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5th Edition
PPT 13-1
Chapter 13
Buying Systems
McGraw-Hill/Irwin PPT 13-2 Levy/Weitz: Retailing Management, 5/e
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Merchandise Management
Planning Merchandise Assortments
Retail Communication Mix
Buying Systems Buying Merchandise
PPT 13-3
Pricing
Merchandise Management Issues
PPT 13-4
Types of Buying Systems Staple Merchandise
Fashion Merchandise
Predictable Demand
Unpredictable Demand
History of Past Sales
Limited Sales History
Relatively Accurate Forecasts
Difficult to Forecast Sales
PPT 13-5
Staple Merchandise Buying System
Forecas t SKU Sales
PPT 13-6
Order Merchand ise
Monitor Sales and Inventor y
Compare Inventor y to Basic Stock List
Considerations in Determining How Much to Order • Basic Stock Plan • Present Inventory • Merchandise on Order • Sales Forecast – Rate of Sales of SKU (Velocity) – Seasonality PPT 13-7
Inventory Management Report for Rubbermaid Merchandise
PPT 13-8
Basic Stock List Indicates the Desired Inventory Level for Each SKU – Amount of Stock Desired
Lost Sale Due to Stockout Cost of Carrying Inventory PPT 13-9
Inventory investment Dollars
Relationship between Inventory Investment and Product Availability
600 500 400 300 200 100 0
80 85 90 95 Product Availability (Percent) PPT 13-10
100
Cycle and Buffer Stock
Units Available
150 -
Order 96 Cycle Stock
100 Buffer Stock
50 -
0-
1
2
3 Weeks
PPT 13-11
4
Buffer Stock We need it so we won’t loose sales, complementary sales, and customers Buffer stock is dependent on: -Forecast interval variance (Forecast interval = lead time + review time) -Variation in Demand (actual demand - forecasted demand) -Time to Get Product from Supplier -Time to Get Product from Distribution Center - Product availability requested of IM systems
PPT 13-12
Forecasting Demand Forecasting -- extrapolating the past into future using statistical and mathematical methods Objectives: – Ignore random fluctuations in demand – But be responsive to real change
PPT 13-13
Forecasting Sales •
Tradeoff Recent Sales Against Past History of Sales –
•
•
Exponential Smoothing Old Forecast
=
84
=
Old Forecast 96
+
ά x (Recent – Old) Demand Forecast
+
.5 x (72
ά ranges for 0 to 1 –
PPT 13-14
Recognize Recent Trends, But Don’t Over Weight Recent Experience
Higher ά Weighs Recent Sales More
– 96)
Order Point • Order point = the point at which inventory available should not go below or else we will run out of stock before the next order arrives. • Assume Lead time = 0, Order point = 0 • Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week • Order point = demand (lead time + review time) + buffer stock • Order point = 100 (3+1) = 400 PPT 13-15
Order Point continued • Assume Buffer stock = 50 units, then • Order point = 100 (3+1) + 50 = 450 • We will order something when order point gets below 450 units.
PPT 13-16
Calculating the Order Point
Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock 167 units = (7 units x (14 + 7 days) + 20 units So Buyer Places Order When Inventory in Stock Drops Below 167 units PPT 13-17
Merchandise Budget Plan • Plan for the 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--doesn’t indicate what specific SKUs to buy or in what quantities.
PPT 13-18
Six-Month Merchandise Budget Plan for Men’s Tailored Suits
PPT 13-19
Steps in Preparing Plan • Forecast Six Month Sales for Category • Breakdown Total Sales Forecast into Forecast for each Month (lines 1, 2) • Plan Reductions for Each Month (lines 3, 4) • Determine Beginning of the Month (BOM) Stock to Sales Ratio (line 5) • Calculate BOM Inventory (line 6) • Calculate EOM Inventory (line 7) • Calculate Monthly Additions to Stock (line 8) PPT 13-20
Open to Buy • Monitors Merchandise Flow • Determines How Much Was Spent and How Much is Left to Spend
PPT 13-21
Six Month Open to Buy
PPT 13-22
Open-to-buy for Past Periods
• Projected EOM stock = actual EOM stock • Open-to-buy = 0 • There is no point in buying merchandise for a month that is already over.
