Chapter 11 – Managing the Merchandise Planning Process
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CHAPTER 11
MANAGING THE MERCHANDISE PLANNING PROCESS
ANNOTATED OUTLINE
INSTRUCTOR NOTES
• Merchandise management activities are undertaken
primarily by buyers and their superiors, divisional
merchandise managers (DMMs) and general merchandise
managers (GMMs).
• Retail buyers manage a portfolio of merchandise inventory.
• Buyers need to be in touch with and anticipate what
customers will want to buy, but this ability to sense market
trends is just one skill needed to manage merchandise
See PPT 11–4 and PPT 11-5
I. Merchandise Management Overview
LO 11-1 Explain the
merchandise management
organization and performance
measures.
A. The Buying Organization
An overview of merchandise
Chapter 11 – Managing the Merchandise Planning Process
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• The highest classification level is the merchandise group.
Each merchandise group is managed by a general
merchandise manager (GMM), who is often a senior vice
president in the firm. Each of these GMMs is responsible
for several departments.
B. Merchandise Category – The Planning Unit
• The merchandise category is the basic unit of analysis for
making merchandising management decisions.
See PPT 11–8
Ask students to name
merchandise that they would
1. Ways to Manage Categories
• A category management approach to managing
merchandise assigns one buyer or category manager to
oversee all merchandising activities for the entire category.
Managing by category can help ensure that the store’s
• Managing merchandise within a brand category can lead to
See PPT 11–9
Chapter 11 – Managing the Merchandise Planning Process
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2. Category Captain
• Some retailers turn to one favored vendor to help them
manage a particular category. Known as the category
captain, this supplier works with a retailer to develop a
better understanding of consumer shopping
behaviors, create assortments that satisfy consumer
needs, and improve the profitability of the
merchandise category.
• Selecting vendors as category captains has several
advantages for retailers. It makes merchandise
gaining access to valuable shelf space.
See PPT 11–10
What should retailers be
concerned about before
appointing a category captain?
What are some disadvantages of
relying too heavily on a category
captain?
C. Evaluating Merchandise Management Performance
• A good measure for evaluating a retail firm is return on
assets (ROA). Return on assets is composed of two
components, asset turnover and net profit margin.
• However, ROA is not a good measure for evaluating the
performance of merchandise managers because they do
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1. GMROI
• A financial ratio that assess a buyer’s contribution to ROA
is gross margin return on inventory investment (GMROI). It
measures how many gross margin dollars are earned on
every dollar of inventory investment.
• GMROI combines the effects of both profits and turnover.
It is important to use a combined measure so departments
with different margin/turnover profiles can be compared
and evaluated.
• GMROI is used as a return on investment profitability
See PPT 11–11
Ask students how it is possible for
two different types of food
products, fresh bakery bread and
gourmet canned food, to have the
same GMROI. Walk through the
2. Measuring Sales-to-Stock Ratio
• Retailers normally express inventory turnover (sales-to–
stock) ratios on an annual basis rather than for part of a
year. If the sales-to-stock ratio for a three-month season
estimates by collecting and averaging the inventory in
See PPT 11–14
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D. Improving GMROI
• There are two paths that buyers can take to increase
1. Improve Inventory Turnover (Sales-to-Stock Ratio)
• To improve the inventory turnover (sales-to–stock
ratio), buyers can either reduce the level of inventory
or increase sales.
• A third approach for increasing inventory turnover is
to buy merchandise more often but in smaller
quantities, which reduces average inventory without
reducing sales. But buying smaller quantities can
decrease the gross margin
• A fourth approach is to increase sales and not
increase inventory proportionally. However, while
inventory turnover would increase in this situation,
See PPT 11–15
Spend extra time with students
discussing the difference
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customers for a long time.
• Finally, when inventory turnover increases, more
2. Increase Gross Margin
• Three approaches to increasing the gross margins are
increasing prices, reducing the cost of goods sold, or
reducing customer discounts.
II. Merchandise Planning Processes
• First, buyers forecast category sales, develop an
assortment plan for merchandise in the category, and
determine the amount of inventory needed to
LO 11-2 Contrast the
merchandise management
processes for staple and
fashion merchandise.
Chapter 11 – Managing the Merchandise Planning Process
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A. Types of Merchandise Management Planning Systems
• Retailers use different types of merchandise planning
systems for managing (1) staple and (2) fashion
merchandise categories.
• Staple merchandise categories, also called basic
merchandise categories, consist of items that are in
continuous demand over an extended time period.
replenishment.
• Fashion merchandise categories consist of items that
are only in demand for a relatively short period of
time. New products are continually introduced into
these categories, making the existing products
obsolete.
• Forecasting the sales for fashion merchandise
See PPT 11–17 for an overview of
the merchandise planning
processes
What happens to demand for
stable products during times of
instability?
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time that the SKUs move out of fashion.
III. Forecasting Category Sales
• The first step in merchandise management planning is to
develop a forecast for category sales.
LO 11-3 Describe how to predict
sales for merchandise
categories.
