Chapter 12 – Managing the Merchandise Planning Process
12-1
CHAPTER 12
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).
* Merchandise management is the process
by which a retailer attempts to offer the right
quantity of the right merchandise in the right
place at the right time while meeting the
company’s financial goals.
See PPT12-4 and PPT 12-5
I. Merchandise Management Overview
A. The Buying Organization
* Every retailer has its own system for
grouping categories of merchandise, but the
basic structure of the buying organization is
similar for most retailers.
An overview of merchandise classifications is
illustrated in PPT 12-6. The levels of the Buying
Organization are illustrated in PPT 12-7.
1. Merchandise Group
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president in the firm. Each of these GMMs
is responsible for several departments.
* The next lower level in the classification
scheme is the category. Each buyer
manages several merchandise categories.
B. Merchandise Category – The Planning Unit
* The merchandise category is the basic unit
of analysis for making merchandising
management decisions.
* A merchandise category is an assortment of
items that customers see as substitutes for
one another.
See PPT 12-8
Ask students to name merchandise that they would
consider to be in the same category. Should
Tommy Hilfiger be a category? What about
luggage?
1. Category Management
* Whereas department stores, in general,
manage merchandise at the category level,
supermarkets and other general merchandise
retailers traditionally have organized their
merchandise around brands or vendors.
* Managing by category can help ensure that
the store’s assortment includes the “best”
See PPT 12-9
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combination of sizes and vendors – the one
that will get the most profit from the
allocated space.
2. Category Captain
* The category captain works with the
category manager/buyer to make decisions
about product placement on shelves,
promotions, and pricing for all brands in the
category.
See PPT 12-10
C. Evaluating Merchandise Management
Performance — GMROI
* A good measure for evaluating a retail firm
is ROI. Return on investment is composed
of two components, asset turnover and net
profit margin.
* However, ROI is not a good measure for
evaluating the performance of merchandise
managers because they do not have control
over all the retailer’s assets or all the
expenses the retailer incurs.
See PPT 12-11
Ask students how it is possible for two different
types of food products, milk and wine to have the
same GMROI. Walk through the exhibit. Then
ask what would happen to GMROI if wine went on
sale. (Answer: it would depend on how much of
a margin reduction was taken and how much
turnover would increase.)
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inventory investment.
* GMROI is a similar concept to return on
assets, only its components are under the
control of the buyer rather than other
managers.
* 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 12-13 for illustrations of GMROI
1. Measuring Sales-to-Stock Ratio
* Retailers normally express sales-to-stock
ratios (and inventory turnover) 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 ratio will be reported
as four times that number, 9.2)
See PPT 12-14
D. Managing Inventory Turnover
See PPT 12-15
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* Inventory turnover and the sales-to-stock
ratio help assess the buyer’s
performance in managing this asset.
Spend extra time with students discussing the
E. Merchandise Management Process
* 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.
* Third, having developed a plan, the
buyer negotiates with vendors and buys
the merchandise.
PPT 12-16 summarizes the Merchandise Planning
Process.
F. Types of Merchandise Planning Processes
See PPT 12-17 for an overview of the
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* Retailers use two distinct types of
merchandise management planning
systems for managing (1) staple
merchandise and (2) fashion
merchandise categories.
* Sales of staple merchandise are
relatively stable from day-to-day so it is
relatively easy to forecast demand, and
the consequences of making mistakes in
forecasting are not as high.
* Because the demand for basic
merchandise is predictable, merchandise
planning systems for staple categories
focus on continuous replenishment.
* Due to the short life cycle of fashion
merchandise, buyers often do not have a
chance to reorder additional
merchandise after an initial order is
placed.
* Seasonal merchandise categories
consist of items whose sales fluctuate
merchandise planning processes
What happens to demand for stable products
during times of instability?
Chapter 12 – Managing the Merchandise Planning Process
dramatically depending on the time of
year. Both staple and fashion
merchandise can be seasonal categories.
II. Forecasting Sales
* The first step in merchandise management
planning is to develop a forecast for
category sales.
