1. Key Issues
 Stores as products
 Merchandise planning decisions
 Developing a successful merchandise plan
 What makes shoppers tick
 Assortment, depth issues
 Mechanics of merchandise management
 Inventory-level planning
Merchandise Management 11.1

2. Are Stores “Products”?
 Stores as products
 new product development
 product positioning
 target marketing
 product life cycle
 Note the kinds of products
that characterize ...
 Upscale department stores
 Discounters
Merchandise Management 11.2

3. Two Aspects to
Merchandise Mgmt
 Merchandise Selection
Decisions
 Merchandise Planning
Decisions
Merchandise Management 11.3

4. Objectives of
Merchandise Planning
 To meet corporate objectives
 To define management’s responsibilities
 To establish timing guidelines for merchandise
 To forecast budgetary needs for merchandise
Objective of good merchandise planning: improved
customer service, leading to more loyalty and repeat
business, which eventually leads to more new business
and greater profits. The retailer wants to …
- get the right product
- to the right stores
- at the right time
- to satisfy customers
Merchandise Management 11.4

5. Merchandising Organization
 Assistant Buyer
 Associate Buyer
 Buyer
 Divisional Merchandising Manager
(DMM)
 General Merchandising Manager
(GMM)
Merchandise Management 11.5

6. Merchandising Organization
Chairman Planning
Merchandise Group Group
Sr. vice pres Sr. vice pres Sr. vice pres Sr. vice pres
merch mgr merch mgr merch mgr merch mgr V.P.
Women’s ready- Men’s, child’s, Cosmet, shoes, Planning
to-wear intimate apparel jewelry, access. Soft home
furn., kitchen
Department
Div. merch Div. merch Div. merch Div. merch Div. merch
manager manager manager manager manager Div Dir.
Men’s suits, Planning
slacks, dress Men’s sports- Young men’s, Children’s Intimate
shirts wear, Polo boys’ apparel apparel apparel
Classification
Buyer Buyer Buyer Buyer Buyer Buyer Mgr.
Preteen Girls’ Girls’ Toddlers’ Infants’ Little boys’ Planning
accessories Size 7-14 Size 4-6
Category
Sportswear Dresses Swimwear Outerwear
SKU
Girls Levi jeans, sz 5,
stone washed blue,
straight leg
Merchandise Management 11.6

7. Developing a Successful Mdse Plan
What Makes Retail Shoppers Tick
Innovativeness
Forecasts Assortments
Merchandise
Plan
Allocation Brands
Timing
Merchandise Management 11.7

8. What Makes Shoppers Tick
Forecasts Innovativeness Fashion Trends
Staple Merchandise Fashion Trends Vertical
Assortment Merchandise Retailer’s Image A “designer” trend
which will change as it
Product Lines etc. Competition filters down to other
Model Stock Plan Customer Segments mkts
Fashion Merchandise Investment Costs Horizontal
Seasonal Merchandise Profitability A trend accepted by a
wide no. of people on
Fad Merchandise Risk its introduction
Assortment Assortment Types Brands
Product Quality Width Manufacturer (National)
Width Wide Narrow Private Label (Dealer)
Depth
Shallow Deep
Considerations:
Depth
Sales & Profit
Space Requirements
Inventory Turnover
Cannibalization
Merchandise Management 11.8

9. Assortment Width & Depth
Wide Width Narrow
Broad Market Special Image
High Level of Customer Traffic Good Selection in Category(ies)
Customer Loyalty Specialized Personnel
One-Stop Shopping Customer Loyalty
No Disappointed Customers No Disappointed Customers
Deep
BUT Lower Cost than Wide and Deep
BUT
Depth
Broad Market Aimed at Convenience Customers
High Customer Traffic Least Costly
Emphasis on Conven. Shoppers High Turnover of Items
Shallow
Less Costly Than Wide and Deep BUT
One-Stop Shopping
BUT
Merchandise Management 11.9

