Retail Merchandising and Distribution
Merchandising W eek 6 1
Developing & I mplementing Developing Merchandise Plans P lans Lecture 6 Outline
Implementation of merchandise plans Financial Merchandise Management 1. 2. 3.
Financial Merchandise Management Cost and Retail Methods of Accounting Merchandise Forecasting and Budgeting Process 2
P rocess for Implementing Merchandise P lans Plans
3 Source : Barry Berman, Joel R. Evans, Retail Management – A Strategic Approach (11th Edition), Prentice Prentice Hall, 2010
1. Financial M erchandise Management
specifies exactly w h i c h products are purchased w h e n products are purchased how many products are purchased 2 kinds of controls:
Dollar control - involves planning and monitoring monitoring a retailer’s merchandise investment over a stated time period Unit control - monitors the quantities quantities for merchand merchandise ise handled during a stated time period
Dollar controls usually precede unit control, because the retailer must make dollar investment decision 4
2.I nventory valu ation atio n : Cost & Retail Method of Accounting A ccounting
Retail inventory accounting systems can be complex since they involve a great amount of data
There are two accounting systems cost accounting system values merchandise at cost plus in-bound transportation charges retail accounting system values merchandise at current retail prices In a profit and loss statement, the following information should be included:
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P rofit -and -L oss statement Sales less cost of goods sold : Beginning inventory (at cost) Purchase (at cost) Transportation charges Merchandise available for sale Ending inventory Cost of goods sold Gross profit Less operating expenses Net profit
1 2 3 4 (2+3+4)= 5 6 (5-6)=7 (1-7)=8 9 (8-9)=10
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P rofit -and -L oss statement
7 Source : Barry Berman, Joel R. Evans, Retail Management – A Strategic Approach (11th Edition), Prentice Hall, 2010
2.1 Cost metho d
each item’s cost is recorded when it is purchased, when it is sold, and when an inventory is conducted to determine total inventory value this method is good for firms whose turnover is low and sell the big-ticket items such as furniture can be used in i) determining physical (actual count) ii) book (record-keeping entries) inventories
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2.1 Cost metho d i) Physical inventory system: ending inventory is measured by an actual count of merchandise still in stock at close of selling period ending stock is recorded at cost Gross profit is computed until ending inventory is valued
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2.1 Cost metho d ii) Book (perpetual) inventory systems avoids the problem of infrequent financial analysis by keeping a running total of the value of all inventory on hand at cost is kept by regularly recording purchases and adding them to existing inventory value ; sales are subtracted to arrive at the new current inventory value
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2.1 Cost metho d Opening inventory + Invento ry increase ( Beginning-of-month Inventory)
(Net monthly purchase)
In ventory decrease = Closing inventory ( Monthly Sales ) ( End-of-month Inventory)
closing inventory of this month becomes the beginning inventory next month
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P erpetual In ventory System Date
7/1/06
Be ginning-of-M onth Inventory $90,500
Net Monthly Purchases
M onthly Sales
End-of-Month Inventory
$40,000
$ 62,400
$68,100
8/1/06
68,100
28,000
38,400
57,700
9/1/06
57,700
27,600
28,800
56,500
10/1/06
56,500
44,000
28,800
71,700
11/1/06
71,700
50,400
40,800
81,300
12/1/06
81,300
15,900
61,200
36,000
TOTAL
$205,900
$260,400
(as of 12/31/06)
( Beginning-of-month I nventory)+(Net monthly purchase)-
( Monthly Sales ) =( End-of-month
Inventory)
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Applying FI FO and LIFO Inventory Methods
13 Source : Barry Berman, Joel R. Evans, Retail Management – A Strategic Approach (11th Edition), Prentice Hall, 2010
2.1 Cost metho d
FI FO (first-in-first-out) method
Assume old merchandise is sold first, while newer items remain in inventory
LI FO (last-in-first-out) method
Assume new merchandise is sold first, while older stock remains in inventory
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Disadvantages of Cost -Based I nventory Systems
Require that a cost be assigned to each item in stock Do not adjust inventory values to reflect style changes, end-of-season markdowns, or sudden surges of demand
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2.2 Re tail method
closing inventory value is determined by calculating the average relationship between the cost and retail value of merchandise for sale during the period overcomes the disadvantage of the cost method, but requires a detailed bookkeeping system ending inventory is first valued in retail dollars and then converted to cost in order to determine gross margins
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2.2 Re tail method 3 Basic Steps to Determining Ending Inventory Value Calculating the cost complement Calculating deductions from retail value Converting retail inventory value to cost
1. 2. 3.