* To develop a category forecast, one needs to
understand the nature of category life cycles
and the factors that might affect the shape of
the life cycle in the future.
See PPT 12-19
B. Forecasting Staple Merchandise
* The sales of staple merchandise are
relatively stable from year to year. Thus,
forecasts are typically based on
extrapolating historical sales. Then,
statistical techniques can be used to forecast
future sales.
PPT 12-20
Ask students to consider uncontrollable factors
that might influence the sales of staple
merchandise. How many can be identified?
C. Forecasting Fashion Merchandise Categories
* Forecasting sales for fashion merchandise
categories is challenging because some or
all of the items in the category are new and
different than units offered in previous
years.
See PPT 12-21
12-8
1. Previous Sales Data
* Although some items in fashion
merchandise categories might be new each
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.
* The depth interview is an unstructured
personal interview in which the interviewer
uses extensive probing to get individual
respondents to talk in detail about a subject.
* A more informal method of interviewing
customers is to require buyers to spend
some time on the selling floor waiting on
customers.
3. Fashion and Trend Services
* There are many services that buyers
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4. Vendors
D. Sales Forecasting for Service Retailers
* Due to the perishable nature of services,
service retailers face a more extreme
problem than fashion retailers. Their
offering perishes at the end of the day.
III. 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.
See PPT 12-23, 12-24
Ask students to name retailers with good
variety/good assortment/good product
availability. Explain that it is difficult to be a
A. Category Variety and Assortment
* Variety is the number of different
merchandising categories 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.
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decisions.
* In the context of merchandise planning, the
concepts of variety and assortment are
B. Determining Variety and Assortment
* In attempting to determine the variety and
assortment for a category, the buyer
considers a variety of factors including (1)
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
IV. Setting Inventory and Product Availability
Levels
* Assortment plans typically include the
inventory levels of each SKU stocked in the
store.
A. Product Availability
* Product availability defines the percentage
See PPT 12-26
Why does inventory investment increase so fast as
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of demand for a particular SKU that is
satisfied. The higher the product availability,
the higher the amount of back-up stock
necessary to ensure that the retailer won’t be
out of stock on a particular SKU when the
customer demands it.
* Cycle stock, also known as base stock, is
inventory that results from the
replenishment process and is required to
meet demand when the retailer can predict
demand and replenishment times (lead
times) perfectly.
* 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.
product availability goes up? Because of safety
stock— a retailer must carry more and more safety
stock to satisfy increasing levels of demand..
When using a Quick Response inventory system,
product availability can increase and inventory
V. Establishing A Control System For Managing
Inventory
* Staple merchandise buying systems are used
PPT 12-30 illustrate the function of a staple
merchandise management system.
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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.
* Several factors determine the level of
backup stock required: (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
that an order needs to be placed and the
point at which the merchandise arrives in the
store and ready for sale) from the vendor,
(4) fluctuations in lead time (retailers using
collaborative supply chain management
systems typically require their vendors to
deliver within a very narrow window to
reduce fluctuations in lead time), and (5) the
vendor’s product availability.
Ask students for examples to review typical staple
merchandise categories.
Factors determining backup stock are shown in
12-32
A. Automated Continuous Replenishment
* Buyer sets the desired product
availability and determines the variation
in demand and the vendor’s lead time
and fill rate, the continuous
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replenishment systems for staple SKUs
can operate automatically.
B. The Inventory Management Report
* The inventory management report
provides information about the current
sales rate or velocity, sales forecasts,
inventory availability, the amount on
order, decisions variables such as
PPT 12-33 shows a retailer’s sample
inventory management report for Rubbermaid
merchandise.
1. 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.
Order point =
See PPT 12-34
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sale.
* Review time is the maximum time between
reviews of the SKU.
2. Order Quantity
* When inventory reaches the order point, the
buyer needs to order enough units so the
stock isn’t depleted and sales dip into
backup stock before the next order arrives.
VI. Control System for Managing Inventory of
Fashion Merchandise
* The merchandise budget plan specifies the
planned inventory investment in dollars in a
fashion merchandise category over time.