PPT 13-23
Open-to-Buy for Current Period (I) • Projected EOM stock = • Actual BOM stock • + Actual monthly additions to stock (what was actually received) • + Actual on order (what is on order for the month) • - Plan monthly sales • - Plan reductions for the month PPT 13-24
Open-to-Buy for Current Period (II) • Open-to-buy = • Planned EOM stock (from merchandise budget plan) – Projected EOM stock (based on what is really happening)
PPT 13-25
Allocating Merchandise to Stores
Fewer Sales, More Inventory
More Sales, Less Inventory
Percentage of total sales
1
1.5
2.5
3.5
4
6
8
12
Percentage of total inventory
1.5
2
3
4
4
4
6
10
PPT 13-26
Breakdown by Store of Traditional $35 Denim Jeans in Light Blue (1)
(2)
(3)
TYPE OF STORE
NUMBER OF STORES
% OF TOTAL SALES, EACH STORE
A
4
10.0%
B
3
C
8
(4)
(5)
(6)
SALES PER SALES PER UNIT SALES STORE (TOTAL STORE TYPE PER STORE SALES X COL. 3) (COL. 2 X COL. 4) (COL. 4/$35)
$15,000
60,000
429
6.7
10,000
30,000
286
5.0
7,500
60,000
214
Total sales $150,000 Source: Banner Distributing Company, Denver, Colorado; used with permission.
PPT 13-27
ABC Analysis Rank - orders merchandise by some performance measure determine which items: – should never be out of stock. – should be allowed to be out of stock occasionally. – should be deleted from the stock selection.
PPT 13-28
Analyzing Merchandise Management Merchandise Performance – ABC Analysis – Sell Through Analysis Vendor Analysis – Multiattribute Method
PPT 13-29
ABC Analysis Rank Merchandise By Performance Measures • Contribution Margin • Sales Dollars • Sales in Units • Gross Margin • GMROI • Use more than one criteria PPT 13-30
ABC Analysis for Dress Shirts C
Percentage of Sales Dollars
10% B 20%
100
Sales
90 80 70 60
A
50
70%
40 30 20
No Sales
10 0 A 5%
10
B 10%
20
30
40
50
C 65%
60
70
Percentage of Items PPT 13-31
80
90
D 20%
100
Sell-through Analysis for Blouses Stock Number 1011 -Sm
Description
Week 1 Week 2 Actual-to-Plan Actual-to-Plan Plan Actual Percent. Plan Actual Percent.
White silk V-neck 20
15
-25
20
10
-50
1011 -Med White Silk V-neck 30
25
-16.6
30
20
-33
1011 -Lg
White Silk V-neck 20
16
-20
20
16
-20
1012 -Sm
Blue Silk V-neck
25
26
4
25
27
8
1012 -Med Blue Silk V-neck
35
45
29
35
40
14
1012 -Lg
25
25
0
25
30
20
PPT 13-32
Blue Silk V-neck
Evaluating a Vendor: A Weighted Average Approach n
∑I
j
*Pij
= Sum of the expression
i =1
PPT 13-33
Ij
= Importance weight assigned to the ith dimension
Pi
= Performance evaluation for jth brand alternative on the jth issue
1
= Not important
10
= Very important
Evaluating a Vendor: A Weighted Average Approach Performance Evaluation of Individual Brands Across Issues
Issues
Importance Evaluation of Issues (I)
(1) Vendor reputation Service Meets delivery dates Merchandise quality Markup opportunity Country of origin Product fashionability Selling history Promotional assistance n Overall evaluation =
(2) 9 8 6 5 5 6 7 3 4
∑ I *P i =1
PPT 13-34
j
ij
Brand A Brand B Brand C Brand D (Pa) (Pb) (Pc) (Pd) (3) 5 6 5 5 5 5 6 5 5 290
(4) 9 6 7 4 4 3 6 5 3 298
(5) 4 4 4 6 4 3 3 5 4 212
(6) 8 6 4 5 5 8 8 5 7 341
Retail Inventory Method (RIM) Two Objectives: – To maintain a perpetual or book inventory of retail dollar amounts. – To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory.
