Merchandise Planning

Retail Merchandising Handout

Merchandise Planning What is it? It projects the sales goals of a store and then forecast specific merchandise purchases in dollars which typically covers a six-month period or a year.

Methods? 1. Top Down Planning 2. Bottom up planning

What is a Six-Month Merchandise Plan? It is the tool that translates profit objectives into a framework for merchandise planning and control. Key components include sales forecasts and stock planning. The plan is established for two distinct selling seasons. o Spring-Summer(Feb-July) o Fall-Winter(Aug-Jan)

Why do we need to develop Merchandise Plan? 1. To provide a n estimate of the amount of capital required to be invested in inventory for specific period. 2. To provide an estimate of planned sales for the period.

What are the benefits of making a Merchandise Plan? 1. 2. 3. 4. 5.

Increased Turnover. Reduced amount of markdowns. Improved maintained markup. Maximized Profits. Minimum investment in inventory.

What are the components of the Six-Month Merchandise Plan? 1. 2. 3. 4. 5. 6. 7.

Initial Markup for the Period. Planned net Sales Planned BOM inventory / Opening Stock Planned EOM stock / Closing Stock. Planned Reductions. Planned Purchases at Retail Planned Purchases at Cost.

Each of the components is further subdivided into the following 4 categories. 1. Last year(actual)represents the actual amount last year for the month. 2. Plan(this year)represents the amount planned for the current year. 3. Revised(this year)represents any revisions made in the current plan due to unanticipated events. 4. Actual(this year)represents actual sales for the month.

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Retail Merchandising Handout

Note: Comparing Actual(this year) to the actual(this year) determines if you have reached your goals. How to prepare a six-month Merchandising Plan? Step 1: PLANNED SALES It involves: Forecasting Sales Past sales figures are important to a buyer when making sales forecasts, but they should only be used as a guide. In addition, other internal factors are likely to affect sales. These are: o Store wide or departmental promotions/sales o Holidays o Current Store-wide and departmental sales trends o Shifts in demographic characteristics of the population o New competition moving into the area o Economic Conditions o Changes in Store Hours o Changes in amount of selling Space All the merchandising decisions are planned in relation to sales or stated as a % of sales. Therefore, if the sales forecast is inaccurate, all other parts of the plan will be in error, possibly causing disastrous results for the retailer. 1. First, you will need to calculate last year’s monthly sales figures as a percentage of last year’s total sales. This has to be done for all the months.. 2. Let’s assume that no major changes have occurred during the current season and sales analysis of previous years indicate that the percentage of total sales occurring during each month has fairly remained constant. 3. Next, you would determine the total planned sales volume for the season. Looking at the past several year sales, we estimate that a total 10% increase is planned for the period. 4. So, the planned total sales = last yr total sales + x% of last yr total sales. 5. Now, plan sales for each month of the current period. e.g. Planned Monthly Sales(Jan)=Planned % of total sales * Planned total sales. Step2:- PLANNED BOM INVENTORY This involves determining the amount of stock required to meet the planned sales. Planned BOM Inventory = Planned Sales * Stock-to-Sales Ratio Methods of Planning Inventory Merchandise in stock must be sufficient to meet sales expectations while allowing for unanticipated demand. As a buyer or merchandiser, your goal will be to maintain an inventory assortment that will be sufficient enough to meet customer demand and yet be small enough to ensure a reasonable return on store’s investment in inventory. 2

Retail Merchandising Handout

1. Sales-to-Stock Method It involves maintaining inventory in a specific ratio to sales. The stock-sales ratio is calculated using the following formula: Stock-sales ratio = Value of inventory / Actual Sales The stock-sales ratio indicates the relationship between planned sales and the amount of inventory required to produce those sales, and is used to calculate BOM stock levels which is as follows: BOM Inventory = Stock-Sales Ratio * Planned Sales

2. Basic Stock Method The concept behind the basic stock method is that all times, you should have on hand a basic dollar amount of merchandise that should remain constant throughout the season. Basic stock is the minimum amount of merchandise that should be maintained within a product category, department, or store even in the slowest month. Basic stock = Average Inventory – Average Monthly Sales BOM Inventory = Planned Sales For Period + Basic Stock Basic Stock Method works best when the inventory is low. In fact, this method of inventory planning is only recommended when the planned stock turnover is six or less in a year.

3. Percentage-Variation Method The percentage variation method is recommended when the stock turnover is more than six-times a year. The concept behind stock planning with this method is that inventory levels should be related to actual changes in sales. Buyers, still require a minimum amount of stock, but that minimum doesnot remain constant for each month. Using this method, the actual stock on hand during any period would vary from average monthly stock by only half of the month’s variation from average monthly sales. Planned BOM would be calculated using the following formula:

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Retail Merchandising Handout

BOM Inventory = Average Stock * ½ ( 1 + Planned Sales for Month / Average Monthly Sales) Retailers prefer to use this method with merchandise categories characterized by high turnover rate(usually exceeding six times a year) because it results in less stock fluctuation than use of basic stock method.

Step3:- PLANNED EOM INVENTORY The EOM stock for any month is simply the planned BOM stock for the following month.