See PPT 12-36
A. 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.
See PPT 12-38
Now that the buyer knows how much to spend
in each month (based on the merchandise
budget plan), the buyer must keep track of
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quantities and with delivery dates such that
the actual EOM (end of month) stock for a
month will be the same as the projected or
forecasted EOM stock.
VII. Allocating Merchandise to Stores
* After developing a plan for managing
merchandise inventory in a category, the
next step in the merchandise management
process is to allocate the merchandise
purchased and received to the retailer’s
stores.
See PPT 12-39
Ask students to consider some of the
challenges of allocating merchandise to
stores. What might influence the decision of
A. Amount of Merchandise Allocated to Each
Store
* Initially, the planner makes the allocation in
proportion to the forecasted sales for each
store.
* Next, the planner fine tunes the allocation
by recognizing that smaller stores require a
proportionally higher inventory allocation
than larger stores because if the depth of the
assortment or the level of product
availability is too small, customers will
perceive it as being inferior.
availability that the firm wishes to portray
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for the store.
B. Type of Merchandise Allocated to Stores
* In addition to classifying stores on the basis
of their size and sales volume, retailers
See PPT 12-40 for illustrations of
merchandise allocation decisions.
C. Timing of Merchandise Allocation to Stores
* Differences in the timing of category
purchases across stores also need to be
considered.
See PPT 12-41
VIII. Analyze Merchandise Performance
* The next step in the merchandise
management process is to analyze the
performance of the process and make
adjustments as necessary.
* Three procedures are used for analyzing
merchandise management performance.
See PPT 12-42
A. Sell-Through Analysis
* A sell-through analysis is a comparison
See PPT 12-43
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between actual and planned sales to
determine whether early markdowns are
required or whether more merchandise is
needed to satisfy demand.
Ask students what action should be taken with
the white and blue silk blouses Exhibit in PPT
B. Evaluating the Assortment Plan and Vendors
* ABC analysis identifies the performance of
individual SKUs in the assortment plan.
* It is used to determine what SKUs should be
in the plan and how much backup stock and
resulting product availability is provided for
each SKU in the plan.
* Measures commonly used in ABC analysis
are sales dollars, sales in units, gross
margin, and GMROI (gross margin return
on investment).
* The next step is to classify the items. Then,
on the basis of the classification, determine
whether to maintain the item in the
assortment plan and if so, what level of
product availability to offer.
See PPT 12-44
Ask students to think of other instances where
the 80-20 principle seems to work, e.g., 80%
of a store’s sales are generated by 20% of its
sales force or 20% of its space.
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same amount of backup stock as for A
items.
* C items account for 65% of SKUs but
contribute only 10 percent of sales.
C. Multiattribute Method for Evaluating
Vendors
* The multiattribute analysis method for
evaluating vendors uses a weighted average
score for each vendor.
3. Make judgments about each individual
brand’s performance on each issue.
4. Combine the importance and performance
scores by multiplying the importance for
each issue by the performance for each
brand or its vendor.
See PPT 12-45
Students may find this a little too
IX. Summary
* This chapter provides an overview of the
merchandise management planning
process and examines sales forecasting
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and assortment planning in more detail.
* Performance measures used to assess
merchandise management are GMROI,
sales-to-stock ratios and inventory
turnover, and gross margin.
Appendix 12A: Merchandise Budget Report and
Open-to-Buy System for a Fashion
Merchandise Category
I. Merchandise Budget Plan
A. Monthly Sales Percent Distribution To Season
(Line 1)
* Line 1 of the plan projects what
percentage of the total sales is expected
to be sold in each month.
Also called a seasonality index. Most
merchandise has some seasonality. Even
toilet paper — fancy styles sell better during
the holiday season when people have lots of
guests in their houses. Can derive using a
weighted average from past years, then
B. Monthly Sales (Line 2)
* Monthly sales are the forecasted total
sales for the six-month period (first
column) multiplied by each monthly
sales percentage (line 1).
See PPT 12A-5
C. Monthly Reductions Percent