LEARNING UNIT 3

MERCHANDISE
MANAGEMENT
SERVICING AND MERCHANDISING
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SARA HILL FRANCOIS MERCER ALFREDO TORRES ADAM MORGAN

PRODUCT MANAGER FINANCIAL MNAGER MARKETING MANAGER COMPANY OWNER
PRESENTATIONS ARE COMMUNICATION PRESENTATIONS ARE COMMUNICATION PRESENTATIONS ARE COMMUNICATION PRESENTATIONS ARE COMMUNICATION
TOOLS THAT CAN BE USED AS TOOLS THAT CAN BE USED AS TOOLS THAT CAN BE USED AS TOOLS THAT CAN BE USED AS
DEMONSTRATIONS DEMONSTRATIONS DEMONSTRATIONS DEMONSTRATIONS

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 YOUR LOGO
SLOGON HERE

OUR TEAM

SARA HILL FRANCOIS MERCER ALFREDO TORRES ADAM MORGAN

PRODUCT MANAGER FINANCIAL MNAGER MARKETING MANAGER COMPANY OWNER
PRESENTATIONS ARE COMMUNICATION PRESENTATIONS ARE COMMUNICATION PRESENTATIONS ARE COMMUNICATION PRESENTATIONS ARE COMMUNICATION
TOOLS THAT CAN BE USED AS TOOLS THAT CAN BE USED AS TOOLS THAT CAN BE USED AS TOOLS THAT CAN BE USED AS
DEMONSTRATIONS DEMONSTRATIONS DEMONSTRATIONS DEMONSTRATIONS

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TABLE OF CONTENTS
3.1 INTRODUCTION 3.6 MERCHANDISE CONTROL
3.2 MERCHANDISE MANAGEMENT 3.6.1 3.6.2
INVENTORY CONTROL INVENTORY
3.3 THE MERCHANDISE PLANINNG PROCESS SYSTEM VALUATIONS
3.4 SALES FORECASTING 3.6.3
3.4.1 3.4.2 MEASURING MERCHANDISE
DEVELOPING SALES FORECASTING PERFORMANCE
FORECASTS DECISIONS 3.7 ASSORTMENT PLANNING
3.5 MERCHANDISE REQUIREMENTS 3.7.1
FACTORS AFFECTING
3.5.1 3.5.2
MERCHANDISE ASSORTMENT
MERCHANDISE MERCHANDISE
3.7.2
PLANNING IN RAND PLANNING IN UNITS
PREPARING ASSORTMENT PLAN
ARE THERE ANY
THOUGHTS OR
FEELINGS THAT
YOU'VE “BOUGHT”
THAT HAVE ACTUALLY
MADE YOUR LIFE LESS RICH?
MERCHANDISE PLANNING PROCESS
INTRODUCTION Rose is a spaza shop owner in Soweto. She opened her shop
after losing her permanent job in Pretoria. As she has to buy
clothes for her children and pay for their education, Rose
decided that starting her own business would be the best
option for her and her family. She had some money saved and
knew someone with a car that could help her purchase and
transport products from the nearest town to her spaza shop in
Soweto. She started small and slowly grew big enough to
register at the South Africa Spaza and Tuck Shop Association
(SASTA) and apply for a loan from the government. Rose
realises that if she receives the loan from the government, she
should make sure that the merchandise she buys are products
that her customers would purchase. Planning the amount of
stock and assortment of her merchandise would give her a
competitive edge over the other spaza shops in her township.
If she can give her customers a good assortment of products
at a reasonable price, she should soon have a very profitable
business. The best way for Rose to achieve this, is by good
planning and keeping track of her sales and inventory levels.
 HOW?

Rose’s spaza shop is an example of how

merchandise planning has an effect on
profitability. She only has to plan for
approximately 20 to 30 different kinds of products,
including staple products such as bread, milk,
eggs, maize meal and some sanitary products.

Larger retailers make sure that each store, nationwide, has enough of
the right stock available at the right time. They use forecasting to
determine what merchandise each store needs. To make accurate
predictions or forecasts, Checkers uses data, which commonly includes
past sales records, inventory levels, information about trends in
consumer demand and what the competition is doing. The goal is to
predict the right assortment of products (merchandise) to bring its
customers value. This ensures profitability and a high inventory
turnover – in other words, when a retailer can sell all the merchandise it
bought quickly and at a profit.
 MERCHANDISE MANAGEMENT
MERCHANDISE MANAGEMENT IS ONE OF THE
MOST IMPORTANT FUNCTIONS OF ANY
SUCCESSFUL RETAILER AND REFERS TO THE
ANALYSIS, PLANNING, ACQUIRING, HANDLING AND
CONTROLLING OF MERCHANDISE INVESTMENTS IN
A RETAIL OPERATION (DUNNE ET AL., 2014:349;
TERBLANCHE ET AL., 2013:193). MERCHANDISE
MANAGEMENT INVOLVES PLANNING AND
CONTROLLING THE BUDGET TO MAKE SURE THAT
THE CORRECT MERCHANDISE AND CORRECT
AMOUNT OF MERCHANDISE IS SELECTED AND
SUPPLIED TO THE CUSTOMERS (TERBLANCHE ET
AL., 2013:193). THE FOLLOWING COMPONENTS
ARE ALL EQUALLY IMPORTANT IN THE
MERCHANDISE MANAGEMENT FUNCTION (DUNNE
ET AL., 2014:349; TERBLANCHE ET AL., 2013:193–
194):
 COMPONENTS

