Tip of the Week

Retail SMART	Budgeting - Merchandise Planning
	By: Dennis A. Conforto Chairman & CEO of A-Z Media Group, Inc.

For the month of November we have been discussing the forecasting process that makes up the budgets for the following year. Today we are going to discuss forecasting your product selection for 2006. 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, this is the short definition of merchandise planning: Merchandise planning - “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 at what these ideas might mean to your business in detail. Merchandise planning is “an approach which has been systemized over a period of time.” This requires good business practice and procedures. You need the right software systems in place and to also ensure that you have the right people on staff and the right processes that support both your software and people. Without the right people, the right processes with the right 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 huge financial investment in retail space, people and corporate infrastructure. While financial investment is the most obvious type, we should not overlook the "opportunity cost" of the investment in time that is required to planning. Achieving 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 the requirement to support sales with realities imposed by the individual store layout and or warehousing and shipping costs. Businesses must put the 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 the increase in profitability by "maximizing sales potential and minimizing losses from marking products down and being out of stock." Two major areas that eat profits in both retail and manufacturing: (1) lost sales resulting from lack of stock in your best selling merchandise, and (2) the forced price reductions due to having the wrong stock 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 to you references of at least 25 companies that do what you do. And talk to at least three owners about the differences 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 to increase profits and decrease losses. SMART planning is what being business SMART is all about.