PPT 13-35
Advantages of RIM • The retailer doesn't have to “cost” each time. • Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower.
PPT 13-36
Advantages of RIM cont’d • Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage can be compared with historical records or industry norms. • Useful for determining shrinkage. • Can be used in an insurance claim case of a loss.
PPT 13-37
Disadvantages of RIM
• System that uses average markup. • Record keeping process involved is burdensome.
PPT 13-38
Steps in RIM Calculate Total Merchandise Handled at Cost and Retail Calculate Retail Reductions Calculate Cumulative Markup and Cost Multiplier Determine Book Inventory at Cost and Retail
PPT 13-39
Retail Inventory Method Cumulative Markon = (total retail - total cost) / total retail: ($290,000 - $160,000) / $290,000 = 44.8%
The Cost Multiplier = cumulative markon (100% - cumulative markon%) = 55.2%
PPT 13-40
Ending book inventory at retail
= total goods handled at retail - total reductions: $290,000 - $208,000 = $82,000
Ending book inventory at cost
= ending book inventory at retail x cost multiplier: $82,000 x 55.2% = 45,264
Retail Inventory Method Example Total Goods Handled
Cost
Retail
Beginning inventory
$ 60,000
$ 84,000
Purchases
50,000
70,000
- Return to vendor
(11,000)
(15,400)
Net Purchases
39,000
54,600
Additional markups
4,000
- Markup cancellations
(2,000)
Net markups
2,000
Additional Transport. Transfers in - Transfers out Net Transfers Total Goods Handled PPT 13-41
1,000 1,428
2,000
(714)
(1,000) 714
(1,000)
$100,714
$141,600
Retail Inventory Method Example Total Goods Handled
Cost
Retail
Gross Sales
$ 82,000
- Consumer Returns & Allowances
( 4,000)
Net Sales Markdowns
6,000
- Markdown Cancellation
(3,000)
Net Markdown
3,000
Employee Discounts
3,000
Discounts to Customers Estimated Shrinkage Total Reductions PPT 13-42
$ 78,000
500 1,500 $ 86,000
PPT 13-1
Chapter 13
Buying Systems
McGraw-Hill/Irwin PPT 13-2 Levy/Weitz: Retailing Management, 5/e
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Merchandise Management
Planning Merchandise Assortments
Retail Communication Mix
Buying Systems Buying Merchandise
PPT 13-3
Pricing
Merchandise Management Issues
PPT 13-4
Types of Buying Systems Staple Merchandise
Fashion Merchandise
Predictable Demand
Unpredictable Demand
History of Past Sales
Limited Sales History
Relatively Accurate Forecasts
Difficult to Forecast Sales
PPT 13-5
Staple Merchandise Buying System
Forecas t SKU Sales
PPT 13-6
Order Merchand ise
Monitor Sales and Inventor y
Compare Inventor y to Basic Stock List
Considerations in Determining How Much to Order • Basic Stock Plan • Present Inventory • Merchandise on Order • Sales Forecast – Rate of Sales of SKU (Velocity) – Seasonality PPT 13-7
Inventory Management Report for Rubbermaid Merchandise
PPT 13-8
Basic Stock List Indicates the Desired Inventory Level for Each SKU – Amount of Stock Desired
Lost Sale Due to Stockout Cost of Carrying Inventory PPT 13-9
Inventory investment Dollars
Relationship between Inventory Investment and Product Availability
600 500 400 300 200 100 0
80 85 90 95 Product Availability (Percent) PPT 13-10
100
Cycle and Buffer Stock
Units Available
150 -
Order 96 Cycle Stock
100 Buffer Stock
50 -
0-
1
2
3 Weeks
PPT 13-11
4
Buffer Stock We need it so we won’t loose sales, complementary sales, and customers Buffer stock is dependent on: -Forecast interval variance (Forecast interval = lead time + review time) -Variation in Demand (actual demand - forecasted demand) -Time to Get Product from Supplier -Time to Get Product from Distribution Center - Product availability requested of IM systems
PPT 13-12
Forecasting Demand Forecasting -- extrapolating the past into future using statistical and mathematical methods Objectives: – Ignore random fluctuations in demand – But be responsive to real change
PPT 13-13
Forecasting Sales •
Tradeoff Recent Sales Against Past History of Sales –
•
•
Exponential Smoothing Old Forecast
=
84
=
Old Forecast 96
+
ά x (Recent – Old) Demand Forecast
+
.5 x (72
ά ranges for 0 to 1 –
PPT 13-14
Recognize Recent Trends, But Don’t Over Weight Recent Experience
Higher ά Weighs Recent Sales More
– 96)
Order Point • Order point = the point at which inventory available should not go below or else we will run out of stock before the next order arrives. • Assume Lead time = 0, Order point = 0 • Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week • Order point = demand (lead time + review time) + buffer stock • Order point = 100 (3+1) = 400 PPT 13-15
Order Point continued • Assume Buffer stock = 50 units, then • Order point = 100 (3+1) + 50 = 450 • We will order something when order point gets below 450 units.
