Which of the Following Is True of Forecasting for Fashion Merchandise Categories

What you lot'll learn to do: Examine the merchandise planning process

Imagine you are a Trade Planner for a big department store concatenation and you accept been asked to assistance prepare the plans for the upcoming fall flavour. How will you assist the buyers in developing their buying plan? Where to showtime?

You would probably start with a sales forecast by calendar month for the 6-month season. What criteria would you apply to confidently predict what those revenue numbers would be? Side by side, yous will demand to establish appropriate inventory levels necessary to achieve those sales, support promotions, and stock store presentation of your products. Finally, you would need to determine your stop-of-period (EOP) inventory to transition to the following flavour.

In this department we volition review the methods retailers use to develop these plans to maximize sales and minimize markdowns.

Learning Outcomes

• Explain how retailers forecast likely sales numbers for trade categories
• Compare and contrast various trade array options
• Summarize how retailers decide product inventory levels
• Outline a organization for decision-making merchandise menstruum
• Describe how retailers decide on merchandise allocations
• Explore the techniques used to evaluate merchandising decisions

Forecasting Sales Numbers

How do retailers forecast sales numbers for trade categories?

One of the concepts we discussed in the previous module in the merchandise planning process was forecasting sales. The retail planning process begins with a sales programme. Besides sales history and statistics, you need to accept an understanding of your overall business in social club to program increases or decreases which will so dictate proper inventory levels.

Forecasting is also important for a few vital functions within the organisation such every bit human resources, marketing, product management, and operations. Information technology is particularly important to product management and operations as they demand to understand how much product to produce and warehouse capacity needs!

The merchandise planner helps make up one's mind a sales plan based on data from the previous season and the desired sales goals that fall in line with the company strategy. For case, if I am the merchandise planner for women'south swimwear I might decide to plan sales with an increase of 10% over the prior year because I missed sales the previous flavor and the manufacture forecasters predict information technology volition exist a strong swimwear flavor. In add-on, I might feel my assortment is even more compelling than terminal yr for a number of reasons including better sizing and more desirable styling based on customer feedback.

We must too consider those external factors that influence how nosotros forecast our sales numbers. Every year the National Retail Federation provides an annual economical forecast to assist guide the industry of the impact that the external environment is expected to take. Take a look at the video below to sympathize how those factors influence the manufacture. Every bit you watch the video consider how the stock market, gas prices, consumer spending, the job market, wage growth, and debt plays a role. Would you say any of these factors are more than of import the other and which of these impact your decision to spend?

Consider what college gas prices and a declining job market might mean for retailers that deport luxury items such as expensive handbags and shoes? In a down economy y'all might find that consumers spend more than on basic staple items.

Some categories of business aren't affected by a downturn in the economy. For example, the beauty industry doesn't typically run into decreased sales patterns during these times. Since the Great Depression the beauty industry has seen sales growth during hard economic times. Why do you believe this is the case? Studies accept shown women want to experience good well-nigh themselves at all times so they will continue to spend on these "luxury" products that are more like a necessity. So although money might exist extremely limited during these times in that location is ever room in a woman'south wallet for those products that will enhance beauty!

Nosotros tin can also look at specific retailers that sally during tough economic times. Wal-Mart is a great instance as their net income rose from 2008-2010 after the fiscal crisis and subprime mortgage. By offer a vast assortment of core products at value prices they were able to attain sales growth.

Can you think of any other categories or retailers that aren't impacted by a downwards trending economy? Why? How does this bear upon the decisions the retailer makes?

Practise Questions

Trade Assortment Options

As we began this chapter we discussed the merchandise direction process. Yous might retrieve we discussed array planning equally a key role of trade planning. As the seasonal plan evolves, inventory dollars are broken down into categories and further downwardly to specific items. This part of the process is known as assortment planning,

Let's talk about the What, Why, and How of Assortment Planning.

• What: Assortment Planning is the process of determining product in each merchandise category.
• Why: Retailers increase sales, productivity (turnover), and margin while also improving customer satisfaction.
• How: By identifying store level opportunities as well every bit how much (breadth of assortment) and in what quantities (depth of assortment) should be carried in a merchandise category.

