How To: Create A Merchandise Plan

How To: Create A Merchandise Plan

By Alan Roseman, President Strategic Results

Core shops are being buffeted by many changes in the retail climate today.  Much of what is affecting retailers is beyond our control. We can't control competition, unemployment, the weather, and surf or snow conditions just as we can't control the tightening of credit from vendors, the banking community, or the fact that big-box stores are now in the action-sports market.  Success will always depend on understanding the factors over which we have dominion, or at least influence, studying them, and making wise choices. One area for improvement for all retailers is the constant improvement of merchandise plans.

Waste In Retail Can No Longer Be Tolerated

Poor merchandise plans equal squandering cash, which can no longer be tolerated.  With fewer customers in the marketplace, sales are too hard to get and margins are too tight (especially in hardgoods) to allow wasteful uses of cash.

The first step to holding on to your cash is understanding where the leaks are. A business keeps score through financial statements.  Do you evaluate financial statements on a monthly or quarterly basis to eliminate waste?  Variable and fixed expenses must be matched to the margin dollars produced.  When margins drop, you must eliminate wasteful expenses.

When was the last time that you re-evaluated credit card merchant fees (variable expense) or annual insurance premiums (fixed expense)?  Cost of goods sold (COGS) must be minimized to increase maintained markup (MMU).  Excessive overbuying increases COGS which decreases MMU.

The next step is developing an effective open-to-buy (OTB) merchandising plan that is based on today's reality, not just a guess based on last year's numbers.  This plan should be adjusted monthly with objective inputs reflecting national trends, the economy, store trends, future events, and then reviewed by qualified merchandisers.  Your plan must provide for the right inventory levels by month by class to support sales levels for planned marketing and store events.  Your plan must also eliminate wasted investment and that starts with an accurate forecast of sales in each classification.

Planning By Meaningful Classifications

Classifications must be meaningful and consist of like items (apples to apples, oranges to oranges).  T-Shirts, pants, walkshorts, and boardshorts are all examples of classes.

Trends happen at the classification level. Vendors are not classifications since they may not be equally strong in every class. A vendor that was strong in a specific class last season or last year may not be equally strong this season or this year.  For this reason, retailers should allocate buying dollars by class and then do assortment planning by vendors.  This approach maximizes the OTB plan and assures the best return on inventory investment.  Too much inventory in the wrong classes results in excessive markdowns and/or costly returns to vendors (RTV).  Not enough inventory in the right classes could result in lost sales, or worse, drive business to competitors.

Three Styles Of Planning

There are three types of sales planning:  top down, bottom up, and interactive. The difference between these is based on how the sales forecasting is done.

1.) Top-down planning is the easiest to model as sales forecasting is based on past sales and adjusted up or down to satisfy management or stakeholder expectations.  Sales goals for each classification are then set by allocating a percentage of the total sales goal.  For instance, a store that has an estimated sales goal of one-million dollars for 2009 where men's T-shirts represent 32 percent of total sales, would plan their annual T-shirt sales to be 320,000 dollars.  This type of planning could lead to inaccurate buying decisions as it overlooks many trending considerations needed on which to derive accurate plans.  Stores that planned their 2008 fall/holiday buys based on 2007 numbers probably landed too much inventory in the wrong classes, which led to excessive markdowns resulting in decreased profits.  This was clearly evident with hoodies and fleece markdowns this past holiday season.  A chain operation might be able to cover mistakes like this with volume and strong stores, while top-down planning could be detrimental to an independent specialty retail store.

2.) Bottom-up planning uses customer expenditures as one input for sales forecasts.  Statistics and computer modeling are used to process inputs on national trends, store results, economic forecasts, local information, marketing plans, and other inputs to create an accurate sales demand forecast. By forecasting demand in each class, this method treats each class as its own profit center.  Each class within the store has its own monthly sales goals and monthly stock to sales ratios to project the required inventory levels needed to reach these goals.  Bottom-up planning is more reactive to customer buying trends and is able to adapt to changing retail conditions much faster than top-down planning.  This type of planning requires extensive analytical work, but lowers the risk of excessive markdowns or lost sales due to stock-outs. One advantage a specialty retailer has is the ability to change quickly. Bottom-up planning provides the guidance to change both quickly and effectively.

3.) Interactive planning is based on bottom-up planning, but incorporates guidance and input from management as well as input from sales staff, buyers, and others who are knowledgeable. It includes changes in inventory levels to accommodate marketing and store events and takes into consideration local economic considerations, geography (distance from ocean) and each store's individual store.  This type of planning requires human intervention.  For instance, surf conditions may dictate additional buys in specific board types (shortboards, fish, funboards, longboards, and SUP).  Warmer water conditions may speed up the transition from 4/3 to 3/2 wetsuits.  Or a planned street closure may require planned lower sales.  This type of planning requires monthly objective analysis and is both high tech and high touch.

Can Your POS System Plan Your OTB

Remember the days before we used our computers to access Mapquest or owned a GPS device like Garmin or TomTom to get directions? Maybe you were told to make a left turn at the stop sign, but should have turned right.  When did you realize that you were going the wrong way?  Didn't it cost you excessive time and gas to get there?  Remember how frustrated you were when you learned that someone gave you the wrong directions.  An inadequate sales forecast that leads to the wrong OTB budget is just as bad as no merchandise plan.  Not all numbers are created equal, and a wrong number can be worse than no number at all. Not all numbers are created equal. POS systems are wonderful tools to help print tickets, ring up sales, track inventory, provide meaningful reports, and even help with customer relationship marketing (CRM). POS systems are great tools for reporting on the past and tracking the present, but just like a cash register from the past, they can't project the future.  Your planning must be based on the future.  An inadequate sales forecast that leaves you short of cash to pay bills at the end of the season is a waste you must eliminate!

In summary, your merchandise plan is a road map for success. It must optimize all aspects of your business. It must take into consideration your expense management, maintained markup, sales goals with planned markdowns, inventory levels based on required stock to sales levels, marketing and store events, and your cash-flow requirements. If you manage by the right numbers, the profits will take care of themselves.

About The Author: After more than 30 years of operating a successful retail operation in Los Angeles, Alan Roseman founded Strategic Results, a consulting firm that targets specialty retailers in the action-sports market. Alan Roseman can be reached at