5th Edition

PPT 13-1
 Chapter 13

Buying Systems

cGraw-Hill/Irwin
PPT 13-2
vy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
 Merchandise Management

Retail Planning
Communication Merchandise
Mix Assortments

Buying
Systems

Buying Pricing
Merchandise

PPT 13-3
 Merchandise Management Issues

PPT 13-4
 Types of Buying Systems

Staple Merchandise Fashion Merchandise

Predictable Demand Unpredictable Demand
History of Past Sales Limited Sales History
Relatively Accurate Forecasts Difficult to Forecast Sales

PPT 13-5
 Staple Merchandise Buying System

Monitor Compare
Forecas Order Inventor
t SKU Sales
Merchand y to
Sales and
ise Basic
Inventor
y Stock
List

PPT 13-6
 Considerations in Determining
How Much to Order
• Basic Stock Plan
• Present Inventory
• Merchandise on
Order
• Sales Forecast
– Rate of Sales of
SKU (Velocity)
– Seasonality

PPT 13-7
 Inventory Management Report for
Rubbermaid Merchandise

PPT 13-8
 Basic Stock List

Indicates the Desired Inventory Level for Each SKU

– Amount of Stock Desired

Lost Sale Due

to Stockout

Cost of Carrying
Inventory

PPT 13-9
 Relationship between Inventory
Investment and Product Availability

Inventory investment Dollars

600

500

400

300

200

100

0
80 85 90 95 100
Product Availability (Percent)

PPT 13-10
 Cycle and Buffer Stock

150 -
Order 96
Cycle
Units Available

Stock
100 -

Buffer
Stock
50 -

0-
1 2 3 4
Weeks

PPT 13-11
 Buffer Stock

We need it so we won’t loose sales, complementary sales, and customers

Buffer stock is dependent on:
-Forecast interval variance (Forecast interval = lead
time + review time)
-Variation in Demand (actual demand - forecasted
demand)
-Time to Get Product from Supplier
-Time to Get Product from Distribution
Center
- Product availability requested of IM systems

PPT 13-12
 Forecasting Demand

Forecasting -- extrapolating the

past into future using
statistical and mathematical
methods
Objectives:
– Ignore random
fluctuations in demand
– But be responsive to real
change

PPT 13-13
 Forecasting Sales

• Tradeoff Recent Sales Against Past History of Sales

– Recognize Recent Trends, But Don’t Over Weight Recent
Experience

• Exponential Smoothing
Old = Old + ά x (Recent – Old)
Forecast Forecast Demand Forecast
84 = 96 + .5 x (72 – 96)
• ά ranges for 0 to 1
– Higher ά Weighs Recent Sales More

PPT 13-14
 Order Point

• Order point = the point at which inventory

available should not go below or else we will
run out of stock before the next order arrives.
• Assume Lead time = 0, Order point = 0
• Assume Lead time = 3 weeks, review time =
1 week, demand = 100 units per week
• Order point = demand (lead time + review
time) + buffer stock
• Order point = 100 (3+1) = 400

PPT 13-15
 Order Point continued

• Assume Buffer stock = 50 units, then

• Order point = 100 (3+1) + 50 = 450

• We will order something when order point gets
below 450 units.

PPT 13-16
 Calculating the Order Point

Order Point = (Demand/Day) x (Lead Time

+Review Time) + Backup Stock

167 units = (7 units x (14 + 7 days) + 20 units

So Buyer Places Order When Inventory in Stock

Drops Below 167 units

PPT 13-17
 Merchandise Budget Plan

• Plan for the financial aspects of a merchandise

category
• Specifies how much money can be spent each
month to achieve the sales, margin, inventory
turnover, and GMROI objectives.
• Not a complete buying plan--doesn’t indicate
what specific SKUs to buy or in what quantities.

PPT 13-18
 Six-Month Merchandise
Budget Plan for Men’s Tailored Suits

PPT 13-19
 Steps in Preparing Plan

• Forecast Six Month Sales for Category

• Breakdown Total Sales Forecast into Forecast for each Month
(lines 1, 2)
• Plan Reductions for Each Month (lines 3, 4)
• Determine Beginning of the Month (BOM) Stock to Sales Ratio
(line 5)
• Calculate BOM Inventory (line 6)
• Calculate EOM Inventory (line 7)
• Calculate Monthly Additions to Stock (line 8)

PPT 13-20
 Open to Buy

• Monitors Merchandise Flow

• Determines How Much Was Spent and

How Much is Left to Spend

PPT 13-21
 Six Month Open to Buy

PPT 13-22
 Open-to-buy for Past Periods

• Projected EOM stock = actual EOM stock

• Open-to-buy = 0
• There is no point in buying merchandise
for a month that is already over.