ANALYSIS PLANNING ACQUISITION

Retailers should be able to

Because retailers are Because retailers generally
accurately identify their
sometimes required to buy their products from
customers to understand their
source and buy others, either manufacturers
needs and wants. In other
merchandise months in or distributors, they need to
words, retailers should be able
advance of the selling source the best
to identify their target market
season, proper planning is merchandise and the best
to acquire and sell the correct
imperative in merchandise possible prices. This often
merchandise to meet their
management. This requires involves a lot of research,
customers’ needs. Analysis
retailers to predict future travelling and negotiations
also refers to analyzing trends
trends and buying patterns, with potential vendors.
and studying information of
as well as the state of the
what happened in the past to
economy, employment and
help predict future trends – in
weather.
other words, sales forecasting.
 COMPONENTS

HANDLING CONTROLLING

And lastly, controlling Merchandise management can

Handling refers to
the logistical in merchandise be defined as the analysis,
arrangements to get management refers to planning, acquiring, handling and
the control of the large controlling of merchandise
the merchandise to
rand investment in investments in a retail operation
where it is required
inventory to ensure an
in the right condition (Dunne et al., 2014:349).
adequate financial
to sell to customers. return on the retailer’s
merchandise
investment.
 THE MERCHANDISE PLANNING PROCESS
The main purpose of merchandise planning is to satisfy the customers’ merchandise as well as
financial needs (Wiid, 2012:51). To achieve this purpose, a retailer should develop a merchandise
plan that creates a balance between the available stock and sales volumes (Wiid, 2012:51). To
maintain this balance, the retailer should forecast sales and plan its merchandise assortment with
regard to inventory support, investment and assortment.

Inventory investment
involves the planning of total rand investment in merchandise inventory so that the retailer can
reach its financial objectives.
Inventory assortment
refers to the planning of various product items the retailer should keep in stock in a particular
product line.
 THE MERCHANDISE PLANNING PROCESS
Inventory assortment
refers to the planning of various product items the retailer should keep in stock in a particular
product line.
Inventory support
Involves the planning of the number of units of each product item the retailer would need to meet
its sales forecast (Wiid, 2012:51).
SALES FORECASTING 125

As seen from the scenario in the introduction,

forecasting is an integral part of the merchandise 100

management process. This is the part where the

retailer predicts which merchandise would sell, and 75

how much to stock in its stores. The process of

predicting sales is not based on guesses or
50
assumptions; but rather on solid information and data
about past sales fi gures, current inventory levels,
25
trends in consumer demand and trends in local stores
and competitors. The right information enables the
retailer to make better predictions. 0
Item 1 Item 2 Item 3 Item 4
SALES FORECASTING
The ability of the retailer to make sound
predictions has a direct eff ect on customer
satisfaction and the profi tability of the retailer. If
the retailer can predict sales volumes correctly,
the right merchandise in the right quantities would
always be available for customers to buy.
Forecasting sales ensures that there are no stock-outs, a low rate of markdowns and a low rate
of transfers.

Stock-out situations mean that a retailer did not anticipate the amount of sales of a specific
product correctly and consequently ran out of stock. To ensure that this does not happen,
inventory levels should be sufficient to cover the demand of a specific item (Schönsleben,
2016:464).

Markdowns refer to the selling of merchandise at lower rates to sell them quicker or to make
space on the shelves for new stock (Dunne & Lusch, 2008:344). Markdowns can be planned or
unplanned. Although retailers do plan to mark down merchandise at a certain stage, they
sometimes buy merchandise that does not sell as well as anticipated and consequently have to
sell it at marked-down prices, which means a loss in profits. An example of a planned markdown
is the Woolworths 75% sale at the end of each season.
Transfers are when a retailer has a stock-out situation and another branch that has suffi cient
stock, has to transfer the stock to the retailer, which costs additional money (Dunne & Lusch,
2008:277).

There are two major types of forecasting, according to Fiorito and Gable (2012:169):

• Macro-forecasting involves the market in general – for instance, would there be a demand for
accessories in the upcoming season, or would dresses be more in demand than skirts.

