CH-12 Managing the Merchandise Planning Process – Retailing Management : Book Guide

CHAPTER 12 MANAGING THE MERCHANDISE PLANNING PROCESS ANNOTATED OUTLINE INSTRUCTOR NOTES * Merchandise management activities are undertaken primarily by buyers and their superiors, divisional merchandise managers (DMMs) and general merchandise managers (GMMs). * Retail buyers manage a portfolio of merchandise inventory. They buy merchandise they think will be popular with their customers. Like investment bankers, they use their retailer’s information system to monitor the performance of their merchandise portfolio – to see what is selling and what is not. * Merchandise management is 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 goals. * Buyers need to be in touch with and anticipate what customers will want to buy, but this ability to sense market trends is just one skill needed to manage merchandise inventory effectively. Perhaps an even more important skill is the ability to continually analyze sales data and make appropriate adjustments in prices and inventory levels. See PPT12-4 and PPT 12-5 I. Merchandise Management Overview A. The Buying Organization * Every retailer has its own system for grouping categories of merchandise, but the basic structure of the buying organization is similar for most retailers. An overview of merchandise classifications is illustrated in PPT 12-6. The levels of the Buying Organization are illustrated in PPT 12-7. 1. Merchandise Group * The highest classification level is the merchandise group. Each merchandise group is managed by a general merchandise manager (GMM), who is often a senior vice president in the firm. Each of these GMMs is responsible for several departments. * The second level in the merchandise classification scheme is the department. Departments are managed by divisional merchandise managers (DMMs). * The third level in the merchandise classification scheme is the classification. A classification is a group of items targeting the same customer type. * The next lower level in the classification scheme is the category. Each buyer manages several merchandise categories. * A stock-keeping unit (SKU) is the smallest unit available for inventory control, usually indicating size, color and style. B. Merchandise Category – The Planning Unit * The merchandise category is the basic unit of analysis for making merchandising management decisions. * A merchandise category is an assortment of items that customers see as substitutes for one another. * Retailers and their vendors may have different definitions of a category. * Some retailers may define categories in terms of brands. See PPT 12-8 Ask students to name merchandise that they would consider to be in the same category. Should Tommy Hilfiger be a category? What about luggage? 1. Category Management * Whereas department stores, in general, manage merchandise at the category level, supermarkets and other general merchandise retailers traditionally have organized their merchandise around brands or vendors. * Managing merchandise within a category by brands can lead to inefficiencies because it fails to consider the interdependencies between SKUs in the category. * Managing by category can help ensure that the store’s assortment includes the “best” combination of sizes and vendors – the one See PPT 12-9 that will get the most profit from the allocated space. 2. Category Captain * Some retailers turn to one favored vendor to help them manage a particular category. Known as the category captain, 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. * A potential problem with establishing a category captain, however, is that vendors could take advantage of their position. See PPT 12-10 What should retailers be concerned about before appointing a category captain? What are some disadvantages of relying too heavily on a category captain? C. Evaluating Merchandise Management Performance -- GMROI * A good measure for evaluating a retail firm is ROI. Return on investment is composed of two components, asset turnover and net profit margin. * However, ROI is not a good measure for evaluating the performance of merchandise managers because they do not have control over all the retailer’s assets or all the expenses the retailer incurs. * Merchandise managers only have control over the merchandise they buy, the price at which the merchandise is sold, and the cost of the merchandise. * The financial ratio that is important to plan and measure merchandising performance is a return on investment measure called gross margin return on inventory investment (GMROI). It measures how many gross margin dollars are earned on every dollar of inventory investment. * GMROI is a similar concept to return on assets, only its components are under the See PPT 12-11 Ask students how it is possible for two different types of food products, milk and wine to have the same GMROI. Walk through the exhibit. Then ask what would happen to GMROI if wine went on sale. (Answer: it would depend on how much of a margin reduction was taken and how much turnover would increase.) control of the buyer rather than other managers. * GMROI = Gross margin percentage X Sales-to-stock ratio * Also, GMROI = Gross Margin Average Inventory, at cost * Average inventory in GMROI is measured at cost, because a retailer's investment in inventory is the cost of the inventory, not its retail value. * GMROI combines the effects of both profits and turnover. It is important to use a combined measure so departments with different margin/turnover profiles can be compared and evaluated. * GMROI is used as a return on investment profitability measure to evaluate departments, merchandise classifications, vendor lines, and items. It's also useful for management in evaluating buyers' performance since it can be related to the retailer's overall return on investment. See PPT 12-12 See PPT 12-13 for illustrations of GMROI 1. Measuring Sales-to-Stock Ratio * Retailers normally express sales-to-stock ratios (and inventory turnover) on an annual basis rather than for part of a year. (If the sales-to-stock ratio for a three- month season equals 2.3, the annual ratio will be reported as four times that number, 9.2) * The most accurate measure of average inventory is to measure the inventory level at the end of each day and divide the sum by 365. Most retailers can use their information systems to get accurate average inventory estimates by averaging the inventory in stores and distribution centers at the end of each day. See PPT 12-14 D. Managing Inventory Turnover * Inventory turnover and the sales-to- stock ratio help assess the buyer’s performance in managing this asset. * Retailers want to achieve a high inventory turnover, but just focusing on See PPT 12-15 Spend extra time with students discussing the difference between sales-to-stock ratio and inventory turnover. increasing inventory turnover can actually decrease GMROI. * Buyers needs to consider the trade-offs associated with managing their inventory turnover. E. Merchandise Management Process * First, buyers forecast category sales, develop an assortment plan for merchandise in the category, and determine the amount of inventory needed to support the forecasted sales and assortment plan. * Second, buyers develop a plan outlining the sales expected for each month, the inventory needed to support the sales, and the money that can be spent on replenishing sold merchandise and buying new merchandise. Along with the plan, buyers or planners/assorters decide what type and how much merchandise should be allocated to each store. * Third, having developed a plan, the buyer negotiates with vendors and buys the merchandise. * Buyers continually monitor the sales of merchandise in the category and make adjustments. * These decisions are not necessarily made sequentially. Some decisions may be made at the same time or in a different order than described above. PPT 12-16 summarizes the Merchandise Planning Process. F. Types of Merchandise Planning Processes * Retailers use two distinct types of merchandise management planning systems for managing (1) staple merchandise and (2) fashion merchandise categories. * Staple merchandise categories, also called basic merchandise categories, consist of items that are in continuous See PPT 12-17 for an overview of the merchandise planning processes Have students discuss some staple merchandise categories. There might be demand over an extended time period. The number of new product introductions in these categories is limited. * Sales of staple merchandise are relatively stable from day-to-day so it is relatively easy to forecast demand, and the consequences of making mistakes in forecasting are not as high. * Because the demand for basic merchandise is predictable, merchandise planning systems for staple categories focus on continuous replenishment. * Fashion merchandise consists of items that are only in demand