Subject: Retail Buying & Category ManagementSession: 1Contents: Retail Inventory: Concepts and Mathematics, Concepts of Cycle Stock, Buffer Stock and Order Point, Inventory Turnover at Retail, Cost and Unit Methods to plan stocks BOM, % Variation Weeks’ Supply Stock Sales Ratio

Jagriti Mishra, NIFT Gandhinagar

Defining the Basic Profit Factors

• Cost is the amount which the retailer pays purchases

• Retail is the price at which stores offer merchandise for sale to the consumer.

Basic terms

• Sales volume or operating income• Cost of goods sold• Operating expenses• Gross margin• Customer returns • Customer allowances• Inward freight• Alteration and workroom cost• Cash Discount• Direct Expenses• Indirect Expenses

Operating Income (sales)

• Gross sales are the total initial dollars received for a merchandise during a given period

• Gross sales = Total of all the prices charged to consumers on individual items x Number of Units actually sold.

Cost of goods sold

• Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period.

• Operating expenses:

An operating expense is an ongoing cost for running a product, business, or system.

• Customer Returns:

When the merchandise is returned to the stock and customer receives a cash refund or charge credit , these return of sales are called customer returns.

• Customer allowance:

If a customer receives a price reduction after the sale is completed, it is known as customer allowance

• Gross margin

Gross margin is the difference between the sales and the cost of goods sold.

• Net sales

Net sales is the sales total after customer returns and allowances have been deducted from gross sales.

Departmentalization

• Is an extension of the specialization principle, occurs when tasks and employees are grouped together into departments to achieve the operating efficiencies of specialization for a group performing similar tasks

• Specialization and Departmentalization can be based on:– Product type (such as apparel, home furnishings, and

appliances)– Activity (such as buying, selling and stocking)– Activity location (such as main store, branch store and

warehouse)– Customer type (such as household and business customer)

• In order to use these as base for departmentalization of store, a retailer should select the one providing the management with the best level of control and producing the highest employee efficiency

PLANNING MERCHANDISE ASSORTMENTS

• Organizing the Buying Process by Categories– The Category– The Category Management– The Category Captain– The Buying Organization

The Category

• A category is an assortment of items that customer sees as reasonable substitutes for each other

• Each of these items have similar characteristics

• Merchandise is priced and promoted to appeal a similar target market

Category Management

• The process of managing a retail business with the objective of maximizing sales and profit of a category

• The buyer is responsible for developing the assortment plan for the entire category, pricing merchandise, and coordinating promotions with the advertising department and stores.

– An important reason for adopting category management is that one person, the category manager, is ultimately responsible for the success or failure of a category

– It is easier to manage to maximize profit

The category captain

• Some retailers turn to one favored vendor to help them manage a particular category known as category captain

• CPFR (Collaboration, Planning, Forecasting, Replenishment)

• Letting the fox into the hen house

THE ASSORTMENT PLANNING

• Variety:– Variety is the number of different merchandising

categories within a store or department.

– Stores with large variety are said to have good breadth (variety & breadth are used interchangeably)

• Assortment:– Assortment is the number of SKU’s within a category.

– Stores with large assortment are said to have good depth (assortment & depth are used interchangeably)

• Product availability:– Product availability defines the percentage of demand for a

particular SKU that is satisfied. Also referred to as the level of support or service level.

Determining product availability

• Cycle Stock / Base Stock:– Is inventory that results from the replenishment

process and is required to meet demand when the retailer can predict demand and replenishment times (lead times) perfectly, as predicted or planned.

– Before the store is out of stock, next order arrives.

• Backup stock / Buffer stock: – Also known as a safety stock, as a cushion for the

cycle stock so they won’t run out before the next order arrives

How do retailers make trade – off’s between variety, assortment & product availability?

The Assortment Plan

• After setting the financial goals and determining the relative importance of variety, assortment, and product availability, the retailer is ready to determine what merchandise to stock using an assortment plan.

• A good assortment plan requires a good forecast for sales, GMROI, and inventory turnover along with a mix of subjective and experienced judgment. A good inventory management system that combines these elements.

Range Width and Assortment Planning

Putting together a profitable range..

Without a Range Plan..

• Assortments are put together in an un-structured manner

• Ranges are bought based on availability with supplier rather than to a specific plan

• Space and volume of merchandise don’t match

• Low margin products occupy more shelf space

• Products bought are either too much or too less to meet the sales and margin plan

Main objectives

• Get the sales and margin plan right for the planned area

• Each store to get a balanced range with sufficient width for sale all year round

• To plan full potential of each option and aim to maximize margins

• To plan the display and replenishment qty for each option so that each option is available for the planned duration without running out of stock.

