Mathematics for Retail Buying

-Six month planning and

components

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The retail year is divided into two six month periods –
Spring (i.e., spring and summer seasons) and Fall (i.e.,
fall and winter plus holiday). For each of these major
fashion seasons, the buyer develops a plan or budget to
drive the business of the department, classification or
subclass.

www.citeman.com/8905-the-six-month-merchandise-plan.htm l 2
 The Six Month Merchandise Plan/Budget is:

• A dollar plan that controls the merchandise activities of the

retailer.
• A blueprint, map, or guide for assisting the retailer in
attaining realistic retail objectives and sales goals
• A projection in retail dollars of the amount of merchandise
that is needed to achieve the planned sales goals
• A merchandise vehicle that coordinates the balance of sales
and stock or inventory levels
• A tool to estimate the value of inventory needed in the store
for a given period of time
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• A merchandise vehicle that coordinates sales, stock
or inventory levels, purchases, reductions (i.e.,
markdowns, shrinkage/shortages, employee
discounts, customer returns and allowances), initial
markup, gross margin and turnover
• A means by which the retailer can measure
effectiveness of current business operations by
analyzing actual figures.
• A plan for the future that can be reviewed and
revised or adjusted throughout the period.
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 • The six month merchandise plan is a tool that
translates profit objectives into a framework of
merchandise planning and then control.
• Careful planning and monitoring of The Six Month
Merchandise Plan or Budget is one of the major
factors contributing to the success and profitability of
the retailer. The merchandise plan is constantly
monitored by the retailer and buyer
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Six Months Merchandising Plan
• Step 1 – The Sales Forecast
• The projection of achievable sales revenue, based on
historical sales data, analysis of market surveys and
trends, and salespersons’ estimates is termed as a
sales forecasting. It is also called sales budget.

• A sales forecast may be made by the merchandiser,

based on the targets given by the top management
or may be handed down by the top management
itself depending on the retail organisation 6
Forecast
• How much of each product will need to be purchased?
• Should new products be added to the merchandise
assortment?
• What price should be charged for the product?

Developing forecasts involves four steps:

1. Reviewing past sales.
2. Analysing the economic conditions and the market
opportunities.
3. Analysing the changes in the marketing strategies of the
retail organisation and the competition.
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4. Creating the sales forecast.
Influences of Developing Sales Forecasts

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Step 2 – Determining the Merchandising
Requirements

• The merchandise budget is the first stage in the

planning of merchandise. It is a financial plan,
which gives an indication of how much to invest
in product inventories, stated in monetary terms.
The merchandise budget usually comprises of
the: Sales plan, stock support plan, planned
reductions, planned purchase levels, gross
margins.

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• The Range Plan
Range plans are at the level of the company and
the department level. The aim of the range plan is
to create a balanced range for each category of
products that the retailer chooses to offer. The
process of range planning ensures, that the goals
of the merchandise plan fall into specific lines,
many a times the Stock Keeping Units.
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 Good range planning should essentially take
care of the following:

• Ensure that sufficient number of items/ options

available to the customer,
• Ensure that over buying and under buying is
limited, and
• Ensure that sufficient quantities of the product
are available.

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Important points
1. The merchandise budget should be prepared in
advance of the selling season.
2. The language of the budget should be easy to
understand.
3. Since, the economy is ever changing the
merchandise budget must be planned for a
relatively short period of time. Six months is the
normal norm.
4. The budget should be flexible enough to make
changes possible 12
Key Components of the Six Month
Merchandise Plan
• Planned Sales
• Planned Purchases
• Planed Reductions
• Planned Markdowns
• Employee Discounts
• Shrinkage
• Planned Markup and Gross Margin.

