Merchandise planning looks different for every company that employs it largely because most businesses define merchandise planning differently. The only consistent across every business and industry is that failing to plan almost always results in some type of “failure,” whether that be the dreaded OUT-OF-STOCK notifications on hot products or having to allot something as on “super sale” due to over purchasing.
Much like the Goldilocks fairytale, you want to have just the right amount of merchandise to fulfill demand or execute the optimal strategy, including core promotion or clearance strategies.
All you have to do is order the right items at the right time in the right quantities for the right price based on the probable future demands of the ever-fickle consumer. Not a problem, right? Heavily note the sarcasm.
There’s no such thing as “perfect,” but there is such a thing as setting yourself up for success and getting as close as possible to that sweet spot using customized merchandise planning and the right technology.
What is Merchandise Planning?
Regardless of how it’s executed, merchandise planning is a systematic approach to financial forecasting, product selection and segmentation, buying, presenting, and selling to meet market demand as closely as possible while earning the best return on investment (ROI).
Merchandise planning done well has innumerable benefits, including (but certainly not limited to):
- Increased revenue due to fewer markdowns of excess/outdated/depreciated stock
- Increased customer satisfaction and revenue due to fewer out-of-stock situations and maintaining channel presentation
- Decreased inventory carrying costs in the warehouse due to higher inventory turnover
- Increased workforce enablement resulting from omni-channel sales, inventory, and shipment plans communicated across the enterprise prior to product landing in the supply chain
- Increased ROI thanks to strategic, data-driven ordering and fulfillment
Merchandise planning is often run by “seasons,” which can either be an actual season, like Halloween decorations for Fall, or year-round items like chocolate, which can have an uptick around Valentine’s Day. The math also changes with the type of store, size, structure, income paths, and product diversity, the last of which requires in-depth merchandise planning for each significantly different product.
Despite all of that, whether the “season” is actually a season or a full year, whether you’re selling men’s trousers or Halloween decorations or chocolates, whether you sell online, in a brick-and-mortar store(s), or through multiple channels, merchandise planning has the same three core components:
- Post-season analysis
- Pre-season planning
- In-Season management of approved pre-season plans
Those are in the correct order, as well, because when it comes to planning your next season, it should start with analyzing the last season.
Step 1: Post-Season Analysis | A Season Post-Mortem
Starting with a blank page/spreadsheet/system is one of the hardest things to do, and, ultimately, it usually isn’t in your best interest. Step one is to dive deep into the data from the previous “season,” asking and answering all the important questions.
What did you get right? What did you get wrong? Where do we need to fix misses or amplify wins? What was the projected plan versus the actuals?
This gap analysis, going back multiple seasons if possible, is endlessly beneficial when projecting ahead. Importantly, context should be applied to these situations, as well, to better understand why projections and actuals didn’t match up, whether for the better or worse.
Step 2: Pre-Season Planning | Setting the Stage for Success
Now that you’ve completed a revisitation of historical data, it’s time to apply growth targets to those actuals – in other words, defining the end-state financial outcomes that should govern decision-making in all subsequent planning stages for your offerings.
Merchandise Financial Planning
Financial planning in pre-season should be done on a regular cadence that makes sense for your business where your merchandise is offered seasonally or as a “core product” offer year-round. Leveraging Financial Planning & Analysis within your merchandising planning prevents:
- Unwanted inventory at the end of a season/cadence
- Out-of-stock signs on hot merchandise
Missing financial targets across revenue, the cost of goods and services, and assets held by the company to deliver your experiences to customers
The goal at this stage is to define growth and budget forecasts for the company by focusing on high-level performance metrics such as sales, inventory, margin, etc., to set multi-year performance objectives while simultaneously considering workforce requirements needed to support those goals.
While each organization’s method to achieve the outcome may differ, year-over-year growth percentages will generally be applied to historical actuals at Division/Department levels to set new performance targets. An evaluation of costs (e.g., workforce planning, capital, operational expenditures, etc.) is also evaluated to understand the offset from revenue and margin goals.
The planner will typically work this all out in three primary stages:
- Define Sales Targets
- Calculate Margin Impacts
- Define Inventory Flow & Valuation Levels
This forecasting can be done either top-down or bottom-up, or a combination of both, the last of which can lead to a very dependable forecast and allow you to plan ahead with increased confidence.
A top-down model evaluates the industry as a whole, and considers broad trends, market size, and potential to make predictions about business performance. This has a number of benefits, including improving the understanding of demographics and audience and the strengths and weaknesses of the business compared to other businesses.
For instance, if you want to provide a new product on the market, let’s say dog collars. How many other dog collar sellers are there? Is there room in the market for another company that sells dog collars to excel? What number of dog owners would be purchasing a dog collar in the upcoming year? What’s the longevity of an average dog collar, and how does that impact the sales of your new product?
Top-down really looks at the market from the most elevated viewpoint possible – hence, top-down.
