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The Four Methods of Dollar Merchandise Planning for Retail

Updated on June 29, 2014

Retailing is the act of sell products or service to a customer. Retailing can come in many forms and different varieties, however they all have similar basics. One of these basics that all or at least most retail location will have in common and that is merchandising. Most retailers sell something tangible, even services usually have physical accompaniments. All this merchandise is called inventory and for retailers, it can encompass upwards of 40 percent of the company’s asset base.

With the amount of money on the line in inventory, stores have to ensure they have enough to satisfy the customer’s demand, without going overboard and being stuck with unmovable stock. Eventually this stock will have to be marked down to sell, dipping into company’s overall profit margins. There are many mistakes that can be made with inventory and if the right mix and amount is not present, a store has little chance of being very successful.

There are four main types of inventory method types; basic stock method, percentage-variation method, week’s supply method and the stock to sales method. Each type of inventory management tool is used best in certain fields of retail, because all retail location and product mixes, are certainly all not the same.

Basic stock method is good for businesses that do not have consistent sales, or have a lower turnover rate. The basis of this method is that once the dollar amount is determined for projected sales, a minimum amount should also be decided. These will be an amount that the company feels must be in stock at all times to make sure customer’s needs are met.

The math is easy enough to understand for this method, as the inventory will be shown in dollar amounts. First you decide what the basic stock amount that should be kept on hand at all times, then you will add it to the monthly projected sales. When those two figures are added together, the result is how much should be on hand on that precise month. If sales should fall or rise unexpectantly, the dollar amount of purchases will be added or subtract to get at the ideal number the next week and so on. This would not be a good method for high turnover and low cost stores.

Percentage variation method is used when the “retailer has a high annual inventory-turnover rate—six or more times a year” (). One this type of inventory method, the assumption is that the fluctuations of inventory will be half as great as the fluctuations in the sales. The formula for this method is the Beginning of month stock (BOM) subtracted by the average stock for the season, multiplied by one half. That total is then added to the planned sales for the month, divided by average monthly sales to come to the inventory dollar amount to be needed each month. This method would not work very well for lower turnover companies like furniture and large appliance sales.

Some retailers have extremely high sales, or high turnover and require a more weekly plan, instead of the monthly plans that many can get away with. The week’s supply method is also good for perishable products that will not last a whole month in stock and will have to be replenished more than once in a months time.

There are three amounts that have to be considered when using this method. First the number of weeks to be stocked should be found out by taking the number of weeks in the period and dividing it by the stock turnover rate for the period. Secondly, the average weekly sales amount should be found by estimating the total sales for the period and then dividing it by the number of weeks in a given period. Lastly, the BOM stock must be figured. This will be done by taking the average weekly sales and multiplying that by the number of weeks to be stocked. After those three figures are done, the company will derive at the total amount that needs to be kept on hand and purchased, on a weekly basis.

The last common inventory plan is called stock-to-sales method. In this method a company will have to first determine a ratio for the amount times the BOM they would like to keep on stock. The suggested sales for the month will then be times by the ratio, to come up to the proper dollar amount of inventory to have on hand.

This method is used well in industries and companies who have been around long enough to use historical data to properly determine their company’s ratio needed. If the ratio is off, the amount of inventory may not be sufficient for the customer’s needs.



REFERENCES

Dunne, P. M., Lusch, R. F., & J. R. Carver. (2014). (8th ed.). Mason, OH: South-Western, Cengage Learning.

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