Merchandise Financial Planning (MFP) is a retail industry best practice that aims to align a company’s high-level financial goals, or budgets, with the tactical plans that drive execution and, eventually, customer satisfaction.
During the MFP process, Finance, Merchandising, Procurement, and Operations teams collaborate to establish and manage financial targets for sales and inventory at different levels of granularity from a product, location, and time perspective. The idea is to define and then operationally manage what will be sold, where, and when.
In other words, MFP consists of determining the value for the main business metrics and indicators at each cube intersection, executing against the plan, and monitoring progress.
The product dimension answers the question of what. The location dimension, where, and the time dimension, when.
The outcome of the MFP process is critical as every department will use it to make the necessary decisions and achieve its targets. It ensures teams are aligned and work toward the same company-wide objective.
MFP, from pre-season planning to in-season management
Pre-season, teams focus on creating the plan. They leverage historical sales, market research analysis, macroeconomic trends (inflation, etc.), and other factors to set sales and margin targets, inventory spend, and other relevant indicators for the retailers.
Because they will serve different purposes, multiple plans are established. Traditional MFP consists of the following plans:
- Strategic Plan (or Finance Plan)
The strategic plan is created for the entire year. It provides a high-level view of the sales and margin targets for each Business Unit, by Channel and Market, for an entire Season.
- Top-Down Plan
The top-down plan dissects the Strategic Plan to a lower level of granularity for each dimension. It usually goes down to the Division or Department level and covers the entire year at the season or even month level. The metrics calculated are also more detailed (sales and margin, inventory, and receipts).
- Bottom-Up Plan
Planners and category or product managers also leverage a bottom-up plan. The granularity is the lowest level of the product hierarchy, above the SKU itself. From a horizon perspective, it details the information at the weekly level and includes metrics such as markdowns, weeks of supplies, and other indicators such as inventory productivity.
- Store Plan
The store plan is slightly decorrelated from the bottom-up plan and the top-down. Indeed, it is usually reconciled against the strategic plan directly.
In-season, the teams leverage the plans to understand the business performance by measuring the actual results against the individual plan, and make decisions or adjustments as necessary. As the season starts, the pre-season plans become the in-season plan, usually referred to as open-to-buy (OTB) or Weekly Sales, Stock, and Intake report (WSSI).
The OTB ingests the actual sales data from the different channels, the latest forecast, shipment and receipt details. The data is compared against the original plan and the current forecast, and the relevant business indicators are re-calculated, providing information on the remaining inventory budget or the delta to achieve the sales target. It is also used to understand product or stores performance.
MFP informs critical strategic and tactical decisions
Merchandise Financial Plans are the insight information that supports many decisions.
The merchandise financial plans are one of the main inputs to the assortment process. Based on the sales target per category of products, and past performance of the category, planners can determine the breadth of the assortment. The marketing teams then use that assortment strategy, the designer teams and the merchant to determine the best product to buy / design.
- Supply Planning
Another key usage of MFP is to provide an early demand signal to the supply planning process. Capacity and raw material planning are two key aspects of the sourcing process that should be anticipated long before there is a concrete article-level demand to reduce the leadtime and secure best pricing. Retailers use the MFP as a guidance to make those decisions aligned to the overall company strategy for the year.
- Operational Planning
During the season, planners, buyers and merchants leverage the plans to make tactical decisions to help them achieve the targets. If the sales are down on a product, they can decide to plan a promotion, to reallocate the product in an area where it sells better. They might need to work with their suppliers and cancel an order. On the other hand, if sales are higher than expected, retailers may increase their inventory levels to ensure they can meet demand or adjust their pricing strategy to maximize profitability. Based on the decisions, the teams will be able to readjust the original plan and reallocate the budget as necessary.
MFP is the foundation to manage the company’s operations and align all the different functions. This process is critical in helping retailers optimize their inventory investments, reduce stockouts and overstocks, and maximize their gross margins. Planning ensures inventory profitability and operational productivity in today’s competitive and disruptive economy.
It requires multiple teams to look at the data from different perspectives, which are difficult to reconcile, resulting in a very complex, manual, and time-consuming process. By using a data-driven platform that can switch automatically between those views (calendars, currencies, hierarchies) to develop and refine their financial plans, retailers can collaborate better and more efficiently, ultimately driving better business outcomes. But what do planning platforms bring to the MFP process?
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About the author
o9 SolutionsThe Digital Brain Platform
o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.