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The Merchandise Management Function

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-The Retailer offers: -the right merchandise -in the right place -at the right time -in the right quantity -for the right price -in order for the Retailer to meet its financial goals -Involves the ability of the Retailer to: -Sense market trends -Analyze sales data -Make appropriate adjustments in its prices and inventory levels

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Viewing Merchandise Management as Investment Portfolio Management

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A different view of "Main Street versus Wall" Street -Dollars to invest in inventory -Invest in "hot" merchandise -Save a little for opportunities (open to buy) -Monitor portfolio of merchandise (stocks) -Sell losers (markdowns) Traders on the stock exchange floor manage a portfolio of stocks, and retail buyers manage a portfolio of merchandise inventory. Both continuously assess the risks associated with their purchase decisions.

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The Merchandise Buying Organization: Levels

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Merchandise Group Department Classification Merchandise Category Stock Keeping Unit (SKU) Refers to both levels of management and of merchandise

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Merchandise Category - The Planning Unit

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-A Merchandise Category = assortment of merchandise items customers view as substitutes -Retailers and Vendors may categorize the same merchandise item differently: -Vendors might assign products to different categories based on differences in product attributes -Retailers might assign two products to the same category based upon common consumers and buying behavior

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Category Management

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Category Management = Process of managing a retail business with the objective of maximizing the sales and profits of a category -Objective is to maximize the sales and profits of the entire category, not just a particular brand -Buyers for nonfood retailers specialize by categories -Buyers for food retailers specialize by brand or vendor

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Category Management and the Category Captain

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Category Captain = Retailer "outsources" category management to a vendor in the category ~ Target relies on P&G to manage the personal cleaning products category -Potential Upside (for retailer): -Vendors frequently have more information and analytical skills about the category in which they compete than retailers -Helps retailer understand consumer behavior -Creates assortments that satisfy the customer -Improves profitability of category -Potential Downside (for retailer): -Vendor category captain may have different goals than retailer

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Evaluating Merchandise Management Performance

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Gross Margin Return on Investment (GMROI) "jim roy" -Merchandise Managers have control over: -The merchandise they buy -The price at which the merchandise is sold -The cost of the merchandise -Merchandise Managers do not have control over: -Operating expenses -Human resources -Real estate -Supply chain management -Information systems SO, HOW ARE MERCHANISE MANAGERS EVALUATED?

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Gross Margin Return on Investment (GMROI)

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-See slide 11 for equation -Sales-to-stock ratio is used because GMROI is a type of ROI measure, so the investment in inventory is expressed at cost. -Inventory Turnover = = (1 - Gross Margin Percentage) x Sales-to-Stock Ratio

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ROA and GMROI ~ Asset Productivity Measures

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Strategic Corporate Level: Return on Assets = Net Profit ------------------ Total Assets Merchandise Management Level: GMROI = Gross Margin ---------------------- Average Inventory at Cost

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Measuring the Retailer's Stock-to-Stock Ratio

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-Rather than rely on inventory estimates (old school) for Sales-to- Stock Ratio calculations, use retail information system (new school) to capture daily inventory levels -Estimation of average inventory -Use information system: averaging the inventory in stores and distribution centers at the end of each day

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Managing Inventory Turnover

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-Inventory Turnover helps assess the Merchandise Buyer's performance in managing an asset (merchandise inventory) -But focusing on increasing inventory turnover can actually decrease GMROI -Buyers need to consider the trade-offs associated with managing Inventory Turnover -See equation on slide 14

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7 Steps in Merchandise Planning Process

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1. Forecast category sales 2. Develop an assortment plan 3. Determine appropriate inventory level and product availability 4. Develop a plan for managing inventory 5. Allocate merchandise for stores 6. Buy merchandise 7. Monitor and evaluate performance and made adjustments

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Two Types of Merchandise Management Planning Processes

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Staple Fashion

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Staple (Basic)

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-Continuous demand over an extended time period -Limited number of new product introductions -Examples: hosiery, basic casual apparel -Easy to forecast demand -Use Continuous Replenishment

