It’s happened again, hasn’t it?
You worked long and hard on sales plans and identified exactly which products need to be in stock at what times, and it all seemed so beautiful.
Yet, you just received your 10th customer complaint that the products they wanted were out of stock.
It seems like an impossible to task to have all your products in-stock at all times, regardless the time of year.
But it doesn’t have to be. There are solutions; effective merchandise planning is one of the best.
What Exactly is Merchandise Planning?
Before we get into the details, let’s first define what exactly is “merchandise planning.”
Merchandise planning is a systematic approach to planning, buying and selling of merchandise with the aim of maximizing return on investment while making merchandise available at the places, times, prices and quantities that the market demands.
In layman terms, it means that if I want to buy product X with color Y and size Z from your shop, you have that available when I come knocking on your door.
Problems like losing customers because of stockouts or having excess stock after the season has ended is exactly what merchandise planning is meant to solve.
How do you achieve that? Well let’s take a look, shall we?
Developing Your Plan
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The basic concept of merchandise planning consists of three equally important steps:
- Post-season analysis
- Pre-season planning
- In-season planning
You can define a season as any time period that you prefer; it largely depends on what exactly you are selling. If it’s Christmas sweaters, your season is probably only a couple of months while ice-cream is a product that is sold year round round but even so, it’s quantities are higher during the warmer months.
When you’re selling merchandise with wildly different seasons, it makes sense to have separate, more detailed plans for all the product categories in which you’re active.
Other factors that affect the process include the size and structure of your organization, type of store (retail, online, multichannel, both), type of merchandise you’re selling and more.
Planning merchandise for a menswear company that has multiple retail locations around the country is vastly different than the same process for a company that is selling tea online.
With tea, your decisions revolve around the types of tea you want to sell and then stocking up on them. With menswear, you have the added fun of forecasting how many suit trousers with length X and waist Y you’re going to sell, what time of year, and then go through the same process with your whole collection.
Fortunately, while the amount of work that goes into planning varies tremendously depending on your industry, the basic concepts of how to conduct merchandise planning stay the same no matter how big or small the company.
Step 1: Post-Season Analysis
Image via Statista
The first step is to gain an understanding of your performance during the last sales season. Again, it’s up to you define a how long or short a season is.
What’s important here is to really dive into the data, looking at not only the total number of sales but going deeper into monthly and even weekly results on an item, category, department, and store basis.
Next, you should compare those numbers to the planned numbers from the same year to gain an understanding of how your actual results measure up. Essentially, what you’re doing is a gap analysis on sales.
It’s important to have the same data available going back multiple sales seasons as this will give you a better overview of where things are going and is crucial for planning into the future.
When looking at your past and current sales data, take context into account. When you see in the data that sales have not grown since 2006 it could very well be that it’s because of something that you did or did not do. Maybe you have closed up under performing retail shops or opened new ones?
Those things certainly will have an effect on pure sales numbers. The 2007 financial crisis certainly has it’s role to play in sales numbers of the last decades.
Whenever you’re trying to make sense of the numbers, it’s never advisable to only look at raw data without any context. Your business doesn’t live in a vacuum, everything is connected and plays a role.
Besides the economy and the uncontrollable effects it has on your business, something that you can change (and have total control over) is your marketing department.
They are constantly running ads, promotions and more on different channels that are aimed at boosting sales at various times and for various products throughout the year. Without a doubt, marketing plays a big role in your success or failure. So be sure to include them in your analysis, their input is crucial!
What you’ll end up with in the end is an understanding of not only the numbers but also the context behind those numbers. This will make planning for the future a whole lot easier.
Armed with all this data, it’s time to move on to Step 2 - Planning.
Step 2: Pre-Season Planning
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This is where the fun begins! Using the data from your previous analysis, it’s time to plan the season ahead. When you start planning for the season ahead, it’s crucial to involve your marketing team(s) from the very beginning.
Without their input you, could be looking at historical data that shows that, in a given period, you have sold X amount of units and so with your projected growth, you’ll add that multiple and be done with it.
What you might not know about is that for that period, marketing has planned new campaigns with three times the spend of previous years. So it would be reasonable to also anticipate a lot better sales results.
Likewise, you might very well be running into stock-outs without even realizing it. Not good.
Another thing to keep an eye on during this phase is the impact that opening new sales channels, like Amazon Marketplace and others, can have on your business.
With new channels, it’s always hard to plan ahead as you have no actual sales data to back up your assumptions. In a situation like that, it pays to look at channel-specific industry sales data to get into and use that for your projections.
