Chapter 11 Managing the merchandise planning process

Inventory for which level goes up and down due to replenishment process is called
base/cycle stock.

Lead time: the amount of time between recognition that an order needs to be placed and
the point at which the merchandise arrives in the store and is ready for sale

Editing the assortment: process of determining the breadth and depth for a merchandise
category
Assortment = depth
Variety = breadth = number of different merchandising subcategories

Large assortments:
o Appeal to customers who like variety
o Provide a more informative and stimulating shopping experience
o Increase the chances customers will find a product to meet their needs

SKU rationalization program: used to analyze benefits retailers might gain from deleting,
adding or keeping certain items in their assortment
o Objective: increase inventory turnover by reducing number of items available for
sale without reducing sales

Fill rate: percentage of complete orders received from a vendor

Open-to-buy system: keeps track of what the present inventory is, when purchased
merchandise is scheduled for delivery and how much has been sold to customers

Steps buyers use to evaluate vendors:

1. Develop list of issues to consider
2. Determine the importance weights for each issue
3. Make judgements about each individual brand’s performance on each issue
4. Develop an overall score by multiplying the importance of each issue by the
performance of each brand or its vendor
5. To determine a vendor’s overall rating, add products for each brand for all issues

Steps of merchandise management process:

1. Forecast category sales
2. Develop an assortment plan
3. Determine appropriate inventory level and product availability
4. Develop plan for managing inventory
5. Allocate merchandise for stores
6. Negotiate and buy merchandise
7. Monitor and evaluate performance and make adjustments
Skills needed by a merchandise manager
o Know when to make adjustments in price and inventory levels
o Be in touch with what customers want to buy
o Ability to analyze sales data

When editing the assortment of a particular category, buyer considers:

o Physical characteristics
o Effects of assortments on GMROI
o The firm’s retail strategy
DOES NOT CONSIDER THE NUMBER OF COMPETITORS SELLING SAME CATEGORY

Category management approach to managing merchandise  assigns one buyer/manager

to oversee all merchandising activities for an entire assortment of similar items

Perpetual inventory: inventory level at each point in time, determined by comparing the
sales made through POS terminals with shipments received by the store

Breaking sizes: the stocking out of a specific size or color stock-keeping unit
o Chances of breaking sizes is greater when a retailer increases the number of SKUs in
its assortment plan

Markdown money: fund that vendor gives a retailer to cover lost gross margin dollars that
result from markdowns

Retail chains typically classify each of their stores based on ANNUAL SALES

Inventory turnover = (1 – Gross margin percentage) x sales-to-stack ratio

Services retailers differ from fashion retailers  offerings provided by them perish more
quickly

Paycheck cycle  retailers often allocate merchandise based on when consumers get paid
from jobs
The buying organization classification
 highest level: merchandise group
o managed by merchandise manager (GMM)
o GMM responsible for several departments
o e.g. women's, men's, cosmetics, home and kitchen
 2nd level: department
o managed by divisional merchandise managers (DMMs)
o e.g. how merchandise inventory is managed in 5 departments:
men's dress apparel, men's sportswear, intimate apparel etc.
 3rd level: classification
o definition: a group of items targeting the same customer type
(size 4 to 6 for girls)
 4th level: categories
o e.g. girl size 4-6 buyer manages different clothing categories for
girls who wear sizes 4-6
 smallest level: stock-keeping unit (SKU)
o a particular brand, size, colour and style

