Ch#12 Retail Assortment Planning [PDF]

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Chapter 12

Managing Merchandise Assortments

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Merchandise Management

Merchandise Planning System Chapter 13

Buying Merchandise Chapter 14

Managing Merchandise Assortments Chapter 12 Retail Pricing Chapter 15

Retail Communication Mix Chapter 16 12-3

Questions ■ How is the merchandise management process organized? ■ Why do the merchandise management processes differ for staple and fashion merchandise? ■ How do retailers evaluate the quality of their merchandise management decisions? ■ How do retailers forecast sales for merchandise classifications? ■ How do retailers plan their assortments and determine the appropriate inventory levels? ■ What trade-offs must buyers make in developing merchandise assortments? 12-4

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Merchandise Management Process by which a retailer offers the correct quantity of the right merchandise in the right place at the right time and meets the company’s financial goals. ■ Sense market trends ■ Analyze sales data ■ Make appropriate adjustments in prices and inventory levels

c) image100/PunchStock

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Merchandise Management and Investment Portfolio Management ■ 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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Buying Organization

Merchandise Group

Department

Classification

Category

SKU

Each merchandise group is managed by a general merchandise manager (GMM), senior VP Departments are managed by a divisional merchandise manager (DMM), A group of items targeting the same customer type, such as girls’ sizes 4-6 Each buyer manages several merchandise categories (e.g., sportswear, dresses, swimwear, outerwear categories for girls’ sizes 4-6 The smallest unit available for inventory control Size, color, style 12-7

Merchandise Classifications & Organization

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Merchandise Category – The Planning Unit A merchandise category is an assortment of items that customers see as substitutes for each other. 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 ■ The 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

Breakfast cereal category vs. Kellogg Corn Flakes Men’s knitted shirts vs. Polo shirts Diary product category vs. Carnation milk products

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Category Captain Selected vendor responsible for managing a category 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 Problems ■ Vendor category captain may have different goals than retailer

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Evaluating Merchandise Management Performance - GMROI 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 MERCHANTS EVALUATED? 12-12

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GMROI Productivity Measures Gross Margin

Inventory

Input

Output

A measurement of how many gross margin dollars are earned on every dollar of inventory investment made by the buyer 12-13

GMROI Gross Margin Return on Inventory Investment

GMROI = Gross Margin Percent x sales-to-stock ratio = gross margin net sales =

x

net sales avg inventory at cost

gross margin avg inventory at cost

Inventory Turnover = (1 – Gross Margin Percent) x sales-to-stock ratio 12-14

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How do buyers influence GMROI?

Components that buyers can control: ■ Gross margin component: 

Price: • Prices that buyers set • Prices that buyers negotiate with vendors

■ Sales-to-stock ratio component: 

Popularity of the merchandise buyers buy

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ROI and GMROI Asset Productivity Measures Strategic Corporate Level ■ Return on Assets = Net Profit Total Assets Merchandise Management Level ■ GMROI = Gross Margin Avg. Inventory at Cost

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Illustration of GMROI Merchandise categories with different margin/turnover profiles can be compared and evaluated

Canned food

Fresh Bakery

Canned food

Fresh Bakery

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GMROI for Selected Department in Discount Stores

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Measuring Sales-to-Stock Ratio ■ Net Sales/Average Inventory at Cost ■ Retailers report on an annual basis ■ If the sales-to-stock ratio for a three-month season is 2.3, the annual sales-to-stock ratio will be 9.2 ■ Estimation of average inventory 



Use information system: averaging the inventory in stores and distribution centers at the end of each day Divide the sum of the end-of-month (EOM) inventories for several months by the number of months 12-19

Managing Inventory Turnover Calculation 

Inventory turnover =



Inventory turnover =



Average inventory =

Net Sales Average inventory at retail Cost of goods sold Average inventory at cost Month1 + Month2 + Month 3 +… Number of months

■ Inventory Turnover helps assess the buyer’s performance in managing 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 12-20

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Inventory Turnover Month ■ EOM January ■ EOM February ■ EOM March ■ Total Inventory

Retail Value of Inventory $22,000 33,000 38,000 $93,000

■ Average inventory = $93,000 ÷ 3 = $31,000

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Inventory Turnover and Stock-to-Sale Ratio Inventory turnover = (at retail)