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2.2 Re tail method 1) calculate the cost complement
it is calculated by examining beginning inventory and purchase figures at both retail and cost levels
cost complement = total cost valuation / total retail valuation
this is the average relationship between cost and retail value 18
Calculating Merchandise Available for Sale at Cost and at R etail
Beginning Inventory Net Purchases Additional Markups Transportation Charges
Total Merchandise Available
At Cost
At Retail
$ 90,500
$139,200
205,900
340,526
__
16,400
3,492
__
$299,892
$496,126
Cost complement = 299,892/496,126 =0.6045
if it is 60.45%, it means that for each retail sales dollar , an 19 average of 60.45 cents is made on the merchandise cost
2.2 Re tail method 2 ) calculate deductions from retail
value
ending retail value of inventory must reflect all deductions from the total merchandise available for sale at retail
markdowns (e.g.. on sales , end-of-seasons, discontinued items) employee discounts stock shortages (e.g. pilferage, unrecorded breakage and spoilage etc)
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2.2 Re tail method 2) calculate deductions from retail
value
markdown and employee discounts can be monitored through book inventory, shortages cannot be assessed until a physical inventory is conducted. If book value exceeds the physical inventory, shortages exists So both shortages and overages are estimated monthly the retail book value is then adjusted after a physical inventory is taken 21
Calculating Merchandise Available for Sale at Cost and at R etail Merchandise available for sale (at retail)
$496,126
Less deductions: Sales Markdowns Employee discounts
Total deductions Ending retail book value of inventory
$422,540 11,634 2,400
436,574 $ 59,552
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Stock Shortages and A djusting Retail Book Value Ending retail book value of inventory
$ 59,552
Physical inventory (at retail)
56,470
Stock shortages (at retail) Adjusted ending retail book value of inventory
3,082 $ 56,470
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2.2 Re tail method 3)
converting re tail inventory value to cost
ending inventory (at cost)= adjusted ending retail book value x cost complement $56,470 x 0.645 = $34,136 this is for the purpose of calculating the gross profit it is not the exact amt. but approximates
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Profit -and -Loss Statement Sales
$422,540
Less cost of goods sold: Total merchandise available for sale Adjusted ending inventory ($56,470 x 0.645 )
$299,892
34,136
Cost of goods sold
$265,756($299892-34136)
Gross profit
$156,784($422540-265756)
Less operating expenses: Salaries
$ 70,000
Advertising
25,000
Rental
16,000
Other
28,000
Total operating expenses Net profit before taxes
139,000 $ 17,784
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Advantages of the Retail Method
Valuation errors are reduced when conducting a physical inventory since merchandise value is recorded at retail and costs do not have to be decoded Because the process is simpler, a physical inventory can be completed more often Profit-and-loss statement can be based on book inventory Method gives an estimate of inventory throughout the year and is accepted in insurance claims
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Limitatio ns of the Retail Limitations Method
Bookkeeping burden Ending book inventory is correctly computed only if the following are accurate: Value of beginning inventory Purchases Shipping charges Markups Markdowns Employee discounts Transfers Returns Sales Cost complement is an average based on the total cost of merchandise available for sale and total retail value
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3.Merch andise Forecasting and Budgetin g P rocess: Dollar Control
•The process should be taken in sequential process
28 Source : Barry Berman, Joel R. Evans, Retail Management – A Strategic Approach (11th Edition), Prentice Hall, 2010
3.1) Control u nits
The merchandise categories for which data are gathered the units should be narrow enough to isolate opportunities and problems with specific lines of merchandise Record data on dollar allotments separately on each category can be set on the base of : Set up the merchandise classification -this includes skirts, pants, sweaters etc
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3.2) Sales Fo recast
accurate sales forecast is very important statistical forecasting technique include trend analysis, time series analysis, and multiple regression and small retailers rely on ‘guesstimates’ a storewide forecast is made and then broken down further external factors should be considered:
consumer demographic life-style trends competitor’s actions- what other store sells by doing comparison shopping state of the economy employment condition fashion factors