10. Software Available
for All of These
 General Merchandising
 Forecasting
 Innovativeness
 Assortment
 Allocation
 Category Management
Merchandise Management 11.10

11. Implementing Mdse Plans
Establish a Formal or Informal Buying Organization
Make M’dise Plans: What to Stock, How Much, When, Where in Store
1. Gathering 2. Selecting & 4. Negotiation
Information Interacting with 3. Evaluation of of Price
about customer Vendors Mdse & Vendor & Terms
demand
8. Reevaluation 6. Receiving &
of Mdse & 7. Reordering Stocking 5. Concluding
Vendor Merchandise Purchases
Merchandise Management 11.11

12. Basic Mdse Mgmt Issues
Knowing how Knowing what to
much buy Knowing how to
to buy in dollars in units and make the buy
dollars
The merchandise The assortment Retailing/Vendor
budget in dollars plan relationships
Open to buy Unit control systems Discounts and
terms of sale
Merchandise Management 11.12

13. Mechanics of Merchandise
Management:
“Dollars” View
Width. Which products, & the number of
2 Variety merchandise categories in a store or department.
This is the Buyer’s decision.
Stock Balance
Depth or support. The number
3 Assortment Planning of SKUs within a category, & the
inventory depth. Most often the
4 invt’y control analyst’s decision
5
6
Turnover $ Planning
7
8 9 10 11
Sales Stock Reduction Purchase
Plan Plan Plan Plan
12
13
Initial Markup
Plan Retail
14 $ Control
Cost 15
• Dollars OTB
• Units
Merchandise Management 11.13

14. Mechanics of Merchandise
Management:
“Units” View
Width. Which products, & the number of
2 Variety merchandise categories in a store or department.
This is the Buyer’s decision.
Stock Balance
Depth or support. The number
3 Assortment Planning of SKUs within a category, & the
inventory depth. Most often the
4 invt’y control analyst’s decision
5
6
Turnover $ Planning
7
8 9 10 11
Sales Stock Reduction Purchase
Plan Plan Plan Plan
12
13
Initial Markup
Plan Retail
14 $ Control
Cost 15
• Dollars OTB
• Units
Merchandise Management 11.14

15. Typical Sales Variations of Levi’s
Fall sales --- typically 40 percent of annual sales
Spring/Summer --- typically 15 percent of annual sales
Winter sales --- typically 30 percent of annual sales.
Merchandise Management 11.15

16. Distributing Seasonal Sales Plans
% of Business Season’s Planned
Month in 6 mos. Sales Forecast Sales
February 10% $52,000 $5,200
March 10% 5,200
April 25% 13,000
May 15% 7,800
June 30% 15,600
July 10% 5,200
TOTAL 100% $52,000 $52,000
Merchandise Management 11.16

17. Reduction Planning
Planned Planned Amount of
Month Sales Reduction* Reduction
February $5,200 30% $1,248
March 5,200 -- --
April 13,000 -- --
May 7,800 -- --
June 15,600 30% 1,248
July 5,200 40% 1,664
TOTAL $52,000 100% $4,160
* Percent of season total
Merchandise Management 11.17

18. Recall the Strategic Profit Model
Rate of Return on Assets
Return on Net Profit Asset Leverage
= x Turnover x
Investment Margin Ratio
Net Profit Net Profit Net Sales Total Assets
Net Worth Net Sales Total Assets Net Worth
The Financial The Financial Program
Objective (The SPM)
Merchandise Management 11.18

19. ROA vs GMROI
 The ROA measure is
used by corporate
Rate of Return on Assets management
Net Profit Asset  It can control G,S,&A &
Margin x Turnover therefore net profit
 It can control total
Net Profit Dollars Net Sales . investment & therefore
Net Sales Avg. Total Assets total assets
Gross Margin Return
on Inventory Investment
Gross Profit Inventory
Margin x Turnover
Gross Profit Dollars Net Sales .
Net Sales Avg. Inventory
Merchandise Management 11.19