Assortment Planning Questions

Some key questions that drive assortment planning are:

• What SKUs volition drive profitability?
• What fundamental items are essential to your business?
• How does your assortment compare to competition?
• How original are the items within your array and how much is duplication?

Assortment Planning Considerations

Earlier beginning the assortment planning process in that location are several key considerations.

What is the merchandise capacity of the stores?

Will store capacity fit all of the array options I am planning?  This can be a trivial tricky for those bondage that have dissimilar prototypes across the store base of operations.  Another primal responsibleness of Merchandise Planning is to rank stores by sales performance and other factors to decide their assortment level.  All stores might not receive every item in your assortment.

Is there a need for complementary merchandise to service the customer?

If y'all acquit laptops should you carry laptop cases likewise?  Recollect well-nigh servicing your customer needs completely.  If they don't get it from your store they tin can go to another store which means you lose sales in this case.  At the aforementioned time if the customer knows you don't deport the complementary merchandise they are less probable to visit your store in the future

Is this merchandise profitable?

Before determining if you should carry the particular, yous need to understand your consummate assortment, your margin goals, and the needs of your consumer.  You will probably accept both low and high margin-producing items in your assortment to service the customer.  The mix of both low and high margin producing items might yet put you in line with your overall profitability goals.  In add-on, if you aren't meeting margin goals on certain items this might be an indication that you lot need to piece of work with the vendor to reduce the cost of the particular.

What are the corporate objectives and does the merchandise align with the strategy and goals of the visitor and section?

You ever want to ensure the goals of your department are in line with the full company strategy. Different retailers volition stand up for different things: exclusive products, lowest prices to beat competition, designer goods, highest quality products, etc.

What are the regional needs for the surface area in which I am planning the assortment?

If you piece of work for a retailer with multiple locations beyond the United States and even the world this becomes peculiarly important.  For example, Florida is a resort area where people often holiday.  If y'all take stores in this surface area you might consider carrying an extensive assortment of resort-like production such as swimsuits, flip flops, and sunglasses.  In addition, if you take stores almost any theme parks such equally Disney World or Six Flags yous might want to carry themed product and other quick travel accessory items such every bit tote numberless.  You might even be able to hold a competitive advantage here because those items could be more than expensive at the park.

As we wrap of this section of the chapter allow's take a wait at a specific example of an array plan for missy collection tops.  In this programme you can see the sales dollars, receipts, anticipated sell-through, ending inventory dollars and gross margin planned.  You can likewise run across the sales and receipt mix percentages.

Example: Excerpts from a Sample Array Plan

	Sales $	Rcpt $	Sell Thru %	EOP $	GM %		Sales Merch Mix %	Rcpt $ Merch Mix %	GM $ Merch Mix %
Women's Tees	$220,982	$269,579	83.26%	$47,089	64.xvi%		100.00%	100.00%	100.00%
* Blackness Triangle	$25,166	$30,275	83.26%	$five,789	64.54%		7.99%	7.xc%	8.03%
* Red Triangle	$29,408	$35,125	83.26%	$5,314	64.51%		9.33%	9.23%	9.39%
* Blue Triangle	$22,621	$28,545	83.23%	$4,568	64.55%		vii.18%	vii.10%	vii.22%
* Yellow Square	$26,580	$32,584	83.26%	$vi,657	64.54%		viii.43%	eight.35%	8.48%
* Pink Square	$34,742	$49,568	83.26%	$7,546	61.38%		11.98%	12.91%	11.46%
* Orange Square	$25,735	$31,357	83.26%	$5,123	64.54%		8.17%	8.08%	8.21%
* Dark-green Diamond	$27,154	$33,582	83.26%	$7,524	64.54%		viii.61%	8.52%	viii.66%
* Imperial Diamond	$29,576	$28,543	83.26%	$4,568	64.54%		nine.42%	nine.32%	9.48%

		Geometric Collection by Grade
			A	B	C	D	Due east
Women's Tees	Sls Tot $/ Avg Str	$11,548	$12,584	$12,684	$11,158	$9,863	$13,138
	Sls Tot $	$311,395	$37,456	$114,134	$56,134	$76,203	$27,468
	Sell Thru $ %	83.26%	82.28%	81.99%	82.24%	83.66%	91.65%
	Rcpt $/ Avg Str	$14,864	$xv,578	$xv,208	$14,928	$12,392	$xv,465
	Rcpt $	$413,846	$47,896	$141,653	$71,209	$97,152	$xxx,643
	Sls Tot $ Loc Mix	100.00%	12.03%	36.65%	eighteen.03%	24.47%	viii.82%

