merch_6 six months

8/3/2019 Merch_6 Six Months

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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 merchandisethat will meet consumer demand & sales goals.

Six month merchandising plan

Dollar Plan


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The goal of a business plan is to minimize theuse of capital and maximize profit. This can bedone with the help of merchandise plan.

The merchandise plan consists of two majorelements:

An estimation of merchandise needed

A control method to regulate stock levels


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Elements of the merchandise plan

Planned sales Estimates for each month and the period

Planned stock

Estimated inventory need at the beginning of eachmonth

Planned markdowns Estimated inventory reduction for each month

Planned purchases: Estimated purchase budget to be spent during a

given period.


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Since a plan is a set of financial goals, itmay include planned figures for:

Workroom cost

Cash discount

Season stock turnover

Shortage

Average stock

Markdown percentage of initial markon

Newspaper advertising

Gross margin percentage


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Merchandise Planning is "A systematic approach. It is aimed at maximisingreturn on investment, through planning sales and inventory in order to increaseprofitability. It does this by maximising sales potential and minimising lossesfrom 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 computerisedsupport. Without the people and processes you will get nowhere.

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

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


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We put the effort into Merchandise Planning "in order to increase profitability".Profitability is the key driver of most businesses. Effective merchandise planningdelivers margin increases directly to the bottom line. We achieve the increase inprofitability "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.


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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

Merchandise Planning


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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 MarginsProfits

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 merchandiseplan.


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WHY IS PLANNING IMPORTANT??

Complex business environment

Stock-outLoss of Sale

OverstockingDead stock


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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.


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Cash Disbursements

Cash Receipts

Credit

Expenses

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 20,000

COGS - 14000

Total 6000

Direct Expenses -4000

Total 2000(indirect ex + profit)

Variables of record-keeping


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Sales

Purchases

Stocks & Inventories

Profit & Loss Statement / Income Statement / Operating

Statement


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Key factors P & L

Net Sales = Gross Sales - Returns &Adjustments

Total Cost of

Purchases =Op. Inventory

(cost)+ Purchase

(cost)

Shipping

(cost)

+

Net Cost of

Goods Sold=

Total Cost

of Purchases- Closing Inventory

(Cost)= Gross COGS -

Cash Discount


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Gross

Margin

Net Sales Net COGS

Total Operating

Expenses

Direct

Expenses

Indirect

Expenses

Net ProfitGross

Margin

Total Operating

Expenses=

=

= -

+

-


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Procedure for preparing the six monthmerchandise plan

Buyers role

Elements of plan

Planning sales

External factors Internal factors

Fashion trends

Planning stocks

Stock-sales ratio Stock turnover rate

Markdowns

Purchases

Open-to-buy

Markup Gross margin

Cash discount

Stock shortages andoverages

Operating expenses

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Planned Sales

Factors:

Economic climate

Enlargement of departments

Elimination of price points Scheduled promotional activities

The proper market strength

Any change in competitive situation

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Planned Stock

Guidelines to balance stock to sales:

Stock turnover

Stock/sales ratio

Faster the stock turn greater is the profit

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Stock turnover

Every department has its own stock turnoverrate.

planned sales(for a period)

= Stock turnover

Planned average Inventory(for the period)

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Stock/Sales ratio

Retail stock (as of a specific date)

= stock/sales

ratioSales for a given period(a month)

In monthly stock-sales ratio the period will be ofa month

Calculations on page 183 13-20


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Retail Inventory method

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Page 184/185/186


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Six month merchandise plan

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Six month merchandising plan in action

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Control System

Page 188/189

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Calculate the profit

Tic-tac-toe

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Net sales cost ofgoods sold

= gross margin -expenses

= profit

$ %


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Methods used for Planning

Top-down:Planning of overall sales based oneconomic trends, external conditions & changes in storepolicies. The sales goals thus set are further brokendown for departments.

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


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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./Ken Cavanagh PhotographerTheMcGraw-HillCompanies,Inc./LarsA.Niki,

photographer

C t ti f St k T


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Computation of Stock Turnover orInventory Turnover

Stock TurnRetail Basis

Stock TurnCost Basis

Stock TurnUnit Basis

=

=

=

Net SalesAvg. Stk atRetail Price

Cost ofGoods Sold

Avg. COGS

No. of UnitsSold

Avg. No. ofunits in stock

1

2

3


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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.


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Factors affecting rate of Stock Turn

Different lines of merchandise have differentrates of stock turn. E.g. Food Vs Apparel

Type of Retail Institution. E.g. Discount Store VsPremium EBO


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Planned Reductions

Allowance for the difference between the originalretail value & actual final sales value of themerchandise.

It consists of 3 factors:

Merchandise Shortage/Overages

Employee Discount

Markdowns


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Merchandise Shortage

It is the diff. between the book inventory & thephysical inventory when the book inventory islarger.

Special attention should be paid while inwarding

stocks or transferring stocks.

Merchandise Overage

It is the diff. between the book inventory & the physical inventory whenthe physical inventory is larger.

This is generally due to error in physical count.

E l Di t & Di t f Oth


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Employee Discounts & Discounts for OtherSpecial Groups

It is the price reduction granted to storeemployees.

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* 100


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Why Markdowns are needed?

To clear slow selling merchandise.

To attract customers to the stores whichultimately results in sale of regular merchandise.

