Because learning changes everything.

Managing the
Merchandise Planning
Process
CHAPTER 12

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 Learning Objectives
LO 12-1 Explain the merchandise management organization and performance
measures.
LO 12-2 Contrast the merchandise management processes for staple and fashion
merchandise.
LO 12-3 Describe how to predict sales for merchandise categories.
LO 12-4 Summarize the trade-offs for developing merchandise assortments.
LO 12-5 Illustrate how to determine the appropriate inventory levels.
LO 12-6 Analyze merchandise control systems.
LO 12-7 Describe how multistore retailers allocate merchandise to stores.
LO 12-8 Review how retailers evaluate the performance of their merchandise
management decisions.
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 Merchandise Management Overview 1

Learning Objective 12-1 Explain the merchandise management organization and performance measures.

The Buying Organization

Merchandise management.
Merchandise group.
• Managed by a general merchandise managers (GMM).
Department.
• Managed by a divisional merchandise manager (DMM).
Classification.
Stock-keeping unit (SKU).

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EXHIBIT 12-1 Illustration of Merchandise Classifications
and Organization

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 Merchandise Management Overview 2

Merchandise Category – The Planning Unit

Ways to manage categories:
• Category management has one buyer or category manager.
• Grocery stores.

• Category captain helps manage category for retailer.

• Merchandise management tasks easier for retailer.
• Can increase profits.
• Antitrust considerations.

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 Merchandise Categories
The breakfast department consists of several categories.

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 Merchandise Management Overview 3

Evaluating Merchandise Management Performance

• GMROI.
• High GMROI achieved with gross margin and inventory turnover.

GMROI = Gross margin percentage  Sales-to-stock ratio

Gross margin Net sales
= 
Net sales Average inventory at cost
Gross margin
=
Average inventory at cost

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 EXHIBIT 12-2 Illustration of GMROI

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 Merchandise Management Overview 4

Evaluating Merchandise Management Performance continued

Measuring sales-to-stock ratio.
• Typically done on annual basis.
• Most accurate: measure inventory level at end of each day and divide sum by 365.
• Can also take end-of-month (EOM) inventories for several months and divide by the number of
months.
Month End-of-Month Inventory
January $22,000
February 35,000
March 38,000
Total $93,000
Average (Total/3) $31,000

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 Sales-to-Stock Ratio

The bakery
department in a
supermarket typically
has a high sales-to-
stock ratio and a low
gross margin.

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 Merchandise Management Overview 5

Improving GMROI
Improve inventory turnover (sales-to-stock ratio).
• Reduce inventory or increase sales.
• Keep existing SKUs but reduce backup stock.
• Buy merchandise more often, in smaller quantities.
• Increase sales but don’t increase inventory proportionally.
Increase gross margin.
• Increase prices.
• Reduce cost of goods sold.
• Reduce customer discounts.

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 Merchandise Planning Processes
Learning Objective 12-2 Contrast the merchandise management processes for staple and fashion merchandise.

Types of Merchandise Management Planning Systems

• Staple merchandise.
• Basic merchandise.
• Continuous replenishment.
• Fashion merchandise.
• Seasonal merchandise.

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 EXHIBIT 12-3 Merchandise Planning Process

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 Merchandise Planning Systems

Staple merchandise categories are those categories that are in continuous demand over an
extended time period, whereas fashion merchandise categories are in demand only for a
relatively short period of time.
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 Forecasting Category Sales 1

Learning Objective 12-3 Describe how to predict sales for merchandise categories.

Forecasting Staple Merchandise

Use of historical sales.
Adjustments for controllable and uncontrollable factors.
• Can control when store opens and closes, prices, special promotions, placement of merchandise.
• Cannot control weather, economic conditions, pandemic, special promotions or new product
introductions by vendors, competitor’s actions.

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 Forecasting Category Sales 2

Forecasting Fashion Merchandise Categories

Previous sales data.
Marketing research.
• Internet and social media sites.
• In-depth interview.
• Observation.
• Focus group.
AI and data analytics.
Fashion trend services.
Vendors.