For example, the first item nether Women'south Tees (Blackness Triangle) is 65.54% GM%, 7.99% of the sales and 7.ix% of the receipts. What changes would you make based on what you encounter below? Take a look at Pink Square. Notice anything well-nigh that particular you would change? If y'all said you would plan less receipts you are correct! That item is 11.98% of the sales, 12.91% of the receipts, and 11.46% of the gross margin dollars. It has more than receipts planned than sales and is producing less gross margin dollars. Y'all might consider decreasing the amount of receipts of this item.

In the lower department of the assortment plan yous can meet the plan numbers broken out by average store for the array. In looking at this plan, you can see how the retailer has adult sales, inventory and purchase levels across the entire organization—broken down past style—and if the array makes sense at store level. Notice the level of item in how the array plan applies primal metrics to each and every way in the assortment.

Practise Questions

Inventory Levels

Let's talk over some important characteristics of how retailers determine appropriate inventory levels.

Meet Customer Demand

If you don't finer plan your inventory levels you won't accept an understanding of your potential sales given peaks and valleys inside the business to run into client demand. Those peaks and valleys depend on the type of retailer, the seasonality of the production, and the promotional environment. Valentine's Mean solar day product is a keen example. There is a relatively short fourth dimension frame in which whatever retailer can sell this product category. Afterward Feb 14th it is likely that the customer volition no longer want the products and you volition accept to markdown any remaining liability to get out of it quickly. Furthermore, if you don't order adequate amounts of inventory for your shelves prior to the holiday you might miss sales. Imagine the bear upon this has on an expanse that merely has seasonal product for holidays such as Valentine'south Day—they could potentially miss the sales plan for an entire twelvemonth!

Lead Time

Every retailer has to factor replenishment pb times in their inventory plans. Pb times can vary from 2 weeks to six months or more. Order lead fourth dimension is the fourth dimension from the placement of the guild with a vendor to when the production arrives at the retailer store or warehouse. Domestic product generally has a shorter lead time while product produced overseas accept longer pb times. Depending on the surface area of business this is a key consideration for product that sells out apace. It might be a good idea to keep warehouse inventory reserve for those items to furnish dorsum to stores that sell out of product.

College Profit

Sourcing and managing inventory has a direct effect on profitability. A retailer is able to increase profitability if they tin can control inventory levels. Ignoring a proper inventory organization in product, sales, and trade will hinder operational efficiency. If a retailer plans inventory levels in line with client demand they are able to realize less potential markdowns as they will sell thru the merchandise at a reasonable rate. While it isn't possible to meet sales objectives 100% of the time there must be a contingency programme in place. Sometimes information technology is better to markdown product as apace as possible when it is determined sales objectives won't be reached to mitigate even more than potential risk. In other words, the longer the retailer waits to reduce the price of a slow seller the deeper the discount will need to be.

Meliorate Cash Flow

Policies and procedures for effectively planning inventory levels enable companies to maintain inventory flow, account for inventory value, and handle aged inventory. These are all policies that will enable the company to achieve sales goals and objectives. As a result the retailer is improve able to manage cash flow. Why is greenbacks period important? Yous might have heard the expression "Greenbacks is King!". First-class greenbacks flow works the same fashion in business that it does for any private. Information technology allows the retailer to be in a more stable position with regards to spending and buying power. Having cash period enables any business organisation to generate and use cash. It too allows the retailer to pay any future debts.

For the terminal segment of this module we will explore the statistical methods the retailer uses to plan inventory levels. These are: frontward weeks of supply, weeks of supply, stock-to-sales ratio, sell-through percentage, bones stock, and turnover.

Frontward Weeks of Supply

An important goal of inventory planning is having enough inventory on paw for the sales planned until the adjacent delivery arrives. This calculation is at the week level and is calculated as the number of weeks of planned sales from the next week forward that current inventory value represents. Using forrard weeks of supply is a skilful metric to make informed trade decisions. It gives good insight as to how the product and category will contribute to overall sales and inventory. However, 1 key disadvantage of forward weeks of supply is it is calculated at a weekly level which doesn't let for a higher level meridian-down approach.