PPT 13-23
 Open-to-Buy for
Current Period (I)
• Projected EOM stock =
• Actual BOM stock
• + Actual monthly additions to stock (what was
actually received)
• + Actual on order (what is on order for the
month)
• - Plan monthly sales
• - Plan reductions for the month

PPT 13-24
 Open-to-Buy for
Current Period (II)

• Open-to-buy =
• Planned EOM stock (from merchandise budget
plan)
– Projected EOM stock (based on what is really
happening)

PPT 13-25
 Allocating
Merchandise to Stores

Fewer Sales, More Sales,

More Inventory Less Inventory
Percentage of total sales 1 1.5 2.5 3.5 4 6 8 12
Percentage of total inventory 1.5 2 3 4 4 4 6 10

PPT 13-26
 Breakdown by Store of
Traditional $35 Denim Jeans in Light Blue

(1) (2) (3) (4) (5) (6)

TYPE OF NUMBER OF % OF TOTAL SALES PER SALES PER UNIT SALES
STORE STORES SALES, EACH STORE (TOTAL STORE TYPE PER STORE
STORE SALES X COL. 3) (COL. 2 X COL. 4) (COL. 4/$35)

A 4 10.0% $15,000 60,000 429

B 3 6.7 10,000 30,000 286
C 8 5.0 7,500 60,000 214

Total sales $150,000

Source: Banner Distributing Company, Denver, Colorado; used with

permission.

PPT 13-27
 ABC Analysis

Rank - orders merchandise by some

performance measure determine which items:
– should never be out of stock.
– should be allowed to be out of stock
occasionally.
– should be deleted from the stock selection.

PPT 13-28
 Analyzing Merchandise Management

Merchandise Performance
– ABC Analysis
– Sell Through Analysis
Vendor Analysis
– Multiattribute Method

PPT 13-29
 ABC Analysis Rank Merchandise
By Performance Measures

• Contribution Margin
• Sales Dollars
• Sales in Units
• Gross Margin
• GMROI
• Use more than one criteria

PPT 13-30
 ABC Analysis for Dress Shirts
C 100
10% Sales
90
B
Percentage of Sales Dollars

80
20%
70
60

A 50
70% 40
30
20
10 No Sales
0 10 20 30 40 50 60 70 80 90 100
A B C D
5% 10% 65% 20%
Percentage of Items
PPT 13-31
 Sell-through Analysis for Blouses

Week 1 Week 2
Stock Actual-to-Plan Actual-to-Plan
Number Description Plan Actual Percent. Plan Actual Percent.
1011 -Sm White silk V-neck 20 15 -25 20 10 -50

1011 -Med White Silk V-neck 30 25 -16.6 30 20 -33

1011 -Lg White Silk V-neck 20 16 -20 20 16 -20

1012 -Sm Blue Silk V-neck 25 26 4 25 27 8

1012 -Med Blue Silk V-neck 35 45 29 35 40 14

1012 -Lg Blue Silk V-neck 25 25 0 25 30 20

PPT 13-32
 Evaluating a Vendor:
A Weighted Average Approach
n

∑I
i =1
j *Pij = Sum of the expression

= Importance weight assigned

Ij to the ith dimension

Pi
= Performance evaluation for
jth brand alternative on the
jth issue

1 = Not important

10 = Very important
PPT 13-33
 Evaluating a Vendor:
A Weighted Average Approach
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
Overall evaluation =
∑ I *P
i =1
j ij
290 298 212 341

PPT 13-34
 Retail Inventory Method (RIM)

Two Objectives:
– To maintain a perpetual or book inventory of retail
dollar amounts.
– To maintain records that make it possible to
determine the cost value of the inventory at any time
without taking a physical inventory.

PPT 13-35
 Advantages of RIM

• The retailer doesn't have to “cost” each time.

• Follows the accepted accounting practice of
valuing assets at cost or market, whichever is
lower.

PPT 13-36
 Advantages of RIM cont’d

• Amounts and percentages of initial markups,

additional markups, markdowns, and shrinkage
can be compared with historical records or
industry norms.
• Useful for determining shrinkage.
• Can be used in an insurance claim case of a loss.

PPT 13-37
 Disadvantages of RIM

• System that uses average markup.

• Record keeping process involved is burdensome.

PPT 13-38
 Steps in RIM

Calculate Total Merchandise Handled at Cost

and Retail
Calculate Retail Reductions
Calculate Cumulative Markup and Cost Multiplier
Determine Book Inventory at Cost and Retail

PPT 13-39
 Retail Inventory Method

Cumulative Markon = (total retail - total cost) / total retail:

($290,000 - $160,000) / $290,000 = 44.8%

The Cost Multiplier = cumulative markon

(100% - cumulative markon%) = 55.2%

Ending book = total goods handled at retail - total

inventory at retail reductions: $290,000 - $208,000 = $82,000

Ending book = ending book inventory at retail x cost

inventory at cost multiplier: $82,000 x 55.2% = 45,264

PPT 13-40
 Retail Inventory Method
Example
Total Goods Handled Cost Retail
Beginning inventory $ 60,000 $ 84,000
Purchases 50,000 70,000
- Return to vendor (11,000) (15,400)
Net Purchases 39,000 54,600
Additional markups 4,000
- Markup cancellations (2,000)
Net markups 2,000
Additional Transport. 1,000
Transfers in 1,428 2,000
- Transfers out (714) (1,000)
Net Transfers 714 (1,000)
Total Goods Handled $100,714 $141,600

PPT 13-41
 Retail Inventory Method
Example
Total Goods Handled Cost Retail

Gross Sales $ 82,000

- Consumer Returns & Allowances ( 4,000)
Net Sales $ 78,000
Markdowns 6,000
- Markdown Cancellation (3,000)
Net Markdown 3,000
Employee Discounts 3,000
Discounts to Customers 500
Estimated Shrinkage 1,500

Total Reductions $ 86,000

PPT 13-42