CHAP 8: Managing Merchandise Planning Process

I. The Buying Organization

The highest classification level is the merchandise group.

 Has four merchandise groups: (1) women’s apparel; (2) men’s, children’s, and intimate apparel;
(3) cosmetics, shoes, jewelry, and accessories; and (4) home and kitchen.
 Each of the four merchandise groups is managed by a general merchandise manager (GMM)
The second level in the merchandise classification scheme is the department.

 Departments are managed by divisional merchandise managers (DMMs).

The classification is the third level

 A classification is a group of items targeting the same customer type, such as girls’ sizes 4 to 6.
Categories are the next lower level in the classification scheme.

 Each buyer manages several merchandise categories. For example, the girls’ sizes 4 to 6 buyer
manages the sportswear, dresses, swimwear, and outerwear categories for girls who wear sizes 4
to 6.
A stock-keeping unit (SKU): is the smallest unit available for inventory control.
  In soft-goods merchandise, for instance, an SKU usually means a particular size, color, and style.
 For example, a pair of size 5, stonewashed, blue, straight-legged Levi jeans is an SKU.
II. Merchandise Category—The Planning Unit
The merchandise category is the basic unit of analysis for making merchandising management
decisions.
A merchandise category is an assortment of items that customers see as substitutes for one another.
Criteria:
- Function: dress, shirt...
- Brand: Tommy, Polo, Ralph Lauren, Gap...
- Supplier: Limited Brands
1. Category Management
The category management approach to managing merchandise assigns one buyer or category manager to
oversee all merchandising activities for the entire category.
Managing by category can help ensure that the store’s assortment includes the “best” combination of sizes
and vendors—the one that will get the most profit from the allocated space.
Objective is to maximize the sales and profits of the entire category, not just a particular brand
The process of managing a retail business with the objective of maximizing the sales and profits of a
category
2. Category Captain
Some retailers select a vendor to help them manage a particular category. The vendor, known as the
category captain, works with the retailer to develop a better understanding of shopping behavior, create
assortments that satisfy consumer needs, and improve the profitability of the merchandise category.
Selecting vendors as category captains has its advantages for retailers. It makes merchandise management
tasks easier and can increase profits.
Vendors are often in a better position to manage a category than are retailers because they have superior
information because of their focus on a specific category. In addition, they have acquired insights from
managing the category for other retailers.
A potential problem with establishing a vendor as a category captain is that the vendor could take
advantage of its position. (Vendor category captain may have different goals than retailer)

III. Evaluating Merchandise Management Performance

Merchandise managers have control

 The merchandise they buy (the retailer’s merchandise inventory assets),

 The price at which the merchandise is sold, and
  The cost of the merchandise.
Merchandise managers do not have control over

 Operating expenses (store operations)

 Human resources
 Real estate
 Supply chain management
 Information systems

SO HOW ARE MERCHANTS EVALUATED?

1) GMROI (gross margin return on inventory investment)
Measures how many gross margin dollars are earned on every dollar of inventory investment made by the
buyer.
GMROI combines gross margin percentage and the sales-to-stock ratio, which is related to inventory
turnover.

To convert the sales-to-stock ratio to inventory turnover:

Buyers have control over both components of GMROI:

 Gross margin component:

o Price: Prices that buyers set & Prices that buyers negotiate with vendors
 Sales-to-stock ratio component:
 o Popularity of the merchandise buyers buy

2) Measuring Sales-to-Stock Ratio

Net Sales/Average Inventory at Cost
Retailers report on an annual basis
If the sales-to-stock ratio for a three-month season is 2.3, the annual sales-to-stock ratio will be 9.2
Estimation of average inventory

 Averaging the inventory in stores and DCs at the end of each day
 Divide the sum of the end-of-month (EOM) inventories for several months by the number of
months

IV. Merchandise Management Process

i. Types of Merchandise Management Planning Processes
Retailers use two different types of merchandise management planning systems for managing:

 Staple (basic) merchandise categories:

o Are categories that are in continuous demand over an extended time period.
o Number of really new product introductions each year in these categories is limited.
o Ex: most categories sold in supermarkets and white paint, copy paper, basic casual
apparel such as t-shirts, and men’s underwear.
o Hosiery, basic casual apparel
o Relatively easy to forecast demand,
o Because the demand for staple merchandise is predictable, merchandise planning systems
for staple categories often involve continuous replenishment.
 Fashion merchandise categories:
o Are in demand only for a relatively short period of time.
o New products are continually introduced into these categories, making the existing
products obsolete.
o Ex: athletic shoes, mobile phones, and women’s apparel.