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Fashion

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-In demand for a relatively short period of time -Continuous introductions of new products, making existing products obsolete -Examples: athletic shoes, laptop computers, women's apparel -Seasonal Merchandise -demand fluctuates significantly depending on time of year -Manage as Fashion Merchandise -Examples: back-to-school supplies, Valentine's Day gifts

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Step 1- Forecast Category Sales

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-Understand the nature of the product life cycle -Collect data on sales of product and comparable products -Use statistical techniques to project sales -Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand - Collaborative Planning, --- Forecasting, and Replenishment

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Step 1- Forecast Category Sales: Staple

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-Predictable Demand -History of Past Sales -Relatively Accurate Forecasts

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Step 1- Forecast Category Sales: Fashion

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-Unpredictable Demand -Limited Sales History -Difficult to Forecast Sales

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Step 1- Forcast Category Sales: Factors Affecting Sales Projections

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-Controllable -Promotions -Store Locations -Merchandise Placement -Cannibalization -Uncontrollable -Seasonality -Weather -Competitive Activity -Product Availability -Economic Conditions

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Step 1- Forecasting Fashion Merchandise Categories

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-Previous Sales Data -Market Research -Fashion and Trend Services -Vendors

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Previous Sales Data

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Many items in a fashion category are often similar to items sold in previous years.

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Market Research

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Research methods range from informal, qualitative research about trends affecting the category to more formal experiments and surveys.

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Fashion and Trend Services

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Firms which specialize in offering various services that buyers can subscribe to that forecast the latest fashions, colors, and styles.

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Vendors

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have their own (proprietary) information about their marketing plans and tend to be very knowledgeable about market trends

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Step 1- Forecasting Sales for Service Retailers

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-Due to the perishable nature of services, service retailers face more challenges than fashion retailers. -Offerings perishes at the end of the day, or sooner, not at the end of the season (or lasts for a very long time). -Must devise approaches for managing demand so that it meets, but does not exceed capacity.

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Step 2- Develop an Assortment Plan

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-Assortment Plan -list of SKUs that retailer plans to offer in a merchandise category; reflects planned variety and assortment for a merchandise category -Variety (breadth) ~ number of different merchandise categories within a store or department -Assortment (depth) ~ number of SKUs within a category -Product Availability ~ defines the percentage of demand for a particular SKU that is satisfied. -Editing the Assortment

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Step 2- Develop an Assortment Plan: Determining Variety and Assortment

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Merchandise Buyer needs to consider: -Retail Strategy ~ strategic decision affecting number of SKUs to offer in a merchandise category -GMROI of the Merchandise Mix -Complementary Merchandise - relationship to other merchandise -Trade-off between too much versus too little assortment -Increasing sales by offering more breadth and depth can potentially reduce inventory turnover and GMROI by stocking more SKUs -Breaking Sizes -SKU Rationalization Program -Physical characteristics of the store

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Step 3 - Determine Appropriate Inventory Level and Product Availability

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-Retailer's Planned Level of Inventory -Model Stock Plan -Retailer's Planned Availability of Product -Product Availability -Backup (Buffer or Safety) Stock -The higher product availability, the higher the amount of backup stock necessary to ensure retailer won't be out of stock on a particular SKU when consumers demand it

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Model Stock Plan

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specification quantity of each SKU in a store

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Product Availabiity

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-Percentage of demand for a particular SKU that is satisfied -Also known as level of support or service level

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Backup (Buffer or Safety) Stock

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Extra inventory to avoid unmet demand for the product

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Step 3- Importance of Backup (Buffer of Safety) Stock

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Choosing an appropriate amount of backup stock is critical to successful assortment planning -If the backup stock is too low --> lose sales and customers -If the backup stock is too high --> scare financial resources will be wasted on unneeded inventory that could be more profitably invested in more variety or assortment Availability and Inventory Investment are not a linear relationship

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Step 4- Develop Merchandise Inventory Control System

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Factors considered to determine the appropriate level of buffer stock and thus the product availability for each SKU -ABC Classification of merchandise inventory [see p. 344] -A - higher product availability -B - medium product availability -C - lower product availability is acceptable -Fluctuations in demand -Lead Time -for ordering and delivery from the vendor -Frequency of store deliveries

