Chapter 13

Buying Systems

McGraw-Hill/Irwin PPT 13-1 Retailing Management, 5/e Levy/Weitz:

Copyright 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Types of Buying Systems

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

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Considerations in Determining How Much to Order

Basic Stock Plan Present Inventory Merchandise on Order Sales Forecast Rate of Sales of SKU (Velocity) Seasonality
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Basic Stock List

Indicates the Desired Inventory Level for Each SKU
Amount of Stock Desired

Lost Sale Due to Stockout Cost of Carrying Inventory

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Buffer Stock
We need it so we wont loose sales, complementary sales, and customers Buffer stock is dependent on: -Forecast interval variance (Forecast interval = lead time + review time) -Variation in Demand (actual demand - forecasted demand) -Time to Get Product from Supplier -Time to Get Product from Distribution Center - Product availability requested of IM systems

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Forecasting Demand
Forecasting -- extrapolating the past into future using statistical and mathematical methods Objectives: Ignore random fluctuations in demand But be responsive to real change

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Forecasting Sales
Tradeoff Recent Sales Against Past History of Sales
Recognize Recent Trends, But Dont Over Weight Recent Experience

Exponential Smoothing Old Forecast 84 = = Old Forecast 96 + + x (Recent Old) Demand Forecast .5 x (72 96)

ranges for 0 to 1
Higher Weighs Recent Sales More

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Calculating the Order Point

Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock 167 units = (7 units x (14 + 7 days) + 20 units So Buyer Places Order When Inventory in Stock Drops Below 167 units

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Merchandise Budget Plan

Plan for the financial aspects of a merchandise category Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives. Not a complete buying plan--doesnt indicate what specific SKUs to buy or in what quantities.

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Open to Buy
Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend

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Allocating Merchandise to Stores

Fewer Sales, More Inventory Percentage of total sales Percentage of total inventory 1 1.5 1.5 2 2.5 3 3.5 4 4 4

More Sales, Less Inventory 6 4 8 6 12 10

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ABC Analysis
Rank - orders merchandise by some performance measure determine which items: should never be out of stock. should be allowed to be out of stock occasionally. should be deleted from the stock selection.

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Analyzing Merchandise Management

Merchandise Performance ABC Analysis Sell Through Analysis Vendor Analysis Multiattribute Method

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ABC Analysis Rank Merchandise By Performance Measures

Contribution Margin Sales Dollars Sales in Units Gross Margin GMROI Use more than one criteria
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Retail Inventory Method (RIM)

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

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Steps in RIM
Calculate Total Merchandise Handled at Cost and Retail Calculate Retail Reductions Calculate Cumulative Markup and Cost Multiplier Determine Book Inventory at Cost and Retail

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Retail Inventory Method

Cumulative Markup = (total retail - total cost) / total retail: ($141,600 - $100,714) / $141,600 = 28.87%

The Cost Multiplier = cumulative markon (100% - cumulative markup%) = 71.13% Ending book inventory at retail Ending book inventory at cost = total goods handled at retail - total reductions: $141,600 - $86,000 = $55,600 = ending book inventory at retail x cost multiplier: $55,600 x 71.13% = $39,548

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