20. So … GMROI:
GMROI = Gross Margin $ (@ Retail or Cost)
Average Invty $ (@ Retail or Cost)
Gross Margin Return
on Inventory Investment
Gross Profit Inventory Gross Margin
Margin x Turnover =
Avg Inventory
GMROI = Gross Margin Dollars x
Net Sales .
= Gross Margin
Net Sales Avg. Inventory Avg Inventory
Merchandise Management 11.20

21. GMROI Examples
Milk Caviar
Gross Margin $ 2,000 $150,000
Sales 150,000 300,000
Average Inventory 1,000 75,000
Gross Profit Inventory Gross Margin
Margin Turnover Avg Inventory
GMROI = Gross Marg $ X Net Sales Gross Margin .
=
Net Sales Average inventory Average Inventory
Milk GMROI = $2,000 X $150,000 $ 2,000
=
$150,000 1,000 1,000
= 1.33% X 150 = 200%
Caviar GMROI = $150,000 X $300,000 $300,000
=
$300,000 75,000 150,000
Merchandise Management 11.21
= 50% X 4 = 200%

22. Discounts & Terms of Sale
Terms of Sale: Conditions under which retailers must make payment
to vendors.
Trade discounts: A price reduction granted to retailers or wholesalers
for performing services.
Quantity discounts: Discounts from the invoice offered to retailers
who purchase a specific quantity.
Cumulative quantity discount: The values of all orders in a period are
added together for the calculation of quantity discounts.
Invoice: A bill sent by suppliers calling for payment.
Seasonal discounts: Discounts retailers earn by ordering or taking
delivery of merchandise before the normal selling period is done.
Terms of Payment: Conditions under which retailers must make
payment to vendors.
Cash discounts: Deductions in price given by suppliers for prompt
payment of invoice.
Merchandise Management 11.22

23. Payment Requirements
Shipping terms
F.O.B. (Free on board): Merchandise is placed on board a truck, railroad car or airplane
with title to goods passing from seller to buyer at the F.O.B. point.
F.A.S. (Free alongside ship): At a named port the seller quotes a price for the goods
including charges for delivery and loading alongside a vessel.
C.I.F. (Cost, insurance, and freight): The seller quotes the price including
transportation, insurance, and miscellaneous expenses.
C.O.D. (Cash on delivery): The seller requires that the buyer pay for the goods at time
of delivery.
Advanced dating Vendors offer retailers more time in which to pay
their bill in order to entice them to purchase their goods.
Extra dating: One type of advanced dating which lengthens the time that retailers have
to take advantage of cash discounts.
EOM (End of month) dating: Under EOM dating, the ordinary period does not begin
until the end of the month of the date shown on the invoice.
ROG (Receipt of goods)dating: Under ROG dating, the terms of the discount do not
begin until the date that goods are received in the store.
Anticipation discount: Discounts given by some vendors as an inventive for early
payment in the form of a percentage rate per year.
Merchandise Management 11.23

24. Inventory Level Planning Methods
 Basic stock method:
 The retailer buys an amount equal to planned sales plus a “basic stock”
 E.g., BOM invty = planned sales + basic stock
 Percentage variation method:
 Recommended when stock turnover is > 6 times per yr.
 Actual stock on hand in any month is allowed to vary by only half of the
month’s variation from avg. estimated monthly sales
 E.g., if we expect a month to have a sales increase of 14% over the avg.
month, invty for that month is increased by only 7%
 E.g., if avg invty = $100k, sales = $70K/mo. & planned sales = $80K,
then BOM invty = $100K x ½(1 + $80K/$70K) = $107K
 Weeks’ supply method:
 Assumes stock is carried in proportion to sales -- stock on hand equals
several weeks’ sales
 E.g., BOM invty = avg weekly sales x # weeks
 Stock-to-sales ratio method:
 Assumes the retailer wants to keep a specified ratio of mdse to sales.
 E.g., a ratio of 3 means that an expected $10K month must be
supported by $30K invty
Merchandise Management 11.24