for a relatively short period of time. New products are continually introduced into these categories, making the existing products obsolete. * Forecasting the sales for fashion merchandise categories is much more challenging than for staple foods. Buyers for fashion merchandise categories have much less flexibility in correcting forecasting errors. * Due to the short life cycle of fashion merchandise, buyers often do not have a chance to reorder additional merchandise after an initial order is placed. * Seasonal merchandise categories consist of items whose sales fluctuate dramatically depending on the time of year. Both staple and fashion merchandise can be seasonal categories. * Retailers buy seasonal merchandise in much the same way that they buy fashion merchandise. some product categories that all students consider staples, like bread, milk, eggs, socks, etc. But are there other product categories that some students consider staple products that others don’t? What happens to demand for stable products during times of instability? II. Forecasting Sales See PPT 12-19 * The first step in merchandise management planning is to develop a forecast for category sales. * To develop a category forecast, one needs to understand the nature of category life cycles and the factors that might affect the shape of the life cycle in the future. B. Forecasting Staple Merchandise * The sales of staple merchandise are relatively stable from year to year. Thus, forecasts are typically based on extrapolating historical sales. Then, statistical techniques can be used to forecast future sales. * Even though sales for staple merchandise categories are relatively predictable, controllable (openings and closings of stores, promotions, and placement) and uncontrollable (weather, economic conditions, and new product introductions by vendors) factors can have significant impact on them. PPT 12-20 Ask students to consider uncontrollable factors that might influence the sales of staple merchandise. How many can be identified? C. Forecasting Fashion Merchandise Categories * Forecasting sales for fashion merchandise categories is challenging because some or all of the items in the category are new and different than units offered in previous years. * Buyers utilize a variety of sources for information to help in forecasting decisions for fashion merchandise categories, including examining previous sales data, personal awareness, fashion and trend services, vendors and market research. See PPT 12-21 1. Previous Sales Data * Although some items in fashion merchandise categories might be new each season, the basic merchandise in many categories is the same, and thus, accurate forecasts might be simply projecting past sales data. 2. Market Research * Information on how customers will react to new merchandise can be obtained by asking customers about the merchandise and measuring customer reactions to new merchandise through sales tests. * Another excellent source of customer information is retail salespeople, since they have the direct contact with the customer to determine their attitudes in depth. * Customer information can be collected through traditional forms of marketing research like depth interviews, and focus groups. * The depth interview is an unstructured personal interview in which the interviewer uses extensive probing to get individual respondents to talk in detail about a subject. * A more informal method of interviewing customers is to require buyers to spend some time on the selling floor waiting on customers. * A focus group is a small group of respondents interviewed by a moderator using a loosely structured format. * Finally, many retailers have a program of conducting merchandise experiments. 3. Fashion and Trend Services * There are many services that buyers (especially buyers of apparel categories) can subscribe to that forecast the latest fashions, colors, and styles. 4. Vendors * Vendors have proprietary information about their marketing plans, such as new product launches and special promotions that can have a significant impact on retail sales for their products and the entire merchandise category. D. Sales Forecasting for Service Retailers * Due to the perishable nature of services, service retailers face a more extreme problem than fashion retailers. Their offering perishes at the end of the day. * Some service retailers attempt to match supply and demand by taking reservations or making appointments. III. Developing an Assortment Plan * After forecasting sales for the category, the next step in the merchandise management planning process is to develop an assortment plan. * An assortment plan is a list of the SKUs that a retailer will offer in a merchandise category. The assortment plan thus reflects the variety and assortment that the retailer plans to offer in a merchandise category. See PPT 12-23, 12-24 Ask students to name retailers with good variety/good assortment/good product availability. Explain that it is difficult to be a master at all three. A. Category Variety and Assortment * Variety is the number of different merchandising categories within a store or department. Stores with a large variety are said to have good breadth. * Some stores carry a large variety of categories, while others carry a much more limited number. * Assortment is the number of SKUs within a category. Stores with large assortments are said to have good depth. * Some stores carry a large assortment, while others carry a narrower assortment. * Service retailers also make assortment decisions. * In the context of merchandise planning, the concepts of variety and assortment are applied to a merchandise category rather than a retail firm. At the category level, variety reflects the number of different types of merchandise, and assortment in the number of SKUs per type. Ask students to give examples of stores with large variety and those with lower variety. Ask students to give examples of stores with large assortments and those with narrow assortments. B. Determining Variety and Assortment * In attempting to determine the variety and assortment for a category, the buyer considers a variety of factors including (1) retail strategy, (2) GMROI of merchandise assortment, (3) physical characteristics of the store, and (4) complementary merchandise. Retailer must decide what type of store it wants to be. They have a finite space and inventory budget. A store that offers good variety means one-stop shopping -- everything that the target market could want. Think of an old-time variety store. A store that offers good assortment can also mean one stop shopping -- if customer is hoping for a group of products, e.g., a knife store. You can get anything you want as long as it is a knife. As for product availability -- a retailer can strike a good balance between variety and assortment, but if they run out of a particular size, color or style (SKU) that a customer wants, a sale is lost. IV. 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 store in a chain. * Retailers typically classify stores on the A, B and C system. The basic assortment in the category is stocked in C stores. The larger A and B stores have more space available and can accommodate more SKUs. These stores may have more brands, colors, styles and sizes in a category. See PPT 12-25 A. Product Availability * Product availability defines 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. * Although the actual inventory investment varies in different situations, the general relationship is that a very high level of service results in a prohibitively high inventory investment. This relationship can be explained by the relationship between cycle stock and back-up stock. * Cycle stock, also known as base stock, is inventory that results from the replenishment process and is required to meet demand when the retailer can predict See PPT 12-26 Why does inventory investment increase so fast as product availability goes up? Because of safety stock-- a retailer must carry more and more safety stock to satisfy increasing levels of demand.. When using a Quick Response inventory system, product availability can increase and inventory investment actually stays the same or decreases. demand and replenishment times (lead times) perfectly. * Unfortunately, most retailers are unable to predict demand and replenishment times without error, so, they carry back-up stock, also known as safety stock or buffer stock, as a safety cushion for the cycle stock so they won't run out before the next order arrives. * Several factors need to be considered to determine the appropriate level of buffer stock and thus the product availability for each SKU. * Retailers often classify merchandise categories or individual SKUs as A, B or C items, reflecting the product availability the retailer wants to offer. For A items, the retailer rarely wants to stock out. Lower availability is acceptable for C