Chapter 6 : Merchandise Planning
Learning Objectives
• Familiarise with concept and dimensions of
merchandise planning
• Learn the process of merchandise planning
• Know concept and components of Six month
merchandise plan
• Develop the Six month merchandise plan
Chapter 6 : Merchandise Planning 2
Concept of Merchandise
Management and Planning
Merchandise management is the analysis,
planning, acquisition, handling and control of
merchandise investment of retail operation.
• Analysis is required because a retailer needs
to understand the needs and wants of his
target audience.
• Planning is necessary since the merchandise
to be sold in future must be bought in
advance.
Chapter 6 : Merchandise Planning 3
Concept of Merchandise
Management and Planning
• Acquisition or Sourcing - Most retailers donot
produce merchandise that is sold in their store,
thus it has to be procured from others.
• Handling - It is necessary to determine where
merchandise is needed and ensure that the
merchandise reaches the required stores at the
right time and in the right condition.
• Control - As the function of retailing involves
spending money for acquiring of products, it is
crucial to control the amount of money spent on
procuring and buying.
Chapter 6 : Merchandise Planning 4
Need for Merchandise Planning
• Merchandise Planning is the approach towards
acquiring the merchandise and aims to maximise
the Return on investment ROI.
• Objective - to increase the retailer’s profits and
thus market share.
• Helps retailer arrive at the quantities of products
that have to be bought in order to ensure
profitability.
• Aims at procuring and making available the right
merchandise to the end consumer
Chapter 6 : Merchandise Planning 5
Process of Merchandise Planning
Determine
Develop a
Forecast Develop Inventory Allocate Monitor and
Plan for Buy
Category Assortment Level and Merchandise Evaluate
managing merchandise
Sales Plan Product for Stores performance
Inventory
Availability
Chapter 6 : Merchandise Planning 6
Process of Merchandise Planning
Merchandise planning can be either top down or
bottom up planning.
• Top down planning : senior management
forecast the growth that they plan or envision
which is then translated down to how to achieve
the forecasted growth. This is usually done for a
period of six months or a year.
• Thus focus is mainly on sales goals.
• It is in sync with the firms goals and mission.
• It provides a more balanced perspective on
merchandising performance.
Chapter 6 : Merchandise Planning 7
Process of Merchandise Planning
• Bottom up Planning : The analysis begins with
knowing what sold – how much, what type, at
which price and when.
• Bottom up plan starts with planning at the SKU
and individual store level, then moves up to the
regional and national level.
• It may take into consideration the space available
in the various types of stores and then plan
numbers of related aspects.
• It is apt for smaller firms.
Chapter 6 : Merchandise Planning 8
Merchandise Hierarchy
Chapter 6 : Merchandise Planning 9
Merchandise Hierarchy
• Product range is subdivided according to
product features and sales pattern similarity.
• The products are then grouped into categories
or sections for ease of handling. This grouping
is termed as hierarchy.
• Hierarchy is established in a logical manner
depending on how the consumers are likely to
buy the merchandise.
Chapter 6 : Merchandise Planning 10
Merchandise Hierarchy
• A category is an assortment of items that
customers perceive as substitutes for one
another. It is the basic unit of analysis for
merchandise decision making.
• Stock Keeping Unit (SKU) is final level of
merchandise hierarchy and most basic level of
identification of merchandise. It helps the buyer
understand the complete breakup of the
quantities needed in every product to be
purchased.
Chapter 6 : Merchandise Planning 11
Hierarchy of Merchandise in the Apparel
Department
Style/ Brands/ Price
Classification
Sub-category
Department
Category
point
SKU
Styles
Zodiac Colors
Shirts
Classic Arrow Sizes
Trouserss
Semi
Men's
formal
Jeans
Casual
Tees
Apparel
Knits Styles
Ethnic Skirts Wovens Colors
Western
Women's Trousers Denim Sizes
wear
Lingerie Dresses
Chapter 6 : Merchandise Planning 12
Types of Merchandise
• Staple/Basic merchandise are the regular
products offered by the retailer that donot need
styling changes.
• Fashion Merchandise refers to products that
have cyclical sales because of changing lifestyles
and tastes. They have frequent style changes,
thus forecasting is difficult.
