3. Learning Objectives for Chapter 9 (Dunne):
• Explain the differences between the four
methods of dollar merchandise planning used
to determine the proper stock levels needed to
begin a merchandise selling period.
• Explain how retailers use dollar merchandise
control and describe how open-to-buy is used
in the retail buying process.
7-3
4. Learning Objectives for Chapter 9 (Dunne):
• Describe how a retailer determines the makeup of its
inventory.
• Describe how a retailer selects proper merchandise
sources.
• Describe what is involved in the vendor-buyer
negotiation process and what terms of the contract
can be negotiated.
• Discuss the various methods of handling the
merchandise once it is received in the store in order to
control shrinkage, including vendor collision and theft.
7-4
5. Retailing Truism
If a retailer doesn’t have the
merchandise, there is nothing to
promote and sell.
7-5
6. Chapters 8 and 9 (compared):
The previous lecture was on merchandise budget
This chapter covers the buying process and how to
ensure there is a right mix
Some exam questions may use the terms
“merchandise makeup” – sometimes known as mix
Don’t confuse the word makeup with “mark-up”
Read the questions carefully!
7-6
7. Dollar Merchandise Planning
•Merchandise Management is the
analysis, planning, acquisition, handling,
and control of the merchandise
investments of a retail operation.
•Process by which a retailer offers the
right quantity of the right merchandise in
the right place at the right time and
meets the company’s financial goals.
(Levy)
7-7
8. Dollar Merchandise Planning
• Gross Margin Return on Inventory (GMROI) is gross
margin divided by average inventory at cost;
alternatively it is the gross margin percent multiplied
by (net sales divided by average inventory
investment). GMROI can be comupted as follows:
• (Gross margin/Net sales) X (Net sales/Average
inventory at cost) = (Gross margin/Average inventory
at cost)
A very important ratio to note- read the text
carefully on this and the implications of a
changing GMROI (note ‘I’ is NOT investment
but inventory)
7-8
9. GMROI
Inventory Productivity Measures
GMROI = Gross Margin Percent x sales to stock ratio
= gross margin x net sales
net sales avg inventory at cost
= gross margin
avg inventory at cost
7-9
10. ROI and GMROI
Asset Productivity Measures
Strategic Corporate Level
• Return on Assets = Net Profit
Total Assets
Merchandise Management Level
• GROI = Gross Margin
Average Inventory
7-10
13. Calculating Inventory Turnover
– Inventory turnover = Net Sales
Average inventory at retail
– Inventory turnover = Cost of goods sold
Average inventory at cost
– Average inventory = Month1 + Month2 + Month 3 +…
Number of months
7-13
14. Inventory Turnover
Month Retail Value of Inventory
• EOM January $22,000
• EOM February 33,000
• EOM March 38,000
• Total Inventory $93,000
• Average inventory = $93,000 ÷ 3 = $31,000
7-14
15. Inventory Turnover and
Stock-to-Sale Ratio
Inventory turnover = Net Sales
Average inventory at retail
Inventory turnover = Cost of goods sold
Average inventory at cost
Sock-to-Sales Ratio = Net Sales
Average cost of
inventory
7-15
16. Advantages of Rapid Turnover
• Increased sales volume
• Less risk of obsolescence and
markdowns
• Improved salesperson morale
• More resources to take advantage of new
buying opportunities
7-16
17. Approaches for Improving Inventory Turnover
• Reduce number of categories
• Reduce number of SKUs within a category
• Reduce number of items in a SKU
BUT if a customer can’t find their size or
color or brand, patronage and sales
decrease!
another approach…
7-17
18. …another approach
To improve inventory turnover
• Buy merchandise more often
• Buy in smaller quantities which should reduce average
inventory without reducing sales
BUT by buying smaller quantities
• Buyers can’t take advantage of quantity discounts so
• Gross margin decreases
• Operating expenses increase
• Buyers need to spend more time placing orders and
monitoring deliveries
7-18
19. Dollar Merchandise Planning
Basic Percentage
Stock Variation
Method Method
Weeks’ Stock-to-
Supply Sale
Method Method
7-19
20. Dollar Merchandise Planning
• Basic Stock Method (BSM) is a technique for
planning dollar inventory investments and
allows for a base stock level plus a variable
amount of inventory that will increase or
decrease at the beginning of each sales period
in the same dollar amount as the period’s
expected sales.