See PPT 11–19
A. Forecasting Staple Merchandise
• The approach for forecasting sales of staple merchandise is
1. Use of Historical Sales
• The sales of staple merchandise are relatively constant
from year to year. Thus, forecasts are typically based on
2. Adjustments for Controllable and Uncontrollable Factors
• Controllable factors include the opening and closing of
stores, the price set for the merchandise in the
category, special promotions for the category, the
PPT 11–20
Ask students to consider
uncontrollable factors that might
Chapter 11 – Managing the Merchandise Planning Process
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by competitors.
B. Forecasting Fashion Merchandise Categories
* Forecasting sales for fashion merchandise is challenging
because some or all of the items in the category are new
See PPT 11–21
1. Previous Sales Data
• Although some items in fashion merchandise categories
might be new each season, many items in a fashion
2. Market Research
• Information on how customers will react to new
merchandise can be obtained by asking customers about
the merchandise and measuring customer reactions to new
merchandise through sales tests.
• Another excellent source of customer information is social
media sites. Buyers learn a lot about their customers’
likes, dislikes, and preferences by monitoring their
past purchases and by monitoring their interactions
Chapter 11 – Managing the Merchandise Planning Process
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• A focus group is a small group of respondents interviewed
by a moderator using a loosely structured format.
3. Fashion Trend Services
4. Vendors
• Vendors have proprietary information about their
marketing plans, such as new product launches and special
C. Sales Forecasting for Service Retailers
• Due to the perishable nature of services, service retailers
face a more extreme problem than fashion retailers. Their
IV. Developing an Assortment Plan
• After forecasting sales for the category, the next step in the
merchandise management planning process is to develop
an assortment plan.
LO 11-4 Summarize the trade-
offs for developing
merchandise assortments.
See PPT 11–23, 11–24
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A. Category Variety and Assortment
• Variety is the number of different merchandising
subcategories offered within a store or department. Stores
Ask students to give examples of
stores with large variety and those
B. 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
A retailer must decide what type
of store it wants to be. They have
a finite space and inventory
budget. A store that offers good
variety means one-stop shopping –
– everything that the target
1. Retail Strategy
• The number of SKUs offered in a merchandise
category is a strategic decision.
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that are closely associated with their image.
2. Assortments and GMROI
• Buyers need to be sensitive to the trade-off of
increasing sales by offering greater breadth and depth
but at the same time potentially reducing inventory
department complement each other.
3. Complementary Merchandise
• When buyers develop assortment plans, they need to
items in their assortments.
4. Effects of Assortment Size on Buying Behavior
• Offering large assortments provides several benefits
to customers, including increasing the number of SKUs
that customers can purchase, providing a more
informative and stimulating shopping experience, and
offering more variety.
5. Physical Characteristics of the Store
• Buyers need to consider how much space to devote to
a category. More space is needed to display
Chapter 11 – Managing the Merchandise Planning Process
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V. Setting Inventory and Product Availability Levels
LO 11-5 Illustrate how to
determine the appropriate
inventory levels.
See PPT 11–25
A. Model Stock Plan
• The model stock plan is the number of each SKU in
B. Product Availability
• The number of units of backup stock, also called buffer
stock or safety stock, in the model stock plan determines
product availability.
• Retailers often classify merchandise categories or
individual SKUs as A, B, or C items, reflecting the product
availability the retailer wants to offer. For A items, the
retailer rarely wants to stock out. Lower availability is
acceptable for C items.
See PPT 11–26
Why does inventory investment
increase so fast as product
availability goes up? Because of
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vendor lead time, and the frequency of store deliveries.
VI. Establishing A Control System for Managing Inventory
• The next step in the merchandise management
process is to establish a control system for how the
LO 11-6 Analyze merchandise
control systems.
PPT 11-30 illustrates the function
A. Control System for Managing Inventory of Staple Merchandise
• The SKUs in a staple merchandise category are sold
month after month, year after year.
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1. Flow of Staple Merchandise
• Staple merchandise buying systems are used for
merchandise that follows a predictable order-receipt-order
cycle. Most merchandise fits this criterion.
2. Determining the Level of Backup Stock
• Several factors determine the level of backup stock
needed for a SKU: (1) the product availability the
retailer wants to provide, (2) fluctuation in demand
3. Automated Continuous Replenishment
• Once the buyer sets the desired product availability
and determines the variation in demand and the
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POS terminals with the shipments received by the
store.
4. The Inventory Management Report
• The inventory management report provides
information about the inventory management for a
staple category. The report indicates the decision
PPT 11–33 shows a retailer’s
5. Order point
• The order point is the amount of inventory below which
the quantity available should not go or the item will be out
See PPT 11–34
6. Order Quantity
• When inventory reaches the order point, the buyer, or
B. Control System for Managing Inventory of Fashion
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Merchandise
See PPT 11–36
1. Merchandise Budget Plan
• The merchandise budget plan specifies the amount of
merchandise in dollars (not units) that needs to be
delivered during each month, based on the sales
forecast, the planned discounts to employees and
2. Open-to-Buy System
• The open-to-buy system starts after the merchandise is
purchased using the merchandise budget plan or staple
merchandise management system.
• The open-to-buy system keeps track of the actual
See PPT 11–38
Now that the buyer knows how
much to spend in each month
(based on the merchandise
VII. Allocating Merchandise to Stores
• After developing a plan for managing merchandise
inventory in a category, the next step in the merchandise
LO 11-7 Describe how
multistore retailers allocate
merchandise to stores.