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Merchandise Plan:

It is a financial plan allocating specific amounts of money to each department/division for the purchase of an appropriate assortment of fashion merchandise that will meet consumer demand & sales goals.

Six month merchandising plan

Dollar Plan

The goal of a business plan is to minimize the use of capital and maximize profit. This can be done with the help of merchandise plan. The merchandise plan consists of two major elements:

An estimation of merchandise needed A control method to regulate stock levels

Elements of the merchandise plan

Planned sales

Estimates for each month and the period

Estimated inventory need at the beginning of each month Estimated inventory reduction for each month

Planned stock

Planned markdowns

Planned purchases:

Estimated purchase budget to be spent during a given period.

Since a plan is a set of financial goals, it may include planned figures for:
Workroom cost Cash discount Season stock turnover Shortage Average stock Markdown percentage of initial markon Newspaper advertising Gross margin percentage

Merchandise Planning is "A systematic approach. It is aimed at maximising return on investment, through planning sales and inventory in order to increase profitability. It does this by maximising sales potential and minimising losses from mark - downs and stock - outs." It is a "systematic approach" in many ways. You need the systems to ensure that you have the right people, the right processes and the right computerised support. Without the people and processes you will get nowhere.

It is "aimed at maximising return on investment", but where is this investment made? Most obviously we are talking about a financial outlay in stock, but less evidently there is also considerable financial investment in retail space, people and corporate infrastructure.

We achieve the goals "through planning sales and inventory". These two elements are inextricably linked and finding an optimum balance is the key to retail success.


We put the effort into Merchandise Planning "in order to increase profitability". Profitability is the key driver of most businesses. Effective merchandise planning delivers margin increases directly to the bottom line. We achieve the increase in profitability "by maximising sales potential and minimising losses from mark downs and stock - outs". There are two major areas of profit leakage in retail. Firstly lost sales resulting from lack of stock and secondly forced margin reductions due to excessive stock.


Merchandise Planning

This process of Merchandise Planning begins with the formulation of objectives, setting of policies and implementation of procedures necessary to carry out dept. / store objectives. It includes both Cash planning in terms of Merchandise budgets Unit planning in terms of Merchandise lists


Six-month merchandise plan Successful retail working requires the right merchandise assortment. To achieve this, the following variables must be planned at least 6 months in advance. Receipt Plans Sales Plan Mark-up Plans Mark-down Plans Inventory shortages EOM Stock levels Weeks Supply

Gross Margins Profits

This plan is called the merchandise budget & it forecasts specific merchandising activities for a dept. or store for a specified period of time. This merchandise budget is also referred to as the six-month merchandise plan.



Complex business environment Stock-out Loss of Sale Overstocking Dead stock


The Planning Process

Planning is based on 3 components:

Objectives : the goal towards which the management activities of the business establishment are directed. Policies: provide management with a frame of reference for decision making that is consistent with planned objectives they provide guidelines for dealing consistently with problems & issues.

Procedures: are necessary steps that must be followed to execute a given policy. Management must emphasize if the procedure is a rule / guide.

Variables of record-keeping
Cash Disbursements Cash Receipts Credit

oDirect: paid out directly for the dept.s benefit. E.g. salary, advertising, promotions, special events. oIndirect: that serve the whole store. E.g. electricity, rent, taxes, insurance etc.

Dept. Sales
COGS Total Direct Expenses Total

- 14000 6000 -4000 2000(indirect ex + profit)

Sales Purchases Stocks & Inventories Profit & Loss Statement / Income Statement / Operating Statement


Key factors P & L

Net Sales
Total Cost of Purchases

= Gross Sales =
Op. Inventory (cost)

Returns & Adjustments

Purchase (cost)

Shipping (cost)

Net Cost of Goods Sold

Total Cost of Purchases

Closing Inventory (Cost)

Gross COGS

Cash Discount


Gross Margin

Net Sales


Total Operating Expenses

Direct Expenses

Indirect Expenses

Net Profit

Gross Margin

Total Operating Expenses


Procedure for preparing the six month merchandise plan

Buyers role Elements of plan

Gross margin

Planning sales
External factors Internal factors Fashion trends

Cash discount Stock shortages and overages Operating expenses

Planning stocks
Stock-sales ratio Stock turnover rate

Markdowns Purchases

Planned Sales

Economic climate Enlargement of departments Elimination of price points Scheduled promotional activities The proper market strength Any change in competitive situation


Planned Stock
Guidelines to balance stock to sales:

Stock turnover Stock/sales ratio

Faster the stock turn greater is the profit


Stock turnover
Every department has its own stock turnover rate.

planned sales(for a period) = Stock turnover Planned average Inventory (for the period)


Stock/Sales ratio
Retail stock (as of a specific date) = stock/sales ratio Sales for a given period(a month)

In monthly stock-sales ratio the period will be of a month Calculations on page 183


Retail Inventory method

Page 184/185/186


Six month merchandise plan


Six month merchandising plan in action


Control System
Page 188/189


Calculate the profit

Net sales cost of goods sold

= gross margin expenses

= profit


Methods used for Planning

Top-down: Planning of overall sales based on
economic trends, external conditions & changes in store policies. The sales goals thus set are further broken down for departments.