7-20
21. Dollar Merchandise Planning
The BSM can be calculated as follows:
• Average monthly sales for the season = Total planned
sales for the season/Number of months in the season
• Average stock for the season = Total planned sales for
the season/Estimated inventory turnover rate for the
season
• Basic stock = Average stock for the season – Average
monthly sales for the season
• Beginning-of-Month (BOM) = Basic stock + Planned
monthly sales
7-21
22. Dollar Merchandise Planning
Percentage variation method (PVM):
Is a technique for planning dollar inventory
investments that assumes that the percentage
fluctuations in monthly stock from average
stock should be half as great as the
percentage fluctuations in monthly sales from
average sales.
7-22
23. Dollar Merchandise Planning
The (PVM) can be calculated as follows:
BOM stock =
Average stock for season X ½[1 + (Planned
sales for the month/Average monthly sales)]
7-23
24. Dollar Merchandise Planning
Weeks’ supply method (WSM):
Is a technique for planning dollar inventory
investments that states that the inventory level
should be set equal to a predetermined
number of weeks’ supply, which is directly
related to the desired rate of stock turnover.
7-24
25. Dollar Merchandise Planning
The WSM can be calculated as follows:
• Number of weeks to be stocked = Number of weeks in
the period/Stock turnover rate for the period
• Average weekly sales = Estimated total sales for the
period/Number of weeks in the period
• BOM stock = Average weekly sales X Number of weeks
to be stocked
7-25
26. Dollar Merchandise Planning
Stock-to-sales method (SSM):
Is a technique for planning dollar inventory
investments where the amount of inventory
planned for the beginning of the month is a
ratio (obtained from trade associations or the
retailer’s historical records) of stock-to-sales.
7-26
27. Dollar Merchandise Planning
The SSM can be computed as follows:
Average BOM stock-to-sales ratio for the
season = Number of months in the
season/Desired inventory turnover rate
7-27
29. Solutions to end of chapter
questions
Chapter Nine:
Merchandise Buying and Handling
7- 29
30. 2. The Corner Hardware Store is attempting to develop a merchandise budget for the
next 12 months. To assist in this process, the following data have been developed. The
target inventory turnover is 4.8 and forecast sales are:
Month Forecast Sales
1 $27,000
2 26,000
3 20,000
4 34,000
5 41,000
Total sales= $
6 40,000
7 28,000
8 27,000
9 38,000
10 39,000
11 26,000
12 28,000
Develop a monthly merchandise budget using the basic stock method (BSM) and the
percentage variation method (PVM).
7- 30
32. Using the percentage variation method we should plan the following inventory levels:
Month Inventory Planned
1 1/2 (374,000/4.8)(1+27,000/(374,000/12))
.5(77,916.67)(1+.87) = $72,708
2 .5(77,916.67)(1+.83) = $71,458
3 .5(77,916.67)(1+.64) = $63,958
4 .5(77,916.67)(1+1.09) = $81,458
5 .5(77,916.67)(1+1.32) = $90,208
6 .5(77,916.67)(1+1.28) = $88,958
7 .5(77,916.67)(1+.90) = $73,958
8 .5(77,916.67)(1+.87) = $72,708
9 .5(77,916.67)(1+1.22) = $86,458
10 .5(77,916.67)(1+1.25) = $87,708
11 .5(77,916.67)(1+.83) = $71,458
12 .5(77,916.67)(1+.90) = $73,958
7- 32
33. Planning Your Own Retail Business:
Alexia White is in the process of developing the merchandise budget for the gift shop she
is opening next year. She has decided to use the basic stock method of merchandise
budgeting. Planned sales for the first half of next year are $200,000, and this is divided as
follows: February = 9 percent, March = 10 percent, April = 15 percent, May = 21 percent,
June = 22 percent, and July = 23 percent. Planned total retail reductions are 9 percent for
February and March, 4 percent for April and May, and 12 percent for June and July. The
planned initial markup percentage is 48 percent. Alexia desires the rate of inventory
turnover for the season to be two times. Also, she wants to begin the second half of the
year with $90,000 in inventory at retail prices.