For example, with Amazon you can look at similar products and how they are selling – taking into account things like the quality of the posting, rank in search results, ads and more. It’s not perfect but at least it gives you some understanding of what to expect which you can then use to quantify your potential for new customers on that channel.
Plan For Every Eventuality
Even when taking all of the above into consideration, there inevitably will be situations where you find yourself with either too much or too little stock. Smart business owners (like you) plan for every eventuality and so they have backup plans for everything, and you should too.
When they run into over stock issues, they have plans for specifically getting rid of that stock. That can mean creating a special newsletter with bargain prices for things that are not selling, using secondary markets like Ebay exclusively for selling extra stock, making combo deals whereby you get one item extremely cheap, and more.
The concrete tactics are up to you; the idea is to have a plan for when those situations arise so you’ll know exactly what to do.When the problem is that you have more orders that you have stock, companies that dropship can be your saviour. Long gone are the days when you could only dropship low-quality merchandise. Today's dropshippers offer quality work.
Take Printful for example. They’re a Californian company that offers on-demand printing for things like t-shirts, posters, mugs, embroidery, leggings, phone cases and more. There are similar businesses for all types of merchandise.
Yes, your margins will suffer in the short-term but the long-term gain is that you have happy, paying customers that don’t have to wait for weeks for new stock to arrive.
Taking all of the above into account and using it is how you’ll end up with your initial sales goals for your weekly/monthly new sales plan. However, having a sales plan is good, but it’s useless without having any merchandise to sell.
So the next step is to figure out how much stock you need at different times during the season. To achieve that, you must move backwards from your sales targets.
A Practical Example
Let’s say your target for the month of July is to sell 10,000 units. That means that at the very least, you have to have 10,000 units in stock by July. If you know that the purchasing process will take approximately four weeks, the beginning of June is the latest everything has to be set if you’re going to be ready in time.
The above scenario is for a single channel store and only applies when you’re buying a month's worth of merchandise at a time. Your plans could include weekly, bi-weekly, monthly, bi-monthly, or quarterly purchasing cycles and the amount you need will vary accordingly.
The amount of stock you need depends on your strategy. Buying in bulk is almost always cheaper so it could make sense to buy months in advance. Then again, storage space also costs money.
In an ideal world, you would never have much stock; everything that comes in goes out right away. But we don’t live in an ideal world. So you have to devise how much stock you’re willing to have at any one time.
The plan should also include timing for things like promotions and markdowns. The more detail you have in your initial plan, the better off you’ll be in the long run.
And don’t forget money. Whenever you’re buying stock, you also have to pay for it according to the terms you have with the supplier. That could very well dictate how much stock to have, and when are you able to hold it, at any given time.
Cash flow is a problem that has taken down many a big business. That’s why planning ahead is so important. It helps you to better manage whatever comes next. Still, no matter how good a plan you have, it never goes exactly as you imagined.
That’s where in-season planning comes into play.
Step 3: In-Season Planning
Having a plan is crucial, but so is having continuous performance reviews as part of that plan. Things change, situations change, the economy changes – you have to be able to adapt to those changing conditions, or you’ll not make it.
For example the single channel store in the example above that plans to order 10,000 units in the beginning of June, can be caught off-guard when they have under- or overestimated their sales.
The store may only need 8,000 more units as they have 2,000 units in stock that they have not managed to sell. Or worse, they are missing 2,000 units as they have sold more than their stock. With a rigid plan, over- or understock can be a real headache to manage.
One way to avoid over- and understock is to manually have your staff go through the sales data and adjust as needed. But big-box stores like Target and others have realized that the way supply is currently managed is dead and that there are smarter ways powered by new technology to take care of that.
The technology is called “Open To Buy.” OTB for short.
OTB is a financial tool that is designed to make it easier for businesses to manage inventory. It’s designed to avoid both overbuying and under buying by making sure that the product is always available.An OTB system looks at your current inventory, plus your planned sales and compares that data with data from your actual sales. The system then makes automatic adjustments to your future purchase orders to make sure that you never run out of or that you don’t overstock on items of which you already have plenty.
Many inventory management systems have OTB either built-in or it’s available as an add-on. As there are so many different systems, it’s hard to provide links or more concrete information on all of them. Your best bet is to talk with your system provider directly.
Merchandise planning is a crucial step for any retailer on- or offline. It enables you to take the maximum possible revenue from your inventory while at the same time making sure that you’re never under- or overstocking.
It might seem like a complicated process but in reality, it’s not. It consists of three easy steps:
- Analyze past results
- Plan for the coming season
- Have regular performance reviews (OTB)
By following these steps, you’ll be well on your way to managing your inventory with ease.