Lecture 5 Flashcards
What is merchandise management?
The process by which a retailer attempts to offer the right quantity of the right merchandise, in the right place, and at the right time, so it can meet the company’s financial goals.
Merchandise Planning Process
- Staple merchandise
- Fashion merchandise
- Seasonal merchandise
Staple merchandise
- Are items that are continuously in demand over an extended period of time. Sales are also steady from week to week, it is relatively easy to forecast demand, and consequences of error in forecasting is not big.
- Focus on continuous replenishment
Fashion merchandise
- Consists of items that are only in demand for a relatively short period of time.
- New products are continually introduced making existing products obsolete.
- Forecasting is more challenging and buyers have much less flexibility in correcting forecasting errors.
- Due to short selling season, buyers often don’t have the chance to repurchase after once.
Seasonal merchandise
- Sales fluctuate dramatically depending on time of the year. Staple and fashion merchandise can be seasonal categories.
- Retailers buy seasonal like fashion.
Forecasting Staple Merchandise
Look at past historical sales
Controllable factors:
- Operating hours, special promotions, placements of merchandise
Uncontrollable factors:
- Weather, economic situation, competitors actions
Forecasting Fashion Merchandise
Challenging as items in category are new and different.
- Can look at previous sales data
Even though some are new items, they are often similar to items sold previous years.
Accurate forecasts can be generated by past projecting sales data.
- Look at market research
How customers react by asking and through sales tests.
- In-depth interview
- Focus group
- Fashion trend services
Latest fashion, trends, styles
- Vendors
Have information on marketing plans like launches and promotions which impacts retail sales
Merchandise Assortment Plan
Control system for staple merchandise
1. Variety (Breadth)
Number of goods / distinct service categories a retail carries.
2. Assortment (Depth)
Variety of one good/service a retail carries.
Large variety: e.g. Departmental Stores
Limited Variety: Place that only sells chocolate
This assortment plan is a set of SKUs that a retailer carries in merchandise category, giving customers a proper selection.
Product availability
- The percentage of demand for a particular SKU that is satisfied
- The number of backup stocks needed for buffer
The higher the number of inventory the higher the inventory investment.
Control system for Staple Merchandise
- To manage the flow of merchandise so the amount of inventory in a category is minimized but are still available.
- Sales are the same hence use automated replenishment control system to manage SKU.
- Once inventory level of SKU drops to a certain level, it triggers a reorder automatically.
- Must carry backup stock to prevent stock out before next order.
Cycle stock
Inventory that goes up and down during replenishment/
Backup stock
Level of inventory needed to ensure merchandise is available during uncertainties.
How to determine level of backup stock for staple merchandise?
- Desired product availability
- Fluctuation in demand
- Lead time from vendor
- Fluctuation in lead time
- Vendor’s fill rate
Merchandise Budget Plan
Control system for fashion merchandise
- Amount of merchandise in dollars that needs to be delivered each month
- Based on sales forecast
- Includes planned employee and customer discounts
- Level of inventory needed to support sales and achieve desired GMROI objectives.
Planned purchases / Monthly additions to stock
Planned sales + planned reductions + End of month - beginning of month
Calculate GMROI
Gross Margin % x Sales-to-Stock ratio
Calculate Inventory Turnover
Sales-to-Stock ratio x (1 - Gross Margin %)
Calculate Average Sales-to-Stock Ratio
6 months / Inventory Turnover
Open-to-Buy System (OTB)
Control system for fashion merchandise
- Used after merchandise is purchased based on merchandise budget plan
- Difference between planned purchases and purchase commitments already made by buyer (often 1 month period)
- Represents dollar amount currently available to a buyer to spend on merchandise without exceeding planned purchases
- Allows buyer to maintain inventory while adjusting to demands
It monitors merchandise flow, determining how much is spent and how much left to spend.
Calculate OTB
Planned purchase/Monthly additions to stock
- Merchandise already bought
- purchase commitments (promise to buy last month)
- customer returns
- transfer in
+ transfer out
+ return to vendor
GMROI
shows the relationship between gross margin dollars and the average inventory investment at cost
Inventory Turnover
- Represent the number of times during a period (usually 1 year) the average inventory on hand is sold
- Most accurate way is inventory level of each day / 365
Approaches to improve inventory turnover
- Reduce the number of merchandise categories, the number of SKUs in a category/the number of items within a SKU.
- Buy merchandise more often in smaller quantities to reduce average inventory without reducing sales
