DOLLAR-

MERCHANDISE
PLANNING
 • As inventory is sold, new stock must to be purchased, displayed,
and sold once again.
• This is why merchandising, while a subfunction of retailing, is the
K heartbeat of every retailer.
E • Those that do a superior job at managing their inventory
Y investments will be the most successful.
• If a retailer’s inventory continues to build up, then the retailer hass
too much money tied up in inventory or is not making the sales it
P was expecting; both situations are problematic.
O
• The retailer who is frequently out of stock will quickly lose
I customers.
N • If the inventory is not sold, the costs involved in carrying excess
T inventory can force the retailer into taking extra markdowns in
addition to having interest on the inventory investment.
S
 Gross Margin Return on Inventory(GMROI)
• Because inventory is the largest investment retailers make, high-performance retailers use a
model called GMROI when analyzing the performance of their inventory.
• GMROI incorporates how quickly inventory sells and profit into a single measure.
• It can be computed as follow:

𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛

× =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑎𝑡 𝐶𝑜𝑠𝑡 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑎𝑡 𝐶𝑜𝑠𝑡
*Here the Gross-Margin Percentage (Gross Margin/Net Sales) is multiplied by Net
Sale/Dollars invested in inventory to get the retailer’s Gross-Margin dollars generated for each
dollar invested in inventory.
*Net Sales are typically computed on an annual of 12-Month basis.
*Note, however, that sales/dollars invested in inventory is not the same as inventory
turnover. Inventory turnover measures sales/inventory at retail.
* In the GMROI, we use inventory at cost to reflect the investment in carrying merchandise.
 Example
• If a particular item has a gross margin of 45%(percent) and annual sales
per dollar of inventory investment of 4.0, its GMROI would be $1.80 (0.45 x
4). In other words, for each dollar invested in inventory, on average, the
retailer obtains $1.80 in gross margin annually. Gross Margin dollars are
used to first pay the store’s operating expenses (both fixed and variable),
with the remainder equaling the retailer’s before-tax profit

0.45 × 4 = $1.80
$1 : $1.80
 • All Retailing activities are aimed at serving the customer’s
needs and wants at a profit. (Chapter 3, Customer)
G • Merchandise management is concerned with the
O acquisition of inventory from other supply chain members.
I (Chapter 5, Behavior of the different supply-chain members)
N • As pointed out in chapter 8, successful merchandise
G management revolves around planning and control. It takes
time to buy merchandise, have it delivered, record the
delivery in the company records, and properly display the
B merchandise; therefore, it is essential to plan. Buyers need
A to decide today what their stock requirements will be
C weeks, months, or even seasons in advance.
K
 • As planning occurs, it is only logical that the retailer
exercise control over the merchandise. A good control
K system is vital.
E • If the retailer carries too much inventory, then the costs
Y of carrying that inventory might outweigh the gross
margin to be made on the sale, especially if the retailer is
P forced to reduce the selling price.
O • A retailer could actually improve GMROI by decreasing
I the retail price if the sale excites customers to the point
N that they buy more of the product- at a level where the
T inventory-turnover increase in more than enough to
S offset gross-margin reduction from reduced sales price.
Merchandising Decisions facing the Retailer
• Calculating the dollar amount available to be spent

• Managing one’s inventory

• Choosing and evaluating merchandise sources

• Handling vendor negotiations

• Handling the merchandise in the store

• Evaluating merchandise performance

 • Working with upper management, buyers are responsible
for the dollar planning of merchandise requirements.
• In the previous chapter, we described the various factors
K that must be considered in making a sales forecast, the first
E step in determining inventory needs.
Y • Once planned sales for the period in question have been
projected, buyers are then able to use any one of four
different methods for planning dollars invested in
P merchandise:
O 1. Basic Stock
I 2. Percentage Variation
N 3. Weeks’ Supply
T 4. Stock-to-sales-ratio method
S
 • While the focus is on retailers who sell tangible goods, the
same basic principles may be applied to service retailers,
with one exception.
K • The tangible products are first produced, then sold, and
E finally consumed, services are first sold but then produced
and consumed simultaneously.
Y
• Service retailers, be they beauty parlors or hospitals, are
prevented from stockpiling their inventories, whether it is a
P hair highlighting process or a heart bypass operation, in
anticipation of future demand.
O
• Given the limited ability to stockpile inventories, service
I retailers must pay special attention to forecasting demand.
N -this is because they do inventory or have available
T personnel to provide services.
S
 Basic Stock Method (BSM)
• The basic stock method (BSM) is used when retailers believe that it is necessary to
have a given level of inventory available at all times. It requires that the retailer
always have a base level of inventory investment regardless of the predicted sales
volume. In addition to the base stock level, there will be a variable amount of
inventory that will increase or decrease at the beginning of each sales period (one
month in the case of our merchandise budget) in the same dollar amount as the
period's sales are expected to increase or decrease. The BSM can be calculated as
follows:

