Developing a Merchandise Budget
MERCHANDISING Forecasting Sales (Sales Planning)
Planning Inventory Levels (Stock Planning)
Estimating Reductions (Planning Reductions)
Planning purchases
Forecasting Sales Forecasting Sales (cont.)
Measuring Past Trends Adjusting for changes in the economic
Assume sales will increase or decrease by the same environment (unemployment, GNP, total
amount as the preceding year (10% up or down) retail sales, consumer confidence)
Use a 3 year moving average (year 1 + year 2 +
year 3 / 3; (7+8+9)/3 = 8% Adjusting for changes in the marketing
environment (eg. New competition, new
Trend Extrapolation advertising, parking improvements)
project future sales based on trend in past sales (10% given
above information)
Planning Inventory Levels Stockturn Example
Month Inv. At Retail Retail Sales
Stock Turnover - relationship between the February Physical Inv. 49,375 11,236
sale of goods and the average inventory of March Book 51,332 14,374
goods (the number of times the average April Book 53,118 16,661
inventory turns over in a year)
May Book 54,636 17,777
Sales (in units, at retail, at cost)/ Avg. Inventory June Book 52,347 16,539
(in units, at retail, at cost)
July Book 50,131 10,322
Stated seasonally, annually, quarterly, monthly, or August Physical 48,359
weekly
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Stockturn Example (cont.) Stock to Sales Ratio
Average Inventory = 359,298/7 = 51,328 Assumes you want to maintain a specified
ratio of inventory to sales
Seasonal Stockturn = Sales at Retail (86,909)/
Helps you determine how much stock you
Average Inventory at Retail (51,328) = 1.69 want to have on hand each month
Annual Stockturn = 1.69 X 2 = 3.38 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
Calculating Stock-to-Sales upcoming Fall season:
Month Sales BOM Retail St. Ratios Month Planned BOM Stock- Planned Retail
August 9,000 27,000 3.0 Sales Sales Ratio BOM Stocks
September 10,000 31,000 3.1 August 9,500 X 3.0 = $28,500
October 12,000 33,000 2.8 September 11,000 X 3.1 = $34,100
November 15,000 36,000 2.4 October 12,500 X 2.8 = $35,000
December 18,000 33,000 1.8
November 16,500 X 2.4 = $38,400
January 8,000 24,000 3.0
February 33,000 December 18,500 X 1.8 = $33,300
January 8,500 X 3.0 = $25,500
Stock-to-Sales Ratio and Stockturn Stock-to-Sales (cont.)
Given a desired stockturn for the year, you If turnover is:
can determine your desired average stock-to-
sales ratio for the year
3.0 12/3.0 = 4.0 Stock-to-Sales ratio
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 4.6 12/4.6 = 2.6 Stock-to-Sales ratio
The higher your turnover, the lower your 6.0 12/6.0 = 2.0 Stock-to-Sales ratio
stock-to-sales ratio
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WeeksSupply Method Weeks Supply Method (cont.)
Planning sales on a weekly basis so your If annual stockturn is 6, seasonal stockturn is 6/2 = 3
stock on hand is equal to several weeks
anticipated sales Average Inventory = 26 weeks (season)/ 3 (seasonal
stockturn) = 8.7 weeks supply
Alternative to the Stock-to-Sales ratio method If you forecast sales for a season at $65,000, the
(purchase for weeks rather than months) average sales per week would be $65,000/ 26 weeks
= $2,500
How many weeks supply you will want on To have 8.7 weeks supply of inventory, the retail
hand will depend on your seasonal stockturn value of the stock on hand would have to be $2,500
X 8.7 = $21,750
Planning Reductions Open-to-Buy
In order to have enough merchandise every
month to support your sales forecast, you need The amount you have left to spend for that
to consider factors that reduce the inventory month after accounting for orders already
level: reductions planned for that months stock
Reductions include markdowns, employee Planned Purchases
discounts, and shrinkage
Ex. If a $75 pair of sneakers is marked down to $60, - Purchase Commitments
there is a $15 markdown; this is a 20% markdown Open-to-Buy
($15/$75)
Open-to-Buy Example Planned Purchases
Planned Purchases = Planned EOM Stock + 800,000
Planned EOM Stock (what you want to have at + Planned Sales + 150,000
the end of the month)
+ Planned Reductions + 20,000
+ Planned Sales
+ Planned Reductions (markdowns, - Planned BOM Stocks - 650,000
shortages, employee discounts) Planned Purchases 320,000
- Planned BOM Stocks (what you think you
will already have in stock from the previous month)
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Purchase Commitments Open-to-Buy Example
Merchandise ordered which will be If you planned to purchase $20,000 worth
delivered that month of merchandise in March, have already
received $5,000 in merchandise, and
Merchandise ordered that has already have $6,000 on order for delivery in
arrived March, what is your open-to-buy?
$20,000-5,000-6,000 = $9,000
Open-to-Buy (cont.) Areas of Negotiation
If you return $4,000 to a vendor in Cost of Merchandise
March, your open-to-buy increases by
$4,000 Discounts
$9,000 + 4,000 = $13,000 at retail
Dating of Discounts
If your cost complement (COGS/Sales
Revenues) is 50%, 13,000 X .5 = $6,500 Transportation Charges
is what you can spend on merchandise
Types of Discounts DATING
Trade Cash Dating - least desirable
cash with order or cash on delivery
retailer performs functions for vendor
Quantity Future Dating
Seasonal (for placing an order prior to the EOM (end of the month)
normal buying period) discount begins on the first day of following month
ROG (receipt of goods)
Promotional Allowance - co-op money discount period begins when goods are received
Cash Discounts (paying for the order within a Date of Invoice - ordering date
specified time period) discount period begins on date of invoice
Extra - most desirable (2/10-60 extra, n/90)
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Transportation Charges Economic Order Quantity (EOQ)
FOB destination (free on board) With a perpetual ordering system, the EOQ is the
quantity purchased when inventory reaches the order
seller pays for transporting goods and assumes
point (the minimal level of inventory the retailer
responsibility for damage or loss (most desirable)
should carry so they will not run out of stock before
the next order arrives)
FOB origin (least desirable)
retailer pays for transporting goods EOQ accounts for the variable cost of ordering
inventory and inventory carrying costs
EOQ (cont.) Order Point Model
EOQ = 2SO/IC Demand per day X (lead time + review time)
O = variable cost per order placed + safety stock
S = estimated annual unit sales lead time is the length of time it takes to get a
product on the sales floor once it is ordered
I = inventory carrying costs as a % of average
inventory
if demand per day = 20 units, lead time = 14
C = unit cost of item
days, review time = 7 days, and safety stock = 50
units
Variable costs decrease with large orders while
carrying costs increase Order point = 20 X (14+7) + 50 = 470
Open-to-Buy Problem
Given the following information, calculate open-
to-buy for February:
$100,000 BOM stock for February
$30,000 February forecasted sales
$7,000 forecasted reductions
$110,000 EOM stock for February
$10,000 merchandise on order for
February