Weeks of Supply

Weeks of supply simply looks at past trend versus any future sales projections. Weeks of supply is calculated every bit the inventory position for a given menstruum divided by the boilerplate sales for that same fourth dimension frame. One huge disadvantage of weeks of supply is it looks at past sales tendency to calculate inventory and not future fourth dimension periods. It shows you where you have been but not where yous are going. This is especially important for those businesses and time periods that have huge sales increases. For example, Easter is a time period in which the sales are typically higher. If you calculate weeks of supply during those fourth dimension frames it would be much lower than an boilerplate fourth dimension menses which would, in event, brand information technology seem as if y'all take much lower inventory levels based on weeks of supply. The retailer must always have into business relationship the fourth dimension menses when using this method.

Stock-to-Sales Ratio

This is an appropriate measure for planning at the monthly level and is calculated by dividing sales at the beginning of period into inventory for that aforementioned time period. Stock to sales ratio provides the retailer with an estimated annual plough. Even so, this mensurate simply looks at i singled-out time menstruum and fails to look at the trend over time.

Sell Thru Per centum

Sell thru is one of the nearly common metrics for retailers to sympathise functioning and inventory levels. It represents the ratio of sales to commencement inventory. It is calculated past dividing sales past beginning inventory. This metric, like stock-to-sales ratio, looks at sales in relation to inventory for one period of time as opposed to a longer time period. However, information technology is useful for understanding performance too as possible inventory needs. For example, if Product A has a sell thru of 10% and the boilerplate for the department is 3%, that is an indication that you need to procure more than inventory for Product A to maximize sales potential.

Turnover

This metric indicates the number of times inventory is sold and replaced over a given period of fourth dimension. This is usually calculated at the annual or seasonal level past dividing period sales by the average inventory value. Turnover isn't equally effective an inventory method for calculating inventory needs for a short period of fourth dimension equally information technology is measured over a longer menses of fourth dimension. However, inventory turnover is a key metric that underlies the retail profit formula.

Basic Stock

Basic stock inventory planning involves establishing a baseline level of inventory for a given fourth dimension period. This is a threshold that inventory levels should never fall below. It is calculated as average inventory divided by average sales. This method of planning inventory levels is useful for retailers with consistent-selling items that are not bailiwick to large fluctuations. Nonetheless, this is not a skilful method for planning seasonal categories or tendency categories where sales are hard to predict. The Basic stock metric is an ideal inventory planning method for replenishment businesses at the SKU (Stock keeping unit) level.

Do Questions

Trade Flow

The most of import goal of whatsoever buyer is to achieve their sales plan. The second most important priority is to go on inventory levels on plan. If you exceed or fall curt of your sales plan, the only aligning you tin can make to keep your inventory in line is to adjust the flow of incoming merchandise. If you exceed your sales programme, you must accelerate your flow of goods. If you miss your sales plan, you must reduce your merchandise menstruum. That said, it is not as simple as it looks.

To begin our discussion of decision-making merchandise period, we accept to understand how merchandise is procured by retailers vis-à-vis the annual and seasonal planning and in-season merchandise management process. Let us render to our previous scenario where we are in the function of buyer for a national sporting appurtenances and apparel chain.

We have completed our annual and seasonal sales and merchandise plans and are now set up to begin the procurement process to source the goods needed to execute those plans. In general, buy commitments are made past buyers based on atomic number 82 times- a concept we introduced in an before section. Nosotros might begin by working with our internal production production organization on our in-house characterization line of goods. Typically, these will be designed and sourced by this internal organization and will have the longest lead time.

Next, we would work with our branded suppliers (Nike, Adidas, etc.) to commit for those purchases for the upcoming season. Finally, we would complete our purchases for the upcoming season by filling in our assortment with other domestic vendors' products.

Now that purchase commitments have been made past our national sporting appurtenances and apparel buyer, we enter the planned selling season. This is where the concept of controlling inventory menses is crucial to a retailer's success.  How does the buyer now control that merchandise period to proceed the inventories on plan as sales occur? There are 2 main systems for doing so: Supply Chain Management (SCM) and Open-To-Purchase (OTB).

