Chapter 12 Managing Merchandise Assortments

McGraw-Hill/Irwin Retailing Management, 6/e

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

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Merchandise Management Issues

Planning Merchandise Assortments (Chapter 12)

Organize the Buying Process by Categories Set Merchandise Financial Objectives -- GMROI Develop an Assortment Plan
Buying Systems (Chapter 13)

Fashion Merchandise Buying Systems

Staple Merchandise Buying Systems

Allocate Merchandise to Stores Analyze Merchandise Performance

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What is Buying?
Buying is the business activity that involves selecting and purchasing products to satisfy the wants and needs of consumers

The Buyers Job

Gorgeous, Glamorous Pressure-Packed, stressful

Sample Career Path for a Buyer

Management Training Assistant Buyer Buyer Merchandise Manager

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Being a buyer Knowing merchandise management

A complex decision making process Forecasting the wants and needs of consumers Planning merchandising assortments to satisfy consumer wants and needs Selecting vendors from whom to purchase merchandise Negotiating contracts with vendors Pricing merchandise Keeping sales and inventory records Reordering merchandise (Replenishment)
Managing Merchandise Assortments Buying Planning Systems

Buying Merchandise

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Merchandise Management
Process by which a retailer offers the right quantity of the right merchandise in the right place at the right time and meets the companys financial goals. Merchandise management: The analysis, planning, acquisition, handling, and control of the merchandise investments of retail operation.

Goods well bought are half sold

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Merchandise Management Investment Portfolio Management

Dollars to invest in inventory Invest in hot merchandise Save a little for opportunities (open to buy) Monitor portfolio Sell losers (markdowns)

Inventory is the largest investment retailers make.

Standard Merchandise Classification Scheme and Organizational Chart

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The Category
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 same category based on common consumers (i.e. buying behavior, target groups)

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Category Management
Category management The process of managing a retail business with the objective of maximizing the sales and profits of the entire category, not just a particular brand. Merchandise Management Department stores - Category level Grocery stores - Brands and Vendors

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Category Captain
Selected vendor responsible for managing a category This supplier forms an alliance with a retailer to help gain consumer insight, satisfy consumer needs, and improve the performance and profit potential across the entire category. The category captain works with the category manager/buyer to make decisions about product placement on shelves, promotions, and pricing for all brands in the category.

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The Category Product Life Cycle

Total Retail Sales

Decline Growth Maturity Introduction

Time
Strategy variable Target market Variety Distribution Intensity Price Promotion

Introduction
High-income Innovators One basic offering Limited or extensive Penetrating or skimming Informative

Growth
Middle-income adapters Some variety More retailers Wide range Persuasive

Maturity
Mass market Greater variety More retailers Lower prices Competitive

Decline
Low-income and laggards Less variety Fewer retailers Lower prices Limited

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Variations of the Category Life Cycle

Fad Sales over many seasons No

Fashion Yes

Staple Yes

Seasonal Yes

Sales of a specific style over many seasons

No

No

Yes

Yes

Sales vary dramatically from one season to the next

No

Yes

No

Yes

SALES

SALES

Illustration (Sales against Time)

SALES

TIME

TIME

TIME

SALES TIME

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The Buying Organization

Merchandise GroupMens wear Department..Young Mens wear Classification...Pants Category..Jeans Stock Keeping Unit (SKU)Levi, 501,size26 waist, 32 inseam

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Evaluating Merchandise Management Performance 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 Supply chain management & Information systems

SO HOW ARE MERCHANTS EVALUATED?

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GMROI
Gross Margin Return on Investment

A measurement of how many gross margin dollars are earned on every dollar of inventory investment made by the buyer
GMROI is a similar concept to Return on Assets, only its components are under the control of the buyer rather than other managers. GMROI = Gross margin percentage X Sales-to-stock ratio

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GMROI: Gross Margin Return on Investment Inventory Productivity Measures

GMROI = Gross Margin Percent x Sales to Stock Ratio = Gross Margin Net Sales = x Net Sales Average Inventory at Cost

Gross Margin Average Inventory at Cost

Inventory turnover = (1 Gross Margin %) x Sales to Stock Ratio Inventory turnover = Net Sales Average inventory at retail price Cost of Goods Sold Average inventory at Cost

Inventory turnover =

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Illustration of GMROI

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GMROI for Selected Department in Discount Stores

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Advantages of Rapid Inventory 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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Assortment Planning
Variety is the number of different merchandising categories within a store or department Assortment 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

Is This Store Heavy on Variety? On Assortment?

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Retailer must decide what type of store it wants to be.

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Determining Variety and Assortment 1. 2. 3. 4. Retail strategy GMROI of merchandise assortment Physical characteristics of the store Complementary merchandise.

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Mini-Cases

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Setting Inventory and Product Availability Levels Assortment plans typically include the inventory levels of each SKU stocked in the store. A model stock plan is a summary of the typical store inventory support for a merchandise category. The retailer might have a model stock plan for each type in a merchandise category and for different store sizes.

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Product Availability
The percentage of demand for a particular SKU that is satisfied. The higher the product availability, the higher the amount of back up stock necessary to ensure that the retailer won't be out of stock on a particular SKU when the customer demands it.

NEXT CLASS Chapter 13 Merchandise Planning

McGraw-Hill/Irwin Retailing Management, 6/e Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.