Developing a Merchandise Budget MERCHANDISING Forecasting Sales Measuring Past Trends Forecasting Sales Sales Planning Planning Inventory Levels Stock Planning Estimating Reductions Planning Reductions Planning purchases Forecasting Sales cont Assume sales will increase or decrease by the same amount as the preceding year 10 up or down Use a 3 year moving average year 1 year 2 year 3 3 7 8 9 3 8 Trend Extrapolation Adjusting for changes in the marketing environment eg New competition new advertising parking improvements project future sales based on trend in past sales 10 given above information Planning Inventory Levels Adjusting for changes in the economic environment unemployment GNP total retail sales consumer confidence Stock Turnover relationship between the sale of goods and the average inventory of goods the number of times the average inventory turns over in a year Stockturn Example Month February March Physical Inv Book Inv At Retail Retail Sales 49 375 11 236 51 332 14 374 April Book 53 118 16 661 May Book 54 636 17 777 Sales in units at retail at cost Avg Inventory in units at retail at cost June Book 52 347 16 539 July Book 50 131 10 322 Stated seasonally annually quarterly monthly or weekly August Physical 48 359 1 Stockturn Example cont Stock to Sales Ratio Average Inventory 359 298 7 51 328 Seasonal Stockturn Sales at Retail 86 909 Average Inventory at Retail 51 328 1 69 Annual Stockturn 1 69 X 2 3 38 Sales 9 000 10 000 12 000 15 000 18 000 8 000 BOM Retail St Ratios 27 000 31 000 33 000 36 000 33 000 24 000 33 000 3 0 3 1 2 8 2 4 1 8 3 0 Stock to Sales Ratio and Stockturn Helps you determine how much stock you want to have on hand each month Ex If you forecast sales of 23 000 in June and your stock to sales ratio in June has historically been 2 2 you should purchase 50 600 in inventory at retail 23 000 X 2 2 To get planned stocks for the upcoming Fall season Calculating Stock to Sales Month August September October November December January February Assumes you want to maintain a specified ratio of inventory to sales Given a desired stockturn for the year you can determine your desired average stock tosales ratio for the year If your yearly stockturn is 4 6 your average stock to sales ratio for the year would be 12 months yearly stockturn 12 4 6 2 6 The higher your turnover the lower your stock to sales ratio Month August Planned Sales 9 500 X BOM StockSales Ratio 3 0 28 500 September 11 000 X 3 1 34 100 October 12 500 X 2 8 35 000 November 16 500 X 2 4 38 400 December 18 500 X 1 8 33 300 January 8 500 X 3 0 25 500 Planned Retail BOM Stocks Stock to Sales cont If turnover is 3 0 12 3 0 4 0 Stock to Sales ratio 4 6 12 4 6 2 6 Stock to Sales ratio 6 0 12 6 0 2 0 Stock to Sales ratio 2 Weeks Supply Method Planning sales on a weekly basis so your stock on hand is equal to several weeks anticipated sales If annual stockturn is 6 seasonal stockturn is 6 2 3 Average Inventory 26 weeks season 3 seasonal stockturn 8 7 weeks supply How many weeks supply you will want on hand will depend on your seasonal stockturn purchase for weeks rather than months In order to have enough merchandise every month to support your sales forecast you need to consider factors that reduce the inventory level reductions Reductions include markdowns employee discounts and shrinkage Alternative to the Stock to Sales ratio method Planning Reductions Weeks Supply Method cont Ex If a 75 pair of sneakers is marked down to 60 there is a 15 markdown this is a 20 markdown 15 75 If you forecast sales for a season at 65 000 the average sales per week would be 65 000 26 weeks 2 500 To have 8 7 weeks supply of inventory the retail value of the stock on hand would have to be 2 500 X 8 7 21 750 Open to Buy The amount you have left to spend for that month after accounting for orders already planned for that month s stock Planned Purchases Purchase Commitments Open to Buy Open to Buy Example Planned Purchases Planned Purchases Planned EOM Stock what you want to have at Planned EOM Stock Planned Sales Planned Reductions Planned BOM Stocks the end of the month Planned Sales Planned Reductions markdowns shortages employee discounts Planned BOM Stocks what you think you Planned Purchases 800 000 150 000 20 000 650 000 320 000 will already have in stock from the previous month 3 Purchase Commitments Open to Buy Example Merchandise ordered which will be delivered that month If you planned to purchase 20 000 worth of merchandise in March have already received 5 000 in merchandise and have 6 000 on order for delivery in March what is your open to buy Merchandise ordered that has already arrived 20 000 5 000 6 000 9 000 Open to Buy cont Areas of Negotiation If you return 4 000 to a vendor in March your open to buy increases by 4 000 9 000 4 000 13 000 at retail If your cost complement COGS Sales Revenues is 50 13 000 X 5 6 500 is what you can spend on merchandise Trade retailer performs functions for vendor Quantity Seasonal for placing an order prior to the normal buying period Promotional Allowance co op money Cash Discounts paying for the order within a specified time period Cost of Merchandise Discounts Dating of Discounts Transportation Charges DATING Types of Discounts Cash Dating least desirable cash with order or cash on delivery Future Dating EOM end of the month discount begins on the first day of following month ROG receipt of goods discount period begins when goods are received Date of Invoice ordering date discount period begins on date of invoice Extra most desirable 2 10 60 extra n 90 4 Transportation Charges FOB destination free on board seller pays for transporting goods and assumes responsibility for damage or loss most desirable retailer pays for transporting goods EOQ cont FOB origin least desirable Economic Order Quantity EOQ With a perpetual ordering system the EOQ is the quantity purchased when inventory reaches the order point the minimal level of inventory the retailer should carry so they will not run out of stock before the next order arrives EOQ accounts for the variable cost of ordering inventory and inventory carrying costs Order Point Model EOQ 2SO IC O variable cost per order placed S estimated annual unit sales I inventory carrying costs as a of average inventory C unit cost of item Variable costs decrease with large orders while carrying costs increase Demand per day X lead time review time safety stock lead time is the length of time it takes to get a product on the sales floor once