Key Issues

1. Key Issues • Stores as products • Merchandise planning decisions • Developing a successful merchandise plan • What makes shoppers tick • Assortment, depth issues • Mechanics of merchandise management • Inventory-level planning

2. Are Stores “Products”? • Stores as products • new product development • product positioning • target marketing • product life cycle • Note the kinds of products that characterize ... • Upscale department stores • Discounters

3. Two Aspects toMerchandise Mgmt • Merchandise Selection Decisions • Merchandise Planning Decisions

4. Objectives ofMerchandise Planning • To meet corporate objectives • To define management’s responsibilities • To establish timing guidelines for merchandise • To forecast budgetary needs for merchandiseObjective of good merchandise planning: improved customer service, leading to more loyalty and repeat business, which eventually leads to more new business and greater profits. The retailer wants to … - get the right product - to the right stores - at the right time - to satisfy customers

5. Merchandising Organization • Assistant Buyer • Associate Buyer • Buyer • Divisional Merchandising Manager (DMM) • General Merchandising Manager (GMM)

6. Chairman Planning Group Merchandise Group Sr. vice pres merch mgr Women’s ready-to-wear Sr. vice pres merch mgr Men’s, child’s, intimate apparel Sr. vice pres merch mgr Cosmet, shoes, jewelry, access. Sr. vice pres merch mgr Soft homefurn., kitchen V.P.Planning Department Div. merch manager Men’s suits, slacks, dress shirts Div. merch manager Men’s sports-wear, Polo Div. merch manager Young men’s, boys’ apparel Div. merch manager Children’s apparel Div. merch manager Intimate apparel Div Dir.Planning Classification Mgr.Planning Buyer Preteen accessories Buyer Girls’ Size 7-14 Buyer Girls’ Size 4-6 Buyer Toddlers’ Buyer Infants’ Buyer Little boys’ Category Sportswear Dresses Swimwear Outerwear SKU Girls Levi jeans, sz 5, stone washed blue, straight leg Merchandising Organization

7. Innovativeness Forecasts Assortments Allocation Brands Timing Developing a Successful Mdse PlanWhat Makes Retail Shoppers Tick Merchandise Plan

8. Product Quality Width Depth Considerations:Sales & ProfitSpace RequirementsInventory TurnoverCannibalization Width Wide Narrow Deep Depth Shallow What Makes Shoppers Tick Forecasts Innovativeness Fashion Trends Staple Merchandise Assortment Merchandise Product Lines etc. Model Stock Plan Fashion Merchandise Seasonal Merchandise Fad Merchandise Fashion Trends Retailer’s Image Competition Customer Segments Investment Costs Profitability Risk VerticalA “designer” trend which will change as it filters down to other mkts HorizontalA trend accepted by a wide no. of people on its introduction Assortment Assortment Types Brands Manufacturer (National) Private Label (Dealer)

9. Assortment Width & Depth Width Wide Narrow Broad Market High Level of Customer Traffic Customer Loyalty One-Stop Shopping No Disappointed Customers BUT Special Image Good Selection in Category(ies) Specialized Personnel Customer Loyalty No Disappointed Customers Lower Cost than Wide and Deep BUT Deep Depth Broad Market High Customer Traffic Emphasis on Conven. Shoppers Less Costly Than Wide and Deep One-Stop Shopping BUT Aimed at Convenience Customers Least Costly High Turnover of Items BUT Shallow

10. Software Availablefor All of These • General Merchandising • Forecasting • Innovativeness • Assortment • Allocation • Category Management

11. 2. Selecting & Interacting with Vendors 3. Evaluation ofMdse & Vendor 4. Negotiationof Price& Terms 6. Receiving & Stocking Merchandise 8. Reevaluationof Mdse &Vendor 7. Reordering 5. Concluding Purchases Implementing Mdse Plans Establish a Formal or Informal Buying Organization Make M’dise Plans: What to Stock, How Much, When, Where in Store 1. Gathering Informationabout customerdemand

12. Basic Mdse Mgmt Issues Knowing how much to buy in dollars Knowing what to buy in units and dollars Knowing how to make the buy The merchandise budget in dollars The assortment plan Retailing/Vendor relationships Open to buy Unit control systems Discounts and terms of sale

13. Mechanics of Merchandise Management:“Dollars” View Width. Which products, & the number ofmerchandise categories in a store or department.This is the Buyer’s decision. Variety 2 Stock Balance Depth or support. The numberof SKUs within a category, & theinventory depth. Most often theinvt’y control analyst’s decision Assortment Planning 3 4 5 6 $ Planning Turnover 7 11 10 9 8 Purchase Plan Sales Plan Stock Plan Reduction Plan 12 13 Initial Markup Plan Retail $ Control 14 Cost 15 • Dollars • Units OTB

14. Mechanics of Merchandise Management:“Units” View Width. Which products, & the number ofmerchandise categories in a store or department.This is the Buyer’s decision. Variety 2 Stock Balance Depth or support. The numberof SKUs within a category, & theinventory depth. Most often theinvt’y control analyst’s decision Assortment Planning 3 4 5 6 $ Planning Turnover 7 11 10 9 8 Sales Plan Stock Plan Reduction Plan Purchase Plan 12 13 Initial Markup Plan Retail $ Control 14 Cost 15 • Dollars • Units OTB

15. Typical Sales Variations of Levi’s Fall sales --- typically 40 percent of annual salesSpring/Summer --- typically 15 percent of annual salesWinter sales --- typically 30 percent of annual sales.