PPT 13-16
Calculating the Order Point
Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock 167 units = (7 units x (14 + 7 days) + 20 units So Buyer Places Order When Inventory in Stock Drops Below 167 units PPT 13-17
Merchandise Budget Plan • Plan for the 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--doesn’t indicate what specific SKUs to buy or in what quantities.
PPT 13-18
Six-Month Merchandise Budget Plan for Men’s Tailored Suits
PPT 13-19
Steps in Preparing Plan • Forecast Six Month Sales for Category • Breakdown Total Sales Forecast into Forecast for each Month (lines 1, 2) • Plan Reductions for Each Month (lines 3, 4) • Determine Beginning of the Month (BOM) Stock to Sales Ratio (line 5) • Calculate BOM Inventory (line 6) • Calculate EOM Inventory (line 7) • Calculate Monthly Additions to Stock (line 8) PPT 13-20
Open to Buy • Monitors Merchandise Flow • Determines How Much Was Spent and How Much is Left to Spend
PPT 13-21
Six Month Open to Buy
PPT 13-22
Open-to-buy for Past Periods
• Projected EOM stock = actual EOM stock • Open-to-buy = 0 • There is no point in buying merchandise for a month that is already over.
PPT 13-23
Open-to-Buy for Current Period (I) • Projected EOM stock = • Actual BOM stock • + Actual monthly additions to stock (what was actually received) • + Actual on order (what is on order for the month) • - Plan monthly sales • - Plan reductions for the month PPT 13-24
Open-to-Buy for Current Period (II) • Open-to-buy = • Planned EOM stock (from merchandise budget plan) – Projected EOM stock (based on what is really happening)
PPT 13-25
Allocating Merchandise to Stores
Fewer Sales, More Inventory
More Sales, Less Inventory
Percentage of total sales
1
1.5
2.5
3.5
4
6
8
12
Percentage of total inventory
1.5
2
3
4
4
4
6
10
PPT 13-26
Breakdown by Store of Traditional $35 Denim Jeans in Light Blue (1)
(2)
(3)
TYPE OF STORE
NUMBER OF STORES
% OF TOTAL SALES, EACH STORE
A
4
10.0%
B
3
C
8
(4)
(5)
(6)
SALES PER SALES PER UNIT SALES STORE (TOTAL STORE TYPE PER STORE SALES X COL. 3) (COL. 2 X COL. 4) (COL. 4/$35)
$15,000
60,000
429
6.7
10,000
30,000
286
5.0
7,500
60,000
214
Total sales $150,000 Source: Banner Distributing Company, Denver, Colorado; used with permission.
PPT 13-27
ABC Analysis Rank - orders merchandise by some performance measure determine which items: – should never be out of stock. – should be allowed to be out of stock occasionally. – should be deleted from the stock selection.
PPT 13-28
Analyzing Merchandise Management Merchandise Performance – ABC Analysis – Sell Through Analysis Vendor Analysis – Multiattribute Method
PPT 13-29
ABC Analysis Rank Merchandise By Performance Measures • Contribution Margin • Sales Dollars • Sales in Units • Gross Margin • GMROI • Use more than one criteria PPT 13-30
ABC Analysis for Dress Shirts C
Percentage of Sales Dollars
10% B 20%
100
Sales
90 80 70 60
A
50
70%
40 30 20
No Sales
10 0 A 5%
10
B 10%
20
30
40
50
C 65%
60
70
Percentage of Items PPT 13-31
80
90
D 20%
100
Sell-through Analysis for Blouses Stock Number 1011 -Sm
Description
Week 1 Week 2 Actual-to-Plan Actual-to-Plan Plan Actual Percent. Plan Actual Percent.
