14 TODAYSEP-OCT 24COVER
Merchandise Planning – The Key to Running a Profitable Business
Ritchie Sayner
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.
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 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.
Planning Markdowns
Next we will focus on planning markdowns. Markdowns are planned because they are a necessary part of the retail
Business Planning
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 is an integral part of the beginning inventory as are the stock-to-sales (S/S) 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.
Consideration of POS System Nuances
Consideration must be given to the nuances of the user’s POS system to avoid stock valuations that are either over- or under-stated. 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 and Open-To-Buy
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’s 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.
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 Feature
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.
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.
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 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 is with Advanced Retail Strategies LLC an affiliate of Management One. Sayner’s book Retail Revelations: Strategies for Improving Sales Margins and Turnover (2nd Ed.) is available on Amazon. He can be reached at www.advancedretailstrategies.com.
Execute Without Your Involvement
- Good Processes Should:
- Prevent recurring issues.
- Reduce overwhelm.
- Clarify tasks and expectations.
- Evaluate performance and outcomes.
- Simplify operations.
- Systematize the workflow.
Accountability
Many think succession means transferring ownership. However there is another aspect – the succession process related to accountability – being responsible for the business. It requires set-
Setting Goals and Accountability
Often the transfer of accountability happens before the transfer of share as NowGens work to offer NextGens ongoing mentoring while they phase into leadership roles with more responsibility and accountability. Frequently the trigger for transferring accountability without ownership is because the NowGens involved want to work towards retirement and at the same time want the NextGens to step up grow the business and increase the value of the business.
If those goals are successful the result could be that the NextGens have the burden of buying the business at a higher value than when they started assuming accountability. Concurrent with this situation is the notion that many NextGens’ compensation may be lower than they could earn elsewhere so they may be wondering why they should stay at the family business if ownership transfer plans are unclear.
Using Pete Mohr’s CPA Foundation
Using Pete Mohr’s CPA Foundation can help families in business work together to make a succession process that families dream of for their vision of generational self-sufficiency.
About the Authors
Pete Mohr is the founder of Simplifying Entrepreneurship a coaching venture designed to help business owners navigate the complexities and ever-changing landscape of running a business. He owns two Shoetopia stores in Ontario Canada and serves on the NSRA Board of Directors. Additionally Pete regularly contributes to NSRA’s Shoe Retailing Today magazine.
Dr. Carol Wittmeyer is Director of Family Business at St. John Fisher University. She has taught at the Family Business Center at Loyola University of Chicago and is also a founding faculty member of NSRA’s NextGen initiative.
Summary of Merchandise Planning in Retail
Merchandise planning is crucial for running a profitable retail business involving key components like sales forecasting markdown planning and inventory management. Effective merchandise plans integrate cash flow and ROI strategies ensuring timely deliveries and markdowns for slow-moving products. The process also emphasizes the importance of maintaining accurate open-to-buy figures to facilitate transparency and effective decision-making.
“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.”
Real-World Examples of Merchandise Planning
Merchandise planning is crucial for running a successful retail business. Here are a few real-world examples demonstrating its application:
- A fashion retailer uses a detailed merchandise plan to forecast sales for each store location based on historical data and current fashion trends. This allows them to optimize inventory levels and reduce markdowns increasing overall profitability.
- An electronics store chain implements an open-to-buy system to track merchandise on order and planned receiving. This helps them manage cash flow effectively and ensures that they have the right products in stock during peak sales periods such as Black Friday.
- A home goods retailer uses a POS system capable of handling permanent markdowns allowing them to adjust inventory valuations accurately. This capability helps them maintain realistic inventory levels during end-of-season sales ensuring better financial planning and customer satisfaction.