ii. Developing a Sales Forecast

Understanding the nature of the product life cycle
Collecting data on sales of product and comparable products
Using statistical techniques to project sales
Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand
(CPFR)
a) Forecasting Staple Merchandise
Two types:
- Use of Historical Sales:
- Adjustments for Controllable Factors:

 Controllable factors: openings and closings of stores, the price set for the merchandise in the
category, special promotions for the category, the pricing and promotion of complementary
categories, and the placement of the merchandise categories in the stores.
Factors Affecting Staple Sales Projections:

 Controllable:
o Promotions
o Store Locations
o Merchandise Placement
o Cannibalization
 Uncontrollable
o Seasonality
o Weather
o Competitive Activity
o Product Availability
o Economic Conditions

b) Forecasting Fashion Merchandise Categories

Some sources of information that retailers use to develop forecasts for fashion merchandise categories
are:
- Previous sales data:
- Personal awareness:

 How do fashion buyers know the trends?

o Internet chat rooms
o Look in closets
o Go to the movies
o Go to rock concerts
o Go to nightclubs
 SCAN
o Shop the retail stores, Web sites and catalogs of competitors as a customer would
o Converse with consumers, sales clerks, and neighbors
o Act like your customer
o Notice

- Traditional Market research

- Fashion and trend services:
  There are many services that buyers, particularly buyers of apparel categories, can subscribe to
that forecast the latest fashions, colors, and styles.
o Trendzine (www.FashionInformation.com)
o Doneger Creative Services (www.Doneger.com/web )
o Fashion Snoops (www.fashionsnoops.com)
o Earnshaw’s
o Women’s Wear Daily (WWD)
o DNR
o Home Furnishings News (HFN)

- Vendors:

 Have proprietary information about their marketing plans, such as new product launches and
special promotions that can have a significant impact on retail sales for their products and the
entire merchandise category.
 Tend to be very knowledgeable about market trends for merchandise categories because they
typically specialize in fewer merchandise categories than do retailers.
 Information from vendors about their plans and market research about merchandise categories is
very useful to buyers as they develop category sales forecasts.

iii. Developing An Assortment Plan

An assortment plan is the set of SKUs that a retailer will offer in a merchandise category in each of its
stores.
The assortment plan thus reflects the breadth and depth of merchandise that the retailer plans to offer in a
merchandise category.
a) Category Variety and Assortment
Variety (breadth) of a retailer’s merchandise is the number of different merchandising categories offered,
and
Assortment (depth) of merchandise is the number of SKUs within a category.
Product availability defines the percentage of demand for a particular SKU that is satisfied.
b) Determining Variety and Assortment
Editing the assortment is the process of determining the variety and assortment for a category
When editing the assortment for a category like jeans, the buyer considers the following factors:

 Retail Strategy:
o The number of SKUs offered in a merchandise category is a strategic decision.
o The breadth and depth of the assortment in a merchandise category can affect the
retailer’s brand image. Retailers might increase the assortment in categories that are
closely associated with their image.
 Assortments and GMROI:
  Complementary Merchandise:
 Effects of Assortment Size on Buying Behavior:
o Offering large assortments provides a number of benefits to customer:
 Increasing the number of SKUs that customers can consider increases the chance
they will find the product that best satisfies their needs.
 Large assortments are valued by customers because they provide a more
informative and stimulating shopping experience due to the complexity
associated with numerous products and the novelty associated with unique items.
 Large assortments are particularly appealing to customers who seek variety—
those who want to try new things.
 Physical Characteristics of the Store
 Trade-off: between too much versus too little assortment
o Increasing sales by offering more breadth and depth can potentially reduce inventory
turnover and GMROI by stocking more SKUs

iv. Setting Inventory & product availability levels

1) Model Stock Plan
The model stock plan is the number of each SKU in the assortment plan that the buyer wants to have
available for purchase in each store.

 The model stock plan in includes nine units of size 1, short, which represent 2 percent of the 429 total
units for girls’ traditional $20 denim jeans in light blue.
Retailers typically have model stock plans for the different store sizes in a chain. For example, retailers
typically classify their stores as A, B, and C stores on the basis of their sales volume.

 ABC Analysis: Rank - orders merchandise by some performance measure determine which
items:
o should never be out of stock
o should be allowed to be out of stock occasionally
o should be deleted from the stock selection
2) Product Availability
Product availability is defined as the percentage of the demand for a particular SKU that is satisfied.
Product availability is also referred to as the level of support or service level.
The number of units of backup stock (buffer/safety stock) in the model stock plan determines product
availability.
The higher product availability, the higher the amount of backup stock necessary to ensure that the
retailer won’t be out of stock on a particular SKU when consumers demand it
Several factors need to be considered to determine the appropriate level of backup stock and thus the
product availability for each SKU.

