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).
• 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
inventory effectively. Perhaps an even more important skill
is the ability to analyze sales data continually and make
appropriate adjustments in prices and inventory levels.
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
• 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.
• Categories are the lowest level in the classification scheme.
Each buyer manages several merchandise categories.
• A stock-keeping unit (SKU) is the smallest unit available for
inventory control, usually indicating brand, size, color and
style.
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
assortment includes the “best” combination of sizes and
vendors – the one that will get the most profit from the
allocated space.
See PPT 11–9
inefficiencies because it fails to consider the
interdependencies among SKUs in the category.
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.
• A potential problem with establishing a category captain,
however, is that vendors could take advantage of their
position.
See PPT 11–10
What should retailers be
concerned about before
appointing a category captain?
What are some disadvantages of
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.
• Merchandise managers only have control over the
merchandise they buy, the cost of the merchandise and
the price at which it is sold, which results in the gross
margin.
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.
• Average inventory in GMROI is measured at cost, because
a retailer’s investment in inventory is the cost of the
inventory, not its retail value.
• 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.
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
See PPT 11–13 for illustrations of
GMROI
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
equals 2.3, the annual sales-to-stock ratio will be reported
as four times that number (9.2)
See PPT 11–14
stores and distribution centers at the end of each day.
Another method is to take the end-of-month (EOM)
inventories for several months and divide by the
number of months.
D. Improving GMROI
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
See PPT 11–15
Spend extra time with students
customers for a long time.
2. Increase Gross Margin
• Three approaches to increasing the gross margins are
increasing prices, reducing the cost of goods sold, or
reducing customer discounts.
• Increasing prices increases gross margin, but it can
also decrease sales and inventory turnover because
price-sensitive customers buy less.
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
support the forecasted sales and assortment plan.
• Buyers continually monitor the sales of merchandise
LO 11-2 Contrast the
merchandise management
processes for staple and
fashion merchandise.
in the category and make adjustments.
• These decisions are not necessarily made sequentially.
Some decisions may be made at the same time or in a
different order than described above.
A. Types of Merchandise Management Planning Systems
• Retailers use different types of merchandise planning
systems for managing (1) staple and (2) fashion
merchandise categories.
• Because sales of staple merchandise are fairly steady
from week to week, it is relatively easy to forecast
demand, and the consequences of making mistakes in
forecasting are not great. Merchandise planning
systems for staple categories focus on continuous
replenishment.
• Due to the short selling season for most fashion
merchandise, buyers often do not have a chance to
reorder additional merchandise after an initial order is
placed. An important objective of merchandise
planning systems for fashion merchandise categories
is to be as close to out of stock as possible at the same
See PPT 11–17 for an overview of
the merchandise planning
processes
consider staples, like bread,
milk, eggs, socks, etc. But are
there other product categories
that some students consider
staple products but others
don’t?
time that the SKUs move out of fashion.
• Retailers buy seasonal merchandise in much the same
way that they buy fashion merchandise.
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
1. Use of Historical Sales
• The sales of staple merchandise are relatively constant
from year to year. Thus, forecasts are typically based on
extrapolating historical sales. Then, statistical techniques
can be used to forecast future sales.
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
influence the sales of staple
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
and different than units offered in previous years.
previous sales data, (2) market research, (3) fashion trend
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
category are often similar to items sold in previous years,
and thus, accurate forecasts might be generated by simply
projecting past sales data.
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.
• Customer information can be collected through traditional
forms of marketing research like in-depth interviews and
focus groups.
• A more informal method of interviewing customers is to
require that buyers spend some time on the selling floor
waiting on customers.
• A focus group is a small group of respondents interviewed
by a moderator using a loosely structured format.
• Finally, many retailers have a program for conducting
merchandise sales experiments.
3. Fashion Trend Services
4. Vendors
• Vendors have proprietary information about their
marketing plans, such as new product launches and special
promotions that can have a significant impact on retail
sales for their products and the entire merchandise
category.
C. Sales Forecasting for Service Retailers
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.
A. Category Variety and Assortment
• Variety is the number of different merchandising
subcategories offered within a store or department. Stores
with a large variety are said to have good breadth.
Ask students to give examples of
stores with large variety and those
with lower variety.
B. Determining Variety and Assortment
• The process of determining the variety and
assortment for a category is called editing the
assortment.
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
You can get anything you want as
long as it is a knife. As for product
availability — a retailer can strike
a good balance between variety
and assortment, but if they run
out of a particular size, color, or
style (SKU) that a customer wants,
a sale is lost.
1. Retail Strategy
• The number of SKUs offered in a merchandise
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
turnover and GMROI.
3. Complementary Merchandise
• When buyers develop assortment plans, they need to
consider the degree to which categories in a
department complement each other.
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.
items in their assortments.
5. Physical Characteristics of the Store
• Buyers need to consider how much space to devote to
a category. More space is needed to display
categories with large assortments.
• Multichannel retailers address space limitations in
stores by offering a greater assortment through their
Internet and catalog channels than they do in stores.
A. Model Stock Plan
• The 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.
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.
website.
• The trade-off among variety, assortment, and product
availability is a crucial issue in determining a retailer’s
merchandising strategy.
• Other factors to consider are fluctuations in demand, the
lead time for delivery from the vendor, fluctuations in
See PPT 11–26
Why does inventory investment
increase so fast as product
availability goes up? Because of
stays the same or decreases.
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
orders, deliveries, inventory levels, and merchandise
sales will evolve over time.
LO 11-6 Analyze merchandise
control systems.
PPT 11-30 illustrates the function
of a staple merchandise
management system.
A. Control System for Managing Inventory of Staple Merchandise
• The SKUs in a staple merchandise category are sold
month after month, year after year.
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.
• Staple merchandise planning systems manage inventory at
the level of the SKU.
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
(greater fluctuation requires more backup stock), (3)
the lead time (amount of time between recognition
3. Automated Continuous Replenishment
• Once the buyer sets the desired product availability
and determines the variation in demand and the
vendor’s lead time and fill rate, the continuous
replenishment systems for staple SKUs can operate
automatically.
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
variables set by the buyer, such as product availability,
the backup stock needed to provide the product
availability, the order points, and quantities, plus
PPT 11–33 shows a retailer’s
sample inventory management
report for Rubbermaid SKUs.
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
of stock before the next shipment arrives.
See PPT 11–34
6. Order Quantity
• When inventory reaches the order point, the buyer, or
system, needs to order enough units to ensure product
availability before the next order arrives.
B. Control System for Managing Inventory of Fashion
Merchandise
• The control systems for managing fashion merchandise
categories are the merchandise budget plan and the open-
to-buy.
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
customers, and the level of inventory needed to
support the sales and achieve the desired GMROI
objectives.
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.
• Differences between actual and planned levels may arise
because an order was shipped late or sales deviated from
the forecast.
See PPT 11–38
Now that the buyer knows how
VII. Allocating Merchandise to Stores
• After developing a plan for managing merchandise
LO 11-7 Describe how
multistore retailers allocate