product quantity decisions and stock management
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CHAPTER 6
PRODUCT QUANTITY DECISIONS AND STOCK MANAGEMENT
LEARNING OBJECTIVES Introduce the objectives and principles of stock
management Understand the risks associated with getting buying
quantities wrong Appreciate that different stock control approaches
are applicable in various retail contexts Understand the relationship between sales, stock
levels and ordering quantities Account for influences on product quantity
requirement
STOCK (INVENTORY) MANAGEMENT PRINCIPLES
How much? By store, region, whole organisation For a day, week or whole season
Not enough? Stock out, lost sale, lost complementary sale, lost
customer, poor image Too much?
Additional costs: stock investment, maintenance, use of space, reduced margin to clear
The Ideal? - one product sold, one taken into stock?
STOCK MANAGEMENT PRINCIPLES (2)
Stock management includes:stock control (controlling flow of physical product
in line with sales) financial control (managing finance tied up in
product)consideration of supply factors: discounts for
large quantities, delivery quantities, lead times (time between order and delivery) and minimum quantities
STOCK MANAGEMENT FOR STAPLE ITEMS
Consistent demand Relatively straightforward Many systems based on the principles of the
periodic revieweasy to administeradjustments can be made to ensure stock-out is
avoidedreview time can be varied between products, according
to lead times
PERIODIC REVIEW
Insert Figure 6.1
ECONOMIC ORDER QUANTITY (EOQ)
Order quantities can be: large, placed infrequentlysmall, placed frequently
EOQ determines the most cost effective quantity to order, based on costs of ordering and possession
Useful in conjunction with periodic review type system
PRINCIPLES OF EOQ
Costs of acquiring a product: ordering administration supplier search and selection expediting inspection increase with frequency of order (smaller quantity)
Costs of possessing a product: finance tied in stock handling costs maintenance costs
EOQ is where total buying cost is lowest, or where cost of acquisition = cost of possession
EOQ
Insert figure 6.4
LIMITATIONS OF EOQ
Only applicable to non-perishable products with staple demand
Ignores delivery quantities and discounts Assumes storage space is unlimited Assumes retailer controls delivery scheduling Cost structures have changed, e.g. ordering
costs reduced by e-commerce, stock is seen as a liability not asset
THE NEED FOR STOCK INVESTMENT
Stock service level is (along with width and depth) a dimension of the retailer’s product assortment offer
High stock service maximises sales opportunities high stock investment (money and space) risk of too much stock
Variety requirement varies according to product (see Figure 6.5)
Dishwash Coffee Chilled deserts Party dresses
>>>>>>> Increasing variety requirement >>>>>>>
FIGURE 6.5
THE NEED FOR VARIETY
STOCK MANAGEMENT SYSTEMS
Used in most large retailers by merchandisers to give overview of stock position by itemcalculate buying quantitiesobserve sales patternsprovide information for forecasting
SALES FORECASTING
Necessary for all products, but more challenging for those with fashion and seasonal influences
EPOS data is the starting point for sales forecasting Factors that influence a sales forecast:
seasonality fashion product endorsements price changes availability of product substitute sales of complementary products promotional activity
SALES FORECASTING TECHNIQUES
Moving Average Exponential Smoothing Base upwards forecasting Top-down forecasting Using DC (distribution centre)
THE MERCHANDISE BUDGET PLAN (MBP)
Concerned with financial side of merchandise planning
Aims to balance: money flowing out for supplies money flowing in from sales
Aims to provide flexibility taking into account: the need to pre-order for some stock variation between forecast and actual sales
ILLUSTRATION OF MBP STOCK LEVEL VARIATION Insert figure 6.7
Add Table 6.6
MBP: STOCK TO SALES RATIO
Depends on: lead times, likelihood of product selling out, importance of keeping in stock, variety requirement.
Generally, when sales are low, stock to sales ratio rises, when sales are high, stock to sales ratio falls
Average stock to sales ratio can be varied through season to build and run down stock
MBP: OPEN-TO-BUY
Planned purchases represents value of stock at retail
OTB is value at cost available to spend with suppliers
OTB rises when actual sales exceed forecast, and falls when actual sales are below forecast
Some of OTB will be already committed to forward orders, remainder and any OTB generated is available for spending
MBP: REDUCTIONS
Account for reduction in stock value other than salesexternal theft internal pilferageshop soiling and damagemark-downscustomer discountsstaff discount
In effect a retailer has to buy extra stock to compensate for reductions
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