 1)
Importance weights for each issue in column 1 are determined by the buyer/planner in conjunction with the GMM (column 2)
Make judgments about each individual brands performance on each issue (the remaining columns)
Develop an overall score by multiplying the importance of each issue by the performance of each brand or its vendor
Determine a vendors overall rating, add the products for each brand for all issues
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Home Depots Vendor Evaluation
Home Depot take vendor evaluations seriously. Home Depots vendor
analysis scorecard gives everyone a quick view of how the vendor is doing.Green is good, but red isnt.
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