• Micro-forecasting, on the other hand, focuses more on detailed unit sales in a specifi c
category (e.g. women’s shoes) – would fl at shoes be more in demand than heels in the coming
season.
 • HOW MUCH OF EACH PRODUCT SHOULD BE
PREDICTIONS ARE MADE PURCHASED/STOCKED?
ABOUT HOW MUCH The retailer must know exactly how much of each product it needs to
INVENTORY WOULD BE
purchase. Purchasing in this instance refers to the retailer buying stock to
SOLD AND HOW WELL
resell. The assortment plan answers this question, as it shows the retailer
THE CONSUMERS WOULD
REACT TO THE CHOICE how many of each product to buy, including the colour, variation and style.
AND ASSORTMENT OF
INVENTORY.
SHOULD NEW PRODUCTS BE ADDED TO THE MERCHANDISE
ACCORDING TO ASSORTMENT?
CLODFELTER (2015:214),
This means that the retailers should evaluate the existing assortment of
A RETAILER SHOULD BE
products available and decide whether to change it. For example, Woolworths
ABLE TO ANSWER THE
FOLLOWING QUESTIONS notices an increase in consumer demand for healthy beverages that can be
AFTER COMPLETING THE used as alternatives for sodas or sugary drinks. It therefore adds the
FORECASTING PROCESS: sparkling, sugar-free, flavoured water series to its assortment.
HOW MUCH INVENTORY IS NEEDED TO SUPPORT THE PLANNED SALES?
This means that the forecasting figures calculated should show exactly how much inventory should be
available to for purchase. This includes calculations for how much inventory is needed at the beginning of
the month, and how much the retailer should order to supply the demand.

• WHAT PRICE SHOULD BE CHARGED FOR EACH PRODUCT?

The price charged for each product is calculated by adding a mark-up on the cost price. The cost price is
the price that the retailer paid for the product. However, many other factors also influence the price charged
for the product, for example, demand for the product – is it high or low, what is the competition charging for
the same kind of product and would the price be affected by factors such as a higher petrol price (Cant,
2010b:94).
The most important forecast a retailer can make is the sales forecast, that is, the total sales the
retailer hopes to make. The sales can be estimated in the following ways (Clodfelter, 2015:215):

• By store – This means forecasting sales on all products in the store. Big retailers such as
Woolworths, with many outlets of various sizes, are able to plan merchandise per individual
store.

• By department – This means planning sales per department, for example, planning the ladies
clothing department, which includes tops, pants and dresses.

• By individual product line or item – This means planning products for individual SKUs or
products lines, for example, ladies summer tops.

• By consumer groups – There are many ways a retailer can segment consumers groups, for
example, according to age, gender or income such as females between 15 to 20 years of age.
DEVELOPING Before a retailer can start to forecast sales, it should obtain in-depth
information about all the factors that can have an impact on the

SALES amount of sales. Remember that the retailer is trying to estimate the
actual amount of sales that it would get in a certain period, because

FORECASTS this has a direct effect on how much merchandise to purchase. For
example, if the retailer knows how many units of milk it sold in the
previous months, it can predict or estimate how many units it would
sell in the coming months. However, if the retailer wants to make an
accurate estimate of the amount of sales, it is not enough to only
know the previous sales data. The retailer should also consider other
factors, for example, how much money it has to purchase new
merchandise, how much merchandise it should buy and what
merchandise would sell.
We now look at some cost factors that are affected when the retailer purchases merchandise
based on sales forecasts. For instance, a retailer sold 1 000 units of low-fat cream cheese in
the same month last year, but it has seen an increase in the sales of full-fat cream cheese in
the past six months. The retailer determines that this is due to a new diet that has gained
popularity among individuals. The retailer decides to increase the amount of full-fat cream
cheese units it stocks to cater for the increase in demand. However before the retailer can
purchase the merchandise, it should consider how the increase in merchandise would affect
factors such as transport and delivery costs, electricity costs and storage costs. The retailer
should also consider factors that could have a direct impact on the amount of sales. This
example shows that trends in the health industry have an effect on the buying habits of
consumers, leading to an increase in sales of the full-fat cream cheese. The retailer should
therefore continuously gather in-depth information about the internal and external environment
that could have an impact on sales predictions.
MOST IMPORTANT FACTORS RETAILERS SHOULD
CONSIDER WHEN PREDICTING SALES OF
MERCHANDISE

PAST SALES FIGURES

PAST SALES FIGURES ARE THE MOST IMPORTANT DATA THE
RETAILER NEEDS WHEN FORECASTING SALES. PAST SALES
FIGURES ARE USED TO DETERMINE WHAT CUSTOMERS WOULD
BUY IN THE FUTURE. THESE FIGURES ONLY GIVE THE RETAILER A
GUIDELINE, BUT AS DISCUSSED LATER IN THE LEARNING UNIT,
RETAILERS CONSTANTLY HAVE TO UPDATE INVENTORY
INFORMATION TO DETERMINE SUDDEN CHANGES IN DEMAND
OR A SLOWER DEMAND THAN ANTICIPATED. FOR EXAMPLE,
INFORMATION ABOUT INVENTORY LEVELS HELPS RETAILERS
REACT QUICKLY AND SELL SLOW-SELLING MERCHANDISE AT
LOWER PRICES BEFORE THE DEMAND COMPLETELY
DISAPPEARS.
MOST IMPORTANT FACTORS RETAILERS SHOULD
CONSIDER WHEN PREDICTING SALES OF
MERCHANDISE

