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What is Merchandise Planning?

O9 blog what is merchandise planning
Published: Reading time: 10 min
o9 Solutions The Digital Brain Platform
o9 SolutionsThe Digital Brain Platform

Merchandise Planning definition

Merchandise Planning process

Why Is Merchandise Planning Important?

What are the challenges of merchandise financial planning?

Scenario planning best practices by o9 Solutions

Published:

Merchandise Planning definition

Merchandise financial planning is a method of selecting, managing, purchasing, displaying, and pricing the products in a manner that brings in maximum returns on investment, value addition to the brand name by satisfying the consumer needs while avoiding the creation of excess inventory. Moreover, merchandise planning is about striving to make the right product available, at the right time, in the right place, in the right quantities, and at the right price. You can also make use of appropriate merchandise inventory software for streamlining your inventory operations.

Merchandise Planning process

A merchandise financial planning process analyses consumer demand and develops strategies to maximize your company's sales and profits. It involves analyzing past sales and trends, forecasting consumer behavior, and setting pricing and promotions strategically. While merchandise planning varies greatly based on things like industry and specialty, there are basic steps that are involved no matter the size or niche of the business.

  • 1.

    Perform a post-season analysis
    The first thing in merchandise management planning is an understanding of how things went during the previous sales season, and you’re going to get that with data. Look at basic things like total sales, but also include a look into specific results like revenue of a particular item or category.

    Next, it’s time to analyse the results by comparing those numbers to the planned numbers from the same year to gain context. Where are things going? What was the marketing? How was the economy? Examining this data means you have not only accurate numbers, but also context around those numbers.
  • 1.

    Forecast sales
    With the data accrued from your post-season analysis, it’s time to move on to forecasting demand, which should include sales for each department, category of products, and the addition of new products/elimination of products that are no longer performing.

    When looking at products that are part of your merchandise plan, be sure to review the sales potential, analyse the market demand, and research marketing channels and strategies.

    Once you have past and present data and take into consideration the impact of trend/demand variations, you can settle on a final prediction for each product and decide if it’s worth ordering that item for your store (and how much you need to purchase).
  • 1.

    Plan and implement the assortment
    Once you know what merchandise to stock, it’s time to get a bit more specific and arrange the products based on their categories. For example, a food section, a wearables section, a cosmetics section, etc. and specifics like sizes, colors, and brands.

    Ensure there’s a proper assortment, that related items are grouped together for easy access for customers, and that there’s adequate SKUs of each category without going overboard in any one section.
  • 1.

    Control merchandise
    There needs to be a balance between the merchandise that you buy and sales, and that can be achieved by creating daily or weekly sales reports for each item. This helps ensure that items are being reordered before reaching dangerously low stock levels, and that you’re not overbuying so much that you’re forced to offer clearance sales, discounts, or offers that eat into your bottom line.

Why Is Merchandise Planning Important?

The merchandise planning process allows the buyer to forecast with some degree of accuracy what to purchase and when to have it delivered. This will greatly assist the company in attaining its sales and gross margin goals. Buyers must rely heavily on historical sales data, coupled with personal experience and their own intuition about market trends. What are the merchandise planning benefits?

The primary goal is to sell merchandise and services. Nothing is more central to the strategic thrust of the firm. Thus, deciding what to buy and how much is a vital task for any company. It takes time to buy merchandise, have it delivered, record the delivery in the company records, and properly display the merchandise; therefore, it is essential to plan. Buyers need to decide today what their stock requirements will be weeks, months, a merchandising season, or even a year in advance.

Through a merchandise plan, you attempt to offer the right quantity of the right merchandise in the right place at the right time while meeting the company’s financial goals. As planning occurs, it is only logical that the retailer exercise control over the merchandise (rupees and units) that it plans to purchase. A good control system is vital. As in any business, a retailer’s ultimate objective is to achieve an adequate return on the investment to the owners. Financial objectives trickle down to the merchandising organization, and, are used to make buying decisions.

