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Retail Operations Week 3

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					      FM10211 – Retail Operations

                Week 3

Finish Chapter 4: Merchandise Planning, Buying,
           Control, and Profitability
              Chapter 5: Sourcing
                Midterm Review
                   Planning
• Provides essential information
• Leads to meeting Mazur’s 5 “rights”
  –   Right merchandise
  –   Right time
  –   Right place
  –   Right quantities
  –   Right price


                  FM10211 - Retail Operations   2
               Forecasting
• Predicting what customers want
• Quantities
• Uses as much input as possible
  – External environmental factors
  – Internal environmental factors




                 FM10211 - Retail Operations   3
    External environmental factors
•   Economy
•   Society and culture
•   Technology
•   Political and legal issues
•   Analysis available from a variety of sources
•   Trend books, etc.

                  FM10211 - Retail Operations   4
  Internal environmental factors
• Store records
  – Sales
  – Profits
• Store culture
• Vendors



                  FM10211 - Retail Operations   5
            Merchandise Budget
• Dollar planning
   – How much money will be spent
• Unit planning
   – How many of each type of item will be purchased and kept in
     inventory
   – Includes the mix
   – Considers assortment and qualitative aspects
• Both usually include dollar amounts and % of net sales



                        FM10211 - Retail Operations                6
             Inventory Flow
•   Start: beginning of month (BOM)
•   Stock comes in
•   Stock is sold
•   Shrinkage
•   Returns
•   End: end of month (EOM)

                 FM10211 - Retail Operations   7
      Step 1: Plan Retail Sales
• Estimate sales
• Usually use sales history, if available
  – Increase or decrease, depending on other
    factors
• If not available, more research necessary
• Plan sell-through
  – Percentage of available merchandise that is sold

                  FM10211 - Retail Operations      8
   Step 2: Plan Inventory/Stock
• Based on Sales Plan
• Must have proper stock to meet sales goals
• Calculate Beginning of the Month (BOM)
  and End of the Month (EOM) inventory
  levels



                FM10211 - Retail Operations    9
  Three Stock Planning Methods
• Basic stock
   – Minimum level of stock at all times
• Stock-to-sales ratio (SSR)
   – Multiply planned monthly sales by ratio to get BOM
   – Ratio comes from Trade Orgs or sales history
• Week’s supply
   – Stock level set to sales for determined number of weeks
   – Directly related to turnover rate




                        FM10211 - Retail Operations            10
         Inventory Turnover
• Also called stock turn
• The number of times stock is sold and
  replaced within a period of time
• High turns means shorter time in inventory
• Short time in inventory means less
  inventory costs
• (This is a slightly simplified version)
                FM10211 - Retail Operations    11
            Inventory Turnover
• Ex. 1: Buy 12 apples, sell one per month
  – Problems
     • Had to invest in 12 apples at once
     • Money tied up for 12 months
     • Apples can go bad, other inventory issues
• Ex. 2: Buy 1 apple, sell it, buy another, etc.
  – Much better!
     • Invest in one apple at a time
     • Money tied up for 1 month
     • Inventory stays fresh
                     FM10211 - Retail Operations   12
          Inventory Turnover
                COGS of all sales in period
  Turnover =
                      Full-stock inventory COGS

• If apples cost $1 each, then:
• Ex 1: $12/$12 = 1 turns
• Ex 2: $12/$1 = 12 turns



                 FM10211 - Retail Operations      13
         Assortment Planning II
• Plans the mixture of merchandise
• Basic stock planning
  – For basics
  – Ongoing levels
• Model stock planning
  – Based on various factors
     •   Fabric
     •   Price
     •   Style
     •   Etc.
                  FM10211 - Retail Operations   14
               Assortment Terms
• Breadth of merchandise
   – Number of different product lines, styles, brands carried
   – Broad = lots of styles
   – Narrow = few styles
• Depth of merchandise
   – Number of units within a line, style, or brand
   – Deep = many colors and sizes
   – Shallow = few colors and sizes