Develop a six-month merchandise budget for Alexia.
7- 33
34. Suggested Answer: After determining planned sales for each month, the BOM inventory
level for each month using the basic stock method is computed as follows:
Average monthly sales = Total planned sales/Number
for the season of months
= $200,000/6 = $33,333
Average stock for the = Total planned sales/Inventory
season turnover
= $200,000/2 = $100,000
Basic stock = Average stock - Average monthly sale
= $100,000 - $33,333 = $66,667
7- 34
34
36. SIX-MONTH PROBLEM
Six-Month Date: December 14
Merchandise Season: Summer
Budget
Spring/Summer Feb March April May June July Seasonal
Total
1.Planned 84,667 86,667 96,667 108,667 110,667 112,667 ______
BOM Stock
2.Planned 18,000 20,000 30,000 42,000 44,000 46,000 200,000
Sales
3.Planned 1,620 1,800 1,200 1,680 5,280 5,520 17,100
Retail
Reductions
4.Planned 86,667 96,667 108,667 110,667 112,667 90,000 ______
EOM Stock
18,000= 200000 x 9%
1620 = 18000 x 9%
(cont’d)
7- 36
37. 5.Planned 21,620 31,800 43,200 45,680 51,280 28,853 222,433
Purchases
@ Retail
6.Planned 11,242 16,536 22,264 23,754 26,666 15,004 115,666
Purchases
@ Cost
7.Planned 10,378 15,264 20,736 21,926 24,614 13,849 106767
Initial
Markup
8.Planned 8,758 13,464 19,536 20,246 19,334 8,329 89,667
Gross
Margin
Refer back to Lecture Six to find out how to get these figures
7- 37
38. (Planned Sales for the Month ) + (Planned
Retail Reductions for the Month) + (Planned
EOM Stock for the Month) - (Planned BOM
Stock for the Month)
= (Planned Purchases at Retail for the
Month)
(Planned Purchases at Retail for the Month )
-
X (100% Planned Initial Markup Percentage)
= (Planned Purchases at Cost for the Month)
(Planned Purchases at Retail for the Month ) X
(Planned Initial Markup Percentage) =
(Planned Initial Markup for the Month)
OR
(Planned Purchases at Retail for the Month) -
(Planned Purchases at Cost for the Month) =
(Planned Initial Markup for the Month)
(Planned Initial Markup for the Month) -
(Planned retail Reductions for the Month) =
(Planned Gross Margin for the Month)
7- 38
39. Dollar Merchandise Control
Open-to-buy (OTB) refers to the dollar amount that a
buyer can currently spend on merchandise without
exceeding the planned dollar stock. Computations for
OTB are as follows:
• Planned sales for month + Planned reductions for
month + End-of-Month (EOM) planned retail stock –
Beginning-of-Month (BOM) stock = Planned purchases
at retail
• Planned purchases at retail – Commitments at retail
for current delivery = Open-to-Buy (OTB)
7-39
40. Dollar Merchandise Control:
Common Buying Errors
• Buying merchandise that is either priced too high or too low for
the store’s target market.
• Buying the wrong type of merchandise (i.e., too many tops and no
skirts) or buying merchandise that is too trendy.
• Having too much or too little basic stock on hand.
• Buying from too many vendors.
• Failing to identify the season’s hot items early enough in the
season.
• Failing to let the vendor assist the buyer by adding new items
and/or new colors to the mix. (All too often, the original order is
merely repeated, resulting in a limited selection.)
7-40
41. Merchandise Planning
Merchandise planning is a dynamic process subject to
many changes. Consider the implications that could
arise in planning your stock levels as a result of:
sales for the previous month being lower or higher
than planned
reductions being either higher or lower than planned
shipments of merchandise being delayed in transit.
