Category management under merchandise planning

This chapter provides an overview of the merchandise management planning process. Merchandise is broken down into categories for planning purposes. Buyers and planners manage these categories, often with the help of their major vendors.

The key performance measures used to assess merchandise management are GMROI and its components, sales-to-stock ratio, inventory turnover, and gross margin. High inventory turnover is important for a retailer’s financial success. But if the retailer attempts to push inventory turnover to its limit, stockouts and increased costs may result.

The steps in the merchandise management process are (1) forecasting category sales, (2) developing an assortment plan, (3) determining appropriate inventory levels and product availability, (4) developing a plan for managing inventory, (5) allocating merchandise to stores, and (6) monitoring and evaluating performance and making adjustments.

Buying systems for staple merchandise are very different from those for fashion merchandise. Because staple merchandise is sold month after month and the sales levels are predictable, an automated continuous replenishment system is often used to manage staple merchandise categories.

The performance of buyers, vendors, and individual SKUs must be determined. Three different approaches can evaluate merchandise performance. The sell-through analysis is more useful for examining the performance of individual SKUs in the merchandise plan. The buyer compares actual with planned sales to determine whether more merchandise needs to be ordered or whether the merchandise should be put on sale. In an ABC analysis, merchandise is rank-ordered from highest to lowest. The merchandising team uses this information to set inventory management policies. For example, the most productive SKUs should carry sufficient backup stock to never be out of stock. Finally, the multiattribute method is most useful for evaluating vendors’ performance.

Appendix 12A to this chapter presents a more detailed description of the development of a merchandise budget plan for fashion merchandise. Appendix 12B discusses the retail inventory method.