 Retailers often classify merchandise categories or individual SKUs as A, B, or C items,

reflecting the product availability the retailer wants to offer.
o A – higher product availability
o B – medium product availability
o C – lower product availability is acceptable
 Factors considered in determining backup stock levels and product availability are the
fluctuations in demand,
 The lead time for delivery from the vendor,
 The fluctuations in vendor lead time
 The frequency of store deliveries.

Importance of Backup (Buffer) Stock

Choosing an appropriate amount of backup stock is critical to successful assortment planning.

 If the backup stock is too low, the retailer will lose sales and possibly customers too when
they find that the products they want are not available from the retailer.
 If the backup stock is too high, scarce financial resources will be wasted on needless
inventory rather than being more profitably invested in increasing variety or assortment.

v. Establish a control system for managing inventory

The objective of this control system is to manage the flow of merchandise into the stores so that the
amount of inventory in a category is minimized but the merchandise will still be available when
customers want to buy it.
1) Control System for Managing Inventory of Staple Merchandise
a) Flow of Staple Merchandise
Cycle (base) stock is inventory for which the level goes up and down due to the replenishment process
 The retailer hopes to reduce the cycle-stock inventory to keep its inventory investment low.
Backup (buffer, safety) stock is the level of inventory needed to ensure merchandise is available in light
of these uncertainties. (Inventory needed to avoid stockout)
Basic Stock: Indicates the desired inventory level for each SKU

b) Determining the Level of Backup Stock

Several factors determine the level of backup stock needed for a SKU:

 The level depends on the product availability the retailer wants to provide.
 The fluctuation in demand
 Lead time from the vendor.
 Fluctuations in lead time
 The vendor’s fill rate
 Affect the amount of backup stock needed.
c) Inventory Management Report
Provides information about the inventory management for a staple category.
Order Point: is the amount of inventory below which the quantity available shouldn’t go or the item will
be out of stock before the next order arrives.

 This number tells the buyer that when the inventory level drops to this point, additional
merchandise should be ordered.
Order point = sales/day (lead time + review time) + buffer stock
2) Control System for Managing Inventory of Fashion Merchandise
Merchandise budget plan: the control system for a fashion merchandise category
The merchandise budget plan specifies the planned inventory investment in dollars in a fashion
merchandise category on the basis of how much merchandise will be ordered, delivered, and sold each
month during the selling season.
Specifies how many dollars will be spent each month to support sales and achieve the desired GMROI
objectives.
Not a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantities.
a) Evaluating the Merchandise Budget Plan
Inventory turnover, GMROI, and the sales forecast are used for both planning and control.
After the selling season, the buyer must determine how the category actually performed compared with
the plan.
Several additional questions should be answered to evaluate the buyer’s performance:

 Why did the performance exceed or fall short of the plan?

  Was the deviation from the plan due to something under the buyer’s control? (For instance, was
too much merchandise purchased?)
 Did the buyer react quickly to changes in demand by either purchasing more or having a sale?
 Was the deviation instead due to some external factor, such as a change in competitive level or
economic activity?

3) Open-to-Buy System
After the merchandise is purchased on the basis of the merchandise budget plan, the open-to-buy system
is used to keep track of the actual merchandise flows—

 What the present inventory level is,

 When purchased merchandise is scheduled for delivery, and
 How much has been sold to customers.

vi. Allocate the merchandise to stores

Allocating merchandise to stores involves three decisions:
1) Amount of Merchandise Allocated (how much merchandise to allocate to each store)
Retail chains typically classify each of their stores on the basis of annual sales.
In addition to the store’s sales level, when making allocation decisions for a category, allocators consider
the physical characteristics of the merchandise and the depth of assortment and level of product
availability that the firm wants to portray for the specific store.
2) Type of Merchandise Allocated (what type of merchandise to allocate)
3) Timing of Merchandise Allocation (when to allocate the merchandise to different stores)
In addition to the need to allocate different inventory levels and types of merchandise across stores,
differences in the timing of category purchases across stores need to be considered.

vii. Analyzing Merchandise Management Performance

Three types of analyses related to the monitoring and adjustment step are:
1) Sell-Through Analysis Evaluating Merchandise Plan
A sell-through analysis compares actual and planned sales to determine whether more merchandise is
needed to satisfy demand or whether price reductions (mark-downs) are required.