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Step 4 - Develop Inventory Control System: Managing Staple Merchandise Inventory

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The Merchandise Buyer Determines: -Assortment Plan -Cycle Stock or Base Stock -Level of Backup Stock The Inventory Control System: -Monitors Inventory levels -Automatically reorders when inventory gets below a specified level

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Step 4 - Inventory Management for Staple Merchandise

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Cycle (or Base) Stock: -Inventory that goes up and down due to demand and the replenishment process Backup (Buffer, Safety) Stock -Inventory needed to avoid stockout

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Step 4 - Inventory Trade-Off:Base Stock

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Indicates the Desired Inventory Level for Each SKU Cost of carrying inventory / Lost sale due to stockout (suppose to be a teter totter)

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Step 4- Determining the Level of Backup Stock

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-Higher product availability (service level) retailer wishes to provide to customers -Greater the fluctuation in demand -Longer Lead Time -from the vendor -More fluctuations in lead time -Lower vendor's Fill Rate -(percent of complete orders received from a vendor)

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Step 4- Calculation of Order Point

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The point at which inventory available should not go below or else retailer will run out of stock before the next order arrives Order point= sales/day x (lead time + review time) + buffer stock

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Step 4- Inventory Management for Fashion Inventory

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Merchandise Budget Plan -system for managing fashion merchandise categories plan for financial aspects of a merchandise category -Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives -Not a complete buying plan—does not indicate what specific SKUs to buy or in what quantities

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Step 4- Managing Evaluating Merchandise Budget Plan

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-Inventory Turnover, GMROI, and sales forecast are also used for control, not just for planning -After the selling season, the actual performance is compared with the plan: -Why did performance exceed or fall short of the plan? -Was the deviation from the plan due to something under the merchandise buyer's control? -Did the merchandise buyer react quickly to changes in demand by either purchasing more or having a sale?

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Step 4- Fashion Merchandise Management: Open-to-Buy System (OTB)

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-used after the merchandise is purchased -Monitors Merchandise Flow -Determines How Much Was Spent and How Much is Left to Spend

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Step 5- Allocate Merchandise to Stores

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Allocating merchandise to stores involves three decisions: 1. How much merchandise to allocate to each store? 2. What type of merchandise to allocate to each store? 3. When to allocate the merchandise to different stores?

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Step 5- Type of Merchandise Allocated to Each Store

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-Retailers classify stores according to the characteristics of the stores' trading area -The assortment offered in a ready-to-eat cereal aisle should match the demands of the demographics of shoppers in a local area

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Step 5- Timing of Merchandise Allocation to Stores by Region

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Seasonality differences and consumer demand differences by region

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Step 6 - Buying Merchandise

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In Chapter 13

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Step 7 - Analyzing Merchandise Management Performance

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Three types of Analyses related to Step 7 (monitoring and making adjustments) are: 1. Sell-Through Analysis 2. ABC Analysis of Assortments 3. Multiattribute Analysis of Vendors

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Step 7 - Sell Through Analysis Evaluating Merchandise Plan

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-A Sell-Through Analysis -actual sales versus planned sales -need to order more merchandise or reduce the price reductions -Markdown Money

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Step 7 - Evaluation of Assortment Plan: ABC Analysis

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ABC Analysis -assess inventory performance of individual SKUs -Ranks merchandise by some performance measure determine which SKUs: -should never be out of stock -should be allowed to be out of stock occasionally -should be deleted from the stock selection -A items: 5% of SKUs, represent 70% of sales -B items: 10% of SKUs, represent 20% of sales -C items: 65% of SKUs, represent 10% of sales -D items: 20% of SKUs, represent 10% of sales

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Step 7 - Evaluation of Vendors : Multiattribute Analysis

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Multiattribute Analysis Method -evaluate vendors -weighted average score -importance to retailer of various matters -vendor's performance on those matters See List of Five Steps

M312 Chapter 12: Managing the Merchandise Planning Process – Flashcards

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