GENERAL BUSINESS AND ECONOMIC ENVIRONMENT

IN TIMES OF RECESSION AND A HIGH UNEMPLOYMENT
RATE, SALES DROP. ALTERNATIVELY, IN TIMES WHERE
ECONOMIC CONDITIONS ARE BETTER AND THE
UNEMPLOYMENT RATE IS LOWER, SALES GENERALLY
INCREASE. THEREFORE, IT IS IMPORTANT TO DO RESEARCH
AND TO KEEP UP TO DATE WITH THE CURRENT BUSINESS
AND ECONOMIC CONDITIONS AND CONSUMER MARKETS TO
PREDICT POSSIBLE CHANGES IN CONSUMER SPENDING
PATTERNS.
MOST IMPORTANT FACTORS RETAILERS SHOULD
CONSIDER WHEN PREDICTING SALES OF
MERCHANDISE

GENERAL BUSINESS AND ECONOMIC ENVIRONMENT

IN TIMES OF RECESSION AND A HIGH UNEMPLOYMENT
RATE, SALES DROP. ALTERNATIVELY, IN TIMES WHERE
ECONOMIC CONDITIONS ARE BETTER AND THE
UNEMPLOYMENT RATE IS LOWER, SALES GENERALLY
INCREASE. THEREFORE, IT IS IMPORTANT TO DO RESEARCH
AND TO KEEP UP TO DATE WITH THE CURRENT BUSINESS
AND ECONOMIC CONDITIONS AND CONSUMER MARKETS TO
PREDICT POSSIBLE CHANGES IN CONSUMER SPENDING
PATTERNS.
MOST IMPORTANT FACTORS RETAILERS SHOULD
CONSIDER WHEN PREDICTING SALES OF
MERCHANDISE

COMPETITION
THE COMPETITION CAN HAVE A SIGNIFICANT EFF ECT ON
FORECASTING SALES. THE RETAILER NEEDS TO QUICKLY READ
AND RESPOND TO WHAT THE COMPETITION IS DOING. A
COMPETITOR THAT OPENS A STORE IN THE SAME MALL, OR A
RETAILER THAT MAKES BIG CHANGES TO ITS MERCHANDISE OR
STARTS A NEW MARKETING CAMPAIGN, CAN HAVE A VERY
NEGATIVE IMPACT ON A RETAILER’S SALES. FOR EXAMPLE,
BEYERS CHOCOLATES REBRANDED ITS NEW RANGE OF
CHOCOLATES, WHICH RESULTED IN A 48% INCREASE IN SALES
(BIZCOMMUNITY, 2016). THIS INCREASE IN SALES CONSEQUENTLY
HAD AN IMPACT ON THE SALES OF OTHER CHOCOLATE BRANDS,
SUCH AS BEACON AND CADBURY.
MOST IMPORTANT FACTORS RETAILERS SHOULD
CONSIDER WHEN PREDICTING SALES OF
MERCHANDISE

TRENDS IN CONSUMER DEMAND

STAYING UP TO DATE WITH WHAT CONSUMERS WANT, AND WHAT
THE LOCAL AND INTERNATIONAL TRENDS ARE, IS VITAL FOR ANY
RETAILER. IT HELPS RETAILERS UNDERSTAND WHICH PRODUCTS
TO STOCK, WHICH PRODUCTS TO STOCK IN LARGER VOLUMES OR
WHICH PRODUCTS TO REMOVE FROM THE SHELVES. THIS IS
BECAUSE AN INCREASE IN THE DEMAND FOR A SPECIFIC ITEM
INCREASES SALES. FOR EXAMPLE, BEFORE THE RELEASE OF THE
NEW APPLE IPHONE, RETAILERS STOCK LESS OF THE PREVIOUS
MODELS AND SELL THEM AT REDUCED PRICES TO CREATE
DEMAND FOR THE NEW PHONE.
MOST IMPORTANT FACTORS RETAILERS SHOULD
CONSIDER WHEN PREDICTING SALES OF
MERCHANDISE