2) ABC Analysis
An ABC analysis identifies the performance of individual SKUs in the assortment plan.
In an ABC analysis, the SKUs in a merchandise category are rank-ordered by several performance
measures, such as sales, gross margin, inventory turnover, and GMROI.
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 sales
B items: 10% of SKUs, represent 20% of sales
C items: 65% of SKUs, represent 10% of sales
D items: 20% of SKUs, represent 10% of sales

3) Multiattribute analysis of vendors.

The multiattribute analysis method for evaluating vendors uses a weighted-average score for each vendor.
The score is based on the importance of various issues and the vendor’s performance on those issues.
1. How and why would you expect variety and assortment to differ between a traditional bricks-
and-mortar store and its Internet counterpart?
Traditional stores are more aware of local tastes than online stores are. Traditional stores can be
customized as per the tastes of customers but, it's rarely possible with an internet store. On the flip side,
costing and infrastructure needs is less in the case of an online store.

2. Simply speaking, increasing inventory turnover is an important goal for a retail manager. What
are the consequences of turnover that’s too slow? Too fast?

Inventory turnover too low:

 It reflects poor sales

 It will result in blockage of capital and make the business cycle inefficient

 The overstocking of inventory will result in space constraints

 Some of the items may expire and become obsolete leading to further losses

 It impacts morale and motivation of team

Inventory turnover too high:

 It may result in shortage of goods leading to loss of revenue

 The consumers may opt for alternate product of competitors resulting in loss of loyal customers

 Consumer may lose brand trust

 It also hampers morale of employees negatively and increase turnover

3. Assume you are the grocery buyer for canned fruits and vegetables at a five-store supermarket
chain. Del Monte has told you and your boss that it would be responsible for making all inventory
decisions for those merchandise categories. Del Monte will now determine how much to order and
when shipments should be made. It promises a 10 percent increase in gross margin dollars in the
coming year. Would you take Del Monte up on its offer? Justify your answer.

Every retailer strives to increase the sales of the various categories of products it offers to the customers.
The retailers undertake several activities and runs loyalty programs to increase the sales of the products
offered for customer buying.

It is assumed that an individual is a buyer of canned fruits and vegetables in a supermarket chain. One of
the manufacturers and suppliers of this product category Company DMM informed the individual and his
boss that he would be responsible for making all inventory decisions for this category of products and
also assures an increase of 10% in gross margin dollars in the coming year.

Over this, the individual would agree to take this offer from Company DMM because if the manufacturer
of the product is itself planning to increase the sales of its products in the supermarket and guarantees an
increase in the gross profits, then nothing can be better than this. There is no reason for the superstore to
deny this offer because every retailer wants to increase the sales of the products sold by it and if there is a
guarantee in certain product category, then the individual and the boss of the supermarket should take this
offer and thereby increase the sales of that category of product.

4. A buyer at Old Navy has received a number of customer complaints that he has been out of stock
on some sizes of men’s t-shirts. The buyer subsequently decides to increase this category’s product
availability from 80 percent to 90 percent. What will be the impact on backup stock and inventory
turnover? Would your answer be the same if the product category were men’s fleece sweatshirts?

An individual is a retailer of Company ONY apparels and received number of complaints from his
customers about the out-of-stock situation of some sizes of men’s T-shirts. As a result, the individual
decided to increase the stock of this product from 80% to 90%.

This decision of the individual to increase the stock of Company ONY from 80 to 90 percent will affect
the old existing stock of other brands and their sales will not take place as the customers would only go
for buying ONY apparels and they will be readily available to them due to the increased stock. The
inventory turnover will increase and the individual would have to pay for various costs including
warehouse, storage, maintenance, insurance and other carrying costs. This will add up to the cost of the
product and the retailer would have to bear these expenses on his own. There is also a possibility that the
high inventory will become old-fashioned and out of trend before getting sold in the market.

This answer would remain the same even if the product category that used to get out of stock and were
increased by the individual from 80% to 90% would be men’s fleece sweatshirts. This is because any
product that remains in the store for long time without getting sold only adds to the cost of the retailer and
no matter whether it is a regular selling product or occasionally buying one, it increases the cost of the
retailer in carrying the unsold merchandize.

5. Variety, assortment, and product availability are the cornerstones of the merchandise planning
process. Provide examples of retailers that have done an out-standing job of positioning their stores
on the basis of one or more of these issues.

The top three retailers who have achieved on positioning their stores with variety assortment and product
availability can be Wal-Mart, Costco and the Home Depot.