A bottom-up model really focuses on a division of your business and its capabilities. It looks inward, taking a granular view of the segment with cash flow forecasting, the cost of goods sold, analyzing sales and it’s performance, operational costs, marketing costs, and any other activity that can impact financial reports.
This sort of inner reflection, if you will, can lead to scenario planning and modeling both for good and bad possibilities. For example, what happens if XYZ’s product gets recalled? What happens if we expand our warehousing? If we grew our team by a third? And on and on.
In clinical terms, the math looks something like this:
Operating Expense Plan – Depreciation Expense + Capital Expenditures
This allows you to determine potential revenue using a very simple equation: the number of sales multiplied by average sale value.
Top-down forecasting tends to be optimistic, while bottom-up tends to be a bit pessimistic. Using a combination with a heavy dash of realism often hits a nice sweet spot, with the general goal being to improve sales numbers and increase revenue to some degree year-over-year.
However you get to your financial goals, they should be leveraged to guide all future planning decisions across the lifecycle of the offering.
This work needs to be done across all the slices of your business, whether you categorize them by subclass, brand, category, what-have-you. There needs to be a drill-down into profitability and performance comparisons on the previous year’s data to forecast with the utmost accuracy and create growth targets.
The key result of this activity is the open-to-buy (OTB), which can essentially be translated to the merchant’s ‘checkbook’ in subsequent planning stages, i.e., how much a retailer can buy during a certain time period.
Once product-level performance goals have been established and reconciled to higher-level targets, retailers can begin to curate the offering for customers.
The Meat-And-Potatoes Planning
With budgets defined, multiple planning processes can be executed in parallel: Marketing/Event Planning, Demand Forecasting, Assortment Planning, and Supply Planning. Despite different departments or teams managing each of these planning activities, they all need to revolve around the prior established plans. They need hyper-visibility and collaboration to best execute the financial goals of the company.
The most complex and time-consuming aspect of merchandise planning is widely considered to be Assortment Planning. Retailers’ processes vary greatly in maturity, with the most advanced organizations needing multiple sub-processes to help govern their practice, including:
- Assessment of sales targets
- Evaluating brick-and-mortar (store) locations based upon:
- Building the breadth (e.g., how many styles, colors, etc.) and depth (e.g., sizes or volumes) of their product lines to sell to the customer by selling channel.
This is where integrating all the data from all previous planning (historical post-season data, financial gaps, growth percentages, et al.) drives product-level planning, helping to align the optimal unit quantities to location (i.e., Store Clusters/Stores and DCs), at the right price. This can then be reconciled against sales and inventory strategic targets through a ladder plan outlining the buying intent.
Once in-season, merchants manage product sales and inventory metrics depending on sales performance.
Now, how do I know how much to buy or sell to generate these targets?
Demand Forecasting can and should be one of the most highly integrated planning use cases in a retailers’ ecosystem. Some exemptions do exist – notably, grocery and convenience, where supply planning is a more crucial planning capability, but, for most retailers, demand forecasting is needed first.
A robust Demand Forecasting software can leverage order, fulfillment, and purchasing data to make a prediction for when sales will occur by product/location. While no manual or software-led planning can guarantee customer shopping behavior, it is the best way to understand what, where, and when a sale could take place with the information already available in the organization.
Once assortment planning is completed, supply planning will assist merchants in planning the procurement and allocation of raw materials and goods to create those offerings. The retailer and vendor(s)/supplier(s) work to balance factory capacity and performance against anticipated demand to produce the materials and goods in time for distribution back to the retailer.
Once aligned in terms of the inventory need and cadences of delivery, a bill of materials and contract is produced between the entities to finalize pre-season preparations of the merchandise mix prior to it being transported throughout the supply chain and presented in-store or online for consumers.
Anaplan’s Unique Position to Dominate the Planning Technology Market
At Spaulding Ridge, we believe all business is personal, and the products and services we enable mirror that likeness. We partner with Anaplan, a game-changing Connected Planning software that can unlock total lifecycle planning benefits and process transformation in your organization to maximize your workforce, increase profit, and reduce operational expenses.
Armed with a platform that can support fluidity in data granularity, process innovation, and customization – with little-to-no long-term technical (IT) engagement – retailers can take advantage of the Anaplan platform to generate solutions that support innovation in all planning aspects, generating long-term value with a low total cost of ownership for the company.
The greatest tool for Merchandise Planning is a quality-connected planning tool and an expert advisory and implementation firm to lay a solid foundation for your new technology.
Want to talk about Merchandise Planning? Reach out to Trent Allen to unlock the benefits of connected planning today.
Manager in Anaplan, Spaulding Ridge
About the Author
Trent is a Manager in the Spaulding Ridge Anaplan Practice with over a decade of experience in Retail IT. Prior to joining the firm, Trent spent a significant amount of time leading retail technology program teams and product management teams across Enterprise ERP (Finance, Legal, Asset Protection, Inventory Management), Merchandising, Product Development, Omnichannel Fulfillment and Logistics at Kohl’s Department Stores and REI (Recreational Equipment Inc.).