After calculating the level of inventory that needs to be purchased, the retailer needs to determine the initial markup for the products. Markups would vary depending on the type of the product, the audience that it is targeted at and the market trends. The original markup must allow for a final profit after paying all operating costs, reduction cost of goods etc

Most retailers have a target markup they want to start with. This markup percentage is calculated by dividing the markup in rupees by the retail price. Markup in rupees is the difference between the cost price and the selling price. For example, if a retail store which sells gift items, buys the same at Rs 100 and sells them at Rs 200, the store gains a 50% markup percentage, otherwise known as gross margin.

Markup in Rupees =Selling price – Cost price

= Rs 200 – Rs 100

= Rs 100

Markup percent =Markup in rupees / Retail Price

= Rs 100 / Rs 200

= 50%

Gross Margin: Gross margin is the difference between the selling price and the cost of the product, less reductions for markdowns, shrinkage and employee discounts. Hopefully what is left after these reductions is enough to pay all operations expenses and leave the retailer with a profit.

To determine the gross margin for each month, all purchases and inventories must be converted to cost price. In the above example, we have a 50% markup per cent (in the case, 50%)

BOM and EOM Planned Inventory Levels: planning End of Month (EOM) or Beginning of Month (BOM) inventory levels (one month’s ending is the next month’s beginning) is another important element of the six month merchandise plan. While calculating the inventory levels, it is necessary to understand the various methods of inventory planning. Typically, four methods of inventory planning can be used and the same are explained below:

Stock to sales Methods: The stock to sales (S/ S) is a ratio of the amount of inventory on hand at a particular date to the sales for the same period. It can be calculated in the following manner:

S/S ratio = Stock on hand EOM (at retail value) / Sales for the same month

If the buyer chooses to use this method of inventory planning, the first decision that needs to be made is determining the ratio that he wishes to achieve every month. These ratios can be determined by checking the ratios achieved in the same period in the previous year. The selected ratio is then multiplied by the projected sales for the period to get the desired EOM inventory level.

A pre-requisite for calculating the stock to sales ratio is for the retailer to have a beginning of the month stock /sales ratio.

Stock sales ratio = value of inventory / actual sales

Planned BOM Inventory = stock- sales ratio x planned sales

Example: Calculate the inventory that the retailer will need at the beginning of the month, using the stock to sales ratio method. The following information is given:

Stock to sales ratio = 1.8

Planned sales for the month of August: 80,000

Planned BOM Inventory = 1.8 x 80,000

= 144,000

The Basic Stock Method: In this method, the buyer believes that he needs to carry a certain fixed amount of inventory in the store at all times. It is calculated using the following formula:

Basic stock = Average stock for the season – Average monthly sales for the season where,

Average stock for the season = Total planned sales for the seasons/ Estimated inventory turnover rate for the seasons

Beginning of the Month (BOM) stock = Planned Monthly Sales + Basic Stock

Example: Calculate the inventory requirements using the Basic Stock Method for the month February using the information given below:

Planned sales for the month of February 60,000

Average monthly sales: 35,000

Average monthly inventory: 45,000

Average monthly inventory:

Basic Stock = 45,000 – 35,000 = 10,000

BOM Stock = 60,000 + 10,000 = 70,000

The percentage variation method: This method of inventory calculation is used in case the stock turnover typically exceeds six times a year. It is calculated using the following formula:

BOM Stock = Avg stock for season * ½ * [1+ {Planned sales for the month Average monthly sales}]

Week’s Supply method: The last method of inventory planning which can be used by a buyer is the Week’s Supply Method. Retailers who need to maintain a control on the inventories on a weekly basis may use. It can be calculated by using formula:

Number of weeks the stocked = the number in weeks in the period / Stock turnover rate for the period

Where,

Average weekly sales = estimated total sales for the period /The number of weeks in the period

BOM stock= average weekly sales * number of weeks to be stocked

Once the buyer and retailer have determined the method of inventory planning the six month merchandise plan out can be finalized.

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