16. Distributing Seasonal Sales Plans % of Business Season’s Planned Month in 6 mos. Sales Forecast Sales February 10% $52,000 $5,200 March 10% 5,200 April 25% 13,000 May 15% 7,800 June 30% 15,600 July 10% 5,200 TOTAL 100% $52,000 $52,000

17. Reduction Planning Planned Planned Amount of Month Sales Reduction* Reduction February $5,200 30% $1,248 March 5,200 -- -- April 13,000 -- -- May 7,800 -- -- June 15,600 30% 1,248 July 5,200 40% 1,664 TOTAL $52,000 100% $4,160 * Percent of season total

18. Recall the Strategic Profit Model Rate of Return on Assets Return on Investment Asset Turnover Net Profit Margin Leverage Ratio = x x Net Profit Net Worth Net Profit Net Sales Net Sales Total Assets Total Assets Net Worth The Financial Objective The Financial Program (The SPM)

19. The ROA measure is used by corporate management It can control G,S,&A & therefore net profit It can control total investment & therefore total assets Gross Profit Dollars Net Sales Net Sales . Avg. Inventory ROA vs GMROI Rate of Return on Assets Asset Turnover Net Profit Margin x Net Profit Dollars Net Sales Net Sales . Avg. Total Assets Gross Margin Returnon Inventory Investment Inventory Turnover Gross Profit Margin x

20. So … GMROI: GMROI = Gross Margin $ (@ Retail or Cost) Average Invty $ (@ Retail or Cost) Gross Margin Returnon Inventory Investment Inventory Turnover Gross Profit Margin Gross MarginAvg Inventory = x Gross MarginAvg Inventory Gross Margin Dollars Net Sales Net Sales . Avg. Inventory = x GMROI =

21. GMROI Examples Milk Caviar Gross Margin $ 2,000 $150,000 Sales 150,000 300,000 Average Inventory 1,000 75,000 Gross Profit Margin Inventory Turnover Gross MarginAvg Inventory GMROI = Gross Marg $ X Net Sales = Gross Margin . Net Sales Average inventory Average Inventory Milk GMROI = $2,000 X $150,000 =$ 2,000 $150,000 1,000 1,000 = 1.33% X 150 = 200% Caviar GMROI = $150,000 X $300,000 =$300,000 $300,000 75,000 150,000 = 50% X 4 = 200%

22. Discounts & Terms of Sale Terms of Sale:Conditions under which retailers must make payment to vendors. Trade discounts:A price reduction granted to retailers or wholesalers for performing services. Quantity discounts:Discounts from the invoice offered to retailers who purchase a specific quantity. Cumulative quantity discount: The values of all orders in a period are added together for the calculation of quantity discounts. Invoice: A bill sent by suppliers calling for payment. Seasonal discounts:Discounts retailers earn by ordering or taking delivery of merchandise before the normal selling period is done. Terms of Payment:Conditions under which retailers must make payment to vendors. Cash discounts:Deductions in price given by suppliers for prompt payment of invoice.

23. Payment Requirements Shipping terms F.O.B. (Free on board): Merchandise is placed on board a truck, railroad car or airplane with title to goods passing from seller to buyer at the F.O.B. point. F.A.S. (Free alongside ship): At a named port the seller quotes a price for the goods including charges for delivery and loading alongside a vessel. C.I.F. (Cost, insurance, and freight): The seller quotes the price including transportation, insurance, and miscellaneous expenses. C.O.D. (Cash on delivery): The seller requires that the buyer pay for the goods at time of delivery. Advanced dating Vendors offer retailers more time in which to pay their bill in order to entice them to purchase their goods. Extra dating: One type of advanced dating which lengthens the time that retailers have to take advantage of cash discounts. EOM (End of month) dating: Under EOM dating, the ordinary period does not begin until the end of the month of the date shown on the invoice. ROG (Receipt of goods)dating: Under ROG dating, the terms of the discount do not begin until the date that goods are received in the store. Anticipation discount: Discounts given by some vendors as an inventive for early payment in the form of a percentage rate per year.

24. Inventory Level Planning Methods • Basic stock method: • The retailer buys an amount equal to planned sales plus a “basic stock” • E.g., BOM invty = planned sales + basic stock • Percentage variation method: • Recommended when stock turnover is > 6 times per yr. • Actual stock on hand in any month is allowed to vary by only half of the month’s variation from avg. estimated monthly sales • E.g., if we expect a month to have a sales increase of 14% over the avg. month, invty for that month is increased by only 7% • E.g., if avg invty = $100k, sales = $70K/mo. & planned sales = $80K, then BOM invty = $100K x ½(1 + $80K/$70K) = $107K • Weeks’ supply method: • Assumes stock is carried in proportion to sales -- stock on hand equals several weeks’ sales • E.g., BOM invty = avg weekly sales x # weeks • Stock-to-sales ratio method: • Assumes the retailer wants to keep a specified ratio of mdse to sales. • E.g., a ratio of 3 means that an expected $10K month must be supported by $30K invty