MERCHANDISE PLANNING

AND SELECTION I

E V A L U AT I N G M E R C H A N D I S E
M A NAG EM ENT PERFORM A NC E
 EVALUATING MERCHANDISE
MANAGEMENT PERFORMANCE
Merchandise management is the process by which:
1. A retailer attempts to offer the right quantity of the right merchandise in
the right place at the right time and met the companies financial goals.
2. Buyersneed to be in touch with what customers want and to be able to
manage merchandise inventory effectively.
3. They need to analyse sales data continually and make appropriate
adjustments.

So far we have discussed who makes the merchandise decisions and some of
the basics that contribute towards the merchandise management process. In
this section, we will be discussing some of the ways in which the
performance of merchandise is evaluated.
 STOCK TURNOVER
• Stock turnover or merchandise inventory turnover is a
ratio that indicates the number of times in a specific period
(a week, a month, a season, a year) that the stock of goods
has been purchased, sold and replaced by fresh
merchandise. i.e. the speed with which goods move from
the retailer to customers.

• This measure can be used to establish how efficient the

department is. How well is my stock working for me.
• Good turnover indicates good management.
 CALCULATING TURNOVER
TURNOVERSales
Turnover= = /SALES • Average inventory is calculated by
AVERAGE INVENTORY adding the beginning and the end
Average inventory of month inventories and dividing
by two.

Average inventory either at selling price

or cost price. • If the turnover is for longer periods,
the inventory at the end of each
month is added and then calculated
Turnover can be compared with records by dividing the total by the number
of similar categories to establish what it of inventories that were used to
should be. make up the total. Could even be
Examples in Diamond – groceries – 18; done with weekly inventories.
sweets - 12; alcohol – 6; children's
clothing – 4; furniture – 3.
 EXAMPLE
• From the following information , find the turnover for the six-
month period:

Month Date Sales Inventory at

Retail
July 1 R 150 000
July 31 R 100 000 R 220 000
August 31 R 80 000 R 180 000
September 30 R 120 000 R 250 000
October 31 R 200 000 R 400 000
November 30 R 150 000 R 300 000
December 31 R 350 000 R 600 000
Total R 1 000 000 R 2 100 000
 SOLUTION

1. Find the average inventory:

R2 100 000 / 7 = R300 000

2. Find the turnover:

Sales / Average Inventory = Turnover
R1 000 000 / R300 000 = 3.33 Stock turnover
 ADVANTAGES OF GOOD TURNOVER
• Generally, the higher the turnover, the better the sales.
• A good turnover ensures that new goods constantly replace the old
ones.
• Funds are rapidly released to make new purchases.
• This increases traffic, store image and staff attitudes.
• The number of markdowns are decreased.
• Goods remain attractive and fresh.
• Profits increase as your money / stock is working.

NOTE: A retailer must beware of having a too fast turnover. Stock

levels might be reduced to create this which results in lost sales when
customers cannot obtain a particular item or size.
 SLOW TURNOVER
DISADVANTAGES CAUSED BY
• Slow moving stock creates a • The buyer over purchasing
problem for the retailer.
• Can happen because of
• Stock that does not move tempting specials deals or
begins to cost money. It can incorrect planning.
deteriorate, be lost to theft or
damages.
• Miscalculation of the
popularity of an item such as
• Money is invested in the stock a fad.
which might have interest
attached to it if it is borrowed.
• Poor logistics.
 APPROACHES FOR IMPROVING
INVENTORY TURNOVER
• Reduce number of categories
• Reduce number of SKUs within a category
• Reduce number of items in a SKU

BUT if a customer can’t find their size or color or brand, patronage

and sales decrease!

another approach… ?
 …ANOTHER APPROACH
To improve inventory turnover
• Buy merchandise more often
• Buy in smaller quantities which should reduce average inventory
without reducing sales