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• Planned Sales
Planned Sales are the projected sales
for the period that is planned.
And For this ,some things to consider are:
• sales performance coming in to the
season
• Monthly promotion
• How are the customers changing?
• Economic factors

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Planned Purchases
• Planned purchases is defined as the amount
of merchandise which are planned for delivery
to the department or store in a given certain
period without exceeding the planned closing
stock for that period.
• Planned purchase is calculated by using the
following formula
• Planned purchase= planned sales+ planned
reduction + planned EOM – planned BOM 15
stock
Planned Purchases
example:
Sonali is a buyer in a Department Store and wants to plan
purchases for the next month. Based on past sales records
and an analysis of market conditions, sales are estimated to
be Rs 200,000. Reductions planned for the month are Rs
20,000. An ending inventory valued at Rs 45,000 is planned.
If the beginning inventory had a value of Rs 40,000 what
are the planned purchases for the month?
Solution:
Planned Purchases = Planned sales + Planned Reductions +
Planned EOM – Planned BOM
= 200,000 + 20,000 + 45,000 – 40,000
= 225,000 16
• Planned Reductions
Markdowns, employee discounts and inventory
shrinkage come under the heading of planned
reductions.
• Planned Markdowns
Markdowns are deductions in prices and may
occur because of many reasons ranging from bad
quality of merchandise, competitive products,
change in trends, etc.

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 •Employee Discounts
The discounts given to the employees for buying the
company’s products.
•Shrinkage
It is the loss of merchandise due to theft or pilferage.
•Planned Markup
Markups vary depending on the type of the product,
the audience that it is targeted and the market trends.
Markup in Rupees= Selling price-Cost price

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• Gross Margin
It is the difference between the selling price
and the cost of the product, less reductions
for markdowns, shrinkage and employee
discounts.
• To determine the GM for each month, all
purchases and inventories must be converted
to cost price.

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B.O.M & E.O.M Planned Inventory Levels
Planning End-of-Month (E.O.M.) or Beginning-of-Month
(B.O.M) inventory levels is another important element
of the six-month merchandising plan.

Four methods of Inventory Planning are:

◦ Stock-to-Sales Method
◦ Basic Stock Method
◦ Percentage Variation Method
◦ Week’s Supply Method

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 Stock-to-Sales Method

The Stock-to-Sales (S/S) is a ratio of the amount

of inventory on hand at a particular date to the
sales for the same period.

S/S ratio= Stock on hand E.O.M. (at retail value)

/Sales for the same month

Stock-sales ratio= Value of inventory/Actual sales

Planned BOM Inventory= Stock-sales ratio X
Planned sales 21
Basic stock method
Basic stock is defined as the minimum stock that should
be maintained.
• BOM Stock = Planned sales + Basic stock
• Basic Stock = Average Stock – Average Monthly Sales
• Average Planned sales for the season
stock = -------------------------------------------
Stock turn for season

• Average Monthly Planned sales for the season

sale = ------------------------------------------
No of months in the season 22
Percentage Variation Method

• This method of inventory calculation is used in case

the stock turnover typically exceeds six times a year.
• It is calculated using the following formula:
BOM Stock= Avg. stock for season*1/2* [1+
(Planned sales for the month/Average monthly
sales)]

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Week’s Supply Method

• Retailers who need to maintain a control on the inventories

on a weekly basis may use this method.
• It can be calculated by using the following formula.

Number of weeks to be stocked= The number in weeks in

the period/stock turnover or the period.
Where,
Average weekly sales= estimated total sales for the
period/The number of weeks in the period

BOM Stock – Average weekly sales* Number of weeks to be 24

stocked
Step 3 Merchandise Control- The Open to Buy

The purpose
1. Depending on the sales for the month and the
reductions the merchandise buying can be adjusted.
2. The planned relation between the stock and sales
can be maintained.

Open to Buy ensures that the buyer

•Limits overbuying and under buying
•Prevents loss of sales due to unavailability of the
required stock.
•Maintain purchases within the budgeted limits 25

•Reduce markdowns, which may arise due to excess

Calculating Open to Buy
Open to Buy= Planned EOM Stock- Projected
BOM Stock
OTB = planned sales + planned end‐of‐the‐
month stock – present inventory – goods on
order
Open to Buy is always calculated for current and
future periods.
 
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