Merchandise category- the planning unit

 merchandise category
o an assortment of items that customers see as substitutes for
one another
 ways to manage categories
o category management
 managing merchandise assigns one buyer or
category manager to oversee all merchandising
activities for the entire category
 some retailers: defining categories as brands
 inefficiency: fails to consider
interdependencies among SKUs in
the category
 e.g. gluten free cereal
o category captain
 definition
 the vendor that retailers select to
help them manage a particular
category
 develop and improve merchandise
category
 creates merchandises assortment
based on consumer shopping
behaviors
 advantages
 easier merchandise management
  increase profits/ profitability
 vendors are better at this
 better understanding of consumer
shopping behaviours
 create assortments that satisfy
consumer needs
 disadvantages
 vendor might take advantage of its
position
 antitrust issue
 collude with retailer
to fix prices or block
other brands
Evaluation of merchandise management performance
 ROA
o good performance measure for evaluating a retail firm
o X good measure for merchandise managers
 X have control over all retailer assets/ operating
expenses
 O only control over what merchandise they buy
 GMROI (gross margin return on inventory investment)
o Gross margin percentage x sales-to-stock ratio
o function
 measures how many gross margin dollars are
earned on every dollar investment
 combines gross margin percentage and the sales-
to-stock ratio (related to inventory turnover)
o difference between sales-to-stock ratio and inventory turnover
 numerator of the equation
 sales-to-stock ratio: affected by popularity of
merchandise they buy
o buyers have control over both components of GMROI
o achieving high GMROI
 gross margin
 inventory turnover (sales-to-stock ratio)
 bakery: high sales-to-stock ratio, low gross margin
 Measuring sales-to-stock ratio
o measure average inventory
 measure it at the end of each day and divide sum
by 365
 measure by taking end-of-month (EOM)
inventories for several months and divide by
month number
  sales-to-stock ratio numerator in the equation =
net sales
Improving / Increasing GMROI
 improve inventory turnover (sales-to-stock ratio)
o reduce number of SKUs within a category
 could also reduce sales: customers will be less
likely to find what they want, risk of losing
customers
o reduce backup stock for each SKU maintaining same SKUs
number
o increase inventory turnover
 buy merchandise more often in smaller quantities
 drawback: decrease gross margin (X quantity
discounts etc.)
 benefits: positive impacts on sales by attracting
more customer visits, improving sales associate
morale, and providing more resources to take
advantage of new buying opportunities, new
merchandise attracts customers to visit stores
more frequently
 shopworn
 when inventory turnover rate low,
merchandise look damaged
 outcome
 more money available to buy new
merchandise
 open up profit opportunities
o increase sales and not increase inventory proportionally
 by reducing price, however gross margin would
decrease-> negative impact on GMROI
 increase gross margin
o increase prices
 drawback: decrease sales and inventory turnover
o lower cost of goods
 sometimes increase % of private-label
merchandise
o reduce customer discounts
 improve supply chain efficiency
o improved vendor relationships
o VMI
o CPFR

Merchandise planning process

 forecast category sales
  develop an assortment plan
 determine appropriate inventory level and product availability
 develop a plan for managing inventory
 allocate merchandise for stores
 buy merchandise
 monitor and evaluate performance and make adjustments

Types of merchandise management planning systems

 staple merchandise (basic merchandise)
o categories in continuous demand over an extended time period
o planning: continuous replenishment
 continuously monitoring merchandise sales
 generating replacement orders (often
automatically)
 forecasting staple merchandise is to project past
sales into the future while making adjustments
for any anticipated factors
 fashion merchandise
o categories in demand only for a relatively short period of time
o new products are continually introduced into these categories
o planning: to be as close to out of stock as possible when SKUs
move out of fashion
o forecasting sales of fashion merchandise categories is much
more challenging than doing so for staple categories
o buyers have much less flexibility in correcting forecasting
errors
o e.g. mango : planning cycle every 3 months
 seasonal merchandise
o can be both staple and fashion merchandise
o items whose sales fluctuate dramatically depending on the time
of year
o planning: similar to fashion merchandise

forecasting category sales

 use of historical sales
 adjustments for controllable and uncontrollable factors
 controllable factors: affect sales of staple merchandise such as the price set
for merch in the category and pricing and promotion of complementary
categories

forecasting fashion merchandise category (4)

 previous sales data
 market research
 o social media sites
o in-depth interview
o focus group
 fashion trend services
o e.g. Doneger Creative Services
 vendors
sales forecasting for service retailers
 match supply and demand by taking reservations or making appointments

developing an assortment plan

 assortment plan
o set of SKUs that a retailer will offer in a merchandise category in
each of its stores and from its website
o includes breadth and depth of merchandise
category variety and assortment
determining variety and assortment
 editing the assortment
o process of determining the variety and assortment for a
category
 retail strategy
 assortments and GMROI
 complementary merchandise
 effects of assortment size on buying behavior
 physical characteristics of the store

setting inventory and product availability levels

 model stock plan
o the number of each stock-keeping-unit in the assortment plan
that the buyer wants to have available for purchase in each store
o retailers typically have different model stock plans for different
store sizes in a chain
 product availability
o determined by number of units of backup stock, buffer stock
and safety stock in the model stock plan
o also referred to as service level and level of support

establishing a control system for managing inventory (inventory control system)

 control system for managing inventory of staple merchandise
o flow of staple merchandise
o determining the level of backup stock
o automated continuous replenishment
o inventory management report
  order point (the amount of inventory below which the
quantity available shouldn’t go or the item will be out of
stock before the next order arrives)
o order quality
 control system for managing inventory of fashion merchandise
o merchandise budget plan

Elements reviewed in an inventory control system

 inventory levels
 merchandise orders
 merchandise sales
 merchandise deliveries

allocating merchandise to stores

 amount of merchandise allocated
 type of merchandise allocated
 timing of merchandise allocation

Analyzing merchandise management performance

 sell-through analysis evaluates merchandise plan
o compares actual and planned sales to determine whether more
merchandise is needed to satisfy demand and whether price
reductions are required
 ABC analysis evaluates assortment plan (individual SKUs)
 Multiattribute method evaluates vendors
Chapter 13 retail pricing

Fixed costs: do not change with quantity of product produced and sold

Multiple unit pricing = quantity discount

If reference price shown in advertisement is bona fide  advertisement is informative