The starting point..

• Sales plan – – Top down and Bottom up approach

• Performance - last year same season and immediate prior season

• Growth % for in like-for-like stores• Business from new stores

– Estimates from Operations

– Market trends

Sales phasing

– Analyse sales by week for last year same period

– Factor in new launches/ promotions

– Plot sales over the current period

Buy Plan

• Corresponding to the sales plan

• Taking into account lead times– Manufacturing– Transit to warehouse– Allocation to stores

• Stock Covers to be maintained within control

Stock turn

• Buyers aim is to convert stock into cash, the no. of times this can be done in a specific period is the Stockturn– Stock turn = Sales/ Avg Stock– High weeks cover = lower stock turn, vice versa

• Plan the closing stock in no. of weeks cover at any given time– Eg. 8 weeks (4 on floor, 2 in warehouse and 2 in transit)

Planned Margins

• Intake margins – at the time of purchasing product

• (Difference between MRP and Cost) / MRP

• Balance the high margin and low margin product to achieve overall planned margins

• Helps to work backwards from MRP

OTB

• Simply, – OTB = Planned Closing Stock – (Opening stock –

(Sales+Markdowns))

  Jan Feb Mar Apr May Jun

Opg Stk 450 370 350 340 350 410

Planned Sales 200 170 180 160 190 220

Markdowns 0 10 10 0 15 30

Closing Stock 250 190 160 180 145 160

Planned Clsg Stk 370 350 340 350 410 220

OTB 120 160 180 170 265 60

Weeks Cover 7.4 8.2 7.6 8.8 8.6  

Building the range

• Good assortment is a balance of:– price– color – styles– Fabrics

• Price:– Determine the lead-in price, mid price and highest price.– Limited number of prices = less confusion for the customer– Overall margin should be achieved with lesser price points

• Color:– Balance the proportion of core colors and highlight colors

– Prevent overkill of any specific color

– Control your own preference consciously

– Involve designers in this process

– All colors only from the seasons color palette

Building the range

• Styles:– Are the styles complimenting each other?

– Are there too many styles?

– Or too few?

– Are key styles available in key colors?

– Are we taking too much risk by introducing a new style in a new color?

• Fabrics – – Are all key fabrics represented?

– Are all key styles presented in key fabrics (and key colors)

Building the range

• Decide the Average Selling Price:– On basis of last year same season ASP +

Inflation– If there’s a conscious shift to have more

expensive products then it should be factored here.

• Sales Density:– Determine the sales per square foot required– Check whether the SPF is feasible from the

given area

Planning the assortment

• Determine the total qty required per option on an avg.

– Find out the total qty sold per option in the last year same season

– Find out avg qty sold per outlet, extrapolate it to total outlets in the current planning period

Planning the assortment

• Inputs:

– Sales plan

– Avg stock holding value

– OTB for the entire period

– Avg selling price

– Avg no of pcs that we can sell per option

• Output:

– OTB / Avg selling price = Total qty to be bought

– Total qty / Avg qty per option = Total no. of options required

Final outcome..

Range Width Planning

• The challenge is to present the best offering in the space available

• Step 1 - Grade the stores– A, B or C based on size

– A – largest, B – Medium sized, C – Smallest

• Step 2 - Grade the categories in each store– Category Grade– 1, 2 or 3 based on business potential

Product Priority

Ladies Western Ladies Ethnic Winterwear Home Denims

Store Type A 1 2 3 2 1

• Combination of store grade and category grade will determine the Assortment Grade i.e. number of options planned for each category at each location.

• Since the characteristics will be the same, each store with the same assortment grade will get exactly the same width and depth.

• For Eg. From Nov to Jan, winterwear will get more space in all Northern stores than in Western region stores, irrespective of store size. So it will be treated as Grade 1 category even in a C grade store in Delhi and therefore get more space and therefore an appropriate number of options for a C1 Assortment Grade!

Range Width Planning

• Look at planned footage at each store grade.

• For eg. – For store Grade A, – Number of pcs that can be displayed using optimum fixturing

– Combination of face-outs and side-outs

– Find out Average depth per option sold last year, arrive at total number of options that can be displayed this year.

– Compare that with the planned number of options as per the Assortment Grade

– Adjust the buy assortment and footage till the offering looks complete - with the aim of maximising sales

Combining the Range Width and Assortment plan