Step4:- PLANNED REDUCTIONS The next component to be planned is reductions which could be markdowns, employee discounts and consumer discounts, and inventory shortages from shoplifting or employee theft. Estimates for these reductions are based on past experience and are presented as a percent of planned sales on the six-month merchandising plan e.g. Planned Sales% = 6.8% Planned Shortage% = 2.1% Planned Employee Discount = 1.1% Therefore, total reductions are planned to be 10% of sales. Total reductions(planned) = Total Planned sales * x%(10%) Based on the past records determine the reductions each month.

Step5: PLANNED PURCHASES AT RETAIL Planned purchases each month should be adequate to implement the six-month merchandise plan. On the merchandise plan, purchases must be planned at retail first since all the other figures were based on retail. The following formula is used to calculate planned purchases at retail: Planned = BOM Purchases

Planned Sales + Planned EOM + Planned Reductions – Planned

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Retail Merchandising Handout

Step6: PLANNED PURCHASES AT COST From the seasonal data, initial markup for the period is planned as x%. Using the following formula, calculate planned purchases at cost. Planned Purchases = (100% - Initial Markup%) * Planned Purchases at retail at Cost The planned purchases at cost lets buyers know how much money they will have to spend on merchandise for the season as well as individual months. ---------------------------------------------------------------------------------------------------------------Each month you must also enter actual figures to assist with future planning. Actual monthly figures can also aid you in making revisions to your plan if they are necessary. If sales are greater than planned, you will need to make larger purchases for the rest of the season to maintain the inventory level shown in the merchandise plan. However, if the sales are less than planned, you must decrease the amount of purchases. DETERMINING STOCK TURNOVER Decisions you make in relation to sales forecasting and stock planning must yield a profit for your store. One measure of how accurately you balance sales to inventory levels is the stock turnover rate. How fast merchandise is sold, replenished, and sold again determines the turnover. The stock turnover rate is the number of times the average stock is sold during a given period and is calculated as: Stock Turnover Rate = Sales / Average Stock The average stock for any period of time is the value of inventory at the beginning of the period, plus the value of inventory at the predetermined periods during the period, plus the value of inventory at the end of the period divided by the stock listings. Benefits of High Turnover 1. 2. 3. 4.

Fresher Merchandise Fewer markdowns and less depreciation Lower Expense Greater Sales

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Retail Merchandising Handout

5. Higher Returns Limitations of High Turnover Excessively high stock turns can mean the retailer is buying in too small quantities. If so, then the retailer is 1. not taking full advantage of available quantity discounts. 2. adding to the costs of transportation and handling 3. danger of losing sales because of stockouts. OPEN -TO - BUY Not all the planned Stock is purchased at the beginning of the month. Purchase decisions are distributed throughout the month in order to take advantage of new merchandise line, to re-order fast selling merchandise, or acquire off merchandise to use in promotional sales. In addition, you may have outstanding orders, commitments to vendors that have not been delivered. The value of these outstanding orders will reduce the planned purchases for the month. As a result, you must be able to calculate, on a specific date during the month, the amount of merchandise to be purchased during the remainder of the month. The remaining purchases are defined as Open-to-Buy. It is the amount the buyer has left to spend for a period and is reduced each time a purchase is made.

Calculating OTB OTB = Planned Purchases – Merchandise on Order-Merchandise Received Planned Purchases

=

Planned Sales + Planned EOM + Planned Reductions – Planned BOM

Then, convert the planned purchases at retail to planned purchases at cost as follows: Planned Purchases at Cost = (100% - Initial Markup%) * Planned Purchases at Retail Purposes of OTB: If effectively used, OTB allows the buyer to: 1. Limit overbuying and underbuying 2. Prevent loss of sales due to inadequate amount of stock. 3. Maintain purchases within budgeted limits. 4. Reduce Markdowns

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Retail Merchandising Handout

5. Increase sales 6. Improve stock turnover 7. Hold back purchase dollars to reorder fast-selling merchandise, to take advantage of off-price merchandise, or to sample new merchandise. Basic Stock Planning For basic merchandise, planned purchases can be calculated without using sixmonth merchandising plan. The quantity of basic stock to purchase is determined using the basic stock plan, The purpose of the plan is to determine the amount of merchandise a retailer must have on hand or on order to have sufficient amount of merchandise available during the period. To make these calculations information about the rate of sale, reorder period, delivery period, and reserve stock levels. The following formula is used to calculate the maximum amount of any basic merchandise item that should be on hand and on order at any given point: Maximum = Sales Volume per Week (Reorder Period + Delivery Period) + Reserve

Rate of Sale: You must first determine the weekly unit sales of each item by analyzing the past sales records. Reorder Period: It is the amount of time between orders for merchandise.] Delivery Period: It is the time between the placement of the order and the time the merchandise is on the sales floor. Enough merchandise must be available in the store to cover the time it takes the vendor to deliver the merchandise once it has been ordered. Reserve / Safety Stock : It is the amount of merchandise that is necessary to meet unanticipated sales. Maximum: It is amount of merchandise that must be on hand or on order at any reordering point Minimum : It is the point at which order should be placed. Minimum = Rate of Sale * Delivery Period + Reserve In using the basic stock plan, buyers will develop a basic stock list. The basic stock list provides information such as description of the item, the retail price, the cost, the maximum, rate of sale, and the minimum reorder quantity.

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