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Retail Merchandising Handout

Merchandise Planning
What is it?
It projects the sales goals of a store and then forecast specific merchandise
purchases in dollars which typically covers a six-month period or a year.

1. Top Down Planning
2. Bottom up planning

What is a Six-Month Merchandise Plan?

It is the tool that translates profit objectives into a framework for merchandise
planning and control. Key components include sales forecasts and stock planning.
The plan is established for two distinct selling seasons.
o Spring-Summer(Feb-July)
o Fall-Winter(Aug-Jan)

Why do we need to develop Merchandise Plan?

1. To provide a n estimate of the amount of capital required to be invested in
inventory for specific period.
2. To provide an estimate of planned sales for the period.

What are the benefits of making a Merchandise Plan?


Increased Turnover.
Reduced amount of markdowns.
Improved maintained markup.
Maximized Profits.
Minimum investment in inventory.

What are the components of the Six-Month Merchandise


Initial Markup for the Period.

Planned net Sales
Planned BOM inventory / Opening Stock
Planned EOM stock / Closing Stock.
Planned Reductions.
Planned Purchases at Retail
Planned Purchases at Cost.

Each of the components is further subdivided into the following 4

1. Last year(actual)represents the actual amount last year for the month.
2. Plan(this year)represents the amount planned for the current year.
3. Revised(this year)represents any revisions made in the current plan due to
unanticipated events.
4. Actual(this year)represents actual sales for the month.

Retail Merchandising Handout

Note: Comparing Actual(this year) to the actual(this year) determines if you

have reached your goals.
How to prepare a six-month Merchandising Plan?
It involves:
Forecasting Sales
Past sales figures are important to a buyer when making sales forecasts, but they
should only be used as a guide. In addition, other internal factors are likely to affect
sales. These are:
o Store wide or departmental promotions/sales
o Holidays
o Current Store-wide and departmental sales trends
o Shifts in demographic characteristics of the population
o New competition moving into the area
o Economic Conditions
o Changes in Store Hours
o Changes in amount of selling Space
All the merchandising decisions are planned in relation to sales or stated as a % of
sales. Therefore, if the sales forecast is inaccurate, all other parts of the plan will be
in error, possibly causing disastrous results for the retailer.
1. First, you will need to calculate last years monthly sales figures as a
percentage of last years total sales. This has to be done for all the months..
2. Lets assume that no major changes have occurred during the current season
and sales analysis of previous years indicate that the percentage of total sales
occurring during each month has fairly remained constant.
3. Next, you would determine the total planned sales volume for the season.
Looking at the past several year sales, we estimate that a total 10% increase
is planned for the period.
4. So, the planned total sales = last yr total sales + x% of last yr total sales.
5. Now, plan sales for each month of the current period.
e.g. Planned Monthly Sales(Jan)=Planned % of total sales * Planned total
This involves determining the amount of stock required to meet the planned sales.
Planned BOM Inventory = Planned Sales * Stock-to-Sales Ratio
Methods of Planning Inventory
Merchandise in stock must be sufficient to meet sales expectations while allowing for
unanticipated demand. As a buyer or merchandiser, your goal will be to maintain an
inventory assortment that will be sufficient enough to meet customer demand and yet
be small enough to ensure a reasonable return on stores investment in inventory.

Retail Merchandising Handout

1. Sales-to-Stock Method
It involves maintaining inventory in a specific ratio to sales. The stock-sales ratio is
calculated using the following formula:
Stock-sales ratio = Value of inventory / Actual Sales
The stock-sales ratio indicates the relationship between planned sales and the
amount of inventory required to produce those sales, and is used to calculate BOM
stock levels which is as follows:
BOM Inventory = Stock-Sales Ratio * Planned Sales

2. Basic Stock Method

The concept behind the basic stock method is that all times, you should have on
hand a basic dollar amount of merchandise that should remain constant throughout
the season. Basic stock is the minimum amount of merchandise that should be
maintained within a product category, department, or store even in the slowest
Basic stock = Average Inventory Average Monthly Sales
BOM Inventory = Planned Sales For Period + Basic Stock
Basic Stock Method works best when the inventory is low. In fact, this method of
inventory planning is only recommended when the planned stock turnover is six or
less in a year.

3. Percentage-Variation Method
The percentage variation method is recommended when the stock turnover is more
than six-times a year. The concept behind stock planning with this method is that
inventory levels should be related to actual changes in sales. Buyers, still require a
minimum amount of stock, but that minimum doesnot remain constant for each
Using this method, the actual stock on hand during any period would vary from
average monthly stock by only half of the months variation from average monthly
sales. Planned BOM would be calculated using the following formula:

Retail Merchandising Handout

BOM Inventory = Average Stock * ( 1 + Planned Sales for Month / Average

Monthly Sales)
Retailers prefer to use this method with merchandise categories characterized by
high turnover rate(usually exceeding six times a year) because it results in less stock
fluctuation than use of basic stock method.


