Key Issues

Stores as products Merchandise planning decisions Developing a successful merchandise plan What makes shoppers tick Assortment, depth issues Mechanics of merchandise management Inventory-level planning

Merchandise Management 11.1

Are Stores Products?

Stores as products
new product development product positioning target marketing product life cycle

Note the kinds of products that characterize ...

Upscale department stores Discounters

Merchandise Management 11.2

Two Aspects to Merchandise Mgmt

Merchandise Selection
Decisions Merchandise Planning Decisions

Merchandise Management 11.3

Objectives of Merchandise Planning

To meet corporate objectives To define managements responsibilities To establish timing guidelines for merchandise To forecast budgetary needs for merchandise
Objective of good merchandise planning: improved customer service, leading to more loyalty and repeat business, which eventually leads to more new business and greater profits. The retailer wants to - get the right product - to the right stores - at the right time - to satisfy customers
Merchandise Management 11.4

Merchandising Organization

Assistant Buyer Associate Buyer Buyer Divisional Merchandising Manager (DMM) General Merchandising Manager (GMM)

Merchandise Management 11.5

Merchandising Organization
Chairman

Merchandise Group
Sr. vice pres merch mgr Womens readyto-wear Sr. vice pres merch mgr Mens, childs, intimate apparel Sr. vice pres merch mgr Cosmet, shoes, jewelry, access.

Planning Group
Sr. vice pres merch mgr Soft home furn., kitchen

V.P. Planning

Department
Div. merch manager Mens suits, slacks, dress shirts Div. merch manager Mens sportswear, Polo Div. merch manager Young mens, boys apparel Div. merch manager Childrens apparel Div. merch manager Intimate apparel

Div Dir. Planning

Classification
Buyer Preteen accessories Buyer Girls Size 7-14 Buyer Girls Size 4-6 Buyer Toddlers Buyer Infants Buyer Little boys

Mgr. Planning

Category
Sportswear Dresses Swimwear Outerwear

SKU
Girls Levi jeans, sz 5, stone washed blue, straight leg

Merchandise Management 11.6

Developing a Successful Mdse Plan

What Makes Retail Shoppers Tick

Innovativeness

Forecasts

Assortments
Merchandise Plan

Allocation

Brands

Timing

Merchandise Management 11.7

What Makes Shoppers Tick

Forecasts
Staple Merchandise Assortment Merchandise

Innovativeness
Fashion Trends Retailers Image Competition Customer Segments Investment Costs Profitability Risk

Fashion Trends
Vertical A designer trend which will change as it filters down to other mkts Horizontal A trend accepted by a wide no. of people on its introduction

Product Lines etc. Model Stock Plan

Fashion Merchandise Seasonal Merchandise Fad Merchandise

Assortment
Product Quality Width Depth Considerations: Sales & Profit Space Requirements Inventory Turnover Cannibalization
Merchandise Management 11.8

Assortment Types
Width Wide Narrow Depth Shallow Deep

Brands
Manufacturer (National) Private Label (Dealer)

Assortment Width & Depth

Wide
Broad Market High Level of Customer Traffic Customer Loyalty One-Stop Shopping No Disappointed Customers BUT

Width

Narrow

Depth

Deep

Special Image Good Selection in Category(ies) Specialized Personnel Customer Loyalty No Disappointed Customers Lower Cost than Wide and Deep BUT

Merchandise Management 11.9

Shallow

Broad Market High Customer Traffic Emphasis on Conven. Shoppers Less Costly Than Wide and Deep One-Stop Shopping BUT

Aimed at Convenience Customers Least Costly High Turnover of Items BUT

Software Available for All of These

General Merchandising Forecasting Innovativeness Assortment Allocation Category Management

Merchandise Management 11.10

Implementing Mdse Plans

Establish a Formal or Informal Buying Organization Make Mdise Plans: What to Stock, How Much, When, Where in Store

1. Gathering Information about customer demand

2. Selecting & Interacting with Vendors

3. Evaluation of Mdse & Vendor

4. Negotiation of Price & Terms

8. Reevaluation of Mdse & Vendor

7. Reordering

6. Receiving & Stocking Merchandise

5. Concluding Purchases

Merchandise Management 11.11

Basic Mdse Mgmt Issues

Knowing how much to buy in dollars Knowing what to buy in units and dollars Knowing how to make the buy

The merchandise budget in dollars Open to buy

The assortment plan Unit control systems

Retailing/Vendor relationships

Discounts and terms of sale

Merchandise Management 11.12

Mechanics of Merchandise Management: Dollars View

2

Variety

Stock Balance
3

Width. Which products, & the number of merchandise categories in a store or department. This is the Buyers decision. Depth or support. The number of SKUs within a category, & the inventory depth. Most often the invty control analysts decision

Assortment Planning
4 5

Turnover
8 9

$ Planning
7 10 11

Sales Plan
12

Stock Plan

Reduction Plan Retail

14

Purchase Plan
13

Initial Markup Plan

$ Control
Cost
15

Dollars Units
Merchandise Management 11.13

OTB

Mechanics of Merchandise Management: Units View

2

Variety

Stock Balance
3

Width. Which products, & the number of merchandise categories in a store or department. This is the Buyers decision. Depth or support. The number of SKUs within a category, & the inventory depth. Most often the invty control analysts decision

Assortment Planning
4 5

Turnover
8 9

$ Planning
7 10 11

Sales Plan
12

Stock Plan

Reduction Plan Retail

14

Purchase Plan
13

Initial Markup Plan

$ Control
Cost
15

Dollars Units
Merchandise Management 11.14

OTB

Typical Sales Variations of Levis

Fall sales --- typically 40 percent of annual sales Spring/Summer --- typically 15 percent of annual sales Winter sales --- typically 30 percent of annual sales.
Merchandise Management 11.15

Distributing Seasonal Sales Plans

% of Business Month in 6 mos.

