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.
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excess/outdated/depreciated stock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:
1.
Define Sales Targets
2.
Calculate Margin Impacts
3.
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?
A dog holding a collar
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:
o
performance
o
location
o
volume
o
demographics
·
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.