Understanding the consequences of each of these
situations points out the interrelationship of
merchandising activities with the merchandise budget.
7-41
42. Dimensions of and Constraints on Optimal
Merchandising Mix
Exhibit 9.1
7-42
44. Optimal Merchandise Mix
• Merchandise Line is a group of products that
are closely related because they are intended
for the same end use (all televisions); are sold
to the same customer group (junior miss
clothing); or fall within a given price range
(budget women’s wear).
• Category Management refers to the
management of merchandise categories, or
lines, rather than individual products, as
strategic business unit.
7-44
45. Optimal Merchandise Mix- 3 Dimensions
• Variety refers to the number of different merchandise
lines that the retail stocks in the store.
• Breadth (or assortment) is the number of merchandise
brands that are found in a merchandise line.
• Battle of the Brands occurs when retailers have
their own products competing with the
manufacturer’s products for shelf space and control
over display location.
• Depth is the average number of stock-keeping units
within each brand of the merchandise line.
7-45
46. Battle of the Brands
Private branding in retailing
is creating a situation in
which many “third-tier”
brands are beginning to be
squeezed out of the market,
thus leaving only the leading
national brand and the
retailer’s private label brand.
Here Albertson’s (the name
of the supermarket) has
strategically located its
private brand to the right of
the national brand (Kelloggs)
7-46
48. Constraining Factors
Dollar merchandise constraint: There seldom will be enough
dollars to emphasize all three dimensions of variety, breadth, and
depth.
Space constraint: If depth or breadth is wanted, space is needed.
If variety is to be stressed, enough empty space is needed to
separate the distinct merchandise lines.
Merchandise turnover constraint: As the depth of the
merchandise increases, more and more variations of the product
must be stocked to serve smaller segments.
Market constraints: The above three dimensions have a profound
effect on how the market perceives the store, and consequently
on the customers the store will attract.
7-48
49. Question to Ponder
How can retailers overcome these
constraints to provide greater value,
especially in comparison to their
competition, for the consumer?
7-49
50. Next stage- Inventory Planning
After deciding the relative emphasis to be placed on
the three dimensions of the merchandise mix, the
retailer needs to decide when to order and reorder the
desired merchandise line items.
1. Ideally, a retailer would receive the
reordered merchandise just as it is needed.
2. When selling a seasonal item, the
retailer would want to be completely sold out of the
item at the planned out-of-stock date.
3. The retailer tries to achieve the
optimization of its inventory dollars by closely
monitoring its inventory using UPC or barcode data.
7-50
51. The concept of tradeoff in inventory
planning
Lost Sale Due
to Stockout
Cost of Carrying
Inventory
7-51
52. Managing the Inventory
Model Stock Plan is a unit stock plan that
shows the precise items and quantities
that should be on hand for each
merchandise line.
•Identify attributes
•Identify levels
•Allocate Dollars or Units
7-52
54. Staple Merchandise Planning
Staple merchandise planning systems provide
information needed to assist buyers by performing
three functions:
•Monitoring and measuring current sales for items
at the SKU level
•Forecasting future SKU demand with allowances
made for seasonal variations and changes in
trend
•Developing ordering decision rules for optimum
restocking
7-54
55. Cycle and Backup Stock
150 -
Order 96
Cycle
Units Available
Stock
100 -
Buffer
Stock
50 -
0-
1 2 3 4
Weeks
7-55
57. Factors Determining Backup
Stock
• Level of backup depends on product availability
retailer wishes to provide
• The greater the fluctuation in demand, the more
backup stock is needed
• The amount of backup stock needed is also
affected by the lead time from the vendor
• Fluctuations in lead time affect the amount of
backup stock
• Vendor’s product availability affects retailers’
backup stock requirements
7-57
59. Conflicts in Stock Planning
• Maintain a strong in-stock position on genuinely new
items while trying to avoid the 90 percent of new
products that fail in the introductory stage.
• Maintain an adequate stock of the basic popular items
while having sufficient inventory dollars to capitalize
on unforeseen opportunities.
