SNEWS® Retail Merchandising Training 101: Merchandise planning

Your merchandise plan will bring together everything we've taught so far -- initial product margin, maintained gross margin, turn goals and the various sales velocity metrics of sell-off percentage, sell-through, etc. -- into a master plan for every category of goods you sell for your company and, in the case of multi-door operations, every store. Doing this manually at the granular level necessary to manage and analyze your inventory purchases and sales requires software and the ability to create an information structure within it. It will also require point-of-sale capture of daily sales feeding into that software.

Your merchandise plan will bring together everything we've taught so far -- initial product margin, maintained gross margin, turn goals and the various sales velocity metrics of sell-off percentage, sell-through, etc. -- into a master plan for every category of goods you sell for your company and, in the case of multi-door operations, every store.

Doing this manually at the granular level necessary to manage and analyze your inventory purchases and sales requires software and the ability to create an information structure within it. It will also require point-of-sale capture of daily sales feeding into that software.

For the discussion that follows, we will assume you have those tools.

Most retail software packages contain the capability to create a merchandise hierarchy or structural framework. This is requisite for creating a merchandise plan and managing within it.

Merchandise framework

First, we need to break down the thousands of styles and SKUs purchased from hundreds of vendors, many of which have quite different seasonal sales cycles. Doing this hierarchically allows us to plan and analyze our business in logical groupings and from a macro to a micro view as our needs demand.

Typically, systems employ a hierarchy similar to the one that follows, but don't be concerned if the nomenclature of your system differs: The concepts are the same.

Here is an example of a simplified merchandise hierarchy:

  • Company or Store Location
  • Division
  • Department
  • Class
  • SKU

In this top-to-bottom example:

  • Company is your entire inventory with no detail. Some retailers may have separate store groupings at this level as well, or as another category beneath company, allowing planning and analysis by location.
  • Division offers a high-level categorization, such as apparel, footwear, equipment and accessories.
  • Each level below offers more and more granularity within the level above it.
  • For instance, departments within the footwear division could be running, hiking, casual, sandals and kids.
  • Classes within the hiking department might be low-cut, backpacking-fabric, backpacking-leather, mountaineering, etc.
  • Below this level will be SKUs or styles. If your system runs at a style level, further modifiers should include size, color and dimension below or as an appendage to the SKU as a matrix, especially useful for apparel and footwear.

Many systems will also have the ability to attach additional identifiers or tags to a SKU, such as men's, women's or promotional, or other useful handles to further group styles for analysis. Also, in the set-up of a SKU, the vendor from whom you purchase the goods should be assigned. That function will offer you the ability to analyze your brands, one against the next.

The specifics of how you end up laying out your inventory will be dictated by your system and your preferences. But it is important for us to say that the decisions you make at the outset are critical and you will need to live with them. You should consider them carefully. Because of this, we encourage you to assign these categories based upon groupings or buckets of data that will endure beyond your current array of brands and their merchandising groupings or current style offerings.

Structure your categories to last

When organizing your category framework, build them to last, i.e. think 10 years or more. Name your department or class "synthetic long underwear" versus "Capilene." Similarly, "casual lifestyle" as a category has more longevity than "Crocs."

Building the merchandise plan

As daunting as the above description sounds, executing it well will pay you back for many years.

It is not necessary for every retailer to plan at each of these levels. For many of us, taking our planning and analysis down two levels may be adequate. Others will see the need to maintain a higher level or granularity. Some retailers maintain 100 or more classes of inventory. Keep in mind that each class will necessitate that you decide a sales goal, margin goal, monthly sales and inventory weight or calendarization, turn goal, planned markdowns, etc., for each month. Potentially thousands of buckets of data.

For our example, we picked a category from the middle of a typical specialty merchandise mix: sportswear as a department within the apparel division.

This chart gives you an idea of the essential parts of a merchandise plan. A good software program will allow you to plan at your lowest level, let's say class, and then the system rolls the various classes up into departments and then again rolls the departments up into their related divisions.

Before we dive in, a few more definition explanations are in order. Sales weight is monthly sales as a percent of your total sales for that season or year. The idea behind this is so you can plan top down. For example, last year you sold $40,000 of Fuzzy Gizmos and you have a good feeling about that category so you calculate you should be able to increase sales by 25 percent this year for total Fuzzy Gizmo sales of $50,000. Now, if you were a good buyer and saved your sales percentages by month from last year as sales history, you achieve your sales weight percentage calculation automatically as your Excel doc will push the numbers for you.