CHANGES IN POLICY
CHANGES IN POLICY, SUCH AS LONGER TRADING HOURS, BETTER
RETURN POLICIES AND BETTER SERVICE CAN HAVE AN EFF ECT
ON SALES. IF THE STORE’S GENERAL SERVICE AND MANAGEMENT
ARE IMPROVED, THERE IS A GOOD CHANCE THAT CUSTOMERS
WHO VISIT THE STORE WOULD STAY LONGER AND SPEND MORE
MONEY THERE INSTEAD OF SOMEWHERE ELSE.
 Variable costs – When a retailer predicts
an increase in sales, certain variable costs
may be affected. Variable costs change
based on whether there is an increase or a
decrease in sales. If there are more sales,
the costs increase, and if there is a
FACTORS THAT MAY BE decrease in sales, the costs decrease.
AFECTED WHEN A RETAILER Examples of variable costs are delivery
PREDICTS AN costs and profit earned from the sales.
INCREASE OR DECREASE
If a retailer predicts an increase in sales,
IN SALES
this probably means an increase in
transportation to transport and deliver the
merchandise to the shop or warehouse. A
predicted increase in sales would also lead
to an increase in profits, because the more
the retailer sells, the more profit it makes.
 Fixed costs – Fixed costs, are costs that a
retailer incurs to keep in business. These
costs include rent, water and electricity. If a
retailer predicts an increase in sales, it can
FACTORS THAT MAY BE result in an increase in these costs. For
AFECTED WHEN A RETAILER example, Woolworths sells a large assortment
PREDICTS AN of prepared vegetable packs. It has seen an
increase in these pre-cut vegetable packs in
INCREASE OR DECREASE the winter. The increase in demand causes an
IN SALES increase in electricity and water consumption
costs, because it needs additional cold
storage and water to wash and prepare an
increased amount of vegetables.
 Greater need for funds – If a retailer
projects an increase in sales, it should
FACTORS THAT MAY BE adjust the budget accordingly. Not only
AFECTED WHEN A RETAILER would it purchase an increased amount of
PREDICTS AN merchandise to cater for the increase in
demand, but it should also take into
INCREASE OR DECREASE
consideration that an increase in
IN SALES merchandise requires increased resources
such as shelf space.
 Increase or decrease in other expenses –
FACTORS THAT MAY BE
An increase or decrease in sales volume
AFECTED WHEN A RETAILER
affects factors such as storage costs,
PREDICTS AN
delivery costs and employee salaries.
INCREASE OR DECREASE
IN SALES
 The most important part in the forecasting
process is to ensure that the retailer has
access to accurate information. The more
accurate the information, the more accurate
FACTORS THAT MAY BE the predictions/ forecasts would be. In the
AFECTED WHEN A RETAILER next section, we discuss the decisions the
PREDICTS AN retailer should make before forecasting can
INCREASE OR DECREASE begin. These decisions include deciding
how to calculate past sales annually or
IN SALES
monthly, and which method of inventory
planning to use.
FORECASTING DECISIONS
WHEN A RETAILER PREDICTS THE AMOUNT OF SALES FOR A CERTAIN PERIOD,
THOSE FIGURES INFLUENCE HOW MUCH MERCHANDISE THE RETAILER SHOULD
PURCHASE FOR THAT PERIOD. THE AMOUNT OF MERCHANDISE THE RETAILER
SHOULD PURCHASE THEN TRANSLATES INTO THE AMOUNT OF INVENTORY THE
RETAILER SHOULD PLAN FOR OR KEEP TO ENSURE THAT THERE IS ENOUGH STOCK
FOR THE PREDICTED SALES. TO CALCULATE THE PREDICTED SALES, THE RETAILER
NEEDS THE PAST SALES FIGURES. THE RETAILER CAN ESTIMATE PAST SALES
FIGURES ANNUALLY OR MONTHLY. THE DECISION IS DETERMINED BY THE KIND OF
PRODUCT – WHETHER IT IS STAPLE OR FASHION MERCHANDISE.
METHODS USE IN
STATS

Day 5

FORECASTING DECISIONS Day 4

Day 3

Day 2

3.4.2.1 CALCULATING PAST SALES FIGURES Day 1

WHEN FORECASTING SALES, THE RETAILER SHOULD USE PAST SALES FIGURES. IN
0 5 10 15 20 25

THIS WAY, IT CAN DETERMINE WHETHER THERE ARE MONTHLY OR YEARLY

TRENDS OR PATTERNS IN SALES. THE RETAILER SHOULD USE ITS EXPERTISE IN
THE FIELD TO DETERMINE IF OTHER FACTORS CAUSED AN INCREASE OR
DECREASE IN SALES, SUCH AS A NEW STORE OPENING IN THE SAME BUILDING,
THE HOLIDAY SEASON, A YEARLY SALE OR CHANGES IN STORE HOURS. EXPERTS
KNOW THAT SALES ARE NOT ONLY AFF ECTED BY DEMAND, BUT ALSO BY
EXTERNAL FACTORS. TWO METHODS THE RETAILER CAN USE TO CALCULATE
PAST SALES FI GURES. PAST SALES CAN BE CALCULATED ON AN ANNUAL OR A
MONTHLY BASIS. THIS DEPENDS ON WHETHER THE RETAILER IS TRYING TO
DETERMINE THE PREVIOUS SALES FIGURES FOR STAPLE OR FASHION PRODUCTS.
METHODS USE IN FORECASTING DECISIONS
METHODS USE IN FORECASTING DECISIONS
If sales are constant throughout the year, meaning there
are no seasonal fluctuations, this method of using the
average is sufficient. However, sales can be influenced
by seasonal fluctuations, such as the weather or the
school calendar. This means that for certain times of the
year, there is an increase or decrease in sales; therefore,
a fluctuation in the sales volumes. volumes. For
example, sales of staple products, such as bread and
milk, only vary slightly throughout the year. However,
there are significant fluctuations in sales for products
such as school stationery, winter clothing, heaters and
fans. In the winter, there is an increased demand for
winter clothing and heaters, while during the summer
months, there is an increased demand for summer
clothing and fans. Therefore, it is necessary to adjust the
monthly sales accordingly.
MERCHANDISE REQUIREMENTS