Bottom-up: initial planning is done by people responsible for actually implementing the plans.


Types of Merchandise Management Systems

Staple Merchandise Predictable Demand Relatively Accurate Forecasts Continuous Replenishment Fashion Merchandise Unpredictable Demand Difficult to Forecast Sales Merchandise Budget Plan Open-to-Buy
The McGraw-Hill Companies, Inc./Lars A. Niki, photographer The McGraw-Hill Companies Inc./Ken Cavanagh Photographer


Computation of Stock Turnover or Inventory Turnover

1 Stock Turn = Retail Basis
Avg. Stk at Retail Price

Net Sales

Stock Turn = Cost Basis

Cost of Goods Sold


Stock Turn = Unit Basis

No. of Units Sold

Avg. No. of units in stock


Methods to increase Stock Turnover

Reducing the no. of price lines carried. Limiting the no. of brands carried. Reducing duplicate styles. Carrying smaller reserve stocks. Avoiding accumulation of unsaleable goods. Eliminating unsaleable goods. Closely following the buying plan.


Factors affecting rate of Stock Turn

Different lines of merchandise have different rates of stock turn. E.g. Food Vs Apparel Type of Retail Institution. E.g. Discount Store Vs Premium EBO


Planned Reductions
Allowance for the difference between the original retail value & actual final sales value of the merchandise.

It consists of 3 factors: Merchandise Shortage/Overages Employee Discount Markdowns


Merchandise Shortage
It is the diff. between the book inventory & the physical inventory when the book inventory is larger. Special attention should be paid while inwarding stocks or transferring stocks.
Merchandise Overage
It is the diff. between the book inventory & the physical inventory when the physical inventory is larger. This is generally due to error in physical count.

Employee Discounts & Discounts for Other Special Groups It is the price reduction granted to store employees. They are also granted to some groups like charitable institutions / bulk corporate orders etc.
Markdown & Markdown %
Reduction in price from original retail price is called Markdown. Markdown = Original Markdown Price Markdown Price Markdown % = Net Markdown Net Sales


Why Markdowns are needed?

To clear slow selling merchandise. To attract customers to the stores which ultimately results in sale of regular merchandise.

Errors are generally of two types: Buying errors Pricing errors


Buyer sells merchandise at a price that will cover the cost of goods & the expenses incurred for acquiring the goods & thereby also yield profit. Markup = Retail Price Cost Price Following Information is crucial for planning mark-ups:
Total amount of sales for the season Planned expenses Planned reductions Profit goal for the season


For planning initial markups the buyer must consider the following:

Covering costs & expenses & making profits Consumer demand Store clientele Kind of merchandise Type of Retail Competition


Markup = Retail Price Cost Price Markup% at Retail = Markup/ Retail Price

Initial Markup = Retail Price Cost Price

Maintained Markup = Final Retail Price Cost Price


Six Month Merchandise Plan for Mens Casual Slacks


Monthly Sales Percent Distribution to Season (Line 1)

1. Sales % Distribution to Season

6 mo. data 100.00% April 21.00% May 12.00% June 12.00% July 19.00% Aug 21.00% Sept 15.00%

The percentage distribution of sales by month is based on Historical data Special promotion plans


Monthly Sales Percent Distribution to Season (Line 1) Continued

Retail sales are very seasonal. The Christmas season often accounts for more than 40% of a retailers annual sales.