items. * Other factors to consider are fluctuations in demand, the lead time for delivery from the vendor, fluctuations in vendor lead time, and the frequency of store deliveries. V. Establishing A Control System For Managing Inventory * Staple merchandise buying systems are used for merchandise that follows a predictable order-receipt-order cycle. Most merchandise fits this criterion. * Staple merchandise planning systems manage inventory at the level of the SKU. * Inventory that goes up and down due to the replenishment process is called cycle stock, or base stock. The retailer would like to reduce the base stock inventory to keep its inventory investment low. * Sales of the SKU and receipts of orders from the vendor cannot be predicted with perfect accuracy. Therefore, the retailer has to carry backup stock, also known as safety stock or buffer stock. * Several factors determine the level of backup stock required: (1) the product availability the retailer wants to provide, (2) fluctuation in demand (greater fluctuation requires more backup stock), PPT 12-30 illustrate the function of a staple merchandise management system. Ask students for examples to review typical staple merchandise categories. (3) the lead time (amount of time between recognition that an order needs to be placed and the point at which the merchandise arrives in the store and ready for sale) from the vendor, (4) fluctuations in lead time (retailers using collaborative supply chain management systems typically require their vendors to deliver within a very narrow window to reduce fluctuations in lead time), and (5) the vendor’s product availability. * Staple merchandise planning systems provide the information needed to determine how much to order and when to place orders for SKUs. These systems assist buyers by performing three functions: (1) monitoring and measuring current SKU sales, (2) forecasting future SKU demand, and (3) developing ordering decision rules for optimum restocking. Factors determining backup stock are shown in 12-32 A. Automated Continuous Replenishment * Buyer sets the desired product availability and determines the variation in demand and the vendor’s lead time and fill rate, the continuous replenishment systems for staple SKUs can operate automatically. * Retailer’s information system determines the inventory level at each point in time, the perpetual inventory, by comparing the sales made through the POS terminals with the shipments received by the store. B. The Inventory Management Report * The inventory management report provides information about the current sales rate or velocity, sales forecasts, inventory availability, the amount on order, decisions variables such as product availability, the backup stock needed to provide the product availability desired, performance measures such as planned and actual inventory turnover, and the PPT 12-33 shows a retailer’s sample inventory management report for Rubbermaid merchandise. approproiate ordering decisions for each SKU. * The combination of having a prespecified schedule based on the trade-off between inventory carrying and ordering costs, and the flexiblity to react to demand fluctions, helps to ensure a profitable ordering strategy. 1. Order point * The order point is the amount of inventory below which the quantity available should not go or the item will be out of stock before the next shipment arrives. Order point = Sales/Day x (Lead time + Review time) + Backup stock * This number tells the buyer that when the inventory level drops to this point, additional merchandise should be ordered. * Lead time is the time between recognition that an order needs to be placed and the receipt of merchandise in stores ready for sale. * Review time is the maximum time between reviews of the SKU. See PPT 12-34 2. Order Quantity * When inventory reaches the order point, the buyer needs to order enough units so the stock isn’t depleted and sales dip into backup stock before the next order arrives. This order quantity is the difference between the quantity available and the order point. * Using this system to calculate order points and order quantities for staple merchandise SKUs, orders can be transmitted directly to vendors using EDI without needing to involve the buyer. VI. Control System for Managing Inventory of Fashion Merchandise * The merchandise budget plan specifies the planned inventory investment in dollars in a fashion merchandise category over See PPT 12-36 time. The plan specifies how much money should be spent each month to support sales and achieve turnover and GMROI objectives. * The buyer needs to plan how much merchandise should be delivered in each month to achieve the financial goals for the period. A. Open-to-Buy System * The open-to-buy system starts after the merchandise is purchased using the merchandise budget plan or staple merchandise management system. * The open-to-buy system keeps track of merchandise flows while they are occurring. Specifically, the open-to-buy system records how much is spent each month, and therefore how much is left to spend. * For the merchandise budget plan to be successful (i.e., meet the sales, inventory turnover, and GMROI goals for a category), the buyer attempts to buy merchandise in quantities and with delivery dates such that the actual EOM (end of month) stock for a month will be the same as the projected or forecasted EOM stock. See PPT 12-38 Now that the buyer knows how much to spend in each month (based on the merchandise budget plan), the buyer must keep track of spending using open-to-buy. VII. Allocating Merchandise to Stores * After developing a plan for managing merchandise inventory in a category, the next step in the merchandise management process is to allocate the merchandise purchased and received to the retailer’s stores. * Many retailers have a created a position called either “allocators” or “planners” to specialize in making store allocation decisions. * Allocating merchandise to stores involves three decisions: (1) how much merchandise to allocate to each store, (2) what type of merchandise to allocate, and (3) when to allocate the merchandise to different stores. See PPT 12-39 Ask students to consider some of the challenges of allocating merchandise to stores. What might influence the decision of which stores should get what amounts? Factors like store size, trade area, seasonality, regional preferences, etc. A. Amount of Merchandise Allocated to Each Store * Initially, the planner makes the allocation in proportion to the forecasted sales for each store. * Next, the planner fine tunes the allocation by recognizing that smaller stores require a proportionally higher inventory allocation than larger stores because if the depth of the assortment or the level of product availability is too small, customers will perceive it as being inferior. * Hence, smaller stores require a higher than average stock-to-sales ratio. The opposite is true for stores with greater than average sales. * The determination of the best stock-to- sales ratio for each type of store depends on the size constraints of the store, the physical characteristics of the merchandise, and the depth of assortment and level of product availability that the firm wishes to portray for the store. B. Type of Merchandise Allocated to Stores * In addition to classifying stores on the basis of their size and sales volume, retailers classify stores according to the characteristics of the stores’ trading area. * Store trade area geodemographics are used to develop merchandise assortments for specific stores. See PPT 12-40 for illustrations of merchandise allocation decisions. C. Timing of Merchandise Allocation to Stores * Differences in the timing of category purchases across stores also need to be considered. * Buyers need to recognize regional differences and arrange for merchandise to be shipped to the appropriate regions when customers are ready to buy to increase inventory turnover in the category. See PPT 12-41 VIII. Analyze Merchandise Performance * The next step in the merchandise management process is to analyze the performance of the process and make adjustments as necessary. * Three procedures are used for analyzing merchandise management performance. * The first, known as ABC analysis, is a method of rank-ordering merchandise to make inventory stocking decisions. * The second procedure, a sell-through analysis, compares actual and planned sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand. * The third approach is a method for evaluating vendors using the multiattribute model. See PPT 12-42 A. Sell-Through Analysis * A sell-through analysis is a comparison between actual and planned sales to determine whether early markdowns are required or whether more merchandise is needed to satisfy demand. * The decision depends on experience with the merchandise in the past, whether the merchandise is scheduled to be featured in