1. PPT 13-1
5th
Edition

2. PPT 13-2
Chapter 13
Buying SystemsBuying Systems
McGraw-Hill/Irwin
Levy/Weitz: Retailing Management, 5/e Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

3. PPT 13-3
Merchandise Management
Buying
Systems
Planning
Merchandise
Assortments
Buying
Merchandise
Pricing
Retail
Communication
Mix

4. PPT 13-4
Merchandise Management Issues

5. PPT 13-5
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

6. PPT 13-6
Staple Merchandise Buying System
Forecast
SKU
Sales
Order
Merchandi
se
Monitor
Sales and
Inventory
Compare
Inventory
to Basic
Stock
List

7. PPT 13-7
Considerations in Determining
How Much to Order
• Basic Stock Plan
• Present Inventory
• Merchandise on
Order
• Sales Forecast
– Rate of Sales of
SKU (Velocity)
– Seasonality

8. PPT 13-8
Inventory Management Report for
Rubbermaid Merchandise

9. PPT 13-9
Basic Stock List
Indicates the Desired Inventory Level for Each SKU
– Amount of Stock Desired
Cost of Carrying
Inventory
Lost Sale Due
to Stockout

10. PPT 13-10
Relationship between Inventory
Investment and Product Availability
InventoryinvestmentDollars
Product Availability (Percent)
600
500
400
300
200
100
0
80 85 90 95 100

11. PPT 13-11
Cycle and Buffer Stock
UnitsAvailable
Weeks
150 -
100 -
50 -
0 -
1 2 3 4
Order 96
Cycle
Stock
Buffer
Stock

12. PPT 13-12
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

13. PPT 13-13
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

14. PPT 13-14
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

15. PPT 13-15
Order Point
• Order point = the point at which inventory
available should not go below or else we will
run out of stock before the next order arrives.
• Assume Lead time = 0, Order point = 0
• Assume Lead time = 3 weeks, review time =
1 week, demand = 100 units per week
• Order point = demand (lead time + review
time) + buffer stock
• Order point = 100 (3+1) = 400

16. PPT 13-16
Order Point continued
• Assume Buffer stock = 50 units, then
• Order point = 100 (3+1) + 50 = 450
• We will order something when order point gets
below 450 units.

17. PPT 13-17
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

18. PPT 13-18
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.

19. PPT 13-19
Six-Month Merchandise
Budget Plan for Men’s Tailored Suits

20. PPT 13-20
Steps in Preparing Plan
• Forecast Six Month Sales for Category
• Breakdown Total Sales Forecast into Forecast for each
Month (lines 1, 2)
• Plan Reductions for Each Month (lines 3, 4)
• Determine Beginning of the Month (BOM) Stock to
Sales Ratio (line 5)
• Calculate BOM Inventory (line 6)
• Calculate EOM Inventory (line 7)
• Calculate Monthly Additions to Stock (line 8)

21. PPT 13-21
Open to Buy
• Monitors Merchandise Flow
• Determines How Much Was Spent
and How Much is Left to Spend

22. PPT 13-22
Six Month Open to Buy

23. PPT 13-23
Open-to-buy for Past Periods
• Projected EOM stock = actual EOM stock
• Open-to-buy = 0
• There is no point in buying merchandise
for a month that is already over.

24. PPT 13-24
Open-to-Buy for
Current Period (I)
• Projected EOM stock =
• Actual BOM stock
• + Actual monthly additions to stock (what was
actually received)
• + Actual on order (what is on order for the
month)
• - Plan monthly sales
• - Plan reductions for the month

25. PPT 13-25
Open-to-Buy for
Current Period (II)
• Open-to-buy =
• Planned EOM stock (from merchandise budget
plan)
– Projected EOM stock (based on what is really
happening)

26. PPT 13-26
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

27. PPT 13-27
Breakdown by Store of
Traditional $35 Denim Jeans in Light Blue
Source: Banner Distributing Company, Denver, Colorado; used with
permission.
(1)
TYPE OF
STORE
(2)
NUMBER OF
STORES
A
B
C
Total sales $150,000
4
3
8
10.0%
6.7
5.0
$15,000
10,000
7,500
60,000
30,000
60,000
429
286
214
(3)
% OF TOTAL
SALES, EACH
STORE
(4)
SALES PER
STORE (TOTAL
SALES X COL. 3)
(5)
SALES PER
STORE TYPE
(COL. 2 X COL. 4)
(6)
UNIT SALES
PER STORE
(COL. 4/$35)

