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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
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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?
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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 companys
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
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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
Mens 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?

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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
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GMROI
Gross Margin Return on Inventory Investment

GMROI = Gross Margin Percent x sales-to-stock ratio

= gross margin
net sales
=

net sales
avg inventory at cost

gross margin
avg inventory at cost

Inventory Turnover
= (1 Gross Margin Percent) x sales-to-stock ratio
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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
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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 buyers 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
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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
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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 cant 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 cant 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, womens apparel
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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
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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
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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)
Earnshaws
Womens 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
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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
sizebut 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 inventoryafter

misreading consumer demand for products at the right price point.

--Forrester Research
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