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No point in giving Big O another roof (http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&call_pageid=971358637177&c=Article&cid=1143499811790)
This is an editorial originally published in The Gazette that has been reprinted by The Star. The author, concerned about spending more money on a new roof for Montreal's Olympic Stadium, makes two references to applied mathematics. The current roof keeps caving in under snow; the author points out that this is a result of a miscalculation. Also, she compares the amounts of money that will be spent if the building is repaired again rather than bulldozed. This comparison is not detailed, but the implication is that math will be required to make an informed decision.
U.S. raises fuel economy standard for light trucks (http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&call_pageid=971358637177&c=Article&cid=1143633248563)
Two groups respond to the raise of fuel economy standards. Both use mathematics to support their claims, yet they disagree. Officials representing the Bush administration allege 10.7 billion gallons of fuel will be saved over the lifetime of the vehicles under the new rules. Environmentalists estimate that the changes will only save two weeks worth of gas a year. Who is right? Actually, they may both be. Neither calculation is given, but both are linked specifically to the miles per gallon average that Bush is requiring of all new model light trucks.
Malpractice costs soar, you get the bill (http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&call_pageid=971358637177&c=Article&cid=1143846635952)
Here is the story of a negligent doctor who has evoked 375 women to bring a malpractice lawsuit against him asking $25 million. What these women may not have known when launching the suit is that the Ontario government is responsible for covering most of the malpractice premiums, so it is tax money that is defending these physicians. Even though the number of malpractice suits is decreasing, the money spent in payouts is rising steadily. The solution to this problem starts with mathematics: how much can the province afford to keep spending? Once this question is answered, methods for decreased spending can be discussed. Whether there needs to be stricter policing of incompetent doctors, lower settlement pay-outs, or higher financial responsibility to doctors involved in malpractice lawsuits, something has to change.
INTERVIEW Sheena, Associate Buyer, Ladies' Intimates, HBC.
Merchandising means buying goods to sell.
Sheena is in merchandising; merchandising is buying goods to sell. She is responsible for mass purchasing ladies’ intimates items for all of The Bay stores across Canada. She is constantly doing formal and informal math calculations.
When Sheena is presented with items from distributors and manufacturers, she must ask herself: Should The Bay sell this item? If so, how much should I buy?
SHOULD THE BAY SELL THIS ITEM?
The question of whether customers will like a certain product or not is surprisingly not the focus of her concern. Instead, her focus is on profit. All items will sell if they are sold at a low enough price, so Sheena must consider how much will The Bay be able to retail a particular product for: at what price will I need to market this item to make an acceptable gross profit percentage? Is this a reasonable price?
Gross profit is the key consideration. Gross profit (GP) is basically the amount of money earned after the cost of selling. GP = Sales – Cost of Sales. This formula seems easy, but it is really very complicated. In fact, there isn’t just one GP formula. Different types of businesses must factor in different expenses, (transportation, employee discounts, stock shortages), so the formula changes to accommodate the needs of the business and the information available.
In Sheena’s case, gross profit is calculated and even forecasted by computer software called MPS (Merchandise Planning System). She inputs sales, purchases, and other relevant information from her end, and the MPS is able to calculate for her the gross profit of a particular item or brand. The gross profit percentage is calculated as a percentage of sales: GP % = GP/Sales.
Ex. If an item is sold for $100 and a $38 gross profit is made, then the GP% is 38%.
Sheena has to choose a markup on every item that she purchases. This involves another calculation. Markup formula: (Retail price – purchase price)/Retail price. As consumers, we think that an item marked up from $5 to $10 is 100% markup, but from the perspective of the retailer, Sheena in this case, it is considered a 50% markup.
Intimates bring in 42.5% gross profit on average. This is high compared to other commodities. Sheena must aim for this goal when calculating markups.
So an initial thought is that merchandise should be marked up to create this percentage: An item bought at $5.75 should be sold for $10 so that the gross profit ($4.25) divided by the sale price ($10) comes out to a GP percentage of 42.5%. However, this does not take into account any other factors.
Sheena must, in fact, mark up merchandise even more to create space for other costs like those mentioned above. Transporting goods, advertising, and other areas outside of her domain are factored into the gross profit percentage calculation through MPS so she doesn’t have to worry about those numbers – she only needs to know approximately how much they adjust the total gross profit. These are only minor factors. It is major factors such as markdowns and vendor incentives that Sheena is responsible for considering.
The factor that most heavily influences the final gross profit percentage is promotions.
Some merchandise never goes on sale, but some merchandise is almost always sold at a discount because that is when customers buy it. So, any potential discount must be factored in to original buying consideration. Sheena has to ask herself, what is the “out the door” price going to be?
When an item is marked down, the markdown rate can be calculated.
Ex. An item is originally retailed for $10. Markdown on item is $3 so out the door price is $7. Markdown Rate = Markdown/Out the door price. So in this example the markdown rate is 3/7, not 3/10. It is viewed as the amount of money being lost as a percentage of money gained. So, a 50% off sale has a markdown rate of 100%.