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3.2) Sales Fo recast changes in taste of target market - by asking and observing e.g.. by consumer surveys, consumer panels, scan the trade publication new products offered from supplier internal factors: addition and deletion of merchandise lines changes in promotion and credit facilities changes in hours of business opening of new shops remodeling of existing stores seasonal variation review and analyze past sales performance for the same time period want book record may be useful because customer inquiries are recorded
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3.2) Sales Fo recast
after a 6 months sales is projected, it is broken into quarterly or monthly planning period a ‘beat last year’s sales’ approach may be appropriate for the store as a whole, but it is not an appropriate method for individual category variable adjustment method - starts with an examination of the past sales history determine a % change that appears reasonable adjust the figure upward or downward by a degree that depends on the nature of the merchandise and its exposure and sensitivity to environmental influences Seasonal planned sales = last year (LY) sales x planned increase % determine the monthly sales by using the past record on the % distribution of sales by month 32
Sales Forecast Using P roduct Control Units P r od uc t Co nt ro l U ni ts
A ct ua l Sa le s 2006 ($)
Projected Growth/ Decline (% )
Sales Forecast 2007 ($)
Lawn movers/snow blowers
200,000
+10.0
220,000
Paint and supplies
128,000
+ 3.0
131,840
Hardware supplies
108,000
+8.0
116,640
Plumbing supplies
88,000
-4.0
84,480
Power tools
88,000
+6.0
93,280
Garden supplies/chemicals
68,000
+4.0
70,720
Housewares
48,000
-6.0
45,120
Electrical supplies
40,000
+4.0
41,600
Ladders
36,000
+6.0
38,160
Hand tools
36,000
+9.0
39,240
Total year
840,000
+4.9
881,080
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Sales by Mo nth Month January
Monthly Actual Sales ($)
Sales I ndex
46,800
67
February
40,864
58
March
48,000
69
April
65,600
94
May
112,196
160
June
103,800
148
July
104,560
149
August
62,800
90
September
46,904
67
October
46,800
67
November
66,884
96
December
94,792
135
Total yearly sales Average monthly sales Average monthly index
840,000 70,000 100 34
Sales Forecast by M onth Month
A ctual Sales 2006 ($)
M on th ly Sa le s I nd ex
M on th ly Sa le s Fo re ca st 2007
January
46,800
67
73,423 *
.67 =
49,193
February
40,864
58
73,423 *
.58 =
42,585
March
48,000
69
73,423 *
.69 =
50,662
April
6,600
94
73,423 *
.94 =
69,018
May
112,196
160
73,423 * 1.60 = 117,477
June
103,800
148
73,423 * 1.48 = 108,666
July
73,423 * 1.49 = 109,400
104,560
149
August
62,800
90
73,423 *
.90 =
66,081
September
46,904
67
73,423 *
.67 =
49,193
October
46,800
67
73,423 *
.67 =
49,193
November
66,884
96
73,423 *
.96 =
70,486
December
94,792
135
73,423 * 1.35 =
9 9,121
Total Sales Average monthly sales
840,000 70,000
Total sales forecast Average monthly forecast
881,080 73,423 35
3.3) I nventory P lanning
inventory must be sufficient to meet sales expectations, allowing a margin for error avoid out-of-stock conditions guard against overstock conditions keep inventory investment at an acceptable level
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3.3) I nventory P lanning Methods in stock planning i) Basic stock method planned sales for that month + a ‘safety stock’ in case actual sales exceed the estimated sales
Basic stock (at retail) = Avg. monthly stock at retail- Avg. monthly sales =(73,423*1.10) - $73,423 =7,342 (want extra stock = 10% of its average monthly forecast)
BOM (Jan) planned stock level (at retail ) = Planned monthly Sales + Basic stock =$49,193 + $7,342 = $56,535
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3.3) I nventory P lanning ii) W eekly’s Supply Method involves forecasting average sales on a weekly basis, so beginning inventory is equal to several week’s expected sales applicable to staple merchandise that does not fluctuate much in sales volume from week to week assume the inventory carried is in direct proportion to sales thus, too much merchandise may be stocked in peak selling periods and too little during slow selling periods 38
3.3) I nventory P lanning
Beginning of month (BOM) planned inventory level (at retail) = Average estimated weekly sales x Number of weeks to be stocked
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3.3) I nventory P lanning iii) Stock-to-sales ratio method A method for planning how much stock should be on hand at a particular time a retailer wants to maintain a specified ratio of goods-on-hand to sales past record is the best source to find the reliable stock-to-sales ratio stock-to-sales is figured for a single month it is based on stock on hand at a specific time, usually the beginning of the month Stock/sales ratio =Retail stock at given time in the period / sales for the period BOM stock=planned monthly sales x stock-to-sales 40 ratio
3.4) R eduction planning Retail reduction the difference between the merchandise item’s original retail value and the actual final sales value Planned retail reduction includes : i) Markdowns - reduction in price to simulate sales. The amount can vary considerable depending on the type of merchandise and conditions under which it is sold. can be expressed as a percentage of a total season’s sale An analysis of markdowns enables buyers to locate trouble spots and adjust future assortment