White silk V-neck 20
15
-25
20
10
-50
1011 -Med White Silk V-neck 30
25
-16.6
30
20
-33
1011 -Lg
White Silk V-neck 20
16
-20
20
16
-20
1012 -Sm
Blue Silk V-neck
25
26
4
25
27
8
1012 -Med Blue Silk V-neck
35
45
29
35
40
14
1012 -Lg
25
25
0
25
30
20
PPT 13-32
Blue Silk V-neck
Evaluating a Vendor: A Weighted Average Approach n
∑I
j
*Pij
= Sum of the expression
i =1
PPT 13-33
Ij
= Importance weight assigned to the ith dimension
Pi
= Performance evaluation for jth brand alternative on the jth issue
1
= Not important
10
= Very important
Evaluating a Vendor: A Weighted Average Approach Performance Evaluation of Individual Brands Across Issues
Issues
Importance Evaluation of Issues (I)
(1) Vendor reputation Service Meets delivery dates Merchandise quality Markup opportunity Country of origin Product fashionability Selling history Promotional assistance n Overall evaluation =
(2) 9 8 6 5 5 6 7 3 4
∑ I *P i =1
PPT 13-34
j
ij
Brand A Brand B Brand C Brand D (Pa) (Pb) (Pc) (Pd) (3) 5 6 5 5 5 5 6 5 5 290
(4) 9 6 7 4 4 3 6 5 3 298
(5) 4 4 4 6 4 3 3 5 4 212
(6) 8 6 4 5 5 8 8 5 7 341
Retail Inventory Method (RIM) Two Objectives: – To maintain a perpetual or book inventory of retail dollar amounts. – To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory.
PPT 13-35
Advantages of RIM • The retailer doesn't have to “cost” each time. • Follows the accepted accounting practice of valuing assets at cost or market, whichever is lower.
PPT 13-36
Advantages of RIM cont’d • Amounts and percentages of initial markups, additional markups, markdowns, and shrinkage can be compared with historical records or industry norms. • Useful for determining shrinkage. • Can be used in an insurance claim case of a loss.
PPT 13-37
Disadvantages of RIM
• System that uses average markup. • Record keeping process involved is burdensome.
PPT 13-38
Steps in RIM Calculate Total Merchandise Handled at Cost and Retail Calculate Retail Reductions Calculate Cumulative Markup and Cost Multiplier Determine Book Inventory at Cost and Retail
PPT 13-39
Retail Inventory Method Cumulative Markon = (total retail - total cost) / total retail: ($290,000 - $160,000) / $290,000 = 44.8%
The Cost Multiplier = cumulative markon (100% - cumulative markon%) = 55.2%
PPT 13-40
Ending book inventory at retail
= total goods handled at retail - total reductions: $290,000 - $208,000 = $82,000
Ending book inventory at cost
= ending book inventory at retail x cost multiplier: $82,000 x 55.2% = 45,264
Retail Inventory Method Example Total Goods Handled
Cost
Retail
Beginning inventory
$ 60,000
$ 84,000
Purchases
50,000
70,000
- Return to vendor
(11,000)
(15,400)
Net Purchases
39,000
54,600
Additional markups
4,000
- Markup cancellations
(2,000)
Net markups
2,000
Additional Transport. Transfers in - Transfers out Net Transfers Total Goods Handled PPT 13-41
1,000 1,428
2,000
(714)
(1,000) 714
(1,000)
$100,714
$141,600
Retail Inventory Method Example Total Goods Handled
Cost
Retail
Gross Sales
$ 82,000
- Consumer Returns & Allowances
( 4,000)
Net Sales Markdowns
6,000
- Markdown Cancellation
(3,000)
Net Markdown
3,000
Employee Discounts
3,000
Discounts to Customers Estimated Shrinkage Total Reductions PPT 13-42
$ 78,000
500 1,500 $ 86,000
