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Chapter 9

Managing Merchandise
Planning Process

Lecturer: Dr. Nguyen Hang Giang Anh

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Learning Objectives

❖ Explain the merchandise management organization and

performance measures.

❖ Describe the merchandise management processes for

staple and fashion merchandise.
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Main content

1. Merchandise Management Overview

2. Merchandise Planning Processes

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1.
MERCHANDISE
MANAGEMENT
OVERVIEW
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Merchandise Management

 Merchandise managment is the process by which a

retailer attempts to offers:
▪ the appropriate quantity of the right merchandise,

▪ in the right place, at the right time,

▪ so that, it can meet the company’s financial goals.

❖ Merchandise managment overview:

▪ how the process is organized,

▪ who makes the merchandise decisions, and

▪ how merchandise management performance is evaluated.

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Organization of merchandise management
Merchandise Broad categories managed by a general
Group merchandise manager (GMM)

Department Specific sub-categories are managed by

a divisional merchandise manager
(DMM)
Groups of items targeting the same
Classification
customer type

Category Groups of substitute items, managed by

buyers

Smallest unit available for inventory

SKU
control (a particular brand, size, color,
style)
 Organization of the merchandise division for LOGO
a department store chain

GMM

DMM
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Merchandise Category
complemantary : when buy this product, we have to buy the neccessary product for it

❖ Merchandise category:
▪ an assortment of items that substitute for one another
▪ basic unit of analysis for making merchandising management
decisions.

Example:
 A department store offer a wide variety of girls’ dresses in
different colours, styles, and brand names.
 A mother buying a dress for her daughter might consider the
entire set of dresses when making her purchase decision.
 Lowering the price on one dress may increase the sales of
that dress but also decrease the sales of other dresses.
 Category Management LOGO

Khi retailers vs supplier hợp tác với nhau thì sẽ cùng nhau set goal chung, nhưng mỗi bên có goal riêng
thì dẫn đến hai goal xung đột nhau --> chênh lệch lợi ích --> conflict interest
❖ Category Management: A retailer manages all activities for
a category to ensure the best assortment of products.
❖ Brand-based Categories: Some retailers manage
categories by brand, especially when brands are distinct and
not substitutes.
❖ Category Captains: Retailers may select a vendor to help
manage a category, leveraging the vendor’s expertise,
although this can lead to conflicts of interest.
Supplier là người sẽ giúp phân phối sản phẩm bởi vì họ sẽ có kiến thức nhiều hơn retailer trong một vài case
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Evaluating Merchandise Management Performance

 Merchandise managers have control only over

■ The merchandise inventory
■ The cost of the merchandise
■ The price at which the merchandise is sold
 Managers do not have control over Operating Expenses
■ Store operations
■ Human resources
■ Real estate
 The performance of merchandise managers is better assessed
using the Gross Margin Return on Inventory Investment (GMROI).
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Performance Measurement

 Gross Margin Return On Inventory Investment (GMROI)

 Financial ratio measuring how many gross margin dollars are
earned on every dollar of inventory investment.
 Determined by gross margin percentage and sales-to-stock ratio
related to inventory turnover.
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Inventory Turnover vs. Sales-to-stock Ratio

𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂 𝐨𝐨𝐨𝐨 𝐠𝐠𝐠𝐠𝐠𝐠𝐠𝐠𝐠𝐠 𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬

Inventory turnover = 𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢 𝐚𝐚𝐚𝐚 𝐜𝐜𝐜𝐜𝐜𝐜𝐜𝐜
(at cost)

𝐍𝐍𝐍𝐍𝐍𝐍 𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬
Sales-to-stock ratio = 𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢 𝐚𝐚𝐚𝐚 𝐜𝐜𝐜𝐜𝐜𝐜𝐜𝐜

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

Inventory Turnover = (1 – Gross Margin Percent) x Sales-to-stock ratio

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Illustrative example

What are Sale-to-stock ratios of the two categories?

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Improving GMROI

 Improve Sales-to-stock ratio/ Inventory Turnover

 Reducing the level of inventory  may risk stockouts.
 Buying in smaller quantities more frequently.
 Increasing sales without increasing inventory proportionally.