• Fad merchandise consists of styles or products
that shoot in fashion and rapidly go out of fashion
also. Sales are generated for a short time. It is
difficult to forecast for such products.
Chapter 6 : Merchandise Planning 13
Assortment
• Assortment is the selection of merchandise a
retailer offers.
• It is a set of products offered within a
merchandise category.
• These products share similar physical
characteristics.
Chapter 6 : Merchandise Planning 14
Assortment
• Terms that define an assortment are :
Width / breadth or variety is the number of distinct
product lines a retailer carries. It is the number of
different merchandising categories offered. A wide
assortment means a lot of product lines and a narrow
one indicates few product lines.
Depth is choice in any of the product lines in terms of
product and brand variation. It refers to the number
of SKUs within a category. Increased depth allows the
retailer to offer a number of different price levels.
Chapter 6 : Merchandise Planning 15
The Six Month Merchandise Plan
• Six Month Merchandise Plan is a tool that
translates profit objectives of the retailer into
a framework of merchandise planning and
control.
• The primary objective of creating a Six Month
Merchandise Plan is to prepare a month by
month purchase schedule.
Chapter 6 : Merchandise Planning 16
Components of Six Month
Merchandise Plan
• Planned Sales - These are the sales projected
for a time period.
• Planned Purchases - These are the purchases
planned for a given period.
Planned purchases = Planned sales + planned
reductions + planned EOM – Planned BOM
Planned purchases at cost = planned
purchases at retail X (100% - initial markup %)
Chapter 6 : Merchandise Planning 17
Components of Six Month
Merchandise Plan
Planned Reductions - In order to have enough
merchandise available every month to achieve
forecasted sales, retailer has to consider other
factors that reduce inventory in addition to the
sales made.
Chapter 6 : Merchandise Planning 18
Components of Six Month
Merchandise Plan
Types of Planned Reductions
a) Planned Markdowns are reductions in prices that
have to be given due to a number of factors like poor
merchandise quality, change in trends or broken
ranges. Markdown is an amount by which retailer
reduces a products original price.
b) Employee Discounts are given to employees for
buying the retailer’s merchandise.
c) Shrinkage is stock that is removed from the store
without any payment for it. Eg;by employee theft,
customer shoplifting or pilferage, vendor fraud and
administrative errors.
Chapter 6 : Merchandise Planning 19
Components of Six Month
Merchandise Plan
• Planned Markup - Markup is the difference
between the cost price and selling price.
• Gross Margin is the difference between the
selling price and cost of the product, minus
the planned reductions.
Chapter 6 : Merchandise Planning 20
Components of Six Month
Merchandise Plan
• Average inventory is average amount on
hand within a time period.
Average inventory = (BOM + EOM ) / 2
• BOM – beginning of month inventory or
opening stock
• EOM – end of month inventory or closing
stock
Chapter 6 : Merchandise Planning 21
Methods of planning inventory
• Stock-to-sales Method
Stock to sales ratio (S/S) is proportionate
relationship between amount of inventory at
hand and sales for the corresponding month or
time period. It is the amount of inventory that
should be on hand at beginning of month to
support the sales forecast and maintain
inventory turnover objective.
Chapter 6 : Merchandise Planning 22
Methods of planning inventory
• Stock-to-sales Method Formulae
Stock to sales ratio = stock on hand EOM(at
retail value) /sales for the month
Stock-sales ratio = value of inventory / actual
sales
Planned BOM inventory = Stock-sales ratio X
planned sales
Chapter 6 : Merchandise Planning 23
Methods of planning inventory
• Basic Stock Method
• Retailers that follow this method of planning
inventory believe that they should carry a certain
basic or fixed amount of inventory in the store at
all times.
• Thus the retailer carries more inventory than he
expects to sell.
• There is a buffer in case sales are more, or
shipments are delayed. This method is
appropriate when inventory turnover is low or
sales are erratic over the year.
Chapter 6 : Merchandise Planning 24
Methods of planning inventory
• Basic Stock Method is calculated using the
following formulae :
Basic Stock = average stock for the season – average monthly
sales for the season
Average monthly sales for the season =Total planned sales for the season
No. of months in the season
Average stock for the season = Total planned sales for the season
Estimated inventory turnover rate for season
BOM stock = Planned monthly sales + basic stock
Chapter 6 : Merchandise Planning 25
Methods of planning inventory
• Weeks’ Supply Method
• This method forecasts average sales weekly
thus BOM is equal to several weeks’ expected
sales. It assumes inventory is proportional to
sales and is used when the stock has to be
turned every week, that is a new inventory
comes in on a weekly basis.