Wal-Mart generally targets the lower income group in US. It has wide variety of goods ranging from
groceries to electronic devices. The main advantage of them is their low price of goods. Wal-Mart buys in
bulk and hence other companies can’t compete because of low cost. Wherever the Wal-Mart store pops
up people move to those areas. It has a very diverse business model growing in countries like Mexico,
Brazil and China.

Costco: Whoever wants variety in their food, the first option that comes up in their mind is Costco. It has
a huge parking lot near its store and offers everything right from cheap foods, drinks at food court etc. its
biggest pro is lowered cost prices. They also provide samples of whatever product they are selling. They
also have quality merchandise from street wear to brand clothing. They also provide photo printing
services to their customers. The unit prices are considered to be very reasonable.

Home Depot: it mainly focuses on customer service and they help everyone in the store to fix their
problem. It has its presence in over 2200 locations and offers everyone whatever they want in this market.
They have a very good supply chain management team to cut costs and hence they can sell them at lower
number. Another main advantage is that Amazon or eBay are not threat to Home Depot in the market.
6. The fine jewelry department in a department store has the same GMROI as the small appliances
department, even though characteristics of the merchandise are quite different. Explain this
situation.

A departmental store uses the same GMROI to sell fine jewelry as well as to sell small appliances in the
electronics department even though the characteristics of both the products are quite different. This
situation can be explained by stating that a firm can use the same GMROI for any number of products no
matter if the products belong to same category or different. This is because GMROI is used a
measurement to calculate the firm ability in buying and selling of products in a profitable manner. In this,
the firm evaluates how much dollar it has earned by selling the particular product as compared to the
dollar spent in making/ buying that product.

Thus, there is no harm if a firm uses same GMROI to sell fine jewelry as well as to sell small appliances
in the electronics department. The point is that the firm should be able to evaluate the money spent and
money earned over those products which can be easily determined when gross margin of the product will
divided by the average inventory cost of it.
7. As the athletic shoe buyer for Sports Authority, how would you go about forecasting sales for a
new Nike running shoe?
Since N is a shoe retailer, which can be put under the apparel category; the fashion merchandise category.
Thus, the sales can be forecasted using the below methods. Firstly, do historical data analysis. Even
though the trend and fashion changes according to the season, but many items are quite similar to the
previous year. So, it helps to identify the sales projection based on past year sales. Secondly, do market
research. To identify the true and accurate market demand, it is necessary to use both quantitative and
qualitative methods. Social media sites where customers input the new trend, in-depth interviews with
true customers, focus group studies are some of the ways in which market research can be made
applicable. This helps to understand what the customer really expects to have. Thirdly, use fashion trend
services. Customers are welcomed to subscribe to certain services where they can input their trends or
desire regarding style, color, and fashion. Finally, get help from vendors. The vendor has direct contact
with customers and they run promotional activities and do product launches. Thus, they can collect the
customers response and give feedback to N regarding the expected sales. From the above methods,
market research and vendors can be used effectively to understand the trend of future sales.
8. Using the 80-20 principle, how can a retailer make certain that it has enough inventory of fast-
selling merchandise and a minimal amount of slow-selling merchandise?
A retailer can use 80-20 principle to determine the stock that needs to be kept in the case of fast-selling
and slow-selling products. According to the principle, even though the product is fast selling or slow-
selling; the retailer should maintain the 20percent of stock to meet the demand. The reason why 20
percent is considered is that 80 percent of the sales come from that 20 percent of inventory. Also, this rule
implies that 80% of the income for the retailer comes from 20% of fast-selling products than slow-selling
products. Thus, the retailer should make sure that at least 20% percent of fast-selling products should be
kept as stock. The amount of stock (fast-selling product) should be more than that of slow-selling
products.
9. A buyer at a sporting goods store in Denver receives a shipment of 400 ski parkas on October 1
and expects to sell out by January 31. On November 1, the buyer still has 350 parkas left. What
issues should the buyer consider in evaluating the selling season’s progress?
Inventory turnover, model stock strategy, and goods price are all factors to examine while analyzing a
business. If the selling season is intended to last four months, the buyer could anticipate to sell around100
units in the first month, according to a sell-through study. Buyers should evaluate any environmental
conditions, such as an unusually mild fall, before evaluating whether or not the goods is selling much
slower than it should be. If the weather remains normal, the buyer should take severe measures, such as
discounting or advertising the parkas. If the buyer opts for the markdown method, the buyer should
attempt to get markdown money from the seller