 Increase Gross margin

 Increasing prices,
 Reducing the cost of goods sold  Negotiating better prices
from vendors,
 Reducing customer discounts.
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2.
MERCHANDISE
PLANNING PROCESSES
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Types of Merchandise Management Planning Systems

❖ Staple/Basic Merchandise Categories

▪ Continuous demand over an extended time period
▪ Limited number of new product introductions each year
▪ Easy to forecast demand
▪ Example: bread, butter, milk, salt, eggs, tissues,...
❖ Fashion Merchandise Categories
▪ Demand only for a short period of time
▪ Continuous introductions of new products, making existing
products obsolete
▪ Relatively difficult to forecast sales
▪ Example: Shoes, tablets, smartphones, apparel,...
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Steps in Merchandise Planning Process
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Forecasting Category Sales
❖ Staple merchandise categories: remain relatively stable
over time, used methods
▪ project past sales trends into the future
▪ adjust for any anticipated factors (ex: promotions and
weather) that may affect future sales.

❖ Fashion merchandise categories: more difficult to predict

due to the unique, seasonal nature of these products.
sources of information:
▪ Previous sales data,
Previous saales data

▪ Marketing research,
marketing research

▪ AI and data analytics,

AI and Data analytics

▪ Fashion
fashion trend services, and
trend services

▪ Vendors.
vendors
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Steps in Merchandise Planning Process
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Developing an assortment plan

❖ An assortment plan is the set of SKUs that a retailer will

offer in a merchandise category in its stores and from its
website.
❖ Variety (breadth) is the number of different types or styles
within a category.
❖ Assortment (depth) is the number of SKUs within a
subcategory.
 Offering a broader variety increases the number of different
types of products, but less depth in each category.
 Offering deeper assortments increase inventory complexity
higher costs, but better serve customer choices.
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Determining Variety and Assortment

❖ The process of determining the variety and assortment for

a category is called editing the assortment
❖ When editing the assortment for a category, the buyer
considers the following factors:
▪ Retail Strategy: The number of SKUs offered in a
merchandise category is a strategic decision
▪ Effect of assortments on GMROI,
▪ Complementary merchandise,
▪ Effects of assortment size on buying behavior,
▪ Physical characteristics of the store.
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Assortment Plan for Girls’ Jeans

• Total of 10 types or varieties.

• For each type, there are 81 SKUs (3 colors×9 sizes×3 lengths).
 Thus, this retailer plans to offer 810 SKUs in girls’ jeans.
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Steps in Merchandise Planning Process
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Setting Inventory & Product Availability Levels

❖ Model stock plan is a tool to determine how many units of

each SKU should be available in a store for purchase  The
goal is to ensure that each store has the right quantity of
each product to meet customer demand.

❖ Product availability/ Service level/ Level of support:

is the percentage of customer demand that a retailer meets
when they visit a store or website. It is a measure of how
well a retailer stocks products to fulfill customer purchases.

❖ Backup stock/Buffer stock/ Safety stock is extra

inventory held to prevent stockouts, ensuring that customers
can find the products they want. It is needed in the model
stock plan if a retailer wants to increase product availability.
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Model Stock Plan for Girls’ Jeans

9 units of size 1 and short length, which represent 2% of the 429

total units for girls’ skinny $20 denim jeans in light blue.
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Product Availability vs. Backup Stock

 The number of units of backup stock in the model stock

plan determines product availability.
 Choosing an appropriate amount
of backup stock is critical to
successful assortment planning
▪ If the backup stock is too low 
lose sales and customers.
▪ If the backup stock is too high 
scarce financial resources will be
wasted on needless inventory 
decrease GMROI.

the more you invest, the more availability you have

 High levels of product availability  high inventory
investments
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Steps in Merchandise Planning Process
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Control System for Managing Inventory

❖ Establish a control system for tracking the movement of

orders, deliveries, inventory levels, and sales.
❖ Objective is to manage the flow of merchandise into the
stores so that minimizing the amount of inventory in a
category while ensuring the availability of
merchandises when customers need.
❖ The control systems for Staple and Fashion merchandise
are different.
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Inventory Control System of Staple Merchandise

❖ Merchandise flow in a staple merchandise management

system shown as below

❖ Cycle/base stock
▪ base inventory that
fluctuates due to sales
and the replenishment
process
❖ Backup/safety stock
▪ Inventory needed to
avoid stockout
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Determining the Level of Backup Stock

Factors determine the level of backup stock for an SKU

❖ Desired Product Availability:
Higher
▪higher availability  more backup stock.
availability --> more backup stock

❖ Demand Fluctuations:is high --> keep more backup store

▪ Higher variability in demand  more backup stock

❖ Lead Time: longer lead times increase the need for backup stock
▪ Longer lead times increase the need for backup stock.