Net Sales Average inventory at retail

Inventory turnover = (at cost)

Sock-to-Sales Ratio =

Cost of goods sold Average inventory at cost Net Sales Average cost of

inventory 12-22

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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

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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…

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…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

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Merchandise Planning Process

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Types of Merchandise Management Planning Processes Two distinct types of merchandise management systems for managing ■ Staple (Basic) Merchandise Categories     

Continuous demand over an extended time period Limited number of new product introductions Hosiery, basic casual apparel Easy to forecast demand Continuous replenishment

■ Fashion Merchandise Categories  



In demand for a relatively short period of time Continuous introductions of new products, making existing products obsolete Athletic shoes, laptop computers, women’s apparel 12-27

Merchandise Management Process

1. forecasting sales 2. Developing an assortment plan 3. Determining the appropriate inventory level

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Developing a Sales Forecast ■ Understanding the nature of the product life cycle ■ Collecting data on sales of product and comparable products ■ Using statistical techniques to project sales ■ Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand: Collaboration, Planning, Forecasting, and Replenishment Systems (CPFR)

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The Category Product Life Cycle

Knowing where a category is in its life cycle is important in developing a sales forecast and merchandising strategy 12-30

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Variations in the Category Life Cycle

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Types of Merchandise

Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales The McGraw-Hill Companies, Inc./Lars A. Niki, photographer

Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts

The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

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Forecasting Fashion Merchandise Categories Retailers develop fashion forecasts by relying on: ■ ■ ■ ■ ■

Previous sales data Personal awareness Fashion and trend services Vendors Traditional market research

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Personal Awareness How do fashion buyers know the trends? ■ ■ ■ ■ ■

Internet chat rooms Look in closets Go to the movies Go to rock concerts Go to nightclubs

Ryan McVay/Getty Images

SCAN Shop the retail stores, Web sites and catalogs of competitors as a customer would Converse with consumers, sales clerks, and neighbors Act like your customer Notice 12-34

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Fashion and Trend Services Buyers subscribe to forecasting services and fashion publications ■ Trendzine (www.FashionInformation.com) ■ Doneger Creative Services (www.Doneger.com/web ) ■ Fashion Snoops (www.fashionsnoops.com) ■ Earnshaw’s ■ Women’s Wear Daily (WWD) ■ DNR ■ Home Furnishings News (HFN)

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Work with Vendors: Collaboration, Planning, Forecasting, and Replenishment Systems (CPFR)

■ Vendors have proprietary information about their marketing plans (e.g., new product launches, special promotions) ■ Procedures used by retailers and vendors to work together to insure that the right merchandise is at the right place at the right time.  

Benefits both retailers and vendors Increases fill rate, reduces stockouts, increases inventory turns

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Developing Assortment Planning Assortment plan is a list of the SKUs that a retailer will offer in a merchandise category and reflects the variety and assortment that the retailer plans to offer in a merchandise category Variety (breadth) is the number of different merchandising categories within a store or department Assortment (depth) is the number of SKUs within a category. Product availability defines the percentage of demand for a particular SKU that is satisfied.

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Assortment Plan for Girls’ Jeans

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Model Stock Plans

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Importance of Backup (Buffer) Stock Choosing an appropriate amount of backup stock is critical to successful assortment planning ■ If the backup stock is too low  loose sales and customers ■ If the backup stock is too high  scare financial resources will be wasted on needless inventory that could be more profitably invested in more variety or assortment 12-40

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Understanding the Challenges of Assortment Planning and Allocation

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Assortment Planning – A Key to Financial Success Right + Product

Right Place

good assortment strategy

+

+

Happy Right Right + = Customer Time Quantities

good assortment execution

=

Financial success

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Reality ■ Customers respond to a promotion, only to find the store is out of stock ■ Customers find a piece of clothing in every size…but not hers ■ Customers go to a store, only to find the inventory ‘picked over’

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For A Retailer, These Situations Are Very Costly

“

• Objective of assortment planning system is to match Inventory to demand –By quantity –By size –By geography –By store format • Mismatch Results In Serious Consequences –Overstocks create markdowns and lost gross margin dollars –Under stocks create lost sales and unhappy customers

A retailer was stuck with $400 million in excess inventory…after misreading consumer demand for products at the right price point.

”

--Forrester Research 12-44 44

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