Average monthly sales for the season = Total planned sales for the season/Number
of months in the season
 Basic Stock Method (BSM)
• The basic stock method (BSM) is used when retailers believe that it is necessary to
have a given level of inventory available at all times. It requires that the retailer
always have a base level of inventory investment regardless of the predicted sales
volume. In addition to the base stock level, there will be a variable amount of
inventory that will increase or decrease at the beginning of each sales period (one
month in the case of our merchandise budget) in the same dollar amount as the
period's sales are expected to increase or decrease. The BSM can be calculated as
follows:
Average monthly sales for the season = Total planned sales for the season/Number
of months in the season
Average stock for the season= Total planned sales for the season/Estimated inventory
turnover rate for the season
Basic Stock= Average stock for the season/ Average monthly sales for the season
Beginning-of-Month(BOM) stock at retail= Basic Stock + Planned monthly sales
 Example
• Planned Sales for Department 353 of Two-Seasons Department Store.
- Assume that the inventory turnover rate is 2.0.
 Percentage-Variation Method (PVM)
• A second commonly used method for determining planned stock levels is the percentage-
variation method (PVM). This method is used when the retailer has a high annual
inventory-turnover rate –six or more times a year. The percentage variation method
assumes that the percentage fluctuations in monthly sales from average sales.

1 𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡𝑗

𝐵𝑂𝑀 𝑆𝑡𝑜𝑐𝑘 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 𝑓𝑜𝑟 𝑟𝑒𝑎𝑠𝑜𝑛 × 1 +
2 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑠𝑎𝑙𝑒𝑠
 Example
• Since the PVM utilizes the same components of BSM, we can use the data from the previous example.
 Week’s Supply Method (WSM)
• A third method for planning inventory levels is the week’s supply method (WSM). Generally,
the WSM formula is used by retailers such as grocers, whose inventories are planned on a
weekly, not monthly, basis and where sales do not fluctuate substantially. It states that the
inventory level should be set equal to a predetermined number of weeks’ supply. The
predetermined number of weeks’ supply is directly related to the inventory turnover rate
desired. In the WSM, inventory level in dollars will also triple.
• To illustrate the WSM, let’s return to our earlier problem and use the following formulas:

Number of Weeks to be Stocked= Number of weeks in the period/Stock turnover rate for the
period

Average Weekly sales= Estimated total sales for the period/Number of weeks in the period

BOM Stock= Average weekly sales x Number of weeks to be stocked

 Stock-to-Sales Method
• The final method for planning inventory levels, and the one used in Chapter 8, is the stock-to-
sales method (SSM). This method is quite easy to use but requires the retailer to have a
beginning-of-the-month stock-to-sales ratio. This ratio tells the retailer how much inventory is
needed at the beginning of the month to support that month's estimated sales. A ratio of 2.5,
for example, would tell the retailer that it should have two and one-half (2 1/2) times that
month's expected sales on hand in inventory at the beginning of the month.
• Stock-to-sales ratios can be obtained from internal or external sources. Internally, the statistics
can be obtained if the retailer has designed a good accounting system and has properly stored
historical data so that the figures can be readily retrieved. Externally, the retailer can often rely
on retail trade associations (such as the Menswear Retailers Association) or on national groups
such as the National Retail Federation (nrf.com) in the United States. the Australian Retailers
Association (ara.com.au), the Retail Merchants Association of New Zealand (retaii.org.nz), the
Retail Council of Canada (retailcouncil.org), the Japan Retail Association (http://www.japan-
retail.or.jpienglish/index.htm), or the Hong Kong Retail Management Association (hkrma.org).
These and other trade associations collect stock-to-sales ratios from participating merchants
and then compile, tabulate, and report them in special management reports or trade
publications.
 Stock-to-Sales Method

• However, these ratios should only be used as a guide to determine how much inventory to have
on hand at the beginning of each month. Successful chain store retailers have long known that
even stores located near each other require not only different merchandise mixes but also
different inventory levels per sales dollars. This is a reflection of the store's trading area, layout,
and competition. However, inventory turnover remains a key factor in a retailer's financial
performance. Planned average BOM stock-to-sales goals can be easily calculated using turnover
goals. If you divide the number of months in the season by the desired inventory- turnover rate,
then we can compute an average BOM stock-to--sales ratio for the season. For example, if you
desired an inventory-turnover rate of 2.0 for the upcoming six-month season (4.0 annually),
your average BOM stock-to-sales ratio would be 3.0 (6/2.0 = 3.0).