SIX MONTH MERCHANDISING 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.

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.

Benefits of making a Merchandise Plan

1. Increased Turnover.
2. Reduced amount of markdowns.
3. Improved maintained markup.
4. Maximized Profits.
5. Minimum investment in inventory.

The components of the Six-Month Merchandise Plan

1. Initial Markup for the Period.
2. Planned net Sales
3. Planned BOM inventory / Opening Stock
4. Planned EOM stock / Closing Stock.
5. Planned Reductions.
6. Planned Purchases at Retail
7. Planned Purchases at Cost.

Each of the components is further subdivided into the following 4 categories.

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.

Preparation of six-month Merchandising Plan

Step 1: PLANNED SALES

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, we will need to calculate last year’s monthly sales figures as a percentage of last
year’s total sales. This has to be done for all the months.
2. Let’s 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, we 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 sales.

Step2: - PLANNED BOM INVENTORY

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, Our 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 store’s investment in inventory.

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, we 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 month.

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 does not remain constant for each month.

Using this method, the actual stock on hand during any period would vary from average
monthly stock by only half of the month’s variation from average monthly sales. Planned
BOM would be calculated using the following formula:

BOM Inventory = Average Stock * ½ (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.

Step3: - PLANNED EOM INVENTORY

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

Step4: - PLANNED REDUCTIONS

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.

Step5: PLANNED PURCHASES AT RETAIL

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 BOM

Purchases

Step6: PLANNED PURCHASES AT COST

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 we must also enter actual figures to assist with future planning. Actual monthly
figures can also aid you in making revisions to our plan if they are necessary. If sales are
greater than planned, we 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, we must decrease the amount of purchases.

DETERMINING STOCK TURNOVER

Decisions we make in relation to sales forecasting and stock planning must yield a profit for
our store. One measure of how accurately we 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 listings.

Benefits of High Turnover

1. Fresher Merchandise
2. Fewer markdowns and less depreciation
3. Lower Expense
4. Greater Sales
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.

OPEN -TO - BUY

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, we 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 follows:

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
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 six-month
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.

The best way to understand each of the above steps would be to actually do these steps
through an example. As part of the merchandise planning in value terms or in rupees,
each of these steps have been explained here below using dummy figures in rupee terms.
The first thing necessary to start the process is to prepare a form for working on the
merchandise plan.

Seasons Spring February March April March April May June July SEASON

Fall August September October November December January TOTALS

SALES Last Year
Plan
Planned %
of season
Revised
Plan
Actual

EOM Last Year

STOCK Plan
Revised
Actual

REDUC- Last Year

TION Plan
Revised
Actual
% of Plan
Reductions

BOM Last Year

STOCK Plan
Revised
Actual

PLANNED Last Year

PURCHASE Plan
AT RETAIL Revised
Actual

PLANNED Last Year

PURCHASE Plan
AT COST Revised
 Actual

Format for Preparing the Merchandise Purchase Plan

The following Row fields are shown (Parameters): Seasons, Sales, EOM stock, Reduction,
BOM stock, Planned Purchases at Retail, Planned Purchases at cost.
Now against each of these fields there are rows which show:
● The last year’s achieved figures, so that one can compare the planned and actual figures for
each parameter against it;

● Planned or targeted figures against the given parameters, it must be noted here that except
for the Sales and Reduction parameters (fields) for rest of the parameters the figures against
planned activity are derived through the use of formulas as discussed here below;

● Revised figures against each parameter to take care of the effect of actual figures, as the
season progresses, on the rest of the months due to change in sales or reduction activities;

● Actual figures against each of the parameters as the season progress.

● Against Sales and Reduction parameters we have also shown month-wise percentage
breakup of planned activity against the overall plan for the season.

● This is done to show how we have planned the sales and reduction activity through
different months or periods of the given season.

Step I: We shall first prepare a Figure to show all the important parameters with their
respective values as shown here below in Figure. The use of these parameters is
done in the calculation of initial mark-up, which is to be used for calculation of purchase
value at cost price.

Parameters Plan Actual

% initial markup 57.14%
% reduction 12.00%
% maintained* markup
% alteration expenses 1.00%
% cash discount 1.50%
% gross margin 52.50%
%operating expenses 44.50%
% net profit 8.00%
season turnover (sales to stock ratio) 2.9
average stock 1724138
basic stock 890805
 Key Parameters with respective Values

Here for the sake of clarity on the calculation of some of the above values, we show the
working as given here below:

% Gross Margin = % Operating Expenses + % Net Profit

= 44.5% + 8% = 52.5 %
% Initial Mark-up = (% Gross Margin + % Reduction + % Alteration Expenses – % Cash
Discount) ÷ (100 + % Reduction) x 100
% Initial Mark-up = (52.5 + 12 + 1 - 1.5) ÷ (100 + 12) x 100 = 57.14%

Step II: Now suppose a store has made following sales and reduction sales plan as shown in
the following Figure for a Fall Season, then we shall proceed to derive figures for other
parameters as specified in following steps.