Errors are generally of two types:

Buying errors

Pricing errors


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Markups

Buyer sells merchandise at a price that will cover thecost of goods & the expenses incurred for acquiring thegoods & 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


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Markups

For planning initial markups the buyer mustconsider the following: Covering costs & expenses & making profits

Consumer demand

Store clientele Kind of merchandise

Type of Retail

Competition


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Markup = Retail Price Cost Price

Markup% at Retail = Markup/ Retail Price

Initial Markup = Retail Price Cost Price

Maintained Markup = Final Retail Price Cost Price

Markups

Six Month Merchandise Plan


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Six Month Merchandise Planfor Mens Casual Slacks

Monthly Sales Percent Distribution to Season


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Monthly Sales Percent Distribution to Season(Line 1)

1. Sales % Distribution to Season6 mo. data April May June July Aug Sept

100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%

The percentage distribution of sales by month is based on

Historical data Special promotion plans

Monthly Sales Percent Distribution to


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Monthly Sales Percent Distribution toSeason (Line 1) Continued

Retail sales are very seasonal. The Christmas seasonoften accounts for more than 40% of a retailers annualsales.

Monthly Sales


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Monthly Sales(Line 2)

Sales % Distribution1. Month 6 mo. data April May June July Aug Sept

100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%2. Mo. Sales $130,000 $27,300 $15,600 $15,600 $24,700 $27,300 $19,500

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

Monthly Reductions Percent Distribution


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Monthly Reductions Percent Distribution(Line 3)

3. Reduction % Distribution to Season

6 mo. data April May June July Aug Sept100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%

To have enough merchandise every month to support themonthly sales forecast, buyers need to consider factorsthat reduce the inventory level in addition to sales made

to customersMarkdownsShrinkageDiscounts to Employees


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Shrinkage

Inventory loss caused by shoplifting, employee theft,merchandise being misplaced or damaged and poorbookkeeping.

Retailers measure shrinkage by taking the differencebetween

1. The inventory recorded value based on merchandisebought and received

2. The physical inventory actually in stores and distributioncenters

Shrinkage % = $ shrinkage

$ net sales

Monthly Reductions


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Monthly Reductions(Line 4)

Reduction % Distribution3. Month % 6 mo. data April May June July Aug Sept

100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%4. mo.

reductions $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320

Monthly Reductions = Total reductions x Monthly reduction %

Beginning of Month (BOM) Stock-to-Sales


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Beginning of Month (BOM) Stock-to-SalesRatio (Line 5)

5. BOM Stock to Sales Ratio6 mo. data April May June July Aug Sept

4.0 3.6 4.4 4.4 4.0 3.6 4.0

Stock-to-Sales Ratiospecifiesthe amount of inventory (in retaildollars) that should be on hand at the beginning of the month to

support the sales forecast and maintain the inventory turnoverobjective for the category

Retails often use a related measure, Weeks of Inventory

Steps in Determining


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Steps in Determiningthe 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 thecategory will produce a gross margin of 45%.

Sales-to-Stock Ratio = 123/45 = 2.73



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Steps in Determiningthe Stock-to-Sales Ratio Continued

Step 2: Convert the Sales-to-Stock Ratio toInventory Turnover

Inventory Turnover = Sales-to-stock ratio x (1 GM%/100)

Inventory Turnover =2.73 x (1 45/100) = 1.50



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Step 3: Calculate Average Stock-to-Sales Ratio

Average Stock-to-Sales Ratio= 6 months/Inventory turnover

= 6/1.5 = 4



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Step 4: Calculate Monthly Stock-to-Sales Ratio

Monthly stock-to-sales ratios vary in the opposite directionof sales

To make this adjustment, the buyer considers theseasonal pattern, previous years stock-to-sales ratios

BOM Stock


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BOM Stock(Line 6)

6. BOM Inventory6 mo. data April May June July Aug Sept

98280 98280 68460 68640 98800 98280 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


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End of Month (EOM) Stock(Line 7)

7. EOM Inventory6 mo. data April May June July Aug Sept

85600 68640 68460 275080 98280 78000 65600

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

Monthly Additions to Stock


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Monthly Additions to Stock(Line 8)

8. Monthly additions to stock6 mo. data April May June July Aug Sept

113820 4260 17910 48406 26180 8670 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

E l i h M h di B d Pl


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Evaluating the Merchandise Budget Plan

Inventory turnover GMROI, sales forecast areused 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 somethingunder the buyers control?

Did the buyer react quickly to changes in demand byeither purchasing more or having a sale?


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Open-to-Buy System

The OTB system is used after the merchandise ispurchased

Monitors Merchandise Flow

Determines How Much Was Spent and HowMuch is Left to Spend

PhotoLink/Getty Images PhotoLink/Getty Images

Wh t I O T B Pl i ?


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What Is Open To Buy Planning?

The goal of good inventory management is to maintainan appropriate level of inventory for the amount of salesthat you are generating.

You want to have adequate assortments when sales areslow so that you dont miss possible sales, but not somuch that you drain your cash flow.

When sales pick up, you want to increase your inventorylevels to support the increased sales, but be careful notto over buy

O t B S t


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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 handat the beginning of any given month and how much newmerchandise should be received during the month to maintain your

optimum inventory levels.

Open-to-Buy System

All ti M h di t St


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Allocating Merchandise to Stores

Allocating merchandise to stores involves threedecisions:

how much merchandise to allocate to eachstore

what type of merchandise to allocate

when to allocate the merchandise to differentstores


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merch_6 six months

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