PPT 12-1

5th Edition5th Edition

PPT 12-2McGraw-Hill/IrwinLevy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 12Chapter 12

Planning Merchandise Planning Merchandise AssortmentsAssortments

PPT 12-3

Merchandise Management

BuyingSystems

PlanningMerchandiseAssortments

BuyingMerchandise

Pricing

RetailCommunication

Mix

PPT 12-4

Merchandise Management Issues

PPT 12-5

The Category

A category is an assortment of items that the customer sees as reasonable substitutes for each other: girls’ apparel, laundry detergents, soup, DVD players.

In merchandise management, we do everything at the category level.

The category can mean different things to different retailers.

PPT 12-6

Category Management

Category management is 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.

Breakfast cereal category vs. Kellogg Corn Flake

Men’s knitted shirts vs. Polo shirts

• One person managing the entire category and responsible for its success or failure.

PPT 12-7

Category CaptainSelected vendor responsible for managing

assortment of merchandise in a category• Vendors frequently have more information

and analytical skills about the category in which they compete than retailers

• Works with category Mgr ---Promotion, pricing, brand & product placement on shelves.

• Problems– Vendor category captain may have different goals

than retailer

PPT 12-8

Standard Merchandise Classification Scheme and Organizational Chart

PPT 12-9

The Buying Organization

Merchandise Group…………Men’s wearDepartment………….……….Young Men’s wearClassification………….……..PantsCategory……………………..JeansStock Keeping Unit (SKU)….Levi, 501, size 36

waist, 32 inseam

PPT 12-10

Organization of a Regional Department Store: Rich’s

PPT 12-11

GMROI Productivity Measures

Inventory Gross Margin

Input Output

PPT 12-12

GMROIInventory Productivity Measures

Combine Gross Margin % and Inventory Turnover (sort of) Gross Margin% Inventory TurnGMROI = Gross Margin x Net Sales

Net Sales Avg Inventory @ costGMROI = Gross Margin

Avg Inventory (@ cost)Output (Margin Generated by Sales)

Input (Inventory Investment in Inventory)

PPT 12-13

ROI and GMROIAsset Productivity Measures

Strategic Corporate LevelReturn on Assets = Net Profit

Total AssetsMerchandise Management LevelGMROI = Gross Margin

Avg Inventory @ cost

PPT 12-14

Illustration of GMROI

PPT 12-15

Gross Margin %, Inventory Turnover,& GMROI for Selected Department in Discount Stores

PPT 12-16

Calculating Inventory Turnover

Inventory turnover = Net Sales

Average inventory at retail Inventory turnover = Cost of goods sold

Average inventory at cost

Average inventory = Month1 + Month2 + Month 3 +… Number of months

PPT 12-17

Inventory Turnover

Month Retail Value of Inventory

EOM January $22,000EOM February 33,000EOM March 38,000Total Inventory $93,000

Average inventory = $93,000 ÷ 3 = $31,000

PPT 12-18

Inventory Turnover and Sales-to-Stock Ratio

Inventory turnover = Net Sales Average inventory at retail

Inventory turnover = Cost of goods sold Average inventory at cost

Stock-to-Sales Ratio = Net Sales Average cost of

inventory

PPT 12-19

Advantages of Rapid Turnover

• Increased sales volume• Less risk of obsolescence and markdowns• Improved salesperson morale• Money for market opportunities• Decreased operating expenses• Increased asset turnover

PPT 12-20

Disadvantages of Rapid Rate of Turnover

• Lowered sales volume• Increased cost of goods sold• Increased buying and ordering time

PPT 12-21

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)

PPT 12-22

The Category Product Life Cycle

To

tal R

etai

l Sal

es

Introduction

GrowthMaturity

Decline

Time

Introduction Growth Maturity DeclineStrategy variable

Target market High-income Middle-income Mass market Low-income

Innovators adapters and laggardsVariety One basic Some variety Greater variety Less variety

offeringDistribution Limited or More retailers More retailers Fewer Intensity extensive retailersPrice Penetrating Wide range Lower prices Lower prices

or skimmingPromotion Informative Persuasive Competitive Limited

PPT 12-23

Variations of the Category Life Cycle

Fad Fashion Staple Seasonal

Sales over many seasons No Yes Yes Yes

Sales of a specific style No No Yes Yesover many seasons

Sales vary dramatically No Yes No Yesfrom one season to the next

Illustration

(Sales against Time)

SA

LE

S

SA

LE

S

SA

LE

S

SA

LE

S

TIMETIMETIME TIME

PPT 12-24

Data Sources for Developing Sales Forecasts

• Previous Sales History

• Published Sources - Buying Power Index (BPI), Monthly Retail Trade Report, InfoScan, Claritas, general retail trade publications like Stores, WWD and Chain Store Age

• Customer Information

• Vendors and Resident Buying Offices

PPT 12-25

Sales for Levi Jeans at Trendsetters Department Store

050

100150200250300350400450

SA

LE

S (

$000

) D

OL

LA

RS

YEAR

Fall sales

Winter sales

Spring & summer

sales

PPT 12-26

Factors Affecting Sales Projections

Controllable• Promotions• Store Locations• Merchandise Placement• Cannabalization

Uncontrollable• Seasonality• Weather• Competitive Activity• Product Availability• Economic Conditions

PPT 12-27

Collaboration, Planning, Forecasting, and Replenishment Systems (CPFR)

Systems used by retailers and vendors to work together to insure that the right merchandise is at the right place at the right time.– Benefits both retailers and vendors– Increases fill rate, reduces stockouts, increases

inventory turns

www.cpfr.org

PPT 12-28

Assortment Planning

Variety is the number of different merchandising categories within a store or department

Assortment is the number of SKUs within a category.

Product availability defines the percentage of demand for a particular SKU that is satisfied.

PPT 12-29

Assortment Plan for Girls’ Jeans

Styles T R A D I T I O N A L

Price levels $20 $20 $35 $35 $45 $45

Fabric Reg denim Stone- Reg denim Stone- Reg denim Stone-composition washed washed washed

Colors Light blue Light blue Light blue Light blue Light blue Light blue

B O O T C U T

Price levels $25 $25 $40 $40

Fabric Reg denim Stone- Reg denim Stone- composition washed washed

Colors Light blue Light blue Light blue Light blue

Indigo Indigo Indigo Indigo

Black Black Black Black

PPT 12-30

Size Distribution for Traditional $20 Denim Jeans in Light Blue for a Large Store

SIZE

Length 1 2 4 5 6 8 10 12 14

Short 2 4 7 6 8 5 7 4 2 %

9 17 30 26 34 21 30 17 9 units

Medium 2 4 7 5 8 4 6 3 2 %

9 17 30 21 34 17 26 12 9 units

Long 0 2 2 2 3 2 2 1 0 %

0 9 9 9 12 9 9 4 0 unitsTotal 100%

429 units

PPT 12-31

Is This Store Heavy on Variety? On Assortment?

PPT 12-32

Determining Variety and Assortment

• Profitability of Merchandise Mix• Corporate Philosophy Toward Assortment• Physical Characteristics of Store• Complementary Merchandise

PPT 12-33

Relationship between Inventory Investment and Product Availability

Inve

nto

ry i

nve

stm

ent

Do

llar

s

Product Availability (Percent)

600

500

400

300

200

100

080 85 90 95 100

PPT 12-34

Cycle and Backup StockU

nit

s A

vail

able

Weeks

150 -

100 -

50 -

0 - 1 2 3 4

Order 96

Cycle Stock

Buffer Stock