• Maintain high merchandise turnover while maintaining
high margin goals.
• Maintain adequate selection for customers while not
confusing them.
• Maintain space productivity and utilization while not
congesting the store.
7-59
60. Selection of Merchandising Sources
In selecting merchandising sources the following
criteria should be considered:
Selling history
Consumers’ perception of the manufacturer’s
reputation
Reliability of delivery
Trade terms
Projected markup
Quality of Merchandise
7-60
61. Selection of Merchandising Sources
Criteria (cont’d)
After sale service
Transportation time
Distribution center processing time
Inventory carrying cost
Country of Origin
Fashionability
Net-landed cost
7-61
62. Retailers using private label brands…
Retailers that use private label brands have found that
private branding
increases as the perceived consequences of making a
buying mistake decrease,
increases when the different brands in the category
are perceived to vary more in their quality, and
decreases if the category benefits are deemed to
require actual trial/experience instead of being
assessable through search of package label
information
7-62
63. Selection of Merchandising Sources
• Vendor Profitability Analysis Statement is a
tool used to evaluate vendors and shows all
purchases made the prior year, the discount
granted, the transportation charges paid, the
original markup, markdowns, and finally the
season-ending gross margin on that vendor’s
merchandise.
7-63
65. Selection of Merchandising Sources
Confidential vendor analysis:
Is identical to the vendor profitability analysis
but also provides a three-year financial
summary as well as the names, titles, and
negotiating points of all the vendor’s sales
staff.
7-65
67. Selection of Merchandising Sources
Based on the information gathered from the two
reports, retailers can then categorize vendors as
falling into the following categories:
• Class A Vendors are those from whom the retailer purchases
large and profitable amounts of merchandise.
• Class B Vendors are those that generate satisfactory sales and
profits for the retailer.
• Class C Vendors are those that carry outstanding merchandise
lines but do not currently sell to the retailer.
• Class D Vendors are those from whom the retailer purchases
small quantities of goods on an irregular basis.
• Class E Vendors are those with whom the retailer has had an
unfavorable experience.
7-67
68. Multi-attribute Method for Evaluating Vendors
The multiattribute method
for evaluating vendors uses
a weighted average score
for each vendor. The score
is based on the importance
of various issues and the
vendor’s performance on
those issues.
7-68
69. Multiattribute Method for Evaluating Vendors
Performance Evaluation of Individual
Brands Across Issues
Importance
Evaluation Brand A Brand B Brand C Brand D
Issues of Issues (I) (Pa) (Pb) (Pc) (Pd)
(1) (2) (3) (4) (5) (6)
Vendor reputation 9 5 9 4 8
Service 8 6 6 4 6
Meets delivery dates 6 5 7 4 4
Merchandise quality 5 5 4 6 5
Markup opportunity 5 5 4 4 5
Country of origin 6 5 3 3 8
Product fashionability 7 6 6 3 8
Selling history 3 5 5 5 5
Promotional assistance 4 5 3 4 7
n
I *P
Overall evaluation = 290 298 212 341
j ij
i 1
7-69
70. Evaluating a Vendor:
A Weighted Average Approach
n
i1
I j * P ij = Sum of the expression
= Importance weight assigned
Ij to the ith dimension
= Performance evaluation for
Pi jth brand alternative on the
jth issue
1 = Not important
10 = Very important
7-70
71. Evaluating Vendors
A buyer can evaluate vendors by using the following five steps:
• Develop a list of issues to consider in the evaluation (column 1)
• Importance weights for each issue in column 1 are determined
by the
buyer/planner in conjunction with the GMM (column 2)
• Make judgments about each individual brand’s performance on
each issue
(the remaining columns)
• Develop an overall score by multiplying the importance for
each issue the
performance for each brand or its vendor
7-71
72. Selection of Merchandising Sources:
Key Questions
• Where does this product fit into the strategic
position that I have staked out for my
department?
• Will I have an exclusive with this product or
will I be in competition with nearby retailers?
• What is the estimated demand for this product
in my target market?