advertising, whether the vendor can reduce the buyer's risk by providing markdown money, and other merchandising issues. See PPT 12-43 Ask students what action should be taken with the white and blue silk blouses Exhibit in PPT 12-43. B. Evaluating the Assortment Plan and Vendors * ABC analysis identifies the performance of individual SKUs in the assortment plan. * It is used to determine what SKUs should be in the plan and how much backup stock and resulting product availability is provided for each SKU in the plan. * ABC uses the general 80-20 principle that implies that approximately 80 percent of a retailer's sales or profits come from 20 percent of the products. See PPT 12-44 Ask students to think of other instances where the 80-20 principle seems to work, e.g., 80% of a store's sales are generated by 20% of its sales force or 20% of its space. * The first step in the ABC analysis is to rank-order SKUs using one or more performance measures. * Measures commonly used in ABC analysis are sales dollars, sales in units, gross margin, and GMROI (gross margin return on investment). * The next step is to classify the items. Then, on the basis of the classification, determine whether to maintain the item in the assortment plan and if so, what level of product availability to offer. * A items account for 5 percent of items and represent 70 percent of sales. These items should never be out of stock. * B items represent 10 percent of the SKUs and an additional 20 percent of sales. The store should pay close attention to the B items, but it may run out of some SKUs in the B category, since it's not carrying the same amount of backup stock as for A items. * C items account for 65% of SKUs but contribute only 10 percent of sales. * There are also D items. These items had no sales whatsoever during the past season, having become out of date or shopworn. These represent excess inventory. Most retailers with excess merchandise should have a simple decision strategy: Mark it down or give it away, but get rid of it. C. Multiattribute Method for Evaluating Vendors * The multiattribute analysis method for evaluating vendors uses a weighted average score for each vendor. * A buyer can evaluate vendors by using five steps. 1. Develop a list of issues to consider in the decision. A balance should be made between too short or too comprehensive a list of issues. 2. Importance weights for each issue should be determined by the buyer/planner in conjunction with the merchandise See PPT 12-45 Students may find this a little too “academic.” To make it a little more palatable, ask them to consider how difficult it was to choose a college. Doing a multiattribute model may have made their ultimate choice seem more rational. They might argue that the ratings and the importance weights are arbitrary. But they really aren’t. If you buy into the weights manager. A scale of 1 – 10, with 1 being least important and 10 being most important, can be used. 3. Make judgments about each individual brand's performance on each issue. 4. Combine the importance and performance scores by multiplying the importance for each issue by the performance for each brand or its vendor. 5. Determine the vendors’ overall rating by summing the product for each brand for all issues to compute an overall rating. and the ratings, then you have to buy into the result. IX. Summary * This chapter provides an overview of the merchandise management planning process and examines sales forecasting and assortment planning in more detail. * Performance measures used to assess merchandise management are GMROI, sales-to-stock ratios and inventory turnover, and gross margin. * When developing a sales forecast, retailers need to know what stage of the life cycle a particular category is in. * The next step in the merchandise planning process is developing an assortment plan and model stock list. Appendix 12A: Merchandise Budget Report and Open-to-Buy System for a Fashion Merchandise Category I. Merchandise Budget Plan A. Monthly Sales Percent Distribution To Season (Line 1) * Line 1 of the plan projects what percentage of the total sales is expected to be sold in each month. * The percentage of total sales in a particular month doesn’t vary appreciably from year to year, so Also called a seasonality index. Most merchandise has some seasonality. Even toilet paper -- fancy styles sell better during the holiday season when people have lots of guests in their houses. Can derive using a weighted average from past years, then adjusting for current trends historical records are used to derive monthly percentages. * The buyer must include special sales that did not occur in the past in the percent distribution of sales by month. See PPT 12A-4 B. Monthly Sales (Line 2) * Monthly sales are the forecasted total sales for the six-month period (first column) multiplied by each monthly sales percentage (line 1). * Monthly sales for April = $27,300 (i.e., $130,000 X 21%) See PPT 12A-5 C. Monthly Reductions Percent Distribution to Season (Line 3) * To have enough merchandise every month to support the monthly sales forecast, the buyer must consider factors that reduce the inventory level. Apart from sales, the value of the inventory is also reduced by markdowns, shrinkages, and discounts to employees. * Markdowns can be forecast fairly accurately from historical records. * Cost of the employee discount is tied fairly closely to the sales level and number of employees and can be forecast fairly accurately from historical records. * Shrinkage is caused by shoplifting by employees or customers, by merchandise being misplaced or damaged, or by poor bookkeeping. The buyer measures shrinkage by taking the difference between (1) the inventory's recorded value based on merchandise bought and received and (2) physical inventory in stores and distribution centers. Reductions are often difficult for students to understand. Tell them that they work in the same direction as sales. In other words, if you put something on sale or if something is stolen, it reduces the value of the inventory at retail. Retailers have to not only buy enough to support their sales; they also have to buy enough to support their reductions. If they don't, consider reductions, they will run out of stock by the amount of merchandise that is put on sale or stolen. See PPT 12A-6 * Shrinkage varies by department and season and typically also varies directly with sales. D. Monthly Reductions (Line 4) * Monthly reductions are calculated the same way monthly sales are calculated. Total reductions are multiplied by each percentage in line 3. * April reductions = $6,600 (i.e., $16,500 X 40%). See PPT 12A-7 E. BOM (Beginning of Month) Stock-to-Sales Ratio (Line 5) * The 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. Like % distribution of sales by month, monthly stock-to-sales ratios fluctuate by month, but in opposite direction of sales. Bathing suits start arriving in March, but sales don’t take off until May, so in May, stock and sales are both increasing, but sales are increasing faster, so stock-to-sales ratio decreases. But in July, stores still have inventory, but sales drop off quickly, resulting in an increase in stock-to-sales ratio. See PPT 12A-8 F. BOM Stock (Line 6) * The amount of inventory planned for the beginning of month (BOM) equals * Monthly sales (line 2) X BOM stock- to-sales ratio (line 5). Sales X (stock/sales) = stock. That is, sales drops out of the equation. See PPT 12A-13 G. EOM (End of Month) Stock (Line 7) * The BOM stock from the current month is the same as the EOM (end of month) stock in the previous month. So, to derive line 7, simply move BOM stock in line 6 down one box and to the left. When a retailer closes for business at the end of the month, the inventory should be the same the next morning when the store opens at the beginning of the month. See PPT 12A-14 H. Monthly Additions to Stock (line 8) * The monthly additions to stock is the amount to be ordered for delivery in Emphasize: Retailer should purchase amounts indicated in line 8 which is based on each month, given turnover and sales objectives. * Additions to stock = Sales (line 2) + Reductions (line 4) + EOM inventory (line 7) - BOM inventory (line 6) * The difference between EOM stock if nothing is purchased (BOM stock - sales - reductions) and the forecast EOM stock is the additions to stock. sales forecasts, inventory turnover goals, and historical sales patterns. See PPT 12A-15 II. Open-to-Buy * The open-to-buy system starts after the merchandise is purchased using the merchandise budget plan or staple merchandise management system. * The open-to-buy system keeps track of merchandise flows while they are occurring. Specifically, the open-to- buy system records how much is spent each month, and therefore how much is left to spend. * For the merchandise budget plan to be successful (i.e., meet the sales, inventory turnover, and GMROI