Inventory weight is a bit more complicated. Essentially, you are using this figure to determine what percentage of your total season inventory order will arrive in your store each month. The formula is: [(season or year sales) divided by (your goal turn)] multiplied by (number of months in the season or year) = Total Inventory Cost.

Or, using the number in our chart below: ($50,000 divided by 2) multiplied by 7 = $175,000 (essentially, this is number you will use ONLY when you calculate monthly inventory weight percentages).

Now, using Excel again, you can manually decide how best to flow your order into your store by inserting a percentage into each month in your planner. If you look at your history from last year and see that you brought in all your product in Jan. and Feb. but no sales happened until May, you were not being very efficient with your inventory. So this year, you'll seek to modify your merchandise plan by putting more inventory weight in March and April and much less if any at all in January and February. Naturally, your vendors will have some influence on what you are and are not able to do here.

We do recognize that many retailers have planning modules within their respective merchandising systems that perform this auto-magically…minus the wand waving. However, understanding the mathematical mechanism behind every merchandise plan will benefit you immensely. Ok…enough babble. On to the chart:

It will take you a year or more to develop history at the classification level in order to confidently forecast your sales, markdowns and the related monthly percentages of sales and inventory flows as we have done above. Collecting and analyzing your history is another key activity we will discuss at a later date. If this is your first year of operation, best guess is about all you will have to go on.

This example gives us monthly goals for sales which, once the season begins, we can track to follow our progress.

It also provides us with our preseason buying budget: If we buy to this budget, and sales and markdowns approximate those we've planned for, we will see the resulting margins and turns shown.

Rarely does reality match our plans exactly. Many things can go awry:

  • In this example, we planned to flow the apparel inventory into our store gradually. Many apparel companies may not offer that option and we may need to front load the goods in January, changing the outcomes.
  • Our vendor, on the other hand, may deliver late, and those sales goals in January and February may disappear into the backorder black hole.
  • Weather. Need we say more? We're all farmers in this market.

There are also variations to the theme worth noting. What works as a standard merchandising plan for a single-store operation in one region may not work so well for a multi-store chain with stores in multiple demographics and climates. In some larger chains, operations that strive to stay focused on the needs of the local cliental, a core merchandising assortment might be decided at the corporate level, but other assortments are managed at a regional level, others at a store level, and others still at the department level. The bottom line to remember is that no matter how good your merchandising planning technology is you are serving the needs of a human customer who likely views you as a local specialty store.

Also, be sure that your merchandising plan not only has the required sell-through elements, but also the inevitable clean-up, product lifecycle, and even product rotation elements built in.

Oh, and one last thing. Be sure to effectively communicate your merchandise plan to your staff. One universal problem with top-down merchandising plans, even very well-conceived ones, is planning and communicating for the fluid nature of retail -- you know, beyond the world of simply slapping your buy up on a shelf or rack each season. Store buyers and owners who are not communicating their plans well to their managers and staff have only themselves to blame when product and the store itself begins to look old and tired.

Now you have an introductory idea of what merchandise planning is and how to go about it…we hope.

But once the bell rings, once the buys have been made and the season kicks off, how do we know what's going on? How do we keep track and make adjustments within this idealized but ultimately imperfect framework?

That's for our open-to-buy discussion, which is part 6 in our ongoing merchandise training series.

Have a question that is not answered here, or an observation, or even a better way of going about the business of retail merchandising planning than we have offered up? Then the SNEWS® Retail Merchandising Training 101 Forum is for you. Click here to enter a private chat section open only to SNEWS® subscribers.

This article is part of a 10-part Retail Merchandising Training series produced by SNEWS® and authored by Michael Hodgson and Geoff O'Keeffe. SNEWS® co-owner and president Michael Hodgson, in a former life, was a manager for five years with Adventure 16 and the general manager overseeing a team of buyers and store managers for three years at Western Mountaineering. In those roles, he learned, sometimes the hard way, how to make a living and make a profit (or not) in the world of specialty retail. Geoff O'Keeffe has held retail senior management positions at Granite Stairway Mountaineering, Adventure 16, Patagonia and, as well as having served as president of Lowe Alpine Systems USA and Mountainsmith. He is currently working on new projects at his home in the mountains above Boulder, Colo., where he is a fourth-generation resident.


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