Monthly Sales (Line 2)

Sales % Distribution 1. Month 6 mo. data April May 100.00% 21.00% 12.00% 2. Mo. Sales $130,000 $27,300 $15,600

June July Aug 12.00% 19.00% 21.00% $15,600 $24,700 $27,300

Sept 15.00% $19,500

Monthly sales = the forecasted total season for the six-month period x monthly sales %


Monthly Reductions Percent Distribution (Line 3)

3. Reduction % Distribution to Season

6 mo. data 100.00% April 40.00% May 14.00% June 16.00% July 12.00% Aug 10.00% Sept 8.00%

To have enough merchandise every month to support the monthly sales forecast, buyers need to consider factors that reduce the inventory level in addition to sales made to customers Markdowns Shrinkage Discounts to Employees

Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping. Retailers measure shrinkage by taking the difference between 1. The inventory recorded value based on merchandise bought and received 2. The physical inventory actually in stores and distribution centers Shrinkage % = $ shrinkage $ net sales


Monthly Reductions (Line 4)

Reduction % Distribution 3. Month % 6 mo. data April 100.00% 40.00% 4. mo. reductions $16,500 $6,600

May 14.00% $2,310

June 16.00% $2,640

July 12.00% $1,980

Aug 10.00% $1,650

Sept 8.00% $1,320

Monthly Reductions = Total reductions x Monthly reduction %


Beginning of Month (BOM) Stock-to-Sales Ratio (Line 5)

5. BOM Stock to Sales Ratio 6 mo. data April May 4.0 3.6 4.4

June 4.4

July 4.0

Aug 3.6

Sept 4.0

Stock-to-Sales Ratio specifies the amount of inventory (in retail

dollars) that should be on hand at the beginning of the month to support the sales forecast and maintain the inventory turnover objective for the category Retails often use a related measure, Weeks of Inventory

Steps in Determining the Stock-to-Sales Ratio

Step 1: Calculate Sales-to-Stock Ratio GMROI = Gross margin% x Sales-to-stock ratio Sales-to-Stock Ratio = GMROI/Gross margin % Assume that the buyers target GMROI for the category is 123%, and the buyer feels the category will produce a gross margin of 45%. Sales-to-Stock Ratio = 123/45 = 2.73

Steps in Determining the Stock-to-Sales Ratio Continued

Step 2: Convert the Sales-to-Stock Ratio to Inventory Turnover
Inventory Turnover = Sales-to-stock ratio x (1 GM%/100) Inventory Turnover =2.73 x (1 45/100) = 1.50


Steps in Determining the Stock-to-Sales Ratio Continued

Step 3: Calculate Average Stock-to-Sales Ratio
Average Stock-to-Sales Ratio = 6 months/Inventory turnover = 6/1.5 = 4


Steps in Determining the Stock-to-Sales Ratio Continued

Step 4: Calculate Monthly Stock-to-Sales Ratio
Monthly stock-to-sales ratios vary in the opposite direction of sales To make this adjustment, the buyer considers the seasonal pattern, previous years stock-to-sales ratios


BOM Stock (Line 6)

6. BOM Inventory 6 mo. data 98280

April 98280

May 68460

June 68640

July 98800

Aug 98280

Sept 8000

BOM Stock
= monthly sales (line 2) x BOM stock-to-sale ratio (line 5) = $27,300 x 3.6 = $98,280


End-of-Month (EOM) Stock (Line 7)

7. EOM Inventory 6 mo. data 85600

April 68640

May 68460

June 275080

July 98280

Aug 78000

Sept 65600

The BOM stock for the current month = the EOM stock in the previous month


Monthly Additions to Stock (Line 8)

8. Monthly additions to stock 6 mo. data April May 113820 4260 17910

June 48406

July 26180

Aug 8670

Sept 8420

Additions to stock = Sales (line 2) + Reductions (line 4) + EOM Stock (line 7)

BOM Stock (line 6)

Additions to stock (April)

= $27,300 + $6,600 + $68,640 - $98,280 = $4,260

Evaluating the Merchandise Budget Plan

Inventory turnover GMROI, sales forecast are used for both planning and control After the selling season, the actual performance is compared with the plan

Why did performance exceed or fall short of the plan? Was the deviation from the plan due to something under the buyers control? Did the buyer react quickly to changes in demand by either purchasing more or having a sale?


Open-to-Buy System
The OTB system is used after the merchandise is purchased Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend

PhotoLink/Getty Images

PhotoLink/Getty Images


What Is Open To Buy Planning?

The goal of good inventory management is to maintain an appropriate level of inventory for the amount of sales that you are generating. You want to have adequate assortments when sales are slow so that you dont miss possible sales, but not so much that you drain your cash flow. When sales pick up, you want to increase your inventory levels to support the increased sales, but be careful not to over buy


Open-to-Buy System

The Right Amount Of the Right Stuff At the Right Time This is where Open To Buy planning comes into play.

It helps the buyer to decide how much inventory should be on hand at the beginning of any given month and how much new merchandise should be received during the month to maintain your optimum inventory levels.

Allocating Merchandise to Stores

Allocating merchandise to stores involves three decisions: how much merchandise to allocate to each store what type of merchandise to allocate when to allocate the merchandise to different stores