28. PPT 13-28
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.

29. PPT 13-29
Analyzing Merchandise Management
Merchandise Performance
– ABC Analysis
– Sell Through Analysis
Vendor Analysis
– Multiattribute Method

30. PPT 13-30
ABC Analysis Rank Merchandise
By Performance Measures
• Contribution Margin
• Sales Dollars
• Sales in Units
• Gross Margin
• GMROI
• Use more than one criteria

31. PPT 13-31
ABC Analysis for Dress ShirtsPercentageofSalesDollars
10 20 30 40 50 60 70 80 90 100
Percentage of Items
No Sales
100
90
80
70
60
50
40
30
20
10
0
C
10%
B
20%
A
70%
A B C D
5% 10% 65% 20%
Sales

32. PPT 13-32
Sell-through Analysis for Blouses
Week 1 Week 2
Stock Actual-to-Plan Actual-to-Plan
Number Description Plan Actual Percent. Plan Actual Percent.
1011 -Sm White silk V-neck 20 15 -25 20 10 -50
1011 -Med White Silk V-neck 30 25 -16.6 30 20 -33
1011 -Lg White Silk V-neck 20 16 -20 20 16 -20
1012 -Sm Blue Silk V-neck 25 26 4 25 27 8
1012 -Med Blue Silk V-neck 35 45 29 35 40 14
1012 -Lg Blue Silk V-neck 25 25 0 25 30 20

33. PPT 13-33
Ij *
i 1
n
P
=
∑ ij = Sum of the expression
Ij
= Importance weight assigned
to the ith dimension
Pi
= Performance evaluation for
jth brand alternative on the
jth issue
1 = Not important
10 = Very important
Evaluating a Vendor:
A Weighted Average Approach

34. PPT 13-34
Evaluating a Vendor:
A Weighted Average Approach
Performance Evaluation of Individual
Brands Across Issues
Importance
Evaluation Brand A Brand B Brand C Brand D
Issues of Issues (I) (Pa) (Pb) (Pc) (Pd)
(1) (2) (3) (4) (5) (6)
Vendor reputation 9 5 9 4 8
Service 8 6 6 4 6
Meets delivery dates 6 5 7 4 4
Merchandise quality 5 5 4 6 5
Markup opportunity 5 5 4 4 5
Country of origin 6 5 3 3 8
Product fashionability 7 6 6 3 8
Selling history 3 5 5 5 5
Promotional assistance 4 5 3 4 7
Overall evaluation = 290 298 212 341
Ij *
i
n
P
=
∑1
ij

35. PPT 13-35
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.

36. PPT 13-36
Advantages of RIM
• The retailer doesn't have to “cost” each time.
• Follows the accepted accounting practice of
valuing assets at cost or market, whichever is
lower.

37. PPT 13-37
Advantages of RIM cont’d
• Amounts and percentages of initial markups,
additional markups, markdowns, and shrinkage
can be compared with historical records or
industry norms.
• Useful for determining shrinkage.
• Can be used in an insurance claim case of a loss.

38. PPT 13-38
Disadvantages of RIM
• System that uses average markup.
• Record keeping process involved is burdensome.

39. PPT 13-39
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

40. PPT 13-40
Retail Inventory Method
Cumulative Markon = (total retail - total cost) / total retail:
($290,000 - $160,000) / $290,000 = 44.8%
The Cost Multiplier = cumulative markon
(100% - cumulative markon%) = 55.2%
Ending book = total goods handled at retail - total
inventory at retail reductions: $290,000 - $208,000 = $82,000
Ending book = ending book inventory at retail x cost
inventory at cost multiplier: $82,000 x 55.2% = 45,264

41. PPT 13-41
Retail Inventory Method
Example
Total Goods Handled Cost Retail
Beginning inventory $ 60,000 $ 84,000
Purchases 50,000 70,000
- Return to vendor (11,000) (15,400)
Net Purchases 39,000 54,600
Additional markups 4,000
- Markup cancellations (2,000)
Net markups 2,000
Additional Transport. 1,000
Transfers in 1,428 2,000
- Transfers out (714) (1,000)
Net Transfers 714 (1,000)
Total Goods Handled $100,714 $141,600

42. PPT 13-42
Total Goods Handled Cost Retail
Gross Sales $ 82,000
- Consumer Returns & Allowances ( 4,000)
Net Sales $ 78,000
Markdowns 6,000
- Markdown Cancellation (3,000)
Net Markdown 3,000
Employee Discounts 3,000
Discounts to Customers 500
Estimated Shrinkage 1,500
Total Reductions $ 86,000
Retail Inventory Method
Example