PPT 13-1

Chapter 13

Buying Systems

McGraw-Hill/IrwinLevy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

PPT 13-2

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

PPT 13-3

Considerations in Determining How Much to Order

• Basic Stock Plan

• Present Inventory

• Merchandise on Order

• Sales Forecast

– Rate of Sales of SKU (Velocity)

– Seasonality

PPT 13-4

Basic Stock List

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

Cost of CarryingInventory

Lost Sale Due to Stockout

PPT 13-5

Buffer Stock

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

Buffer stock is dependent on:

-Forecast interval variance (Forecast interval = lead time + review time)

-Variation in Demand (actual demand - forecasted demand)

-Time to Get Product from Supplier

-Time to Get Product from Distribution Center

- Product availability requested of IM systems

PPT 13-6

Forecasting Demand

Forecasting -- extrapolating the past into future using statistical and mathematical methods

Objectives:

– Ignore random fluctuations in demand

– But be responsive to real change

PPT 13-7

Forecasting Sales

• Tradeoff Recent Sales Against Past History of Sales– Recognize Recent Trends, But Don’t Over Weight Recent

Experience

• Exponential Smoothing

Old = Old + ά x (Recent – Old) Forecast Forecast Demand Forecast

84 = 96 + .5 x (72 – 96)

• ά ranges for 0 to 1 – Higher ά Weighs Recent Sales More

PPT 13-8

Calculating the Order Point

Order Point = (Demand/Day) x (Lead Time +Review Time) + Backup Stock

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

So Buyer Places Order When Inventory in Stock Drops Below 167 units

PPT 13-9

Merchandise Budget Plan

• Plan for the financial aspects of a merchandise category

• Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives.

• Not a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantities.

PPT 13-10

Open to Buy

• Monitors Merchandise Flow

• Determines How Much Was Spent and How Much is Left to Spend

PPT 13-11

Allocating Merchandise to Stores

Percentage of total sales 1 1.5 2.5 3.5 4 6 8 12

Percentage of total inventory 1.5 2 3 4 4 4 6 10

Fewer Sales, More Sales,More Inventory Less Inventory

PPT 13-12

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 stockoccasionally.

– should be deleted from the stock selection.

PPT 13-13

Analyzing Merchandise Management

Merchandise Performance

– ABC Analysis

– Sell Through Analysis

Vendor Analysis

– Multiattribute Method

PPT 13-14

ABC Analysis Rank Merchandise By Performance Measures

• Contribution Margin

• Sales Dollars

• Sales in Units

• Gross Margin

• GMROI

• Use more than one criteria

PPT 13-15

Retail Inventory Method (RIM)

Two Objectives:– To maintain a perpetual or book inventory of retail

dollar amounts.

– To maintain records that make it possible to determine the cost value of the inventory at any time without taking a physical inventory.

PPT 13-16

Steps in RIM

Calculate Total Merchandise Handled at Cost and Retail

Calculate Retail Reductions

Calculate Cumulative Markup and Cost Multiplier

Determine Book Inventory at Cost and Retail

PPT 13-17

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 = total goods handled at retail - totalinventory at retail reductions: $141,600 - $86,000 = $55,600

Ending book = ending book inventory at retail x costinventory at cost multiplier: $55,600 x 71.13% = $39,548