Seasons SEASON
Fall Aug Sep Oct Nov Dec Jan TOTALS

SALES Last Year

Plan 800000 850000 6,00000 9,50,000 11,50000 6.50000 50,00000
Planned % 16% 17% 12% 19% 23% 13%
of season

REDUC Last Year

-TION Plan
% of Plann 15% 20% 25% 16% 10% 14%
-ed Monthly
Reduction

Figure Showing Planned Sales and Reduction Percentages

Step III: We must determine now Beginning of Month (BOM) stock figures. But before
we do that we need to know the Basic Stock figure. To calculate the Basic Stock figure
we shall use the following formula

(a) Basic stock = Average Inventory – Average Monthly Sales

= (Sales ÷ Sales to Stock Ratio) – (Sales ÷ No. of Months)

= (5000000 ÷ 2.9) – (5000000 ÷ 6)
= 1724138 – 833333 = 890805
(b) Now the BOM stock figures are calculated as shown here below:

BOM Stock = Planned Monthly Sales + Basic Stock

Therefore, the month-wise figures of BOM are as follows:

August = 800000 + 890805 = 1690805

September = 850000 + 890805 = 1740805
October = 600000 + 890805 = 1490805
November = 950000 + 890805 = 1840805
December = 1150000 + 890805 = 2040805
January = 650000 + 890805 = 1540805

Step IV: The next step is to determine End of Month (EOM) stock figures as shown here
below. It should be clear here that the BOM of the following month is the EOM of the
preceding month. (When the basic stock method is used, plan the last month’s EOM
inventory/stock equal to the average inventory)

August = ‘1740805
September = ‘1490805
October = ‘1840805
November = ‘2040805
December = ‘1540805
January = ‘1724138

Step V: The next step is to determine total reduction in terms of rupee value and distribute
for each month based on the percentage reduction planned.
(a) The total planned reduction in rupee value terms is as follows = ‘50,00000 x 12%
= ‘600000
(b) Distribute monthly planned reduction as shown below:
August 15% x ‘600000 = Rs. 90000
September 20% x ‘600000 = Rs. 120000
October 25% x ‘600000 = Rs. 150000
November 16% x ‘600000 = Rs. 96000
December 10% x ‘600000 = Rs. 60000
January 14% x ‘600000 = Rs. 84000

Total 100% Rs 600000

Step VI: This is the important step as we shall be determining monthly planned purchases
at retail price as per the formula shown here below:

Monthly Planned Purchase = Sales for the month + EOM stock + Reduction Value –
BOM stock

August 800000 + 1740805 + 90000 1690805 = 940000

September 850000 + 1490805 + 120000 17,40805 = 720000
October 600000 + 1840805 + 150000 1490805 = 1100000
November 950000 + 2040805 + 96000 1840805 = 1246000
December 1150000 + 1540805 + 60000 2040805 = 710000
January 650000 + 1724138 + 84000 1540805 = 917333

Step VII: This is the final step in Merchandise Planning process where we shall convert
monthly planned purchases at retail to cost. In this step we are actually determining the cost
of our purchases and thereby the fund requirement during various months of the given
season. As we have seen in Step 1 above, the initial mark-up is 57.14%, thus for finding the
cost of the goods purchased at retail price we have to use the following formula:

Purchase Value at Cost price = Purchase Value at Retail Price x [(100 – Initial markup) ÷
100]

August 940000 × 42.86% = 402884

September 720000 × 42.86% = 308592
October 1100000 × 42.86% = 471460
November 1246000 × 42.86% = 534036
December 710000 × 42.86% = 304306
January 917333 × 42.86% = 393169

After we are done with step VII, we can now transfer all the corresponding figures to
the format as shown in the below Figure.
SIX MONTH MERCHANDISE PLAN

Department Name: Men’s wear

Merchandise Manager: ABC

Buyer: XYZ

Period: August to January

Seasons SEASON
Fall Aug Sep Oct Nov Dec Jan TOTALS

SALES Last Year

Plan 800000 850000 6,00000 9,50,000 11,50000 6.5000 50,00000
Planned % 16% 17% 12% 19% 23% 13%
of season

EOM
STOCK Last Year
Plan 1740805 1490805 1840805 2040805 1540805 1724138
Revised
Actual

REDUC- Last Year

TION Plan 90000 120000 150000 96000 60000 84000 600000
Revised
Actual
% of 15% 20% 25% 16% 10% 14%
Planned
Monthly
Reduction

BOM
STOCK Last Year
Plan 1690805 17,40805 1490805 1840805 2040805 1540805
Revised
Actual

PLAN Last Year

PURCH- Plan 940000 720000 1100000 1246000 710000 917333
ASES AT Revised
RETAIL Actual

PLANN Last Year

PURCH- Plan 402884 308592 471460 534036 304306 393169 2414447
ASES AT Revised
COST Actual
Completed Merchandise Planning Figure