goals for a category), the buyer attempts to buy merchandise in quantities and with delivery dates such that the actual EOM (end of month) stock for a month will be the same as the projected or forecasted EOM stock. See PPT 12A-16 Now that the buyer knows how much to spend in each month (based on the merchandise budget plan), the buyer must keep track of spending using open-to-buy. A. Calculating Open-to-buy for the Current Period * Buyers develop plans indicating how much inventory for the merchandise category will be available at the end of the month. * These plans might be inaccurate. Shipments might not arrive on time, sales might be greater than expected, and/or reductions might be less than expected. See PPT 12A-17 * The open-to-buy is the difference between the planned EOM inventory and the projected EOM inventory. * The EOM planned inventory is taken from the merchandise budget plan, and the EOM projected inventory is calculated as follows: * Projected EOM inventory = * actual BOM inventory + monthly additions actual (received new merchandise) + on order (merchandise to be delivered) – sales plan (merchandise sold) – monthly reductions plan. * Thus the projected EOM inventory will be less than the planned EOM inventory if sales or reductions are greater than the merchandise budget plan or less merchandise is delivered than planned. Appendix 12B: Retail Inventory Method (RIM) A. The Problem * Retailers generally think of their inventory at retail price levels, rather than at cost. They take their initial markups, markdowns, and so forth as a percentage of retail. * The problem is that when retailers design their financial plans, evaluate performance, and prepare financial statements, they need to know the cost value of their inventory. See PPT 12A-23 B. Advantages of RIM * RIM has five advantages over a system of evaluating inventory at cost: * The retailer doesn't have to "cost each item.” * RIM follows the accepted accounting practice of valuing assets at cost or market, whichever is lower. * As a by-product of RIM, the amounts and percentages of initial markups, additional See PPT 12A-24 markups, markdowns, and shrinkage can be identified. * RIM is useful for determining shrinkage. * The book inventory determined by RIM can be used in an insurance claim in the case of a loss such as a fire. C. Disadvantages of RIM * One disadvantage of RIM is based on the system’s use of average markup. When markup percentages change substantially during a period, or when inventory on hand is different from total goods, the cost figure could be distorted. * Another disadvantage is that the record- keeping process involved in RIM is burdensome. See PPT 12A-25 D. Steps in RIM 1. Calculate Total Goods Handled at Cost and Retail a. Record beginning inventory at cost and at retail. b. Calculate net purchases by recording gross purchases and adjusting for returned merchandise to vendor. c. Calculate net additional markups by adjusting gross additional markups by any additional markup cancellations. d. Record transportation expenses. e. Calculate net transfers by recording the amount of transfers in and out. f. The sum is the total goods handled. See PPT 12A-26, 12A-27 2. Calculate Retail Reductions * Reductions are the transactions that reduce the value of inventory at retail (except additional markup cancellations which were included as part of the total goods handled). a. Record net sales. b. Calculate markdowns. See PPT 12A-29 c. Record discounts to employees and customers. d. Record estimated shrinkage. e. The sum is the total reductions. 3. Calculate the Cumulative Markup and Cost Multiplier * The cumulative markup is the average percentage markup for the period. It is calculated the same way the markup for an item is calculated: * Cumulative markup = Total retail - Total cost Total retail * The cumulative markup can be used as a comparison against the planned initial markup. * The cost multiplier is similar to the cost complement. * The cost multiplier = (100% - Cumulative markup%) See PPT 12A-31 4. Determine Ending Book Inventory at Cost and Retail * ending book inventory at retail = total goods handled at retail - total reductions. * The ending book inventory at cost is determined the same way that retail has been changed to cost in other situations: * Ending book inventory at retail = ending book inventory at retail X cost multiplier See PPT 12A-32 ANSWERS TO SELECTED GET OUT & DO ITS “GET OUT AND DO ITS” 2. INTERNET EXERCISE Go to the homepage for Merchandise Management Company (MMC), the exclusive merchandising service partner for Kohl’s at: http://www.merchmanco.com/Default.aspx. Watch the three minute video and read the posted information and press releases at this web site. How does this service provider support vendors to manage merchandise sold at this discount department store? What is the ‘Store Vision’ system? How is it used to measure merchandise performance? - Increases sales at retail - Consistent product presentation to match planograms - Account managers and merchandisers who are in store - Customized servicing programs - Display delivery and set-up - StoreVision - interactive reporting system. StoreVision provides a continuous flow of information as visits are taking place, giving real-time results – 24/7. 3. IN STORE or INTERNET EXERCISE Go to the store location or homepage for a craft store such as Michaels Stores, Inc, Jo-Ann Fabric and Craft Stores or A.C. Moore Arts & Crafts (http://www.michaels.com, http://www.joann.com or http://www.acmoore.com). How does this type of retailer organize their merchandise in terms of Merchandise Group, Department, Category and Stock Keeping Unit? Select a category of merchandise that you would expect to have a high inventory turnover and a low inventory turnover. Explain your reasoning for each selection. From the Michael’s Homepage - Departments Art Supplies, Beads, Craft Painting, Framing, Home Décor, Scrapbooking, Wedding, Bakeware, Christmas, Floral, General Crafts, Kids / Teachers, Yarn & Needle Crafts, Seasons & Celebrations By clicking on the Yarn Department, then the customer sees brands offered: Bernat®, Caron®, Lily® Sugar 'N Cream, Lion Brand®, Loops & Threads™, Patons®, Red Heart®, Vanna's Choice® Popular crafts that frequently go on sale would like have a high inventory turnover. Big thick items would probably have a lower inventory turnover. 4. GO SHOPPING Visit a big box office supply store and then visit a discount store to shop for school supplies. Contrast the variety and assortment offered at both. What are the advantages and disadvantages of breath vs. depth for each retailer? What are the advantages and disadvantages from the consumer’s perspective? Students should be able to describe that an office supply store has greater depth in office and school supplies. The discount store does carry this type of merchandise, but with less selection. Shoppers can buy other types of merchandise at a discount store such as clothes, toys, food and heath/beauty items. If a customer wants more school/office supply selection then they would prefer the office super store. 5. INTERNET EXERCISE. Go to the home page for the following three retail trade publications: WWD at www.wwd.com, Chain Store Age at www.chainstoreage.com, and Retailing Today at www.retailingtoday.com . Find an article from each that focuses on managing merchandise. How can these articles assist retailers with merchandise planning decisions? Answers here will vary. Here are a few article titles that could also be assigned for this question: Shopper Trak: Last four days before Christmas to be among 10 busiest, Marianne Wilson, Chain Store Age, October 29, 2013 Toys R Us prepares for Halloween, Dan Berthiaume, Retailing Today, September 25, 2013 6. INTERNET EXERCISE Go to http://www.sas.com/industry/retail/merchandise/index.html, the SAS Merchandise Intelligence group Web site. How does the SAS® Merchandise Intelligence product provide retailers with information to support merchandising planning, forecasting and measurement? From the company web site… Right merchandise. Right place. Right price. Only SAS Merchandise Intelligence provides real intelligence at every step of the merchandising life cycle. With this collection of software and services, you can maximize the profitability of the merchandising process while improving customer loyalty and satisfaction levels. Retailers get reporting, planning, forecasting and optimization at critical points through the planning process, which lead to faster and better decisions. SAS® Merchandise Intelligence includes: SAS Integrated Merchandise Planning, which provides complete planning capabilities for the merchandising process, including performance analysis, financial planning, assortment planning, space planning, allocation and more. SAS Size Optimization, which uses powerful analytics to transform historical sales data into valuable size-demand intelligence. The solution accurately predicts future sales and inventory needs by size, and determines case-pack supply to optimally meet this demand. SAS Revenue Optimization Suite, the only software suite available today that helps retailers manage revenue and margin through the entire merchandise life cycle. This suite includes three integrated components: SAS Regular Price Optimization – Establish and maintain optimal everyday prices based on costs, regional demand patterns and competitive price information. SAS Promotion Optimization– Maximize margin and revenue through improved promotion planning powered by advanced demand modeling and optimization. SAS Markdown Optimization – Determine which items should be marked down, by how much, when and in which markets or stores. Because it includes our leading forecasting capabilities and advanced analytics, SAS Merchandise Intelligence helps you drive profits by optimizing the merchandising process from planning through inventory fulfillment. All of these solutions leverage the SAS® Business Analytics Framework and its core components – industry-leading data integration, analytics and reporting technologies. This framework ensures an open, extensible foundation that integrates with your existing infrastructure to deliver accurate, in-depth retail intelligence. ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. How and why would you expect variety and assortment to differ between JCPenney’s store and Internet channel? JCPenney’s individual stores will cater more towards local and regional tastes than will the JCPenney’s online channel. In addition, JCPenney’s stores are limited on space and cannot physically contain the variety and assortment that an online channel can. Therefore the variety and assortment that JCPenney’s is able to offer through its online channel will likely exceed what JCPenney’s offers through its individual stores. However, the “feel” and categories of merchandise should be similar across all channels and customers should feel that shopping multiple channels of a retailer is a seamless experience. 2. Simply speaking, increasing inventory turnover is an important goal for a retail manager. What are the consequences of turnover that’s too slow? Too fast? With a rapid rate of turnover, sales volume increases. When retailers sell merchandise quickly, they are able to obtain fresh stock, improve salesperson morale, and create more open-to-buy opportunities. Also, there are fewer markdowns caused by slow selling merchandise. There are fewer costs of goods sold, less operating expenses and asset turnover increases. When inventory turnover is low, merchandise begins to look shopworn. When inventory turnover is too fast, sometimes sales associates might not have a chance to learn about a new product. In addition, buyers have to plan for high inventory turnover and account for the appropriate levels of back up stock in order to keep the retail floor from being too sparse. 3. Assume you are the grocery buyer for canned fruits and vegetables at a five-store supermarket chain. Del Monte has told you and your boss that it would be responsible for making all inventory decisions for those merchandise categories. It would determine how much to order and when shipments should be made. It promises a 10 percent increase in gross margin dollars in the coming year. Would you take Del Monte up on its offer? Justify your answer. In this case, Del Monte would act as a category captain for the fruits and vegetables category for the supermarket chain. Since the supermarket is a small five-store chain, one can presume that it may not have sufficient resources to have a sophisticated market research, forecasting or inventory management in place. Instead, it is possible that store managers or category managers may be making these decisions based simply on daily turnover and customer demand and traffic patterns. A partnership arrangement with Del Monte would provide this chain with tremendous benefits. It can leverage the customer insights developed at Del Monte through its expertise in the field and experience in working with other supermarkets. These insights, in turn, would help the chain become more responsive to the customers and therefore, improve performance and profits across this category. The chain would also benefit from the category and brand awareness created by Del Monte through its national promotions and advertising. On the flip side, there could be several issues that must be settled before proceeding further on the arrangement. First, Del Monte may be able to take advantage of its position as the controller of information and inventory and make decisions that may profit it more than the supermarket chain. Second, if Del Monte stocks more of its own brands with no space devoted to competitive products, consumers may be deprived of a good assortment and brand choice. Third, there may be other attempts by Del Monte to control more store-level decisions, including shelf space utilizations, display, etc. Del Monte could offer a lot of advantages, but several risks and issues do remain. On one hand, the various benefits and the promise of a 10 percent increase in gross margin dollars is attractive. But, a cautious supermarket executive would try to negotiate a deal which safeguards the chain's interests. One option is to develop contract provisions, including trying out Del Monte for a short-term contract period first. Additional contract provisions should clearly specify the areas of cooperation, redress in case the promised 10 percent increase in margins are not realized, and cancellation of the agreement at any time for any reason with only a 90-days notice. 4. A buyer at Old Navy has received a number of customer complaints that he has been out of stock on some sizes of men’s t-shirts. The buyer subsequently decides to increase this category’s product availability from 80 percent to 90 percent. What will be the impact on backup stock and inventory turnover? Would your answer be the same if the product category were men’s fleece sweatshirts? An increase in customer service by 10% will increase backup stock by much greater than 10% (see Exhibit 12-10). Inventory turnover will be adversely affected. Although net sales will increase by 10%, because service level increased by 10%, inventory investment will increase by more than 10%. In calculating inventory turnover, net sales and inventory investment both increased. But, since inventory investment increased at a higher rate, then inventory turnover must decrease. As both types of shirts could be considered staple merchandise for Old Navy, the results may be expected to be similar for men’s t-shirts and men’s sweatshirts. 5. Variety, assortment, and product availability are the cornerstones of the merchandise planning process. Provide examples of retailers that have done an outstanding job of positioning their stores based on one or more of these issues. Students will have a variety of answers to this question. However, some possible responses are: * Costco has a wide variety of merchandise where you can find 4,000 carefully chosen products. The assortment within each category, however, is narrow. *Amazon.com has a great assortment of products. With the introduction of AmazonFresh grocery, Amazon is quickly becoming a one-stop shop. *The Gap is strong on product availability for their basic merchandise. They don’t want to be out of any size of jeans or khakis. You can even special-order out-of-stock or hard to find sizes. 6. The fine jewelry department in a department store has the same GMROI as the small appliances department, even though characteristics of the merchandise are quite different. Explain this situation. The jewelry department has a low turnover, but a very high margin. Typically, a jewelry department can command a very high markup because they are selling merchandise that the customer perceives as being unique. It is also difficult to make price comparisons for jewelry. The jewelry store may also carry some brand names, such as Rolex watches, that are not available in many stores. Since the merchandise is priced high, and not generally purchased regularly, inventory turnover is often low. Inventory turnover is also generally low because jewelry departments must carry a large selection of high priced merchandise. The small appliance department, on the other hand, is often used as a “loss leader” department. That is, the department specializes in selling merchandise at low margins to bring customers into the store in the hope that they will buy other things. The relatively low price creates a high velocity of sales. In turn, the high velocity of sales keeps inventory relatively low. The combination of high sales and low inventory facilitates high inventory turnover. 