Retail SMART

Budgeting - Merchandise Planning

 

By: Dennis A. Conforto
Chairman & CEO of A-Z Media Group, Inc.


dennisDuring the month of November, we have been discussing the forecasting process that makes up the budgets for the coming year. Today we are going to discuss forecasting your product selection for 2012. Ask several retailers, "What is merchandise planning?" and you will get at least as many definitions as the number of retailers you ask. This is because merchandise planning is impossible to limit, and therefore, difficult to describe and define in its range and scope.

What Is Merchandise Planning?

For the purpose of our discussion, the short definition is:

“Merchandise planning is an approach which has been systemized over a period of time. Its goal is to maximize the gross margin return on investment (GMROI), through forecasting sales and inventory levels in order to increase profitability. A method of maximizing sales potential and minimizing losses from product markdowns and being out of stock."

Now that I have provided you with a broad definition, let's take a look, in detail, at what these ideas might mean to your business.

“Merchandise planning is an approach which has been systemized over a period of time.” This requires good business practices and procedures. You need to have the right software systems in place, the right people on staff, and the right processes that support both your software and people. Without the right people, processes and software, you will get nowhere.

The goal of merchandise planning is "to maximize the gross margin return on investment (GMROI)." The investment you have made in your inventory is, over time, the largest investment of all. However, there is also a huge financial investment in retail space, people and corporate infrastructure. And while financial investment is the most obvious type, we should not overlook the "opportunity cost" of the investment in the time that is required for planning.

To achieve maximum GMROI, "forecasting sales and inventory levels" is required. These two business elements are forever linked, and finding the perfect balance is the key to retail and manufacturing success. It is important to note, however, that this is more than just calculating a new purchase or re-order quantity. Smart businesses carefully consider what is required to support sales within the realities imposed by the individual store layout and/or warehousing and shipping costs.

Businesses must put the necessary effort into merchandise planning "in order to increase profitability." Profitability should always be the key driver in all for-profit businesses. Effective merchandise planning creates powerful margin increases that directly impact the bottom line. You can achieve increases in profitability by "maximizing sales potential and minimizing losses from marking down products and being out of stock." Two major areas that eat profits in both retail and manufacturing are: (1) lost sales resulting from lack of stock of your best selling merchandise; and (2) forced price reductions due to having the wrong merchandise in stock.

Invest in the Software

If you don’t have the right software to run your business, you need to invest in that now. Look for a system supplier that can give you references of at least 25 companies that do what you do. Talk to at least three to five of these owners about the difference in their bottom lines prior to and after they put the system in place.

A typical retail scrapbooking business will lose about 15% of its income in markdown, and perhaps 10% due to lost sales. If we assume annual revenues of $500,000, then you are looking at a loss of $125,000 right there. Reducing each of these figures by 10%, adds $12,500 to your bottom line. Merchandise planning and the right system tools will help your business to decrease losses and increase profits.

If you would like to comment directly to Dennis about this article or have him address a subject matter in future articles feel free to email him directly at dconforto@a-z.com.