BUT by buying smaller quantities

• Buyers can’t take advantage of quantity discounts so
• Gross margin decreases
• Operating expenses increase
• Buyers need to spend more time placing orders and monitoring
deliveries
 THE COST OF CARRYING INVENTORY
• Capital costs – interest paid on money invested in stock
• Inventory risk costs – the costs of out of date stock,
shrinkage and other losses that can incur in the
warehouse and the store.
• Storage space costs – fixed and variable costs.
• Inventory costs – insurance, taxes and other costs.
GMROI – GROSS MARGIN RETURN ON
INVENTORY INVESTMENT
“Jim-roy”

•A good performance measure for evaluating a retail firm is

ROI (return on investment).This is made up of asset
turnover and net profit margin.
But, this is not a good way to evaluate the performance of a
merchandise manager because they do not have control
over the firms assets or the expenses that the firm incurs.
• Merchandise managers have control over the merchandise
that they buy, the price at which the merchandise is sold,
and the cost of the merchandise.
• In other words, they have control over the gross margin, but
not the operating expenses.
 GMROI
Merchandise managers have control over:
• The merchandise they buy
• The price at which the merchandise is sold
• The cost of the merchandise

Merchandise managers do not have control over:

• Operating expenses
• Human resources
• Real estate
• Supply chain management
• Information systems
 GMROI PRODUCTIVITY MEASURES

Input Output
Inventory Gross Margin

GMROI is a measurement of how many gross margin

Rands are earned on every Rand of inventory investment
made by the buyer
 EVALUATING MERCHANDISE
MANAGEMENT PERFORMANCE - GMROI
• A financial ratio that assesses a buyer’s ROI performance on the
basis of the factors that the buyer can control is gross margin return
on investment (GMROI).
• Expressed at cost because GMROI is a return calculated on an
investment measure which is would be at cost price.
• GMROI combines gross margin percentage and sales-to-stock ratio,
which is related to inventory turnover.

GMROI= Gross margin % x sales-to-stock ratio

= Gross margin x net sales
net sales ave inventory at cost
= Gross margin
ave inventory at cost
 GMROI
Buyers have control over both components of GMROI.
• The gross margin component is affected by the prices they
set and the prices they negotiate with suppliers when buying
merchandise.
• The stock-to-sales ratio is affected by the popularity of the
merchandise they buy. If they buy merchandise that is
popular, it sells quickly, and the sales-to-stock ratio is high.
• Like ROI, GMROI assesses not just the profitability of
merchandise decisions but also how effectively the
merchandise assets (inventory) are used. Thus merchandise
categories with different margin/turnover profiles can be
compared and evaluated.
 ILLUSTRATION OF GMROI
• Merchandise categories with different margin/turnover
profiles can be compared and evaluated

• See Exhibit 12-2. Page 306 in Levy and Weitz handout

 GMROI FOR SELECTED RETAILERS

• See Exhibit 12-3 Levy and Weitz handout. Page 307

GMROI for selected departments in discount stores

PATHS TO GOOD GMROI MEASURES
Two paths to achieving a high GMROI

Gross margin inventory turnover

• Some categories in a supermarket (such as wine) could be

high margin – low turnover, while others (such as milk)
could be low margin – high turnover.

VS

• If performance was just measured on one of those aspects,

the interpretation of their performance could be inaccurate.
 HOW TO IMPROVE GMROI
• Improve inventory turnover (sales-to-stock ratio) - This measure
can be improved by either increasing sales or reducing stock.
• Reducing the number of SKUs in a category requires careful
consideration as a merchandise assortment requires enough
products in a mixture of sizes, flavours and colours etc. So that
customers can be satisfied. If customers cannot always find what
they want, they might withdraw their patronage.
• Less backup stock also leads to the same problem.
• Buying merchandise in smaller quantities but more often can also
be costly as there is less chance of getting quantity discounts,
while transportation also becomes more costly.
• Increasing sales would necessitate a reduction in prices. This
could effectively reduce gross margin.
 INCREASE GROSS MARGIN
Three methods:
• Increasing prices – this could result in a loss of sales and
inventory turnover as price-sensitive customers
withdraw.
• Decreasing the cost of goods sold – by negotiating with
suppliers for a lower price. An increase in private label
merchandise in the mix could also have a similar result.
• Reducing customer discounts – this means less
markdowns, which can only occur if buying is improved
and goods sell well.
THANK YOU
ANY
QUESTIONS?