What Exactly is a Merchandise Plan Anyway?
In this article we will examine the engine that drives a retail store: the merchandise plan. An intelligently designed merchandise plan consists of the following:
- A sales forecast by month
- A markdown plan
- A projected first of month inventory plan @ retail (current selling price)
- Planned receiving @ cost and retail
- A section devoted to merchandise-on-order
- An open-to-buy (OTB) shown at both cost AND retail
- Historical valuations for all the above for comparison purposes
Sales Forecast
Let’s look under the hood and take a closer look at each one of these important components beginning with the sales forecast. The sales forecast is the starting point for every merchandise plan. It does not emanate from the total company or store. That would be an example of top-down planning as opposed to a bottom-up approach. To achieve a bottom-up approach the sales planning must begin at the classification level. Each store location must be planned separately.
Several considerations should be taken into account when planning sales. Certainly last year’s selling cycle should be considered along with any unique seasonal factors. What is the current trending of the class being planned? What have the IMU% MMU% GMROI and turnover been historically? Assuming you or your buyers have been to market lately how does the merchandise look for next season? Are there any new hot lines in the industry that might drive sales? Were sales last year driven by markdowns? Were sales missed in any month last year due to insufficient inventory levels? The answers to these questions and others will help you formulate the monthly sales forecast for the upcoming season or year.
Next we will focus on planning markdowns.
Markdowns are planned because they are a necessary part of the retail business. There are several ways to plan markdowns. Some planners prefer to use a percentage of planned sales while others might want to follow known historical patterns. Either way the markdowns should be planned around a desired maintained markup figure to ensure profitability.
A sales plan void of planned markdowns runs the risk of coming up short in inventory toward the end of a given season. Understandably markdowns are considerably higher at traditional clearance times such as January and July but can also run higher for regularly occurring promotions.
An understanding of how your POS system handles markdowns will be helpful here as some systems deal only with point-of-sale markdowns while others have the capability of handling blanket markdowns also known as general price changes or permanent markdowns.
Inventory Levels
Inventory levels are the next consideration. Inventories should be planned at the current selling retail price and are shown as BOM (Beginning of Month) or FOM (First of Month); either is fine. Since the monthly beginning inventory levels are such a key component of any merchandise plan it is vital that this figure be as accurate as possible.
Desired Inventory Turnover
Desired inventory turnover is an integral part of the beginning inventory as are the stock-to-sales ratios. For the sake of illustration let’s assume we are planning a given class to turn 3 times. Our total planned sales divided by our planned turn will provide us with an “average” retail inventory. However that is one number and there are twelve months. So stock-to-sales ratios or number of months of supply are used to provide FOM stock levels. In our example of a 3-time turn the average s/s ratio is 4. This is calculated by dividing the planned turn into twelve months. The S/S ratio will most likely vary each month based on seasonality and selling patterns. The busier the month the tighter or lower the planned s/s ratio will be.
POS System Considerations
Consideration must be given to the nuances of the user’s POS system to avoid stock valuations that are either over or understated. If a certain POS system only recognizes point-of-sale markdowns the FOM inventory levels will be overstated as long as it takes the reduced inventory to sell. This can be particularly relevant during highly promotional time periods like season-ending sales. In faster turning operations this is less of an issue than in slower turning stores as the reduced product is typically liquidated in a few weeks. If the POS system has the capability of handling permanent price changes the markdown is “realized” or recorded when it is actually taken and the inventory valuation is adjusted accordingly.
Planned Receiving at Cost and Retail
Planned receiving at cost and retail becomes a math calculation once the topics already discussed have taken place. Since we are dealing with the retail system of inventory the planned receiving at retail considers the FOM inventory from the current month minus the projected sales and planned markdowns. This difference is then compared to the planned FOM stock level of the next month to establish the planned retail receiving number.
Merchandise-on-Order (MOO)
The merchandise-on-order is the next step in the process. The MOO is deducted from the receiving at retail or cost to yield the Open-To-Buy or OTB. This is why it is so important to have updated MOO figures. Without knowing how much is on order you only have a sales inventory and receiving plan but no realistic open-to-buy. It is a good business practice to record orders in the POS system immediately upon being placed so that all involved have complete transparency to the on-order. Maintaining the MOO also includes making certain that “dead” orders or merchandise that has been cancelled are removed from the open order status.
Open-to-Buy Calculation
The Open-to-buy feature is the very last calculation of the merchandise plan. Actually OTB is merely planned receiving at either retail or cost minus the merchandise on order.
Beyond Open-to-Buy
It should be obvious by now that a merchandise plan is so much more than simply an open-to-buy plan. If done correctly it is also a cash flow and ROI plan incorporating properly timed deliveries on new goods as well as markdowns on slow-moving products.
Maintenance and Adjustments
Like any engine maintenance is the key to performance and longevity. Sales should be retrended often during the month to provide the most realistic outcome. Markdowns may end up being higher or lower than plan and inventory and on-order levels are also subject to change based on adjustments in delivery schedules cancelled orders or new orders placed.
Operating any retail operation without a merchandise plan
Operating any retail operation without a merchandise plan would be like building a house without a blueprint or trying to drive a car without an engine. In either case without a plan the results will not be what you had hoped for.
Ritchie Sayner
Summary of Merchandise Planning
A merchandise plan is essential for retail success involving a detailed sales forecast markdown strategy inventory management and open-to-buy calculations to optimize cash flow and ROI. It requires careful consideration of sales trends inventory turnover and POS system nuances to ensure accurate stock valuations and timely product deliveries. Regular maintenance and adjustments are crucial to adapt to market changes and maintain effective operations.
“Operating any retail operation without a merchandise plan would be like building a house without a blueprint or trying to drive a car without an engine.” – Ritchie Sayner
Real-World Examples of Merchandise Planning
Here are a few real-world examples of how merchandise planning is applied in various retail scenarios to optimize inventory sales and profitability.
- A large fashion retailer uses merchandise planning to prepare for seasonal changes by analyzing sales forecasts and historical data. This enables them to stock up on trending items for the upcoming season ensuring they meet customer demand while minimizing overstock.
- An electronics store implements a markdown plan during the holiday season to clear out older models of gadgets. By planning these markdowns as a percentage of projected sales they maintain profitability while making room for new inventory.
- A grocery chain utilizes open-to-buy calculations to manage their perishable goods inventory. By accurately tracking merchandise on order and adjusting based on real-time sales data they reduce waste and ensure fresh products are always available for customers.