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 Forecasting Category Sales 3

Sales Forecasting for Service Retailers

Offerings perish at end of day, not end of season.
• Empty seats on an airplane.
Take reservations.
Make appointments.
Sell advance tickets.
• Cancellation issues.

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 Developing an Assortment Plan 1

Learning Objective 12-4 Summarize the trade-offs for developing merchandise assortments.

Category Variety and Assortment

• Assortment plan.
• Variety or breadth.
• Assortment or depth.

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 EXHIBIT 12-4 Assortment Plan for Girls’ Jeans 1

Styles Skinny Skinny Skinny Skinny Skinny Skinny

Price levels $20 $20 $35 $35 $45 $45

A table summarizes assortment plan for Girl's
Fabric Distressedjeans. Row 3, colors,
Rinsed span three Rinsed
Distressed rows. Distressed Rinsed
composition wash washed wash

Colors Light blue Light blue Light blue Light blue Light blue Light blue

Indigo Indigo Indigo Indigo Indigo Indigo

Black Black Black Black Black Black

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 EXHIBIT 12-4 Assortment Plan for Girls’ Jeans 2

Styles Boot-Cut Boot-Cut Boot-Cut Boot-Cut

Price levels $25 $25 $45 $45
A table summarizes assortment plan for Girl's
Fabric composition Distressed Rinsed
jeans. Row 3, colors, wash
span Distressed
three rows. Rinsed washed

Colors Light blue Light blue Light blue Light blue

Indigo Indigo Indigo Indigo
Black Black Black Black

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 Developing an Assortment Plan 2

Determining Variety and Assortment

Editing the assortment.
Retail strategy.
• Costco has very few SKUs.
• Best Buy has many SKUs.
Assortments and GMROI.
• Breaking sizes.

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 Costco’s Limited Assortment

Costco offers a
limited assortment at
low prices,
increasing its
inventory turnover
and lowering its
costs.

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 Developing an Assortment Plan 3

Determining Variety and Assortment continued

Complementary merchandise.
• Add more SKUs to increase accessory sales.
Effects of assortment size on buying behavior:
• Large assortment gives more opportunity for customer finding what they want.
• Large assortment provides more informative shopping experience.
• Large assortment appealing to customers who seek variety.
• SKU rationalization programs.
Physical characteristics of the store.

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 Setting Inventory and Product Availability Levels 1

Learning Objective 12-5 Illustrate how to determine the appropriate inventory levels.

Model Stock Plan

• Each SKU in assortment plan buyer wants available for purchase in each store.
• Different stock plans for different store sizes.

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 EXHIBIT 12-5 Model Stock Plan for Girls’ Jeans

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 Setting Inventory and Product Availability Levels 2

Product Availability
• Backup stock (buffer stock, safety stock).
• Product availability.
• Level of support (service level).
• Trade-off among variety, assortment, and product availability.

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 EXHIBIT 12-6 Inventory Investment and Product
Availability

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 Establishing a Control System for Managing Inventory 1
Learning Objective 12-6 Analyze merchandise control systems.

Control Systems for Managing Inventory of Staple Merchandise

Flow of staple merchandise.
• Cycle stock or base stock.
• Retailer must also carry backup stock.

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 EXHIBIT 12-7 Merchandise Flow of a Staple SKU

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 Establishing a Control System for Managing Inventory 2

Control Systems for Managing Inventory of Staple Merchandise continued

Determining the level of backup stock:
• Desired product availability.
• Greater fluctuation, more backup stock required.
• Lead time from vendor.
• Fluctuations in lead time.
• Vendor’s fill rate.

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 Backup Stock

Lowe’s carries more

backup stock of its
popular white paint
than its specialty
colors like melon.

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 Establishing a Control System for Managing Inventory 3

Control Systems for Managing Inventory of Staple Merchandise continued

Automated continuous replenishment.
• Perpetual inventory.
Inventory management report.
Order point.
Order quantity.

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 EXHIBIT 12-8 Inventory Management Report for
Rubbermaid SKUs

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 Establishing a Control System for Managing Inventory 4

Control Systems for Managing Inventory of Fashion Merchandise

Merchandise budget plan.
• Amount of merchandise in dollars that needs to be delivered each month.
• This is based on the sale forecast.
• Includes planned employee and customer discounts.
• Level of inventory needed to support sales.
After the selling season, buyer must determine how the category performed compared
with the plan.