7. Calculate GMROI and inventory turnover given annual sales of $20,000, average inventory (at cost) of $4,000 and a gross margin of 45%. * GMROI = Gross margin % x Sales-to-stock ratio * GMROI = 45% x (20,000 ÷ 4,000) * .45 x 5 = 2.25 * Inventory turnover (IT) =(1 – Gross margin percentage) x Sales-to-stock ratio * IT = (1 - .45) x 5 * IT = .55 x 5 = 2.75 8. As the athletic shoe buyer for Sports Authority, how would you go about forecasting sales for a new Nike shoe? As the athletic shoe buyer for Sports Authority, you are dealing with a staple merchandise category. Sales of athletic shoes should prove to be relatively steady over time for Sports Authority. Because your sales are relatively constant from year to year, you can use historical sales figures to project likely sales to come from Nike’s new shoe as a starting point for further evaluation. As the athletic shoe buyer you must be careful to take into account factors such as openings and closings of stores, price for the shoes relative to the category, special promotions or placements of the shoes that will impact sales in the category or for this particular Nike shoe. 9. Using the 80-20 principle, how can a retailer make certain it has enough inventory of fast-selling merchandise and a minimal amount of slow-selling merchandise? Retailers should rank products by the 80-20 principle, which maintains that 80% of a retailer’s sales or profits come from 20% of the products. This ranking system is known as the ABC Analysis. Essentially, the retailer should divide the inventory into “A”, “B”, or “C” categories depending upon the importance of each item. The “A” category items are those that are most important. The retailer should make sure that the store has these items all the time. The “B” category items are important but the retailer can afford to be out of these items once in a while. The “C” category items are not that important and the retailer should try to only special order these items for specific customer orders. 10. A buyer at a sporting goods store in Denver receives a shipment of 400 ski parkas on October 1 and expects to sell out by 31. On November 1, the buyer still has 350 parkas left. What issues should the buyer consider in evaluating the selling season’s progress? Using a sell-through analysis, if the selling season is supposed to be four months, the buyer should expect to sell about 100 units in the first month. Before deciding whether or not the merchandise is really selling significantly slower than it should be, the buyer should consider any environmental factors such as a particularly warm autumn. If the weather is normal, the buyer should take drastic action, such as marking down the parkas or promoting them. If the markdown strategy is chosen, the buyer should try to obtain markdown money from the vendor. 11. A buyer is trying to decide from which vendor to buy a certain item. Using the following information, determine from which vendor the buyer should buy. VENDOR PERFORMANCE Importance Issues Weight Vendor A Vendor B Reputation for collaboration 8 9 8 Service 7 8 7 Meets delivery dates 9 7 8 Merchandise quality 7 8 4 Gross margin 6 4 8 Brand name recognition 5 7 5 Promotional assistance 3 8 8 Vendor A Vendor B 8 x 9= 72 8 x 8 = 64 7 x 8 = 56 7 x 7 = 49 9 x 7 = 63 9 x 8 = 72 7 x 8 = 56 7 x 4 = 28 6 x 4 = 24 6 x 8 = 48 5 x 7 = 35 5 x 5 = 25 3 x 8 = 24 3 x 8 = 24 330 310 Therefore the buyer should choose Vendor A. ANCILLARY LECTURES AND EXERCISES Ancillary Lecture 12-1 Predicting Fadsa Instructor’s Notes: The purpose of this lecture is to supplement the material on fads in the chapter. There are five questions that a buyer can explore to predict whether a new category or item will be a fad or a long-term fashion or staple?i First, does it fit with basic lifestyle and value changes? Consumers are time-poor and therefore seek products and services that make their lives more convenient. Thus, products that speed mundane tasks, like cleaning the house, are likely to be successful. The second question a buyer must ask is, how important are the product’s benefits to the consumer? For instance, private-label merchandise, which is often priced lower than national brands has become more popular as consumers seek better value. Private-label merchandise is a brand of products designed, produced, controlled by, and carrying the name of the store or a name owned by the store. Since consumers are not willing to forego quality for price, some retailers have successfully introduced “premium” private label merchandise such as President’s Choice cookies. Third, the buyer must determine whether the product is based on a basic trend or is a side effect of that trend. The side effects will be replaced, but the trend continues to grow. For instance, the popularity of spicy food is a trend that continues to grow in the U.S. However, the different types of ethnic restaurants that serve the food may change over time -- the side effect. For instance, some experts predict that Indian and Thai food will grow in popularity at the expense of Mexican and Italian. Fourth, is a new development supported by developments in other areas? If not, it will probably be a fad. For instance, if people are allowed to dress more casually at work, and more people are working at home, and people are searching for value in their clothing purchases, then we can expect retailers like The Gap to remain popular because they provide casual clothing at a good value. Fifth, the buyer should consider which groups of consumers have changed their behavior. If the product is supported by key market segments and from unexpected sources, it has a greater chance of becoming a fashion or a staple. Birkenstock sandals, for instance, have remained popular for several decades because they appeal to people who demand comfortable footwear (a key market segment,) and certain youth segments who find the generally unattractive sandals to be fashionable. LECTURE 12-2 a This lecture is adapted from, Martin G. Letscher, “How to Tell Fads From Trends,” American Demographics, December 1994, pp. 38-45. Category Management Instructor’s Note: This lecture is designed to supplement the discussion in Chapter 12 on Category Management. It's important to establish from the beginning that the category is the unit of analysis used for planning merchandising decisions. Since all SKUs (of the same size) within a category are reasonable substitutes for one another, they follow similar demand patterns. For instance, demand for jeans is heaviest during the back-to-school period in August. Jeans are heavily promoted and discounted at this time. Demand, inventory levels, promotions, and prices for girls' jeans behave similarly to each other throughout the year. Customers and (from an inventory management perspective) buyers think of items within a category as somewhat substitutable. Since the items within a category are related, and may even be substituted for one another, decisions about one brand or product usually impact other products in the category. Buyers can therefore best plan their merchandising strategies at the category level. Forecasting sales, setting inventory turnover and profit goals, making merchandise budget plans, and determining open-to-buy are all performed on a category-by-category basis. What is Category Management and Who Uses It? “Category management is a process that involves managing product categories as business units and customizing them on a store-by-store basis to satisfy customer needs.”i Category Management may sound like the most natural method of managing merchandise, but not all retailers operate using this system. National specialty store chains, department stores, and grocery stores view category management differently. National specialty store chains. Some national specialty store chains, like The Gap and The Limited, are natural Category Managers. Their “buyers” have always managed their categories from start to finish. They define their target customers. They design and develop merchandise to meet their customers’ needs, and that is consistent with the firm’s image. The merchandise in the category is coordinated with other categories. Packaging, pricing, space management, display, and promotional decisions are made by the buyer. Finally, the buyer and his/her staff forecast sales and is responsible for allocating merchandise to stores. In the end, the buyer is evaluated on the category’s performance. Department stores. Buyers in department stores used to be Category Managers. In the last ten to fifteen years, however, many categories and departments within these stores have turned many of the responsibilities normally associated with a Category Manager over to designers such as Ralph Lauren, Tommy Hilfiger, Liz Claiborne, and Donna Karan. Instead of buying men’s sport shirts, or ladies dresses, buyers are assigned to a designer. The buyers still choose specific SKUs, forecast sales, and allocate merchandise. They have less than total control, however, over pricing, display, and