In the first step, we learnt how to forecast and calculate planned sales by looking at the
past sales figures. In this step, we explain how the planned sales are used to calculate how
much inventory the retailer needs to purchase and ultimately the budget requirements to meet
these demands. In this step, you learn how to plan the budget – planning in rand, and how to
plan the number of units required – planning in units. In simple terms, planning in rand means
that you have a certain amount of money to spend on buying merchandise. This amount is
calculated by looking at past sales figures and factors such as consumer trends and other
internal and external factors – which we discussed in step 1. Planning in units means that now
that you have a specific amount that you are allowed to spend, you must allocate the amount
of money to specific products (or units). For example, if you have R30 000 to spend on a new
range of men’s shorts, you have to decide, based on inventory levels, past sales figures and
planned sales figures, how much of each size, colour and style to buy. This is called planning
an assortment of merchandise based on the planned merchandise budget (this is the third step
in the process and is discussed in section 3.6).
5 PARTS OF MERCHANDISE BUDGET
MERCHANDISE PLANNING IN RAND
COMPONENTS IN CALCULATING
MERCHANDISE BUDGET
COMPONENTS IN CALCULATING
MERCHANDISE BUDGET
 CALCULATING INITIAL MARK-UP/PROFIT MARGINS
Profit is not necessarily all the money the retailer puts in
Item 5 Item 1
its pocket after a sale. The gross profit (meaning, the
20% 20%
total amount of profit) is used to cover expenses such
as buying new stock, shelving, rent and transport while
still having enough money to pay employees and be
profitable (Cant, 2010b:94).

Item 4
20%
Item 2
20% The retailer should therefore plan the initial mark-up
percentage carefully to make sure that it covers all its
expenses and stays profitable. As we have seen in the
Item 3 previous section, the mark-up is the percentage that
20%
retailers add to the cost price of merchandise before
reselling.
 MARK-UP PERCENTAGE PLAN

ESTIMATED REDUCTIONS ANTICIPATED DESIRED PROFIT

TOTAL ANNUAL which is usually 10% EXPENSES OBJECTIVE
SALES of the annual sales which is usually 20% which is 12% of
of the annual sales sales
CALCULATING PLANNED MERCHANDISE PURCHASES AT RETAIL AND COST PRICE

When working with monthly sales records, a retailer works in retail prices, that is, the
price that customers pay and not the price the retailer paid for the stock. The retailer
first calculates thE planned merchandise in retail and then, by using the mark-up
percentage already calculated, works out the planned merchandise at cost.

Calculating planned merchandise purchases in retail price

We use an example to explain the calculations. Rose is planning to buy new
merchandise with the loan she has received from the government.
She has the following data at her disposal:
HER PLANNED SALES HER BOM / PLANNED
STOCK LEVELS AT THE
PER MONTH ARE R20 000
BEGINNING OF THE
(IN RETAIL PRICES).
MONTH WAS R15 000 (IN
RETAIL PRICES).

HER EOM / PLANNED SHORTAGES AND

STOCK LEVELS AT THE PLANNED MARKDOWNS
END OF THE MONTH WAS FOR THE MONTH WERE
R13 000 (IN RETAIL R2 500 (IN RETAIL
PRICES). PRICES).
PLANNING INVENTORY LEVELS

PERCENTAGE
BASIC STOCK WEEK'S STOCK-TO-SALES
VARIATION
METHOD SUPPLY RATIO METHOD
METHOD
BASIC STOCK
METHOD
125

The basic stock method is a very conservative way to 100

plan stock levels. It uses a baseline level of inventory,

and the retailer makes sure that the stock never falls
75
below that point. The retailer uses this method to make
sure that there are no out-of-stock situations. Retailers
50
with a low stock turnover rate usually use this method.
When retailers have a low stock turnover rate, it means
that the stock they carry is sold out at a low rate. This 25

means that it takes long for the retailer to sell all the
products in stock. A high turnover rate means that 0
Item 1 Item 2 Item 3 Item 4

products are sold out quicker, and the retailer needs to

order more stock more frequently. A turnover rate of
two is a low turnover rate, and a turnover rate of 13 is
high.
BASIC STOCK
METHOD
125

100

This method of stock-taking uses average sales to predict

monthly sales, and does not account for seasonal 75

variability. Therefore, this method would be perfect for

staple merchandise with a predictable selling pattern. One 50

negative aspect of this method is the fact that retailers

have to keep more stock on hand than they would have if
25
they only kept the planned stock for the month.

