What is the first step in merchandise management planning
What you'll learn to do: Examine the merchandise planning process Imagine you are a Merchandise Planner for a large department store chain and you have been asked to help prepare the plans for the upcoming fall season. How will you assist the buyers in developing their buying plan? Where to start? Show
Learning Outcomes
Forecasting Sales NumbersHow do retailers forecast sales numbers for merchandise categories?
One of the concepts we discussed in the previous module in the merchandise planning process was forecasting sales. The retail planning process begins with a sales plan. Besides sales history and statistics, you need to have an understanding of your overall business in order to plan increases or decreases which will then dictate proper inventory levels. Practice QuestionsMerchandise Assortment Options As we began this chapter we discussed the
merchandise management process. You might remember we discussed assortment planning as a key function of merchandise planning. As the seasonal plan evolves, inventory dollars are broken down into categories and further down to specific items. This part of the process is known as assortment planning,
Assortment Planning QuestionsSome key questions that drive assortment planning are:
Assortment Planning ConsiderationsBefore beginning the assortment planning process there are several key considerations. What is the merchandise capacity of the stores?Will store capacity fit all of the assortment options I am planning? This can be a little tricky for those chains that have different prototypes across the store base. Another key responsibility of Merchandise Planning is to rank stores by sales performance and other factors to determine their assortment level. All stores might not receive every item in your assortment. Is there a need for complementary merchandise to service the customer?If you carry laptops should you carry laptop cases as well? Think about servicing your customer needs completely. If they don't get it from your store they can go to another store which means you lose sales in this case. At the same time if the customer knows you don't carry the complementary merchandise they are less likely to visit your store in the future Is this merchandise profitable?Before determining if you should carry the item, you need to understand your complete assortment, your margin goals, and the needs of your consumer. You will probably have both low and high margin-producing items in your assortment to service the customer. The mix of both low and high margin producing items might still put you in line with your overall profitability goals. In addition, if you aren't meeting margin goals on certain items this might be an indication that you need to work with the vendor to reduce the cost of the item. What are the corporate objectives and does the merchandise align with the strategy and goals of the company and department?You always want to ensure the goals of your department are in line with the total company strategy. Different retailers will stand for different things: exclusive products, lowest prices to beat competition, designer goods, highest quality products, etc. What are the regional needs for the area in which I am planning the assortment? If you work for a retailer with multiple locations across the United States and even the
globe this becomes especially important. For example, Florida is a resort area where people often vacation. If you have stores in this area you might consider carrying an extensive assortment of resort-like product such as swimsuits, flip flops, and sunglasses. In addition, if you have stores near any theme parks such as Disney World or Six Flags you might want to carry themed product and other quick travel accessory items such as tote bags. You might even be able to hold
a competitive advantage here because those items could be more expensive at the park. Example: Excerpts from a Sample Assortment Plan
For example, the first item under Women's Tees (Black Triangle) is 65.54% GM%, 7.99% of the sales and 7.9% of the receipts. What changes would you make based on what you see below? Take a look at Pink Square. Notice anything about that item you would change? If you said you would plan less receipts you are correct! That item is 11.98% of the sales, 12.91% of the receipts, and 11.46% of the gross margin dollars. It has more receipts planned than sales and is