promotional decisions than they used to. Importantly, one of the most basic buyer’s functions -- determining the merchandise assortment -- is shared with the designer/vendor. Department stores see the powerful role of designers to be a double-edged sword. Certainly these designers bring an image and a ready-made market to the department stores. They also usurp control from the retail buyer. Recently, however, department stores are rediscovering the concept of the category manager. For example, they have strengthened their position in private label. Grocery stores. Prior to implementing a Category Management program, a grocery buyer’s responsibility would entail purchasing from one or more vendors. There would be, for example, one buyer for Proctor & Gamble, one for General Mills, one for Kraft Foods, and so on. The Kraft buyer would purchase the entire line of Kraft products -- everything from salad dressings to cheese. Other people within the grocery organization would be responsible for making sure the merchandise was delivered to the stores in the right quantities (logistics), promoting the merchandise (advertising), and allocating space on the shelves for the merchandise (store manager or Kraft sales representatives). Oftentimes, no one in the retail organization did consumer research to determine exactly what the customer wanted to buy. Grocery stores gauged customer needs by measuring what was selling. Prior to POS terminals they only knew what was sold after they took a physical inventory in the stores. The traditional buying system in grocery stores is fraught with problems. No one individual is totally responsible for the success or failure of a category. It is also more difficult to identify the source of a problem and solve it under the traditional system. Suppose, for instance, an ad is placed in the newspaper for a Memorial Day sale. However, the stores don’t have the merchandise. Who caused the problem? Was it because the buyer didn’t order the merchandise in time? Did the advertising manager fail to inform the buyer or the logistics manager that the ad was going to run? Did the distribution center fail to get the merchandise to the stores? Importantly, under the traditional system, the buyer doesn’t have the power to solve the problem. By using a Category Management system, all of the activities and responsibilities mentioned above become under the control of the Category Manager and her staff. Setting up a Category Management Program Setting up a Category Management program requires a strong commitment from the top. Given the scenario that we described above, you can see that a new CM program will require changes in responsibilities and in the organization structure. Setting up a CM program requires three major steps: Review and coordinate strategies, define the categories, and establish strategic partnerships with vendors. Review and coordinate strategies. The first step in setting up the CM program is to review the firm’s overall marketing and financial strategies. The retailer must know how it wants to be positioned in the marketplace -- high fashion versus traditional, high priced versus moderate. The merchandise categories must be consistent with that strategy and the image that the retailer wishes to maintain. Define the categories. The category structure must be consistent with the retailer’s overall strategy and organizational structure. The categories must conform with the way the customer perceives the products. For example, a manufacturer might view shampoos and conditioners as separate categories. Yet shoppers choose between purchasing a shampoo combined with a conditioner or buying the shampoo and conditioner separately. Although shampoo and conditioner are not substitutable products, the customer uses them in a similar way. Therefore, they should probably be grouped as one category. i Establish strategic partnerships with vendors. The importance of establishing strategic partnerships with vendors has been stressed throughout Retailing Management Since retailers and their vendors share the same goals -- to sell merchandise and make profits -- it is only natural for them to share the information that will help them achieve those goals. Since vendors can develop systems for collecting information for all of the areas that they service, they can provide Category Managers with valuable information. Some retailers turn to one favored vendor to help them manage a particular category. Known as the Category Captain, 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.i Levi Strauss, for example, works with key retailers by balancing stock selections. Their account executives work with buyers and sales associates in the stores. They provide merchandising advice and fixtures, as well as an electronic ordering system.i Another apparel manufacturer, Sassco which makes better women’s’ suits, has representatives go from store to store checking out what items are selling and whether proper markdowns are being taken. They also take physical counts of stock and work with the stores on presentation techniques.i A potential problem with establishing a Category Captain, however, is that vendors could take advantage of their position. It is somewhat like letting the fox watch the henhouse. Suppose, for example, that a large candy manufacturer like Mars has become the Category Captain for a grocery store chain like Safeway. Part of their responsibility is to provide Safeway with planograms. Will the planogram provide an assortment that maximizes the profitability for Safeway, or will there be a tendency for the plan to be biased in favor of Mars?i How to Implement a Category Management Program Category management is a circular, long-term process that involves five stages. Each stage is ongoing and flows naturally into the next. The stages, illustrated in Exhibit x-x, include: Reviewing the category, targeting customers, planning merchandising, implementing strategy, and evaluating results. Reviewing the category. The first step in the category management process is a thorough review of the category. The Category Manager should determine the market share that the category has maintained. Second, the CM must attempt to determine which activities have contributed to the success or failure of a category. For instance, has the product mix, pricing, promotion, and quality been appropriate for the merchandise? Finally, how is competition treating this category? Targeting customers. A category manager cannot determine what to buy (the third step) without knowing who their target customers are. Identifying their target customers goes beyond an understanding of their demographics. CMs should know what they purchase, where, how often, and how they respond to promotions. Armed with these data, the Category Manager groups stores with similar customer profiles so she can target each group with customized product assortments, pricing, promotions, and shelf-space allocations. Planning merchandising. By utilizing the information collected in the first two steps -- reviewing the category and targeting the consumer -- the CM is ready to make merchandising decisions. She must decide what to buy, how much, and when it should be delivered. She must also decide how to price the merchandise, how to promote the merchandise, and how much space should be allocated to the merchandise in the stores. Implementing strategy. Implementing strategy requires a close cooperative relationship between the Category Manager and employees at individual stores. A great strategic plan and superlative tactics will fail unless they are communicated clearly to store managers and employees. Systems for communicating programs and monitoring results must be in place. Importantly, the CM must establish strong relationships with store managers. There must be a team effort between the CM and the stores if strategies are to succeed. Evaluating results. It is critical to evaluate the results of the retailer’s merchandising strategy quickly and continuously. Many retailers can determine how a particular SKU, or category is doing minute-by-minute, system-wide. Retailers can react to this information by taking markdowns, reordering, and reallocating space. It is equally important to determine why merchandise is exceeding or falling short of sales and profit goals. Examples of questions the CM must answer are: Were the plans implemented properly? Has competition hurt business? Is the merchandise available in the stores? Is the merchandise priced right? Were promotions coordinated with merchandise flow? After completing a situational analysis the retailer can ask, is expansion possible in this location? Will the organization be able to reach its goals and objectives of growth, profit and market share considering the costs and benefits of global expansion? Solution Manual for Retailing Management Michael Levy, Barton A. Weitz, Dhruv Grewal 9780078028991