0
Item 1 Item 2 Item 3 Item 4
 PERCENTAGE VARIATION METHOD

The retailer uses the percentage variation method when it has a high stock turnover rate – usually
above six times or more per year (Dunne & Lusch, 2008:289). Fashion merchandise usually has such a
high turnover. This is because fashion merchandise is not sold constantly or at the same rate every
month, and new styles and designs replace old stock. For example, Mr Price sells tops with long
sleeves, short sleeves and cropped sleeves. Each item can be sold out throughout the year, and each
item is sold in different quantities throughout the year. Therefore, Mr Price has to adjust stock levels
according to the variations in sales volume for each month depending on the turnover rate.
 Retailers that sell products with a constant rate
WEEK'S SUPPLY of sales, for example greengrocers, usually use
the week’s supply method. The retailer plans
METHOD inventory of green produce on a weekly basis. It
can plan stock levels in advance by looking at
how many weeks there are in a year and dividing
it by the rate of inventory turnover. This gives the
retailer the amount of times it would need to re-
order new stock.
STOCK-TO-SALES RATIO
THE STOCK-TO-SALES METHOD USES A PLANNED RATIO TO DETERMINE STOCK
LEVELS. A PRE-DETERMINED RATIO FOR EXAMPLE 2:1 (STOCK TO SALES) OR 3:1 CAN
BE USED. THIS RATIO IS DEVELOPED BY LOOKING AT PAST SALES FIGURES TO
DETERMINE WHAT THE RATIO WAS, AND WOULD CONTINUE TO BE.
Merchandise Planning
in units
Planning merchandise in units is done with
lists. Retailers should use three diff erent kinds
of lists depending on the type of products
they sell, namely model stock lists, basic stock
lists and never-out lists.
It is possible for a retailer to have more than
one list. For example, Pick n Pay Hyper is a big
store that sells food, hardware and clothing
items, therefore, staple products and fashion
articles. It would use the model stock list for the
fashion articles, the basic stock list for the staple
products, and the never-out list for the most
popular items or most-sold seasonal items in
store such as bread, milk and umbrellas.
MODEL
STOCK LIST
Retailers use a model stock list when selling fashion
articles/products. The company policy
determines the list of products, for instance, to only
stock items that are popular and not
the complete range – to only stock 300 dresses in
sizes 34 to 36 or to only stock umbrellas with
patterns.

The model stock list diff ers from the basic stock list in
that it does not keep exact count of stock
on hand. The model stock list gives general guidelines
on price, colour, style and material. For
example, a retailer knows it should buy 300 dresses in
blue, white and red, but does not specify how much of
each colour. The flexibility of this list compensates for
the changes in selling
patterns in a season.
BASIC STOCK LIST
You are probably rather familiar with basic stock planning. Retailers use this method when
selling staple products such as food, hardware, cosmetics and sanitary products. The list
keeps precise data of each stock item. The list also indicates what the minimum level of
stock must be at all times and how much stock has been ordered, the planned sales and
the actual sales. The retailer counts the stock at regular intervals to make sure that there is
never a stock-out situation and to know how much to order.

We use Rose’s spaza shop as an example: It is the middle of the month, and Rose is doing
stocktaking. She has 50 boxes of toothpaste in stock at the moment. She knows that her
planned sales are 40 boxes per month. At the beginning of the month she had 15 boxes and
bought another 35. She makes sure that there are never less than 10 boxes available on the
shelf.
NEVER-OUT LIST
Retailers use the never-out list to make sure that the most popular products in the store
never run out. According to Wiid (2012:62), the list can include fast-selling staple products
(such as bread and milk), key seasonal products (such as jerseys, heaters or umbrellas) or
fashion articles the latest trend). The retailer specifi es what percentage should be in stock
and displayed at all times. For example, there should always be at least 90% of the items on
the list in stock, displayed and ready to sell.
MERCHANDISE
CONTROL
Once the retailer has determined the amount of merchandise to stock at the
beginning of each month, week or season, he/she then needs to control the
merchandise. One way retailers can know whether they are on track with their
forecast and merchandise budget, is to constantly check the inventory levels. In
other words, retailers have to ensure that stock is available when the
customer wants it. Retailers should therefore implement inventory control
systems that gather, capture, analyse and use merchandise data to determine
whether suffi cient stock is available in-store (Wiid, 2012:85). Merchandise
control essentially means controlling inventories.
If the retailer suddenly has excess inventory, this can mean that the sales team did not
sell the products eff ectively, or the price is too high in relation to the quality, or the
product was not what the consumers wanted to buy (Clodfelter, 2015:308). When you
have control over the inventory, you can know exactly when to replenish or change your
merchandise strategy.
INVENTORY SALES VERSUS INVENTORY
CONTROL SYSTEMS The information that the inventory system provides,
helps the retailer to know what the relationship is
Inventory control systems are put in place
between the sales and inventory. This means that the
to maintain adequate merchandise
retailer can track the number of sales and check that
quantities to meet the need of the
there are enough inventories for the projected sales
customer without investing too much
capital in stock (Wiid, 2012:87). “Inventory for the month. The information can therefore ensure
control systems are organised to supply that the retailer is neither overstocked, nor
information about the status of understocked.
merchandise for a specific
period” (Wiid, 2012:87). Inventory control IDENTIFYING MARKDOWNS
systems that are managed correctly can
The inventory system can provide the information
assist retailers in decision-making, because
the system provides the retailer with about which products do not sell fast enough. By
important information about stock levels discovering these products early, the retailer can
and what has been purchased. change its strategy and reduce the price of these
According to Clodfelter (2015:308–309), products before customers completely
there are four major benefits of an efficient lose interest in them.
inventory system:
 IDENTIFYING BEST SELLERS
INVENTORY The retailer can see which products are selling faster

