Process of Merchandise Planning

The process of merchandise planning involves the following steps

Step 1 : Developing the Sales Forecast

            Sales forecast is the projection of achievable sales revenue, based on historical sales data, analysis of market surveys and trends and salesperson’s estimates. Sales forecast also called sales budget, forms the basis of a business plan, since the level of sales revenue affects practically every aspect of a business. Forecasting involves what the consumer may do under a given set of conditions.

A sales forecast may be made by the merchandiser based on the targets given by the top management or may be handed down by the top management itself depending on the retail organisation. A sales forecast is the first step in determining inventory needs of the product or category.

Forecasts are typically developed to answer the following questions

• How much of each product will need to be purchased?
• Should new products be added to the merchandise assortment?
• What price should be charged for the product?

The process of developing sales forecasts involves the following steps :

(a)     Reviewing Past Sales : A review of the past sales records is necessary to establish if there is any pattern or trend in the sales figures. A look at the sales figure of the past year for the same period, would give an indication of the sales in the current year, given that the conditions are constant.

(b)     Analysing the changes in the economic conditions : It is necessary to take into account the changes happening at the economic front as this has a direct link to the consumer spending patterns. Economic slowdowns, increase in unemployment levels etc, all affect business,

(c)     Analysing the changes in the sales potential : It is now necessary to relate the demographic changes in the market to that of the store and the products to be sold.

(d)     Analyse the changes in the marketing strategies of the retail organisation and the competition : While creating the sales forecast, it is necessary to consider the marketing strategy to be adopted by the organisation and the competition. Is there a new line of merchandise to be introduced, a new store to be opened or an existing store to be remodelled? All those factors are to be considered.

(e)     Creating the sales forecast : Then, an estimate of the projected increase in sales is arrived at. This is then applied to the various products/categories to arrive at the projected sales figures.

Step : 2 : Determining the Merchandise Requirements

Planning is essential to provide direction and serve as a basis of control for any merchandise department. In order to be able to provide the right goods to the consumer at the right place and time, one needs to plan a course of action. Planning in merchandise is at two levels.

(1)     The creation of the merchandise budget and

(2)     The Assortment Plan

There are two methods of developing a merchandise plan. They are top down planning and bottom up planning. In top town planning, the top management works on the sales plan and this is passed down to the merchandising team. In bottom up planning, individual department managers work on the estimated sales projections. These are then added up to arrive at the total sales figures.

After the sales forecasting exercise has been completed, inventory levels needs to be planned. The merchandise budget is the first stage in the planning of merchandise. It is a financial plan which gives an indication of how much to invest in product inventories, stated in monetary terms.

The merchandise budget usually comprise of five parts

(a)     The sales plan, i.e. how much of each product needs to be sold, this may be department wise, division wise or store wise.

(b)     The stock support plan, which tells us how much inventory or stock is needed to achieve those sales.

(c)     The planned reductions, which may need to be made in case the product does not sell.

(d)     The planned purchase levels, i.e. the quantity of each product that needs to be procured from the market.

(e)     The gross margins (the difference between sales and cost of goods sold that the department, division or store contributes to the overall profitability of the company.)

The assortment plan details the merchandise that will be sold in each product category, i.e. the complete mix of products that will be made available to the consumer. This is the next stage, after having determined the money available for the inventory.

Merchandise Hierarchy : Every retail organisation has a merchandise hierarchy, which is an indicator of the manner in which product classification is done. It is a logical manner depending on the manner in which the customers are likely to buy the products. It is a disciplined way of grouping the merchandise mix at different levels, starting from a high level grouping to the lowest level of Stock Keeping Unit (SKU). The grouping may at times have even more than four five levels.

The merchandise hierarchy forms the platform needed to create the store merchandise mix. The merchandising vision for the store dictates the different divisions and the lower rungs that the store must have in the hierarchy.

Building the stores merchandise mix by following the concept of merchandise hierarchy has its advantages.

(a)     One can define in terms of ratios the mix of element at each level of the hierarchy.

(b)     One can analyse and drill down through the rungs of the hierarchy to the problem areas, if any upto SKU level.

(c)     One can remove or add elements following security escalations.

Step 3 : Merchandise control – The Open To Buy : The purpose of the concept of Open to Buy is twofold. First, depending on the sales for the month and the reductions, the merchandise buying can be adjusted. Secondly, the planned relation between the stock and sales can be maintained. When used effectively, open to buy ensures that the buyer-

(a)     Limits overbuying and under buying.

(b)     Prevents loss of sales due to unavailability of the required stock.

(c)     Maintains purchases within the budgeted limits.

(d)     Reduces markdowns which may arise due to excess buying.

When planning for any given month, the buyer will not be able to purchase the amount equal to the planned stocks for that month. This is because there may be some inventory already on hand or on order but not yet delivered.

Calculating the Open – to – Buy :  The open-to-buy amount available to a buyer is calculated using the formula which is given below :

            Open-to-Buy-Planned EOM stock – Projected EOM stock

EOM = End of Month Open-to-Buy is always calculated for current and future periods.

Step 4 : Assortment Planning : Assortment planning is extremely important and challenging for retailers.

            Assortment has been defined .by Van Herpen as the combination of all products made available in a store” and ‘a set of products offered within a product category’. These products form a set because they share similar physical characteristics. Assortment Planning involves determining the quantities of each product that will be purchased to fit into the overall merchandise plan. Details of colour, size, materials, brand etc. have to be specified. The main purpose of creating an assortment plan is to create a balanced assortment of merchandise for the customer.

Various factors affect the assortment planning process. The first among these factors is the type of merchandise that is to be stocked in the retail store. Merchandise may be classified as basic or staple merchandise, fashion, convenience or specialty goods.

Step 5 : The Range Plan The aim of the range plan is to create a balanced range for each category of products that the retailer chooses to offer. The process of range planning ensures that the goals of the merchandise plan fall into specific lines, and many a times, the SKUs. Good range planning should essentially take care of the following

• The number of items/options available to the customer should be sufficient at all times and should be such that it helps the customer make a choice.
• The range planning process should ensure that overbuying and under buying is limited.
• Sufficient quantities of the product should be available, so that all the stores can be serviced and the product should be available at all stores across various locations.

Step 6 : The Model Stock Plan : After determining the money available for buying, a decision needs to be taken on what to buy and in what quantity. This results in the creation of the Model Stock Plan. The model stock plan gives the precise items and quantities that need to be purchased for each merchandise line. To arrive at the model stock plan, the buyer needs to identify the attributes that the customer would consider in buying the product, then decide on the levels under each attribute and finally, allocate the total money available or the units to the respective item categories.