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 EXHIBIT 12-9 Six-Month Merchandise Budget Plan
for Men’s Casual Slacks

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 Establishing a Control System for Managing Inventory 5

Control Systems for Managing Inventory of Fashion Merchandise

continued
Open-to-buy system.
• Tracks actual merchandise flows.
• Present inventory level.
• Purchased merchandise delivery schedules.
• How much has been sold to customers.
The open-to-buy system compares the planned end-of-month inventory to the actual
end-of-month inventory.

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 Allocating Merchandise to Stores 1

Learning Objective 12-7 Describe how multistore retailers allocate merchandise to stores.

Amount of Merchandise Allocated

• Based on annual sales.
• Physical characteristics of merchandise.
• Depth of assortment.
• Level of product availability.

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 Allocating Merchandise to Stores 2

Type of Merchandise Allocated

• Geodemographics of store’s trading area considered.
• Can vary between stores in the same chain.
Timing of Merchandise Allocation
• Seasonality differences.
• Consumer demand differences.
• Paycheck cycle.

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 EXHIBIT 12-11 Apparel Size Differences for the Average and
Specific Store in a Chain

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 EXHIBIT 12-12 Sales of Cropped Pants by Region

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 Analyzing Merchandise Management Performance 1

Learning Objective 12-8 Review how retailers evaluate the performance of their merchandise management
decisions.

Evaluating the Merchandise Plan Using Sell-Through Analysis

Sell-through analysis:
• Compares actual and planned sales.
• Determines if more merchandise needed.
• Determines if price reductions necessary.
• Availability of markdown money.

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 EXHIBIT 12-13 Example of Sell-Through Analysis

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 Analyzing Merchandise Management Performance 2

Evaluating the Assortment Plan Using ABC Analysis

ABC analysis identifies performance of individual SKUs in assortment plan.
• SKUs rank-ordered by sales, gross margin, inventory turnover, GMROI.
• Reveals 80-20 principle.
• SKU items classified.

Retailers should concentrate on products that provide the biggest returns.

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 Analyzing Merchandise Management Performance 3

Evaluating the Assortment Plan Using ABC Analysis continued

Evaluating vendors using the multiattribute analysis method.
• Weighted score for each vendor.
1. Develop list of issues to consider.
2. Determine importance weights for each issue.
3. Make judgments about each individual brand’s performance on each issue.
4. Develop an overall score by multiplying importance of each issue by performance of each brand or its
vendor.
5. Add scores for each brand for all issues to get overall rating.

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 EXHIBIT 12-14 Multiattribute Method for
Evaluating Vendors

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 Key Terms 1

ABC analysis – an analysis that rank orders SKUs by a profitability measure to determine which items
should never be out of stock, which should be allowed to be out of stock occasionally, and which
should be deleted from the stock selection.
assortment – the number of SKUs within a merchandise category. Also called depth.
assortment plan – a list of merchandise that indicates in very general terms what should be carried in a
particular merchandise category.
backup stock – the inventory used to guard against going out of stock when demand exceeds forecasts
or merchandise is delayed. Also called safety stock or buffer stock.
base stock – the inventory that goes up and down due to the replenishment process. Also known as
cycle stock.

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 Key Terms 2

basic merchandise – inventory that has continuous demand by customers over an extended period of
time. Also known as staple merchandise.
breadth – in merchandise planning, the variety in the number of subcategories carried within any
particular merchandise category. Also known as variety.
breaking sizes – running out of stock on particular sizes.
buffer stock – merchandise inventory used as a safety cushion for cycle stock so the retailer won’t run
out of stock if demand exceeds the sales forecast. Also called backup stock or safety stock.
category captain – a supplier that 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.
category management – the process of managing a retail business with the objective of maximizing
the sales and profits of a category.

