CHAPTER
14
CHAPTER 12
Managing the Merchandise
Planning Process
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Merchandise Management
Managing the Merchandise Planning
Process Chapter 12
Buying Merchandise
Chapter 13
Retail Pricing
Chapter 14
Retail Communication Mix
Chapter 15
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Learning Objectives
• What is the merchandise management process?
• How are merchandise management processes different for
staple and fashion merchandise?
• How do retailers forecast sales for merchandise categories?
• What trade-offs do buyers consider in developing
merchandise assortments?
• How do retailers plan their assortments and determine the
appropriate inventory levels?
• How do multistore retailers allocate merchandise to stores?
• How do retailers evaluate the performance of their
merchandise management process?
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Merchandise Management
Process by which a retailer attempts to offer the appropriate
quantity of the right merchandise, in the right place and at
the right time, so that it can meet the company’s financial
goals.
• Sense market trends
• Analyze sales data
• Make appropriate adjustments
in prices and inventory levels
Which positions in a company in charge for merchandise planning?
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Merchandise Management and
Investment Portfolio Management
• Dollars to invest in inventory
• Invest in “hot” merchandise
• Save a little for opportunities
(open to buy)
• Monitor portfolio of
merchandise (stocks)
• Sell losers (markdowns)
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Buying Organization
Merchandise Group The highest classification level. Each merchandise
group is managed by a general merchandise manager
(GMM),senior VP
Department Departments are managed by a divisional merchandise
manager (DMM)
Classification A group of items targeting the same customer type, such
as girls’ sizes 4-6
Each buyer manages several merchandise categories
Category (e.g., sportswear, dresses, swimwear, outerwear
categories for girls’ sizes 4-6
SKU The smallest unit available for inventory control
Size, color, style
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Buying Organization
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Merchandise Category –
The Planning Unit
• A merchandise category is an assortment of items that
customers see as substitutes for each other.
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Category Management
• The process of managing a retail business with the objective
of maximizing the sales and profits of a category
• Objective is to maximize the sales and profits of the entire
category, not just a particular brand
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Category Captain
Selected vendor responsible for
managing a category
• Vendors frequently have more
information and analytical skills about
the category in which they compete than
retailers
• Helps retailer understand consumer
behavior
• Creates assortments that satisfy the
customer
• Improves profitability of category
Problems
• Vendor category captain may have
different goals than retailer
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Evaluating Merchandise Management Performance
GMROI
• Merchandise managers have control over
• The merchandise they buy
• The price at which the merchandise is sold
• The cost of the merchandise
• Merchandise managers do not have control over
• Operating expenses
• Human resources
• Real estate
• Supply chain management
• Information systems
SO HOW ARE MERCHANTS EVALUATED?
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GMROI - Productivity Measures
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GMROI- Gross Margin Return on Investment
GMROI = Gross Margin Percent x sales-to-stock ratio
= gross margin x net sales
net sales avg inventory at cost
= gross margin
avg inventory at cost
Sales-to-stock ratio is used because GMROI is a type of ROI
measure, so the investment in inventory is expressed at cost.
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Managing Inventory Turnover
• Inventory Turnover helps assess the buyer’s performance in
managing asset (merchandise inventory)
• But focusing on increasing inventory turnover can actually
decrease GMROI
• Buyers need to consider the trade-offs associated with
managing Inventory Turnover
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Inventory Turnover and Stock-to-Sale Ratio
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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
• Use information system: averaging the inventory in stores and
distribution centers at the end of each day
• Divide the sum of the end-of-month (EOM) inventories for several
months by the number of months
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Illustration of GMROI
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Merchandise
Planning Process
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Types of Merchandise Management
Two distinct types of merchandise management systems for managing
• Staple (Basic) Merchandise Categories
• Continuous demand over an extended time period
• Limited number of new product introductions
• Hosiery, basic casual apparel
• Easy to forecast demand
• Continuous replenishment
• Fashion Merchandise Categories
• In demand for a relatively short period of time
• Continuous introductions of new products, making existing products
obsolete
• Athletic shoes, women’s apparel
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Merchandise Management Process
1. Forecasting sales
2. Developing an assortment plan
3. Determining the appropriate inventory level
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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
Using 2 retail company examples, discuss the
methods retailers use to forecast sales in
merchandise planning.
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Factors Affecting Sales Projections
Controllable
• Promotions
• Store locations
• Merchandise placement
• Cannibalization
Uncontrollable
• Seasonality
• Weather
• Competitive activity
• Product availability
• Economic conditions
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Forecasting Fashion Merchandise Categories
Retailers develop fashion forecasts by relying on:
• Previous sales data
• Market research
• Fashion and trend services
• Vendors
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Forecasting for Service Retailers
• Due to the perishable nature of
services, service retailers face
more challenges than fashion
retailers.
• Offerings perish at the end of the
day, not at the end of the season.
• Must devise approaches for
managing demand so that it
meets, but does not exceed
capacity.
HOW DO SERVICE RETAILERS
MATCH SUPPLY AND DEMAND?
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Developing an Assortment Plan
• Assortment plan is a list of the SKUs that a retailer will offer
in a merchandise category and reflects the variety and
assortment that the retailer plans to offer in a merchandise
category.
• Variety (breadth) is the number of different merchandising
categories within a store or department.
• Assortment (depth) is the number of SKUs within a category.
• Product availability defines the percentage of demand for a
particular SKU that is satisfied.
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Determining Variety and Assortment
Buyers consider:
• Retail strategy
• The number of SKUs to offer in a merchandise category is a strategic
decision
• Assortments GMROI of the merchandise mix
• Trade-off between too much versus too little assortment
• Increasing sales by offering more breadth and depth can potentially
reduce inventory turnover and GMROI by stocking more SKUs
• Physical characteristics of the store
PhotoLink/Getty Images
• Complementary merchandise
• Effects of assortment size on buying behavior
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Model Stock Plan
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.
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Product Availability
• The percentage of demand for a particular SKU that
is satisfied.
• Level of support or service level
• The backup (buffer) stock in the model stock plan
determine 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.
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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 à lose
sales and customers
• If the backup stock is too high à
scare financial resources will be
wasted on needless inventory that
could be more profitably invested in
more variety or assortment
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Evaluating the Merchandise Budget Plan
• Inventory turnover GMROI, sales forecast are used for both
planning and control
• After the selling season, the actual performance is compared
with the plan
• Why did performance exceed or fall short of the plan?
• Was the deviation from the plan due to something under the buyer’s
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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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
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Type of Merchandise Allocated
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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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
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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 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 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
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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 vendor’s
performance on those
issues.
C Squared Studios/Getty Images
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Multi-attribute Method for Evaluating Vendors
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Evaluating Vendors
• A buyer can evaluate vendors by using the following five
steps:
1. Develop a list of issues to consider in the evaluation (column 1)
2. Importance weights for each issue in column 1 are determined by
the buyer/planner in conjunction with the GMM (column 2)
3. Make judgments about each individual brand’s performance on
each issue (the remaining columns)
4. Develop an overall score by multiplying the importance of each
issue by the performance of each brand or its vendor
5. Determine a vendor’s overall rating, add the products for each
brand for all issues
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Summary
1. This chapter provides an overview of the merchandise management
planning process and examines sales forecasting and assortment
planning in more detail.
2. Performance measures used to assess merchandise management are
GMROI, sales-to-stock ratios and inventory turnover, and gross margin.
3. When developing a sales forecast, retailers need to know what stage of
the life cycle a particular category is in.
• The next step in the merchandise planning process is developing an
assortment plan and model stock list.
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