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Chapter 12 - Managing the Merchandise Planning Process
12-20
Distribution to Season (Line 3)
* To have enough merchandise every
month to support the monthly sales
forecast, the buyer must consider factors
that reduce the inventory level. Apart
from sales, the value of the inventory is
also reduced by markdowns, shrinkages,
and discounts to employees.
* Shrinkage is caused by shoplifting by
employees or customers, by merchandise
being misplaced or damaged, or by poor
bookkeeping. The buyer measures
shrinkage by taking the difference
Reductions are often difficult for students to
understand. Tell them that they work in the
same direction as sales. In other words, if
you put something on sale or if something is
stolen, it reduces the value of the inventory at
retail. Retailers have to not only buy enough
to support their sales; they also have to buy
enough to support their reductions. If they
don't, consider reductions, they will run out of
D. Monthly Reductions (Line 4)
* Monthly reductions are calculated the
same way monthly sales are calculated.
Total reductions are multiplied by each
percentage in line 3.
* April reductions = $6,600 (i.e., $16,500
X 40%).
See PPT 12A-7
E. BOM (Beginning of Month) Stock-to-Sales
Ratio (Line 5)
Like % distribution of sales by month,
monthly stock-to-sales ratios fluctuate by
sales don’t take off until May, so in May,
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F. BOM Stock (Line 6)
* The amount of inventory planned for the
beginning of month (BOM) equals
* Monthly sales (line 2) X BOM stock-to-
sales ratio (line 5).
Sales X (stock/sales) = stock. That is, sales
drops out of the equation.
See PPT 12A-13
G. EOM (End of Month) Stock (Line 7)
* The BOM stock from the current month
When a retailer closes for business at the end
of the month, the inventory should be the same
the next morning when the store opens at the
See PPT 12A-14
H. Monthly Additions to Stock (line 8)
* The monthly additions to stock is the
amount to be ordered for delivery in
each month, given turnover and sales
objectives.
Emphasize: Retailer should purchase amounts
indicated in line 8 which is based on sales
forecasts, inventory turnover goals, and
historical sales patterns.
II. Open-to-Buy
* 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
See PPT 12A-16
Now that the buyer knows how much to spend
in each month (based on the merchandise
budget plan), the buyer must keep track of
spending using open-to-buy.
Chapter 12 - Managing the Merchandise Planning Process
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merchandise flows while they are
occurring. Specifically, the open-to-buy
system records how much is spent each
month, and therefore how much is left to
spend.
A. Calculating Open-to-buy for the Current
Period
* Buyers develop plans indicating how
much inventory for the merchandise
category will be available at the end of
the month.
* The open-to-buy is the difference
between the planned EOM inventory and
the projected EOM inventory.
* The EOM planned inventory is taken
from the merchandise budget plan, and
the EOM projected inventory is
calculated as follows:
See PPT 12A-17
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Appendix 12B: Retail Inventory Method (RIM)
A. The Problem
* Retailers generally think of their inventory
at retail price levels, rather than at cost.
They take their initial markups, markdowns,
and so forth as a percentage of retail.
See PPT 12A-23
B. Advantages of RIM
* RIM has five advantages over a system of
evaluating inventory at cost:
* The retailer doesn't have to "cost each item.”
* The book inventory determined by RIM can
be used in an insurance claim in the case of
a loss such as a fire.
See PPT 12A-24
C. Disadvantages of RIM
* One disadvantage of RIM is based on the
system’s use of average markup. When
See PPT 12A-25
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D. Steps in RIM
1. Calculate Total Goods Handled at
Cost and Retail
a. Record beginning inventory at cost and at
retail.
b. Calculate net purchases by recording
gross purchases and adjusting for
returned merchandise to vendor.
See PPT 12A-26, 12A-27
2. Calculate Retail Reductions
* Reductions are the transactions that reduce
the value of inventory at retail (except
additional markup cancellations which were
included as part of the total goods handled).
See PPT 12A-29
3. Calculate the Cumulative Markup and
Cost Multiplier
* The cumulative markup is the average
percentage markup for the period. It is
calculated the same way the markup for an
See PPT 12A-31
Chapter 12 - Managing the Merchandise Planning Process
item is calculated:
4. Determine Ending Book Inventory at Cost
and Retail
* ending book inventory at retail = total goods
handled at retail - total reductions.
See PPT 12A-32
ANSWERS TO SELECTED GET OUT & DO ITS
“GET OUT AND DO ITS”
2. INTERNET EXERCISE Go to the homepage for Merchandise Management Company
(MMC), the exclusive merchandising service partner for Kohl’s at:
information and press releases at this web site. How does this service provider support vendors to
manage merchandise sold at this discount department store? What is the ‘Store Vision’ system?
How is it used to measure merchandise performance?