producing less gross margin dollars. You might consider decreasing the amount of receipts of this item. Practice QuestionsInventory LevelsLet's discuss some important characteristics of how retailers determine appropriate inventory levels.Meet Customer DemandIf you don't effectively plan your inventory levels you won't have an understanding of your potential sales given peaks and valleys within the business to meet customer demand. Those peaks and valleys depend on the type of retailer, the seasonality of the product, and the promotional environment. Valentine's Day product is a great example. There is a relatively short time frame in which any retailer can sell this product category. After February 14th it is likely that the customer will no longer want the products and you will have to markdown any remaining liability to get out of it quickly. Furthermore, if you don't order adequate amounts of inventory for your shelves prior to the holiday you might miss sales. Imagine the impact this has on an area that only has seasonal product for holidays such as Valentine's Day—they could potentially miss the sales plan for an entire year! Lead TimeEvery retailer has to factor replenishment lead times in their inventory plans. Lead times can vary from two weeks to six months or more. Order lead time is the time from the placement of the order with a vendor to when the product arrives at the retailer store or warehouse. Domestic product generally has a shorter lead time while product produced overseas have longer lead times. Depending on the area of business this is a key consideration for product that sells out quickly. It might be a good idea to keep warehouse inventory reserve for those items to replenish back to stores that sell out of product. Higher ProfitSourcing and managing inventory has a direct effect on profitability. A retailer is able to increase profitability if they can control inventory levels. Ignoring a proper inventory system in production, sales, and trade will hinder operational efficiency. If a retailer plans inventory levels in line with customer demand they are able to realize less potential markdowns as they will sell thru the merchandise at a reasonable rate. While it isn't possible to meet sales objectives 100% of the time there must be a contingency plan in place. Sometimes it is better to markdown product as quickly as possible when it is determined sales objectives won't be reached to mitigate even more potential risk. In other words, the longer the retailer waits to reduce the price of a slow seller the deeper the discount will need to be. Better Cash Flow Policies and procedures for effectively planning inventory levels enable companies to maintain inventory flow, account for inventory value, and handle aged inventory. These are all policies that will enable the company to achieve sales goals and objectives. As a result the retailer is better able to manage cash flow. Why is cash flow important? You might have heard the expression "Cash is King!". Excellent cash flow works the same way in business that it does for any individual. It allows
the retailer to be in a more stable position with regards to spending and buying power. Having cash flow enables any business to generate and use cash. It also allows the retailer to pay any future debts. Forward Weeks of SupplyAn important goal of inventory planning is having enough inventory on hand for the sales planned until the next delivery arrives. This calculation is at the week level and is calculated as the number of weeks of planned sales from the next week forward that current inventory value represents. Using forward weeks of supply is a good metric to make informed merchandise decisions. It gives good insight as to how the product and category will contribute to overall sales and inventory. However, one key disadvantage of forward weeks of supply is it is calculated at a weekly level which doesn't allow for a higher level top-down approach. Weeks of SupplyWeeks of supply simply looks at past trend versus any future sales projections. Weeks of supply is calculated as the inventory position for a given period divided by the average sales for that same time frame. One huge disadvantage of weeks of supply is it looks at past sales trend to calculate inventory and not future time periods. It shows you where you have been but not where you are going. This is especially important for those businesses and time periods that have huge sales increases. For example, Easter is a time period in which the sales are typically higher. If you calculate weeks of supply during those time frames it would be much lower than an average time period which would, in effect, make it seem as if you have much lower inventory levels based on weeks of supply. The retailer must always take into account the time period when using this method. Stock-to-Sales RatioThis is an appropriate measure for planning at the monthly level and is calculated by dividing sales at the beginning of period into inventory for that same time period. Stock to sales ratio provides the retailer with an estimated annual turn. However, this measure only looks at one distinct time period and fails to look at the trend over time. Sell Thru PercentSell thru is one of the most common metrics for retailers to understand performance and inventory levels. It represents the ratio of sales to beginning inventory. It is calculated by dividing sales by beginning inventory. This metric, like stock-to-sales ratio, looks at sales in relation to inventory for one period of time as opposed to a longer time period. However, it is useful for understanding performance as well as possible inventory needs. For example, if Product A has a sell thru of 10% and the average for the department is 3%, that is an indication that you need to procure more inventory for Product A to maximize sales potential. TurnoverThis metric indicates the number of times inventory is sold and replaced over a given period of