If reference price is inflated or just plain fictitious  advertisement is deceptive and may
cause harm to consumers

Leader pricing: pricing certain items lower than normal to increase customers’ traffic flow or
boost sales of complementary products

Reductions: factors that decrease actual selling price from initial sales

Vendors enforce MSRP (manufacturer’s suggested retail price)  withholding benefits such
as cooperative advertising and refusing to deliver merchandise to noncomplying retailers

Cherry picker  patronize different stores, only buy times that are offered on special
discounts

Coupon  offers a discount on price of specific items when they are purchased

Markdown approaches  retailers use promotional markdowns to increase sale of

complementary products

Value: ratio of perceived benefit of products and services offered by the retailer to what
they have to pay for it

Price lining strategy: closes gap in the ability of a retailer’s current assortment to meet
customers’ needs, offer a limited number of predetermined price points within a
merchandise category

Keystoning: pricing approach that sets retail price of product by simply doubling its cost

Reference price: price against which buyers compare the actual selling price of a product
(facilities their evaluation process)

Adjust prices according to capacity utilization is a strategy for service retailers

Pricing strategies
 Odd pricing: using price that ends in an odd number, typically a 9
 high/low pricing
 o discount initial prices for merchandise through sales promotions
o advantages
 increases profits
 creates excitement
 sells slow-moving merchandise
 everyday low pricing (EDLP) strategy
o supermarkets, home improvement centers, discount stores
o emphasizes the continuity of retail prices at a level somewhere
between the regular nonsale price and the deep-discount sale
price of high/low retailers
o consistent pricing strategy
o X frequent sales, not always lowest price
o low-price guarantee policy: to reinforce EDLP strategy
o advantages
 assures customers low prices
 reduces advertising and operating expenses
 reduces stockouts and improves inventory
management

setting retail prices

 customer price sensitivity
o price experiment to test
o price elasticity: commonly used measure
o when price elasticity is more than -1.0 (e.g. -0.5), can be positive
 Market is inelastic
 Market is price insensitive
 1% price decrease-> 0.5% increase in quantity sold
o price sensitive when price elasticity is less than-1 (e.g. -2.0)
 market is elastic
 market is price-sensitive
 1% price decrease->2% increase in quantity sold
o various factors affect the price sensitivity for a product
 more substitutes, more likely it is price-elastic
(sensitive: e.g. air tickets)
 price-inelastic: necessities products and services
(e.g. medical care)
 price-elastic: expensive products relative to a
consumer's income (e.g. car)
 competition
o have to consider pricing set by competitors too
 pricing of services
o matching supply and demand
o determining service quality
 setting prices with analytical tools
 o related terms
 markup
 difference between the retail price
and cost of an item
 initial markup
 retail selling price initially set for
merchandise minus cost
 maintained markup
 actual sales realised for the
merchandise minus its costs
 break-even analysis
 based on fixed and variable costs,
how much merchandise needs to be
sold to achieve a break-even (zero)
profit
o using pricing opimization software
o relying on internet, mobile and social capabilities
 geofencing
 promotional offers considering
consumers' geographic location

Markdowns
 reasons for taking markdowns
o markdown
 part of cost of doing business
o clearance (to dispose of merchandise)
o promotional (to generate sales)
 consolidate markdown merchandise:
 consolidated into another retail chain
 made into one or a few of retailer’s regular locations
 shipped to a distribution center for final sale

 optimising markdown decisions

 reducing the amount of markdowns
 liquidate markdown merchandise
 sell to another retailer
 consolidate unsold merchandise
 sell on the internet
 return to vendor
 donate to charity
 carry over the merchandise to the next season
 markdown money: given to retailer by a vendor
 reduce markdowns by creating a feeling of product scarcity among customers
Pricing techniques for increasing sales and profits
 dynamic pricing (individualised pricing)
o process of charging different prices for goods or services based
on the type of customer, time of the day, week, or even season,
and level of demand
o popular in automobile and antique dealers
 promotional markdowns
 coupons
 price bundling: items packaged together for one price
 quantity discounts/ multiple-unit pricing
 zone pricing: charging different prices in different stores, markets or regions
 leader pricing
 odd pricing

Legal and ethical pricing issues

 deceptive reference price
 reference price
o price against which buyers compare the actual selling price of
the product
 predatory pricing
o dominant retailer sets prices below its costs to drive competitive
retailers out of business
 resale price maintenance
o manufacturer's suggested retail price (MSRP)
 horizontal price fixing
o agreements between retailers that are in direct competition
with each other to set the same prices
 bait-and-switch tactics
o bait and switch
 unlawful, deceptive practice that lures customers
into a store by advertising a product at a lower-
than-normal price
o rain check
 a promise to customers to sell currently out-of-
stock merchandise at the advertise price when it
arrives