- Increases sales at retail
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3. IN STORE or INTERNET EXERCISE Go to the store location or homepage for a craft
store such as Michaels Stores, Inc, Jo-Ann Fabric and Craft Stores or A.C. Moore Arts & Crafts
type of retailer organize their merchandise in terms of Merchandise Group, Department,
Category and Stock Keeping Unit? Select a category of merchandise that you would expect to
have a high inventory turnover and a low inventory turnover. Explain your reasoning for each
selection.
From the Michael’s Homepage - Departments
4. GO SHOPPING Visit a big box office supply store and then visit a discount store to shop for
school supplies. Contrast the variety and assortment offered at both. What are the advantages and
disadvantages of breath vs. depth for each retailer? What are the advantages and disadvantages
from the consumer’s perspective?
5. INTERNET EXERCISE. Go to the home page for the following three retail trade
merchandise. How can these articles assist retailers with merchandise planning decisions?
Answers here will vary. Here are a few article titles that could also be assigned for this
question:
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the SAS Merchandise Intelligence group Web site. How does the SAS® Merchandise
Intelligence product provide retailers with information to support merchandising planning,
forecasting and measurement?
From the company web site…
Right merchandise. Right place. Right price.
SAS Revenue Optimization Suite, the only software suite available today that
helps retailers manage revenue and margin through the entire merchandise life
cycle. This suite includes three integrated components:
SAS Regular Price Optimization – Establish and maintain optimal everyday
prices based on costs, regional demand patterns and competitive price
information.
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ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. How and why would you expect variety and assortment to differ between JCPenney’s
store and Internet channel?
JCPenney’s individual stores will cater more towards local and regional tastes than will
the JCPenney’s online channel. In addition, JCPenney’s stores are limited on space and
2. Simply speaking, increasing inventory turnover is an important goal for a retail
manager. What are the consequences of turnover that’s too slow? Too fast?
With a rapid rate of turnover, sales volume increases. When retailers sell merchandise
3. Assume you are the grocery buyer for canned fruits and vegetables at a five-store
supermarket chain. Del Monte has told you and your boss that it would be responsible
for making all inventory decisions for those merchandise categories. It would
determine how much to order and when shipments should be made. It promises a 10
percent increase in gross margin dollars in the coming year. Would you take Del Monte
up on its offer? Justify your answer.
In this case, Del Monte would act as a category captain for the fruits and vegetables category
for the supermarket chain. Since the supermarket is a small five-store chain, one can
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On the flip side, there could be several issues that must be settled before proceeding further
on the arrangement. First, Del Monte may be able to take advantage of its position as the
controller of information and inventory and make decisions that may profit it more than the
supermarket chain. Second, if Del Monte stocks more of its own brands with no space
devoted to competitive products, consumers may be deprived of a good assortment and brand
choice. Third, there may be other attempts by Del Monte to control more store-level
decisions, including shelf space utilizations, display, etc.
4. A buyer at Old Navy has received a number of customer complaints that he has been
out of stock on some sizes of men’s t-shirts. The buyer subsequently decides to increase
this category’s product availability from 80 percent to 90 percent. What will be the
impact on backup stock and inventory turnover? Would your answer be the same if the
product category were men’s fleece sweatshirts?
An increase in customer service by 10% will increase backup stock by much greater than
10% (see Exhibit 12-10). Inventory turnover will be adversely affected. Although net sales
5. Variety, assortment, and product availability are the cornerstones of the merchandise
planning process. Provide examples of retailers that have done an outstanding job of
positioning their stores based on one or more of these issues.
Chapter 12 - Managing the Merchandise Planning Process
Students will have a variety of answers to this question. However, some possible responses
are:
6. The fine jewelry department in a department store has the same GMROI as the small
appliances department, even though characteristics of the merchandise are quite
different. Explain this situation.
The jewelry department has a low turnover, but a very high margin. Typically, a jewelry
department can command a very high markup because they are selling merchandise that the
turnover.
7. Calculate GMROI and inventory turnover given annual sales of $20,000, average
inventory (at cost) of $4,000 and a gross margin of 45%.
* GMROI = Gross margin % x Sales-to-stock ratio
Chapter 12 - Managing the Merchandise Planning Process
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8. As the athletic shoe buyer for Sports Authority, how would you go about forecasting
sales for a new Nike shoe?
As the athletic shoe buyer for Sports Authority, you are dealing with a staple merchandise
category. Sales of athletic shoes should prove to be relatively steady over time for Sports
9. Using the 80-20 principle, how can a retailer make certain it has enough inventory of
fast-selling merchandise and a minimal amount of slow-selling merchandise?
Retailers should rank products by the 80-20 principle, which maintains that 80% of a
10. A buyer at a sporting goods store in Denver receives a shipment of 400 ski parkas on
October 1 and expects to sell out by 31. On November 1, the buyer still has 350 parkas
left. What issues should the buyer consider in evaluating the selling season’s progress?