time. This is usually calculated at the annual or seasonal level by dividing period sales by the average inventory value. Turnover isn't as effective an inventory method for calculating inventory needs for a short period of time as it is measured over a longer period of time. However, inventory turnover is a key metric that underlies the retail profit formula. Basic StockBasic stock inventory planning involves establishing a baseline level of inventory for a given time period. This is a threshold that inventory levels should never fall below. It is calculated as average inventory divided by average sales. This method of planning inventory levels is useful for retailers with consistent-selling items that are not subject to large fluctuations. However, this is not a good method for planning seasonal categories or trend categories where sales are hard to predict. The Basic stock metric is an ideal inventory planning method for replenishment businesses at the SKU (Stock keeping unit) level. Practice QuestionsMerchandise Flow The most important goal of any buyer is to achieve their sales plan. The second most important priority is to keep inventory levels on plan. If you exceed or fall
short of your sales plan, the only adjustment you can make to keep your inventory in line is to adjust the flow of incoming merchandise. If you exceed your sales plan, you must accelerate your flow of goods. If you miss your sales plan, you must reduce your merchandise flow. That said, it is not as simple as it looks. B.O.P Inventory − Sales − Markdowns − E.O.P Inventory Plan = Open-To-Buy So let’s plug in some values to see how the formula works: Assume we start with a Beginning of Period (B.O.P) inventory of $500,000.00. We experience sales of $100,000.00, markdowns of $25,000.00, and our inventory target for the End of Period (E.O.P) is $600,000.00. What would be our OTB? $500k (BOP) − $100k (Sales) − $25k (Markdowns) − $600k (EOP) = $225k (OTB) In this example we see an OTB of $225k (using this formula will yield a negative number but we retailers use absolute value to keep the OTB a positive integer). To double-check your math, you can plug the OTB into the calculation as “Purchases” to ensure you are hitting your EOP target: $500k (BOP) − $100k (Sales) − $25k (Markdowns) +$225k (Purchases) = $600k (EOP Inventory) Keep in mind that these methods will vary depending on retail organization size, sophistication, business goals, strategies and category of goods. Practice QuestionsMerchandise Allocations Merchandise allocation is the process of determining how to distribute merchandise to individual store units for maximum sales and minimal markdowns. Depending on the size and sophistication of the retail operation, this can be a simple process, or an extremely complex algorithmic exercise. Some retailers plan
their season’s purchases from the ground up based on ideal store allocation, or others use the allocation process to break down merchandise receipts to allocate to online warehouse distribution, regional distribution centers or direct to stores. Practice QuestionsMerchandising Decisions Like all businesses, retailers must evaluate their performance on a regular basis in order to continue success, improve results, or turn-around sub-par situations. Based on the condition of the retail industry today, one might say that it is more crucial than ever to get it right. Given the different kinds of retailers it is difficult to make general statements
regarding the methods used to evaluate merchandise decisions. Dick’s Sporting Goods would have a somewhat different perspective than 7-11. Macy’s would review their business differently than Big O Tires. Practice QuestionsLicenses and AttributionsCC licensed content, Specific attribution
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What is the first step in merchandise management planning quizlet?(The first step in merchandise management planning is to develop a forecast for category sales. The approach for forecasting sales of staple merchandise is to project past sales trends into the future, while making adjustments for any anticipated factors, such as promotions and weather, that may affect future sales.)
What are the steps of merchandising?Merchandise buying typically consists of four steps, including:. Identify merchandise sources. The first step when merchandise buying is to identify sources where you can purchase quality goods to sell to customers. ... . Negotiate with manufacturers. ... . Select products for purchase. ... . Purchase merchandise for retailer.. What is merchandise planning process in management?Merchandise planning process refers to selecting, managing, and displaying products in a manner that they bring maximum turnover on a brand name. This is all done by meeting consumer needs and desires.
What is the basic component of merchandise planning?1) Product
Merchandise or product is the most basic component of merchandising planning. The retailer has to provide products which are expected to be demanded by his consumers. He is required to keep enough inventory of each products category so that he never runs out of it and lose business.
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