Buying Systems

1. Buying Systems Staple and fashion merchandise

2. Buying systems for staple merchandise • Provide info to buyers concerning: • Sales velocity • Inventory availability • Amount on order • Inventory turnover • Sales forecast • Quantity to order per SKU

3. Basic components of a staple ordering system • Basic stock list • Inventory turnover • Product availability • Forecast • Order point • Order quantity

4. Basic stock list • Most basic component • Describes each SKU • Summarizes inventory position • Quantity on hand + quantity on order=quantity available

5. Inventory turnover • Turnover is net sales/average retail inventory • Can look at inventory for a specific item or SKU

6. Product availability • The percentage of demand for an item a retailer wishes to fulfill

7. Forecast • Simple trend analysis • Exponential smoothing • New forecast = old forecast + a(actual demand – old forecast)

8. Order point • Quantity below which inventory should not dip below, or item will be out of stock before the next shipment arrives • Order point = [(demand/day)(lead time + review time)]+ backup stock

9. Order point practice problem • James is the replenishment buyer for the hosiery department of a small discount chain. He checks his inventory once a week, and orders take five days to arrive once placed. The store typically sells 12 pair of men’s tan socks each day. Backup stock is 24 pair. What is the order point for men’s tan socks?

10. Buying systems for fashion merchandise • Incomplete information • Objectives • Maintain adequate assortments • Regulate the dollar investment of stocks in relation to sales to obtain a satisfactory balance

11. Starting point: planned sales • Planned sales=Last year’s sales (% increase or decrease) • To determine, consider: • Last year’s sales • Fashion trends • Economic trends • Local conditions • Market factors • Previous growth rates

12. Another consideration: turnover • Stimulates sales • Reduces markdowns • Lowers cost of goods sold • Decreases expenses • Interest • Merchandise taxes • Operating expenses

13. Turnover • How often, on average, merchandise cycles through a store

14. Calculating turnover • If average retail stock and sales for the period are known • Turnover= net sales for a period/average retail stock for the same period

15. Turnover practice problem • For the year, the infants’ department had net sales of $2,000,000. The average retail stock during this period was $500,000. What was the rate of stock turn?

16. Calculating average stock when planned sales and turnover are known • Average retail stock= planned sales for a period/turnover rate

17. Practice problem • The hosiery department planned sales of $3,000,000 with a stock turn of 5 as the goal. What should be the average stock carried for the period under consideration?

18. Calculating average stock • Average retail stock = (sum of beginning inventories + ending inventory for a given period)/ number of inventories

19. Stock-sales ratio • Used to balance planned monthly sales with planned monthly stocks • Vary from month-month depending on seasonal factors • Historical figures, or published figures

20. Calculating stock to sales ratio • Sales to stock ratio = retail stock at a given time/sales for the period

21. Practice problem • On February 1, the boys’ wear department had a retail stock of $120,000. The planned sales for this month were $20,000. Find the stock-sales ratio for the month of February.

22. Calculating BOM stock • When planned sales and stock-sales ratio are known • BOM stock = planned monthly sales * stock-sales ratio

23. Practice problem • The fabric department planned sales of $40,000 for the month of July. Experience in the department showed an 8.2 stock-sales ratio was successful. What should be the planned BOM stock for July?

24. Reductions to inventory • Markdowns • Employee discounts • Shrinkage

25. Markdowns • Reductions in initial selling price • Objectives • Stimulate sales of merchandise to which customers are not responding satisfactorily • Attract customers by offering bargains • Meet competitive prices • Provide open-to-buy money to purchase new merchandise • Create special promotions

26. Causes of markdowns • Buying errors • Pricing errors • Selling errors • Off-price promotions or multiple sales • Broken assortments

27. Employee discounts • Type of markdown • Employee benefit

28. Shrinkage • Reductions in inventory caused by shoplifting by employees or customers, by merchandise being misplaced or damaged, or by poor bookkeeping

29. Common causes of shrinkage • Clerical errors • Physical merchandise losses

30. Planned purchases Planned EOM stock + planned sales for the month + planned markdowns for the month total merchandise requirements for month - planned BOM stock planned purchase amount for month

31. Practice problem • From the following planned figures for the lingerie department, calculate the planned purchase amount for June: • Planned stock June 1 $ 38,000 • Planned sales for June $ 100,000 • Planned markdowns for June $ 5,000 • Planned stock for July 1 $ 40,000

32. Open-to-buy • Amount of unspent money available for purchasing merchandise OTB for the balance of the month

33. Calculating open-to-buy at the beginning of the month Planned purchases - merchandise on order Open-to-buy

34. Practice Problem • If planned purchases for June are $107,000 and merchandise on order is $52,000, what is the OTB for June?

35. Calculating open-to-buy for the balance of the month Planned purchases - merchandise received to date - merchandise on order Open-to-buy

36. Converting to cost • Planned purchases at cost= planned purchases at retail (1-MU%) • OTB at cost= OTB at retail (1-MU%) • This is how much you can actually spend!!