❖ Fluctuating Lead Times:

uncertainty in lead times require s maintaining more backup stock
▪ Uncertainty in lead times requires maintaining more backup stock.

❖ Vendor Fill Rate:

▪ IfIfthe vendorconsistently
the vendor consistently ships ships the full
the full order, theorder, the retailer
retailer needs less needs less
backup cost. If the fill rate is lower, backup stock must increase
backup stock. If the fill rate is lower, backup stock must increase.
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Inventory Management Report

❖ Provides information about the inventory management for a

staple category.
❖ Indicates the decision variables set by the buyer, such as
product availability, the backup stock level, the order
points, and order quantities
▪ Order point: amount of inventory below which the item will be
out of stock before the next order arrives.
▪ Order Quantity: when inventory reaches the order point, the
buyer needs to order enough units to ensure product availability
before the next order arrives
❖ Indicates performance measures such as planned and
actual inventory turnover, the current sales rate, sales
forecasts, inventory availability, and the amount on order.
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Inventory Control System of Fashion Merchandise

❖ The control systems for managing fashion merchandise

categories are the merchandise budget plan and the
open-to-buy system.
❖ Merchandise budget plan specifies the amount of
merchandise in dollars (not units) needed for each
month, based on:
▪ the sales forecast, the planned discounts, and the level of
inventory needed to support the sales and achieve the
desired GMROI objectives.
❖ Open-to-buy system keeps track of the actual
merchandise flows and compares the planned end-of-
month inventory to the actual end-of-month inventory.
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Steps in Merchandise Planning Process
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Allocating Merchandise to Stores

❖ When allocating merchandise to stores, retailers must make

decisions that ensure optimal stock levels and meet
customer demand across various locations.

❖ 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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Example: what type of merchandise to allocate

Does Store X sell more large sizes or small sizes?

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Example: when to allocate the merchandise

When is the sales peak in the two regions of the US?

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Steps in Merchandise Planning Process
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Analyzing Merchandise Management Performance

❖ Analyze the performance of the process and make

adjustments, such as
▪ ordering more or less merchandise,
▪ lowering prices to increase sales,
▪ allocating different assortments to specific stores, or
▪ changing the assortment and model stock plans.
❖ Three types of analyses for monitoring and
adjustmenting:
▪ Sell-through analysis,
▪ ABC analysis of assortments,
▪ Multiattribute analysis of vendors.
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Sell-Through Analysis - Merchandise Plan

❖ A sell-through analysis compares actual and

planned sales to determine whether more
merchandise needs to be ordered or whether price
reductions (markdowns) are required.
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ABC Analysis - Assortment Plan (1/2)

❖ An ABC analysis identifies the performance of individual

SKUs in the assortment plan and determines
▪ which SKUs should be in the plan
▪ how much backup stock
▪ product availability for each SKU
❖ SKUs in a merchandise category are rank-ordered by
several performance measures (sales, gross margin,
inventory turnover, GMROI)
❖ Then, the items are classified and determined whether to
▪ maintain in the assortment plan
▪ what level of product availability to offer.
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ABC Analysis - Assortment Plan (2/2)

For example, a men’s dress shirt buyer identify the A, B, C, and D

SKUs by rank-ordering them by sales volume.

Percentage Percentage
Items of SKUs in of sales Buyer/Retailer decisions
the category
A items 5% of SKUs 70% of sales these SKUs should never be out
of stock  thus plans to maintain
more backup stock
B items 10% of SKUs 20% of sales run out of some SKUs
occasionally
C items 65% of SKUs 10% of sales carry some SKUs only in the most
popular one
D items 20% of SKUs no sales until eliminate most of these items from
they are the assortment plan
marked down
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Multiattribute Method – 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.