CONTROL SYSTEMS than planned, and re-order new stock in time.

IDENTIFYING SHORTAGES
All retail shops have a margin of shortage or
4 Major benefits of an shrinkage, for example due to employee theft or
efficient inventory system customer shoplifting. Retailers adjust their inventory
systems to provide for these shortages. If the
inventory system is effi cient, the retailer can quickly
respond if the data shows that there have been
excessive shortages in inventory.
PERPETUALCONTROL SYSTEM
Perpetual control means that the retailer continuously keeps track of inventory. This inventory control
system “supplies the most recent information and is intended to ensure a correspondence between the
inventory records and quantities actually in inventory at the given time” (Wiid, 2012:89). This can be done
manually or with computers. Each sale is recorded and inventory levels are adjusted as it happens. With a
computerised inventory system, the information about stock levels are gathered at the point-of-sale (POS),
and directly put into a software system that automatically adjusts the inventory levels, giving the retailer
real-time information (Clodfelter, 2013:303).

MANUAL INVENTORY CONTROL SYSTEMS CAN BE USED TO

FACILITATE THE RECORDING OF INVENTORY INFORMATION
MANUAL INVENTORY CONTROL SYSTEMS CAN BE USED TO
FACILITATE THE RECORDING OF INVENTORY INFORMATION
FOLLOWING COMPUTERISED INVENTORY
CONTROL SYSTEMS CAN BE IMPLEMENTED
TO CONTROL INVENTORY LEVELS
PERIODIC OR PHYSICAL CONTROL
SYSTEM
With this method of inventory control, the retailer physically counts the inventory on a periodic basis. This can
be annually, bi-annually or, for smaller shops, monthly or even weekly. Physically counting inventory helps the
retailer match the inventory against planned sales. In addition, before the retailer can close its fi nancial
statements, such as profi t and loss, it needs to determine what the shrinkage was (due to theft, breakage or
pilferage) (Clodfelter, 2013:305).
TWO PERIODIC OR PHYSICAL INVENTORY
CONTROL SYSTEMS CAN BE IMPLEMENTED
INVENTORY CONTROL SYSTEMS IN
RAND OR UNIT VALUE
An inventory control system in terms of rand value stores data on merchandise in terms
of the rand value – in other words, the value of merchandise can be expressed in terms
of the cost price or retail selling price (Wiid, 2012:87). For instance, R4 000 worth of blue
shirts has been sold. Unit control systems base the value of merchandise on the number
of items rather than the rand value of the merchandise. This inventory control system
indicates the number of merchandise items in inventory, on order and items sold (Wiid,
2012:87). For instance, the inventory control system indicates that there are 20 blue
shirts in stock, fi ve on order and 25 have already been sold.

The most important factor of the inventory system is the accuracy and usefulness of the
information it provides (Clodfelter, 2013:308). If the inventory system provides incorrect
information, the retailer would make incorrect assumptions and decisions, which would
lead to stock-outs or excess stock.
FEW MISTAKES THAT CAN CAUSE INCORRECT INVENTORY INFORMATION
McDowell Tech | March 2020
FACTORS THAT HAVE AN INFLUENCE ON A RETAILER’S DECISION-
MAKING WHEN PLANNING ITS MERCHANDISE ASSORTMENT
FACTORS THAT HAVE AN INFLUENCE ON A RETAILER’S DECISION-
MAKING WHEN PLANNING ITS MERCHANDISE ASSORTMENT
FACTORS THAT HAVE AN INFLUENCE ON A RETAILER’S DECISION-
MAKING WHEN PLANNING ITS MERCHANDISE ASSORTMENT
PREPARING AN
ASSORTMENT PLAN
5 STEP IN ASSORTMENT
PLANNING PROCESS
KEY CONCEPTS
THANK YOU FOR
LISTENING!