Sheena has to think about whether a particular item is likely to sell at full price or whether it will have to be marked down. There is another type of common promotion in ladies’ intimates that she must consider – multiple item purchase sales.
What happens if a $10 item is on sale for 3 for $25? It has to be assumed that customers will buy three at a time (based on previous similar sales), so the out the door price is reduced to $8.33 each.
There is one factor that allows Sheena to relax a little bit when thinking about meeting the gross profit percentage: vendor incentives. Often, to ensure their products are purchased, vendors will guarantee a gross margin, or cover 50% of the cost of a markdown. This way, if a product generates a very low gross profit, the vendor takes on part of its cost and the gross profit percentage receives less of a blow.
After considering these factors and calculating how much to sell an item for, Sheena has to decide how much to buy.
HOW MUCH SHOULD I BUY?
Even if Sheena decides that a product is worth buying, she may not think it will succeed in all of The Bay stores. After each season (fall and spring), she looks at how successful brands are in different stores. She clusters stores based on total sales, gross profit percentages, and projected profits. Then based on these clusters, she decides brands and designs to go to each.
So Sheena first thinks, how many stores am I buying this item for? From there, she needs to decide how many items to buy per store. To make this decision, Sheena pictures the floor of a store and exactly what in-store setup the product would take. Perhaps she wants this product to be displayed on a single 4-way rack. Then she considers how many items will fit on each arm. She takes this number, multiplies it by 4 for each arm, and then multiplies again by the number of stores that she wants to sell the item in. But this only tells her how many total items to purchase. Most distributors and manufacturers sell products in bundles of six. So she must divide the total number of items by six to find how many bundles to order. Then, allocate a number of bundles to each store.
These bundles do not come in a choice of sizes. Instead, Sheena must decide on a ratio of sizes within the bundle of six and then each bundle will be made with the same ratio. While having to decide size ratios with only a total of six items seems very limiting, Sheena said that the ratio of 1:3:2 for small, medium, large, respectively is often extremely accurate. When items are available in extra large, the ratio changes to 1:2:2:1. Usually, the vendors are best at suggesting ratios for the bundles based on feedback they have received from other retailers and from the shape of the particular garment.
With an area like ladies’ intimates, Sheena must also consider items sold as sets, such as camisoles and panties. In this case, she must determine a ratio of camisoles to panties. Here, she also finds that the vendors are best at knowing which item sells more and how much of each should be purchased.
WHAT DOES A SUCCESSFUL PURCHASE LOOK LIKE?
After explaining the mathematics that goes into deciding what to buy and how much of it, Sheena discussed what a successful purchase looks like. Again, she found herself talking about mathematical calculations.
Ultimately, Sheena wants to see a product sell out before it ever has to be marked down. She brought up the “sell through” of a product and explained what this is. Basically, a product’s “sell through” can be calculated daily, weekly, monthly or over any particular time period. It means the number of units sold per unit of time as a percentage of the total purchase.
Ex. If Sheena buys 100 items and sells 15 per week, then her weekly “sell through” is 15%.
Most often, sell through is calculated based on weekly sales. The ideal is to have 8-10% weekly sell through so that items remain in the store for 10-12 weeks.
An unsuccessful purchase, Sheena explained, is when too much merchandise has been purchased and more markdowns must take place than have been anticipated.
In general, Sheena uses past sales to predict how well an item will sell. Since each size and colour of a particular garment has a different skew number, she is able to look at specific sales histories. This prevents problems such as being left with too many of one size or colour.
If Sheena looks back on the history of an item and finds that it had to be marked down the last time it was sold, she may decide not to purchase the item or to use a 2-arm rack instead of a 4-arm rack. This way, if the product sells in a similar way to previous seasons, the sell through percentage will be much higher and fewer markdowns will be required.
WHAT MAKES PEOPLE BUY THESE ITEMS?
When an item is not selling, Sheena must mark down the price of the item. She explained that customers respond better to having a percentage off than to having a specific dollar amount off. So, markdowns are done on a percentage basis. Although the exact reasons for this preference are unknown to Sheena, she mentioned that much market research has been done to learn about consumer trends and offered this resource:
Why We Buy: The Science of Shopping by Paco Underhill.
She did, however, give examples of some market research that she performs somewhat informally. When an item is being put on sale, sometimes she will decide to vary the promotion from one region to another to see if there is any large effect on the sales.
Ex. An item may be placed on sale at 25% off in Calgary, and everywhere else the promotion may be 25% off + 10,000 HBC points.
This way, she can see if the HBC points make any difference to the consumer's decision to make a purchase.
Whether it is Sheena doing market research or if she is taking ideas from those who have already done it, there is mathematics in this as well; the only way for her to know if one promotion works better than another is to compare the numbers.
Sheena warns that for those out there looking to start a career in "fashion," you'd better know your math! Although she knew the math content of this field before getting into it because of the training and schooling she endured, many outsiders are ignorant to the fact that merchandising is at least 75% math. Sheena must know what each mathematical term means; she must know how things like markup percentage, markdown rate and gross profit are calculated so that the numbers have meaning to her and can inform her decision making.
Sheena was a great choice for this project because she knows her job and industry so well. Thanks, Sheena!