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 Key Terms 3

classification – a group of items or SKUs for the same type of merchandise, such as pants (as opposed
to jackets or suits), supplied by different vendors.
continuous replenishment – a system that involves continuously monitoring merchandise sales and
generating replacement orders, often automatically, when inventory levels drop below predetermined
levels.
cycle stock – the inventory that goes up and down due to the replenishment process. Also known as base
stock.
department – a segment of a store with merchandise that represents a group of classifications the
consumer views as being complementary.
depth – the number of SKUs within a merchandise category. Also called assortment.
editing the assortment – selecting the right assortment of merchandise.

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 Key Terms 4

fashion merchandise – category of merchandise that typically lasts several seasons, and sales can vary
dramatically from one season to the next.
fill rate – the percentage of an order that is shipped by the vendor.
focus group – a marketing research technique in which a small group of respondents is interviewed by
a moderator using a loosely structured format.
in-depth interview – an unstructured personal interview in which the interviewer uses extensive
probing to get individual respondents to talk in detail about a subject.
lead time – the amount of time between recognition that an order needs to be placed and the point at
which the merchandise arrives in the store and is ready for sale.

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 Key Terms 5

level of support – a measure used in inventory management to define the level of support or level of
product availability; the number of items sold divided by the number of items demanded. Service level
should not be confused with customer service. Also called service level.
markdown money – funds provided by a vendor to a retailer to cover decreased gross margin from
markdowns and other merchandising issues.
merchandise budget plan – a plan used by buyers to determine how much money to spend in each
month on a particular fashion merchandise category, given the firm’s sales forecast, inventory turnover,
and profit goals.
merchandise category – an assortment of items (SKUs) the customer sees as reasonable substitutes for
one another.
merchandise group – a group within an organization managed by the senior vice presidents of
merchandise and responsible for several departments.

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 Key Terms 6

merchandise management – the process by which a retailer attempts to offer the right quantity of the
right merchandise in the right place at the right time while meeting the company’s financial goal.
model stock plan – a list of fashion merchandise that indicates in very general terms (product lines,
colors, and size distributions) what should be carried in a particular merchandise category; also known as
a model stock list.
multiattribute analysis – a method for evaluating vendors that uses a weighted average score for each
vendor, which is based on the importance of various issues and the vendor’s performance on those issues.
open-to-buy – the plan that keeps track of how much is spent in each month and how much is left to
spend.
order point – the amount of inventory below which the quantity available shouldn’t go or the item will
be out of stock before the next order arrives.

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 Key Terms 7

perpetual inventory – an accounting procedure whose objectives are to maintain a perpetual or book
inventory in retail dollar amounts and to maintain records that make it possible to determine the cost
value of the inventory at any time without taking a physical inventory.
product availability – a measurement of the percentage of demand for a particular SKU that is satisfied.
safety stock – the inventory used to guard against going out of stock when demand exceeds forecasts or
merchandise is delayed. Also called backup stock or buffer stock.
seasonal merchandise – inventory whose sales fluctuate dramatically according to the time of the year.
sell-through analysis – a comparison of actual and planned sales to determine whether early
markdowns are required or more merchandise is needed to satisfy demand.

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 Key Terms 8

service level – a measure used in inventory management to define the level of support or level of product
availability; the number of items sold divided by the number of items demanded. Service level should not
be confused with customer service. Also called level of support.
shopworn – merchandise that looks damaged because it has been on display for a long time and
customers have been handling it.
shrinkage – an inventory reduction that is caused by shoplifting by employees or customers, by
merchandise being misplaced or damaged, or by poor bookkeeping. Also called inventory shrinkage.
SKU rationalization program – an analysis of the potential benefits a retailer could achieve by adding or
deleting specific items from its assortments.
staple merchandise – inventory that has continuous demand by customers over an extended period of
time. Also known as basic merchandise.

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 Key Terms 9

stock-keeping unit (SKU) – the smallest unit available for keeping inventory control. In soft goods
merchandise, an SKU usually means a size, color, and style.
stock-to-sales ratio – specifies the amount of inventory that should be on hand at the beginning of the
month to support the sales forecast and maintain the inventory turnover objective. The beginning-of-
month (BOM) inventory divided by sales for the month. The average stock-to-sales ratio is 12 divided
by planned inventory turnover. This ratio is an integral component of the merchandise budget plan.
variety – the number of different merchandise categories within a store or department. Also known as
breadth.

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