Using a sell-through analysis, if the selling season is supposed to be four months, the buyer
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11. A buyer is trying to decide from which vendor to buy a certain item. Using the
following information, determine from which vendor the buyer should buy.
VENDOR PERFORMANCE
Importance
Issues Weight Vendor A Vendor B
Reputation for collaboration 8 9 8
Service 7 8 7
Meets delivery dates 9 7 8
Merchandise quality 7 8 4
Gross margin 6 4 8
Brand name recognition 5 7 5
Promotional assistance 3 8 8
ANCILLARY LECTURES AND EXERCISES
Ancillary Lecture 12-1 Predicting Fadsa
Instructor’s Notes: The purpose of this lecture is to supplement the material on fads in the chapter.
There are five questions that a buyer can explore to predict whether a new category or item will be a fad
or a long-term fashion or staple?i First, does it fit with basic lifestyle and value changes? Consumers are
time-poor and therefore seek products and services that make their lives more convenient. Thus, products
that speed mundane tasks, like cleaning the house, are likely to be successful.
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Third, the buyer must determine whether the product is based on a basic trend or is a side effect of that
trend. The side effects will be replaced, but the trend continues to grow. For instance, the popularity of
spicy food is a trend that continues to grow in the U.S. However, the different types of ethnic restaurants
that serve the food may change over time -- the side effect. For instance, some experts predict that Indian
and Thai food will grow in popularity at the expense of Mexican and Italian.
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LECTURE 12-2
Category Management
Instructor’s Note: This lecture is designed to supplement the discussion in Chapter 12 on Category
Management.
It's important to establish from the beginning that the category is the unit of analysis used for planning
merchandising decisions. Since all SKUs (of the same size) within a category are reasonable substitutes
for one another, they follow similar demand patterns. For instance, demand for jeans is heaviest during
What is Category Management and Who Uses It?
“Category management is a process that involves managing product categories as business units and
customizing them on a store-by-store basis to satisfy customer needs.”i Category Management may sound
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Department stores see the powerful role of designers to be a double-edged sword. Certainly these
designers bring an image and a ready-made market to the department stores. They also usurp control
from the retail buyer. Recently, however, department stores are rediscovering the concept of the category
manager. For example, they have strengthened their position in private label.
The traditional buying system in grocery stores is fraught with problems. No one individual is totally
responsible for the success or failure of a category. It is also more difficult to identify the source of a
problem and solve it under the traditional system. Suppose, for instance, an ad is placed in the newspaper
for a Memorial Day sale. However, the stores don’t have the merchandise. Who caused the problem?
Was it because the buyer didn’t order the merchandise in time? Did the advertising manager fail to
Setting up a Category Management Program
Setting up a Category Management program requires a strong commitment from the top. Given the
scenario that we described above, you can see that a new CM program will require changes in
responsibilities and in the organization structure. Setting up a CM program requires three major steps:
Review and coordinate strategies, define the categories, and establish strategic partnerships with vendors.
Establish strategic partnerships with vendors. The importance of establishing strategic partnerships with
vendors has been stressed throughout Retailing Management Since retailers and their vendors share the
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same goals -- to sell merchandise and make profits -- it is only natural for them to share the information
that will help them achieve those goals. Since vendors can develop systems for collecting information for
all of the areas that they service, they can provide Category Managers with valuable information.
A potential problem with establishing a Category Captain, however, is that vendors could take advantage
of their position. It is somewhat like letting the fox watch the henhouse. Suppose, for example, that a
large candy manufacturer like Mars has become the Category Captain for a grocery store chain like
Safeway. Part of their responsibility is to provide Safeway with planograms. Will the planogram provide
an assortment that maximizes the profitability for Safeway, or will there be a tendency for the plan to be
biased in favor of Mars?i
How to Implement a Category Management Program
Category management is a circular, long-term process that involves five stages. Each stage is ongoing
and flows naturally into the next. The stages, illustrated in Exhibit x-x, include: Reviewing the category,
targeting customers, planning merchandising, implementing strategy, and evaluating results.
Targeting customers. A category manager cannot determine what to buy (the third step) without
knowing who their target customers are. Identifying their target customers goes beyond an understanding
of their demographics. CMs should know what they purchase, where, how often, and how they respond
to promotions. Armed with these data, the Category Manager groups stores with similar customer
profiles so she can target each group with customized product assortments, pricing, promotions, and
shelf-space allocations.
Chapter 12 - Managing the Merchandise Planning Process
fail unless they are communicated clearly to store managers and employees. Systems for communicating
programs and monitoring results must be in place. Importantly, the CM must establish strong
relationships with store managers. There must be a team effort between the CM and the stores if
strategies are to succeed.
