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