February March April May June July
TOTAL

Seasons Sales Forecast

$52,000

Planned Sales
$5,200 5,200 13,000 7,800 15,600 5,200
$52,000

10% 10% 25% 15% 30% 10%

100%

$52,000

Merchandise Management 11.16

Reduction Planning
Planned Planned Month Sales
February March April May June July TOTAL $5,200 5,200 13,000 7,800 15,600 5,200 $52,000

Amount of Reduction*
30% ---30% 40% 100%

Reduction
$1,248 ---1,248 1,664 $4,160

* Percent of season total

Merchandise Management 11.17

Recall the Strategic Profit Model

Rate of Return on Assets

Return on Investment
Net Profit Net Worth

Net Profit Margin

Asset Turnover

Leverage Ratio

Net Profit Net Sales

Net Sales Total Assets

Total Assets Net Worth

The Financial Objective

The Financial Program (The SPM)

Merchandise Management 11.18

ROA vs GMROI

Rate of Return on Assets

Net Profit Margin Asset Turnover

The ROA measure is used by corporate management

It can control G,S,&A &

therefore net profit It can control total investment & therefore total assets

Net Profit Dollars Net Sales

Net Sales . Avg. Total Assets

Gross Margin Return on Inventory Investment

Gross Profit Margin

Inventory Turnover

Gross Profit Dollars Net Sales

Net Sales . Avg. Inventory

Merchandise Management 11.19

So GMROI:
GMROI = Gross Margin $ (@ Retail or Cost) Average Invty $ (@ Retail or Cost)
Gross Margin Return on Inventory Investment
Gross Profit Margin

Inventory Turnover

Gross Margin Avg Inventory

GMROI = Gross Margin Dollars Net Sales

Net Sales . Avg. Inventory

Gross Margin Avg Inventory

Merchandise Management 11.20

GMROI Examples
Milk
Gross Margin Sales Average Inventory
Gross Profit Margin

Caviar
$150,000 300,000 75,000
Gross Margin Avg Inventory

2,000

150,000 1,000
Inventory Turnover

GMROI Milk GMROI

= Gross Marg $ X Net Sales Net Sales Average inventory = $2,000 $150,000 X $150,000 1,000

Gross Margin . = Average Inventory

=
=

$ 2,000 1,000

=
Caviar GMROI

1.33%

X
X X

150
$300,000 75,000 4

200%
$300,000 150,000 200%

= $150,000 $300,000 = 50%

=
=

Merchandise Management 11.21

Discounts & Terms of Sale

Terms of Sale:
to vendors. Conditions under which retailers must make payment
A price reduction granted to retailers or wholesalers

Trade discounts:
for performing services.

Quantity discounts:

Discounts from the invoice offered to retailers who purchase a specific quantity. Cumulative quantity discount: The values of all orders in a period are added together for the calculation of quantity discounts. Invoice: A bill sent by suppliers calling for payment.

Seasonal discounts:

Discounts retailers earn by ordering or taking delivery of merchandise before the normal selling period is done.

Terms of Payment:
payment to vendors.

Conditions under which retailers must make

Deductions in price given by suppliers for prompt

Cash discounts:
payment of invoice.

Merchandise Management 11.22

Payment Requirements
Shipping terms
F.O.B. (Free on board): Merchandise is placed on board a truck, railroad car or airplane with title to goods passing from seller to buyer at the F.O.B. point. F.A.S. (Free alongside ship): At a named port the seller quotes a price for the goods including charges for delivery and loading alongside a vessel. C.I.F. (Cost, insurance, and freight): The seller quotes the price including transportation, insurance, and miscellaneous expenses. C.O.D. (Cash on delivery): The seller requires that the buyer pay for the goods at time of delivery.

Advanced dating

Vendors offer retailers more time in which to pay their bill in order to entice them to purchase their goods.
Extra dating: One type of advanced dating which lengthens the time that retailers have to take advantage of cash discounts. EOM (End of month) dating: Under EOM dating, the ordinary period does not begin until the end of the month of the date shown on the invoice. ROG (Receipt of goods)dating: Under ROG dating, the terms of the discount do not begin until the date that goods are received in the store. Anticipation discount: Discounts given by some vendors as an inventive for early payment in the form of a percentage rate per year.
Merchandise Management 11.23

Inventory Level Planning Methods

Basic stock method:

The retailer buys an amount equal to planned sales plus a basic stock E.g., BOM invty = planned sales + basic stock Recommended when stock turnover is > 6 times per yr. Actual stock on hand in any month is allowed to vary by only half of the months variation from avg. estimated monthly sales E.g., if we expect a month to have a sales increase of 14% over the avg. month, invty for that month is increased by only 7% E.g., if avg invty = $100k, sales = $70K/mo. & planned sales = $80K, then BOM invty = $100K x (1 + $80K/$70K) = $107K Assumes stock is carried in proportion to sales -- stock on hand equals several weeks sales E.g., BOM invty = avg weekly sales x # weeks Assumes the retailer wants to keep a specified ratio of mdse to sales. E.g., a ratio of 3 means that an expected $10K month must be supported by $30K invty

Percentage variation method:

Weeks supply method:

Stock-to-sales ratio method:

Merchandise Management 11.24