• What is my anticipated gross margin for this
product?
7-72
73. Selection of Merchandising Sources:
Key Questions
• Will I be able to obtain reliable, speedy stock
replacement?
• Can this product stand on its own, or is it
merely a “me-too” item?
• What is my expected turnover rate with this
product?
• Does this product complement the rest of my
inventory?
7-73
74. Vendor Negotiations
• Negotiation
is the process of finding mutually satisfying
solutions when the retail buyer and vendor
have conflicting objectives.
• The retailer must negotiate price, delivery
dates, discounts, shipping terms, and return
privileges.
7-74
76. Trade Discount
• Trade Discount is also referred to as a functional
discount and is a form of compensation that the buyer
may receive for performing certain wholesaling or
retailing services for the manufacturer.
Often expresses in a chain, or series, such as “list less
40-20-10.” The computations would look like this:
List price $1,000
Less 40% - 400
600
Less 20% - 120
480
Less 10% - 48
Purchase price $432
7-76
77. Quantity Discount
• Quantity Discount is a price reduction offered
as an inducement to purchase large quantities
of merchandise.
• Non-Cumulative Quantity Discount is a
discount based on a single purchase.
• Cumulative Quantity Discount is a discount
based on the total amount purchased over a
period of time.
• Free Merchandise is a discount whereby
merchandise is offered in lieu of price
concessions.
7-77
78. Quantity Discount
• For an example of how a quantity discount works,
consider the following schedule:
Order Quantity Discount from List Price
1 to 999 0%
1,000 to 9,999 5%
10,000 to 24,999 8%
25,000 to 49,999 10%
7-78
80. Seasonal Discount
•Seasonal Discount is a discount
provided to retailers if they purchase and
take delivery of merchandise in the off
season.
7-80
81. Cash Discount
Cash Discount is a discount offered to the
retailer for the prompt payment of bills.
• End-of-Month (EOM) Dating allows the retailer
to take a cash discount and the full payment
period to begin on the first day of the following
month instead of on the invoice date.
• Middle-of-Month (MOM) Dating allows the
retailer to take a cash discount and the full
payment period to begin on the middle of the
month.
7-81
82. Cash Discount
• Receipt of Goods (ROG) Dating allows the
retailer to take a cash discount and the full
payment period to begin when the goods are
received by the retailer.
• Extra Dating (Ex) allows the retailer extra or
interest-free days before the period of payment
begins.
• Anticipation allows the retailer to pay the
invoice in advance of the end of the cash
discount period and earn an extra discount.
7-82
83. Delivery Terms
• Free on Board (FOB) Factory is a method of charging
for transportation where the buyer assumes title to the
goods at the factory and pays al transportation costs
from the vendor’s factory.
• Free on Board (FOB) Shipping Point is a method of
charging for transportation in which the vendor pays
for transportation to a local shipping point where the
buyer assumes title and then pays all further
transportation costs.
• Free on Board (FOB) Destination is a method of
charging for transportation in which the vendor pays
for all transportation costs and the buyer takes title on
delivery.
7-83
84. In-Store Merchandise Handling
• Shrinkage is the loss of merchandise due to theft, loss,
damage, or bookkeeping errors.
• Vendor collusion occurs when an employee of one of
the retailer’s vendors steals merchandise as it is
delivered to the retailer.
• Employee theft occurs when employees of the retailer
steal merchandise where they work.
• Customer theft is also know as shoplifting and occurs
when customers or individuals disguised as
customers steal merchandise from the retailer’s store.
Hijacking theft of merchandise while in transit.
7-84
85. 5 of the 50 Tricks for Bartenders
Exhibit 9.6 - Sample
7-85
86. Past Year Examination Questions
Note: in October 2008, the entire set of compulsory
questions tested in Section B was on the topic of
Merchandise Buying- Chapter 9. However in order to
answer these questions, you also needed to fully
understand the techniques of Merchandise Budget
found in Chapter 8. This demonstrates why it is
important to have wide coverage of reading and
practice as exam questions can cover two or more
chapters on a combined question.
7-86