We discussed the concept of SCM in an earlier department- a system where the retailer partners with vendors to command all aspects of product production to deliver goods to the retailer as planned. Since SCM systems are controlling production and transportation of product, information technology is possible to use the system to increase or decrease the flow of goods to the retailer. All the same, keep in mind that due to the longer lead times and overall complexity of a SCM system, there is less flexibility to make large adjustments on the wing short-term.

Using OTB is the primary means retailers utilise to command the menstruum of goods in the selling flavour. Here is a simple Open-To-Purchase Formula:

B.O.P Inventory − Sales − Markdowns − E.O.P Inventory Plan = Open up-To-Buy

Then let's plug in some values to see how the formula works: Assume we start with a Beginning of Menstruation (B.O.P) inventory of $500,000.00. Nosotros feel sales of $100,000.00, markdowns of $25,000.00, and our inventory target for the End of Period (East.O.P) is $600,000.00. What would be our OTB?

$500k  (BOP) − $100k (Sales) − $25k (Markdowns) − $600k (EOP) = $225k (OTB)

In this example we run into an OTB of $225k (using this formula will yield a negative number merely nosotros retailers use absolute value to go along the OTB a positive integer). To double-check your math, y'all tin can plug the OTB into the calculation every bit "Purchases" to ensure you lot are hitting your EOP target:

$500k (BOP) − $100k (Sales) − $25k (Markdowns) +$225k (Purchases) = $600k (EOP Inventory)

Go on in mind that these methods will vary depending on retail organisation size, sophistication, business concern goals, strategies and category of appurtenances.

Do Questions

Merchandise Allocations

Merchandise allocation is the process of determining how to distribute merchandise to individual shop units for maximum sales and minimal markdowns. Depending on the size and sophistication of the retail performance, this can exist a simple process, or an extremely complex algorithmic exercise. Some retailers plan their flavour's purchases from the footing upwards based on ideal store allocation, or others use the allocation procedure to suspension downwards merchandise receipts to allocate to online warehouse distribution, regional distribution centers or direct to stores.

In additional to the math of the process, there are strategic and tactical considerations for merchandise allocation as well. Stores in their "grand opening" phase will receive maximum merchandise allocation to both make an bear upon to new customers and to help determine the sales potential of the new store unit for time to come allocation accurateness. Allotment can as well be influenced by a competitive strategy where a retailer is attempting to make a "testify of strength" with wide assortments and deep quantities for a more than favorable impression when compared their competitors inventory position.

As yous would imagine, commercial software applications have been adult to assist retailers in the computational-heavy process of trade allocation. Vendors such as JustEnough, RELEX, Logility, JDA Software, Oracle, and many others compete in this space. Here are some screen shots of a package from JustEnough, to give y'all an idea of the capabilities of these applications.

In the starting time, screen shot you can run across the individual shop locations cleaved out and the allocation percentages listed based on performance metrics. The 2d screen shot is more focused on a category of merchandise grouped by manner with exception reporting enabled.

Practice Questions

Merchandising Decisions

Like all businesses, retailers must evaluate their functioning on a regular basis in order to continue success, improve results, or turn-around sub-par situations. Based on the condition of the retail industry today, one might say that it  is more than crucial than always to become information technology correct. Given the different kinds of retailers it is difficult to brand general statements regarding the methods used to evaluate trade decisions. Dick's Sporting Goods would accept a somewhat different perspective than 7-11. Macy'due south would review their concern differently than Big O Tires.

Despite the differences between retailers, in that location is one major common factor: the degree of complexity within their businesses. A review of retailer merchandise decisions reflects this complexity, revealing all of the dimensions of merchandise organization. Retail merchandise organization can be broken downward from a product perspective: group, division, department, vendor, classification, sub-class and SKU. Another dimension of review could be a location perspective: region, area, district, shop, department, nomenclature and SKU. Layer on to that the time dimension: year, season, quarter, month and week. Retailers so take these various dimensions and find points of intersection depending on the level of the business undergoing analysis.

Retail merchandise assay in unremarkably performed both at a fiscal level and a unit of measurement level- again owing to the degree of complexity and level of detail needed to manage and analyze merchandise decisions.

Practice Questions

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