The EOM stock for any month is simply the planned BOM stock for the following


The next component to be planned is reductions which could be markdowns,
employee discounts and consumer discounts, and inventory shortages from
shoplifting or employee theft. Estimates for these reductions are based on past
experience and are presented as a percent of planned sales on the six-month
merchandising plan e.g.
Planned Sales% = 6.8%
Planned Shortage% = 2.1%
Planned Employee Discount = 1.1%
Therefore, total reductions are planned to be 10% of sales.
Total reductions(planned) = Total Planned sales * x%(10%)
Based on the past records determine the reductions each month.


Planned purchases each month should be adequate to implement the six-month
merchandise plan. On the merchandise plan, purchases must be planned at retail
first since all the other figures were based on retail. The following formula is used to
calculate planned purchases at retail:
Planned =

Planned Sales + Planned EOM + Planned Reductions Planned

Retail Merchandising Handout


From the seasonal data, initial markup for the period is planned as x%.
Using the following formula, calculate planned purchases at cost.
Planned Purchases = (100% - Initial Markup%) * Planned Purchases at retail
at Cost
The planned purchases at cost lets buyers know how much money they will have to
spend on merchandise for the season as well as individual months.
---------------------------------------------------------------------------------------------------------------Each month you must also enter actual figures to assist with future planning. Actual
monthly figures can also aid you in making revisions to your plan if they are
necessary. If sales are greater than planned, you will need to make larger purchases
for the rest of the season to maintain the inventory level shown in the merchandise
plan. However, if the sales are less than planned, you must decrease the amount of
Decisions you make in relation to sales forecasting and stock planning must yield a
profit for your store. One measure of how accurately you balance sales to inventory
levels is the stock turnover rate. How fast merchandise is sold, replenished, and sold
again determines the turnover.
The stock turnover rate is the number of times the average stock is sold during a
given period and is calculated as:
Stock Turnover Rate = Sales / Average Stock
The average stock for any period of time is the value of inventory at the beginning of
the period, plus the value of inventory at the predetermined periods during the
period, plus the value of inventory at the end of the period divided by the stock
Benefits of High Turnover

Fresher Merchandise
Fewer markdowns and less depreciation
Lower Expense
Greater Sales

Retail Merchandising Handout

5. Higher Returns
Limitations of High Turnover
Excessively high stock turns can mean the retailer is buying in too small
quantities. If so, then the retailer is
1. not taking full advantage of available quantity discounts.
2. adding to the costs of transportation and handling
3. danger of losing sales because of stockouts.
Not all the planned Stock is purchased at the beginning of the month. Purchase
decisions are distributed throughout the month in order to take advantage of new
merchandise line, to re-order fast selling merchandise, or acquire off merchandise to
use in promotional sales. In addition, you may have outstanding orders,
commitments to vendors that have not been delivered. The value of these
outstanding orders will reduce the planned purchases for the month. As a result, you
must be able to calculate, on a specific date during the month, the amount of
merchandise to be purchased during the remainder of the month. The remaining
purchases are defined as Open-to-Buy. It is the amount the buyer has left to
spend for a period and is reduced each time a purchase is made.

Calculating OTB
OTB = Planned Purchases Merchandise on Order-Merchandise Received
Planned Purchases

Planned Sales + Planned EOM + Planned

Reductions Planned BOM

Then, convert the planned purchases at retail to planned purchases at cost as

Planned Purchases at Cost = (100% - Initial Markup%) * Planned Purchases at Retail
Purposes of OTB:
If effectively used, OTB allows the buyer to:
1. Limit overbuying and underbuying
2. Prevent loss of sales due to inadequate amount of stock.
3. Maintain purchases within budgeted limits.
4. Reduce Markdowns

Retail Merchandising Handout

5. Increase sales
6. Improve stock turnover
7. Hold back purchase dollars to reorder fast-selling merchandise, to take
advantage of off-price merchandise, or to sample new merchandise.
Basic Stock Planning
For basic merchandise, planned purchases can be calculated without using sixmonth merchandising plan. The quantity of basic stock to purchase is determined
using the basic stock plan, The purpose of the plan is to determine the amount of
merchandise a retailer must have on hand or on order to have sufficient amount of
merchandise available during the period. To make these calculations information
about the rate of sale, reorder period, delivery period, and reserve stock levels.
The following formula is used to calculate the maximum amount of any basic
merchandise item that should be on hand and on order at any given point:
Maximum = Sales Volume per Week (Reorder Period + Delivery Period) + Reserve

Rate of Sale: You must first determine the weekly unit sales of each item by
analyzing the past sales records.
Reorder Period: It is the amount of time between orders for merchandise.]
Delivery Period: It is the time between the placement of the order and the time the
merchandise is on the sales floor. Enough merchandise must be available in the
store to cover the time it takes the vendor to deliver the merchandise once it has
been ordered.
Reserve / Safety Stock : It is the amount of merchandise that is necessary to meet
unanticipated sales.
Maximum: It is amount of merchandise that must be on hand or on order at any
reordering point
Minimum : It is the point at which order should be placed.
Minimum = Rate of Sale * Delivery Period + Reserve
In using the basic stock plan, buyers will develop a basic stock list. The basic stock
list provides information such as description of the item, the retail price, the cost, the
maximum, rate of sale, and the minimum reorder quantity.