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Planning merchandise Needs & Merchandise Budgets

Merchandise Planning is "A systematic approach. It is aimed at maximising return on investment, through planning sales and inventory in order to increase profitability. It does this by maximising sales potential and minimising losses from mark - downs and stock - outs." Merchandise Management

The planning and control of merchandise inventories to meet desired sales and product-related objectives.Also includes the planning of the size and composition of the merchandise inventories, as well as a variety of functions dealing with the purchase, display, pricing, promotion, and sale of merchandise. Merchandise Planning Marketing the right merchandise at the right place at the right time in the right quantities at the right price.Involves those activities which are needed to ensure a balance between inventories and sales.Management of the product component of the marketing mix. Essential Terms Product: what retailer is selling (or service). Product line: all products/services offered by retail firm. Category: assortment of items that the customer sees as reasonable substitutes for each other. Assortment: range of choices/selection in a given product line (# of SKUs in a category) Inventory turnover: # of times the avg. inventory of an item or SKU is sold, usually in annual terms

Merchandise Assortment Width (Breadth): refers to assortment factors necessary to meet needs of target market and competition Brand of Beer Types Sizes o Coors reg., light 6-pk, 12-pk o Miller o Budweiser o Michelob SKUs = 16 Support (Depth): Determination of how many units of merchandise are needed to support expected sales of each assortment factor (e.g. brand, type, size, color, etc.) Rely on customer needs, past sales trends, image of department and store, etc.

Merchandise Planning Objective Ensure that both the customers merchandise needs and the retailers financial requirements are satisfied by creating an acceptable balance between merchandise inventories and sales. Merchandise Budgeting A merchandise budget may be defined as a plan that forecasts specific merchandising activities for a department or store for a specific period of timeThe buyer will work with numerous store executives in developing a plan to guide him or her in the various phases of the merchandising activity. For example, the finance manager will provide information regarding the availability of funds, future cash needs etc. The merchandise manager will provide valuable guidance based on company objectives and procedures and will maintain a proper balance among the departments under his jurisdiction with regard to departmental opportunities and needs. A buyer will rely on past experience, on his or her ability as a manager and merchandising objectives when planning a workable merchandise budget.

Once all available information regarding business conditions, consumer trends, market and supply conditions, competition, business philosophies and future forecasts are gathered, actual planning for the year ahead may begin.A small store will usually adopt a six month plan that is very simple. For example, the desired results of the various merchandising activities for a specific period are put down on paper in the form of financial figures. Comparisons and adjustments are made at frequent intervals in relation to the actual performance. Planning Annual Sales Annual sales estimates o time series o judgmental forecasting Make monthly sales estimates

Forecasting Sales Staples: demand year-round (appliances, hardware, etc.). Consider sales trends, profitability, quantity discounts Seasonal Merchandise: use past knowledge, info. from vendors, length of season, planned sales, selling price Style and perishable items.

Example : Als Party Shop wants to maintain a 3-week supply of domestic beer in inventory and average sales of Miller Lite beer are 500 6-packs per week. The order point is 1500 (500 X 3 weeks). When inventory drops below 1500, more beer should be ordered. Suppose the order interval is 2 weeks. We must consider to include stock to maintain during the order interval and add to our order point -- in order to determine our order ceiling. Order ceiling=Order point+Order interval sales. o 1500 + (500 X 2) = 2500 We can then determine our order quantity by subtracting stock on hand from order ceiling. o Order Quantity = Order ceiling - stock on hand

Inventory Turnover Turnover @ retail Retail sales/Avg. inv. in retail $ Turnover @ cost Cost of goods sold/avg. inv. at cost Total $ Available for Sale= BI + Purchases COGS=Total $ available for sale - Ending inventory Turnover based in units of units sold/Avg. inv. in units

Determining Stock-to-Sales Ratio Divide the turnover figure into 12 (months in year) to determine the number of times of merchandise needed to support the desired sales based on turnover

Examples: Turnover = 4; Stock-to-sales = 3.0 Turnover = 2.8; Stock-to-sales = 4.28 Turnover = 10; Stock-to-sales = 1.2 Lower the turnover, the higher the stock-to-sales ratio

Calculating BOM Stock-to-Sales Ratios Step 1: Calculate sales-to-stock ratio o GMROI=gross margin% * sales-to-stock ratio Step 2: Convert sales-to-stock ratio to inventory turnover

o Inventory turnover = sales-to-stock ratio * (100% - Gross margin %, expressed as decimal) Calculate average stock-to-sales ratio Average stock-to-sales ratio = # months/inventory turnover Calculate monthly stock-to-sales ratios

Stock ratios considerations Dont confuse stock-to-sales ratio with the sales-to-stock ratio Sales are the same in both ratios Stock in the sales-to-stock ratio is the average inventory at cost over all days in the period Stock in the average stock-to-sales ratio is the average BOM inventory at retail BOM stock-to-sales ratio is an average for all months

GMROI & Sales-to-Stock GMROI = gross margin return on inventory investment measures how many gross margin dollars are earned on every dollar of inventory investment Sales-to-stock ratio = net sales/avg. inv. GMROI = gross margin/avg. inv. GMROI combines the effects of profits and turnover.

Calculating Open-to-Buy for Current Period Calculate Projected EOM stock Actual BOM stock + monthly additions + order amount - Planned monthly sales planned monthly reductions

Open-to-buy = Planned EOM stock - Projected EOM stock

Calculating Open-to-Buy for Future Periods Calculate projected EOM stock Projected BOM stock + actual order - monthly sales - planned reductions

Open-to-buy = Planned EOM stock - Projected EOM stock.

Analyzing Merchandise Performance ABC Analysis o Rank order merchandise categories (SKUs) by some performance measure Contribution margin Sales Dollars/Units Gross margin Gross margin return on investment Sales or gross margin per square foot o Determine optimal stocking formulas based on performance measures Sell-Through Analysis o Comparison between actual and planned sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand Multiple-Attribute Method o Used to evaluate vendors using a weighted average score for each vendor (current or proposed).