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3.4) R eduction planning
It stimulates sales of slow-moving or inactive stock Dispose of broken assortments, discontinued lines and damaged or shopworn merchandise Provide additional OTB for the purchase of new merchandise Meet competitors' prices of the same or similar merchandise Increase customer traffic Markdown = Previous Price – New reduced Price Markdown percent = Dollar markdown/Dollar Net Sales For advertising record, markdown % is referred as a reduction from original retail, but for internal record, 42 markdown percentage use net sales as the base
3.4) R eduction planning ii) Employee Discount - reductions in the original retai price that are granted to store employees as special fringe benefits and to special customers iii) Shortages - reduction in total value of the retailer’s inventory as a result of shoplifting, merchandised being soiled and bookkeeping error usually if a firm has less than 2 to 4% stock shortage ,it is deemed to be doing well
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A Checklist to Reduce Inventory Shortages
44 Source : Barry Berman, Joel R. Evans, Retail Management – A Strategic Approach (11th Edition), Prentice Hall, 2010
3.4) R eduction planning
a retailer should study the follow ing in planning total reductions for the budget period: past experience with reductions markdown data for similar retailers changes in company polices -a retailer expands its assortment of seasonal and fashion merchandise would probably lead to an increase in markdowns merchandise carryover from one budget period to another price trends stock-shortage trends - generally 1/4 of shortage is from clerical or handling error 45
3.4) R eduction planning
after total reductions are determined, they must be planned by month because reductions as a % of sales would not be same during each month e.g. stock shortages may be much higher during busy periods, when stores are more crowded and transactions happened more quickly sell-through analysis should be carried out for markdown category - a comparison between actual and planned sales a check on retailer buyer’s estimation on: the demand schedule - how many units would be sold at a certain price
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3.4) R eduction planning the sales schedule - the speed at which inventories would be depleted by closely supervising these schedules, merchandise managers can determine both when (time) and how much (amount) markdown is appropriate given the relationship between planned and actual sales Estimate of expected retail reduction: Planned reductions = (beginning inventory + planned purchases) (planned sales + ending inventory) After estimating the expected total reductions for the budget period, distribute the estimates by month
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3.5) P lanning P urchases
Planned purchases (at retail) = Planned sales for the month + planned reductions for the month + Planned end of month stock - Beginning-ofmonth stock
Planned purchase (at cost) =Planned purchases at retail x Merchandise costs as a % of selling price
Open to buy (at retail) = planned purchase for the month purchase commitments for that month
OTB (at cost) =OTB at retail x merchandise costs as a % of selling48 price
3.5) P lanning P urchases Advantages of OTB concepts:
it maintains a specified relationship between inventory and planned sales is maintained, which avoids overbuying and under-buying it is better to keep at least a small OTB figure for as long as possible because: new lines or items may appear that the buyer wishes to purchase reorders may need to be placed to fill in staple stock or replace fast-selling items special promotions from vendors may become available sometimes an OTB limit must be exceeded due to underestimates of demand (low sales forecasts)
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3.6) P lanning P rofit Margins
Retail = Cost + Markup Required initial mark-up % =(Planned retail expenses + planned profit + planned reductions) / (Planned net sales + planned reductions) It is a companywide average Retailers do not apply the same markup % to all merchandise, individual items may be priced according to the demand and other factors, as long as the average is met A lower markup may be applied to promotional goods but a higher markup on exclusive or unique items Markup can be used for individual item but an average markup is determined by the total cost 50 and total retail
Sources
Chapter 15 & 16 - Barry Berman, Joel R. Evans, Retail Management – A Strategic Approach (11 Edition), Prentice Hall, 2010
Chapter 10 - Lusch. Dunne, Carver, Introduction to Retailing, South-western (7th edition), Cengage Learning, 2011
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ENDS
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