Chapter 6 : Merchandise Planning 26
Methods of planning inventory
• Weeks’ Supply Method
Number of weeks to be stocked = the number in weeks in the
period / Stock turnover for the period
Average weekly sales = estimated total sales for the period
number in weeks in the period
BOM stock = average weekly sales X number
of weeks to be stocked
Chapter 6 : Merchandise Planning 27
Methods of planning inventory
• Percentage Variation Method
• When BOM differs from planned average
monthly stock by half of that month’s variation
from estimated average monthly sales. This
method is used when the stock turnover exceeds
six times a year, that is, is relatively stable.
BOM stock = Average stock for the season X 1/2
X [1+(planned sales for the month / average
monthly sales )]
Chapter 6 : Merchandise Planning 28
Developing the Six Month
Merchandise Plan
Before developing the six month merchandise
plan :
• Method of inventory planning is finalised.
• Gather sales data for the same period last
year.
• Review data on returns, markdowns and
inventory.
Chapter 6 : Merchandise Planning 29
Developing the Six Month
Merchandise Plan
• Data available for last year for a retailer ABC.
The retailer expects a 10% increase in sales.
The reductions planned are Rs 125,000. Let us
help the retailer prepare his six month
merchandise plan based on this data.
• Step 1 – Calculate monthly sales as a percent
of total sales in order to determine sales for
next year. The same has been done in the
table on the next page .
Chapter 6 : Merchandise Planning 30
Developing the Six Month
Merchandise Plan
Jan Feb Mar Apr May Jun Total
Sales 180,000 200,000 210,000 350,000 450,000 425,000 18,15,000
% of total 10 11 12 19 2 23 100
sales
Stock to 1.8 1.5 1.5 1.8 1.5 2
sales ratio
% of 10 10 15 25 25 15 100
reductions
Chapter 6 : Merchandise Planning 31
Developing the Six Month
Merchandise Plan
• Step 2 – Management expects a 10% increase
in sales next year. Using this data, calculate
the total projected sales next year as below :
Jan Feb Mar Apr May Jun Total
Projected 198,000 220,000 231,000 385,000 495,000 467,500 1,996,500
sales
Chapter 6 : Merchandise Planning 32
Developing the Six Month
Merchandise Plan
• Step 3 – Using data of planned reductions and
percentage of reductions per month, calculate
the monthly reductions in terms of value.
Jan Feb Mar Apr May Jun Total
% of 10 10 15 25 25 15 100
reductions
Monthly 12,500 12,500 18,750 31,250 31,250 18,750 125,000
reduction
Chapter 6 : Merchandise Planning 33
Developing the Six Month
Merchandise Plan
• Step 4 - Calculate BOM and EOM. The BOM
for the current month is the same as EOM of
the previous month.
BOM sales = monthly sales X stock to sales
ratio
Chapter 6 : Merchandise Planning 34
Developing the Six Month
Merchandise Plan
• Step 4 - Calculate BOM and EOM.
• EOM for the last month of June, has to be estimated
since data for BOM of next month July is not
available so we assume it as 900,000.
Jan Feb Mar Apr May Jun Total
Sales 180,000 200,000 210,000 350,000 450,000 425,000 1,815,000
Stock to 1.8 1.5 1.5 1.8 1.5 2
sales
ratio
BOM 324,000 300,000 315,000 630,000 675,000 850,000 3,094,000
EOM 300,000 315,000 630,000 675,000 850,000 900,000* 3,670,000
Chapter 6 : Merchandise Planning 35
Developing the Six Month
Merchandise Plan
• Step 5 – Calculate the monthly additions to stock
which is the amount that needs to be ordered
each month.
Additions to stock = Sales + reductions + EOM stock –
BOM stock
Jan Feb Mar Apr May Jun Total
Additions 6,500 227,500 543,750 426,250 656,250 493,750 2,354,000
to stock
• This six month merchandise plan serves as an
indicator of the inventory required every month.
Chapter 6 : Merchandise Planning 36