                         FM10211 - Retail Operations             15
       Step 3: Plan Reductions
• Rare to sell all inventory at original price
• Helps clean out inventory to be replaced
• Various types
  – Markdowns
     • Promotional or Permanent
     • Adjust price down
  – Markup cancellation
     • Adjust amount of markup
  – Discounts
     • For employees and/or special customers
                   FM10211 - Retail Operations   16
            Step 4: Plan Markup
• In dollars, retail price minus cost
• Percentage of cost added to cost to get price
• Keystone markup
   – Markup = cost
• Short markup
   – Less than keystone
• Volume and competition are primary factors in
  determining markup
   – E.g. Wal-Mart



                          FM10211 - Retail Operations   17
                          Pricing
• Much more than just considering expenses
• Consider
   – Type of merchandise           – Target customer
   – Competition                   – COGS and expenses
• Strategy
   –   Price range
   –   Price points
   –   Promotionally priced vs. regularly priced
   –   Odd priced vs. even priced
   –   Loss Leader?
• Pricing is regulated by Federal Trade Commission (FTC)!

                       FM10211 - Retail Operations          18
         Step 5: Plan Purchases
• Now, purchases can be planned
• Based on
  –   BOM
  –   EOM
  –   Planned Sales
  –   Reductions
• Open to Buy (OTB)
  – Planned purchases minus on-order
                      FM10211 - Retail Operations   19
                  Calculations
•   Sales
•   +Reductions
•   +EOM
•   -BOM
•   = Planned Purchases

• IE:
Sales + Reductions + EOM = BOM + Purchases

    Everything out of Month            Everything into Month

                     FM10211 - Retail Operations               20
        Six-Month Merchandise Plan
      Spring    Feb        Mar           Apr               May        Jun       Jul
        Fall    Aug        Sep           Oct               Nov       Dec        Jan
Sales           44,800     47,600       36,400             50,400    61,600    39,200
EOM Stock       97,485     86,285      100,285            111,485    89,085    96,552
Reductions       7,448      7,840        8,624              6,664      3,920     4,704
BOM Stock       94,685     97,485       86,285            100,285   111,485    89,085
Purchases
    Retail      55,048     44,240        59,024            68,264   43,120     51,371
    Cost*       27,524     22,120        29,512            34,132   21,560     25,686



             *Cost is after taking out markup
                (this example uses keystone markup)

                            FM10211 - Retail Operations                        21
   Chapter 5: Sourcing

Determining how and where goods
             bought
               Supply Chain
• Resources
  – Manufacturers
    • A/k/a vendors, suppliers, resources
• Middlemen
  – Wholesalers
    • A/k/a distributors
    • Buy in large quantities, break down, distribute
  – Finishers
  – Drop-shippers
  – Brokers
                   FM10211 - Retail Operations          23
      Contract Manufacturing
• Independent producers
• Perform aspects of manufacturing
  – Sewing
  – Cutting
  – Finishing
• Can be exclusive
  – Only work for a particular company
  – Pros and cons
                 FM10211 - Retail Operations   24
                 Lead Time
•   Time between order placed and arriving
•   The faster the better
•   Long lead times may be hard to avoid
•   Technology can help
    – Quick Response
    – Just-in-time


                  FM10211 - Retail Operations   25
       Domestic vs. International
• Domestic Sources
   – Faster
   – More expensive
   – Easier to work with?
• International Sources
   –   Often less expensive
   –   Longer lead time
   –   Red tape
   –   Ethical issues
                      FM10211 - Retail Operations   26
Manufacturing Cost Comparison




          FM10211 - Retail Operations   27
  Centralized vs. Decentralized
• Centralized
  – One group/individual buys for entire company
• Decentralized
  – Buying happens locally
  – Less common for larger retailers




                  FM10211 - Retail Operations      28
              Buying Offices
• Resident Buying Office (RBO)
  – Located in particular fashion market
  – Local representative for retailer
  – Store-owned or independent
     • Independent works for multiple retailers
     • Independent can save money




                   FM10211 - Retail Operations    29
                      Markets
• Where retailers and manufacturers meet
• Merchandise Marts
  – Located in major cities
• Trade Shows
• International markets
  – Largest cities


                     FM10211 - Retail Operations   30

				
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