Companies cannot hope to be financially successful unless they preplan the financial implications of their merchandising activities. Financial plans start at the top of the organization and are broken down into categories, while buyers and merchandise planners develop their own plans and negotiate up the organization. Top management looks at the overall merchandising strategy. They set the merchandising direction for the company by (1) defining the target market, (2) establishing performance goals, and (3) deciding, on the basis of general trends in the marketplace, which merchandise classifications deserve more or less emphasis. Buyers and merchandise planners, on the other hand, take a more micro approach. They study their categories’ past performance, look at trends in the market, and try to project the assortments for their merchandise categories for the coming seasons.

The resulting merchandise plan is a financial buying blueprint for each category.

It considers the firm’s financial objectives along with sales projections and merchandise flows. The merchandise plan tells the buyer and planner how much money to spend on a particular category of merchandise in each month so that the sales forecast and other financial objectives are met. After concluding the rupee amount of inventory needed for stock requirements, the other merchandising decisions facing the retailer are: calculating the rupee amount available to be spent, managing the inventory, choosing and evaluating merchandise sources, handling vendor negotiations, handling the merchandise in the store, and evaluating merchandise performance.

Look for an enterprise merchandise planning tool that’s built for planning, not simply a destination data entry tool after the planning is done elsewhere. It should support collaborative planning and seamless information sharing with your planning and buying team. As planners work collaboratively with buyers, they can mix the art of the buy with the science of the plan.

What are the challenges of merchandise financial planning?

As much as you might want to believe it, having a plan doesn't guarantee success. That means when planning what merchandise to stock, you're bound to face a few challenges. How you front up to these challenges will ultimately decide whether you're successful or not.

1. Adjusting Quickly to Customer Expectations
It’s not enough to review financial results on a quarterly basis to inform budgeting and forecasting. Retail financial planning of today requires more flexibility and agility than ever before. That’s because consumers can now interact with brands in more and more ways. They expect a more personalized approach to retail, one in which stores and brands tailor experiences to their unique circumstances.

CFOs of course need thorough data to make broad and informed decisions for their companies at a macro level. But consumers expect service on a micro level. For example, what may work for one group of customers in a particular region won’t necessarily resonate with shoppers in a different location.

The ability to drill down into micro financial data at the store level is crucial to a retailer’s ability to quickly adjust to consumer trends. And it remains one of the biggest challenges for retail CFOs when tackling the financial planning process.

2. Leveraging Data on the Fly
In addition to understanding their customers, it’s essential for retailers to understand their merchandise and how it performs. Beyond getting product into stores via the supply chain, it is necessary for retailers to think strategically about how to display, promote, and sell their acquired product.

Poor merchandising can negatively affect retail businesses by reducing their overall profitability. For finance professionals tasked with merchandise financial planning, it is crucial to turn inventory into sales.

Corporate financial planning and analysis (FP&A) software needs to be savvy enough to drill down to the most rudimentary levels of retail data—such as SKU number—to understand how products are performing and how they are contributing to overall sales. And this software needs to be able to do the work quickly.

Perceptive FP&A abilities in systems like Tidemark help transform the most basic retail financial data into digestible real-time reporting, necessary for informing vital business decisions on the fly. Clear sales data broken down by category or department speeds the financial planning process and improves the retailer’s ability to budget and forecast.

This creates solid financial insights that enable actionable decision-making for retailers. Even more helpful is when intuitive financial planning software offers packaged retail processes that guide financial reporting. Retailers can leverage existing productized functionality to understand sales volume forecasts and breakdowns by category.

3. Getting the Most from Their Human Resources
The recent uptick in the number of digital sellers has led to wide-sweeping layoffs in the retail sphere. Much of this has stemmed from the closure of many brick-and-mortar locations of traditional retailers. Despite this, retail businesses still require the expertise and services of human resources to operate.

Case in point: The move to direct-to-consumer online sales has reduced the number of in-person salespeople, but opened up new opportunities in other key business areas. Retailers have had to look at ways to bolster their workforce in functional areas including marketing and technology.

With new ways of working becoming the norm, the challenge for retailers is to maximize the efficiency of their remaining personnel to support the best financial results.

Very often, management of personnel is delegated to the human resources function. However, finance can—and should—play a huge role in maximizing personnel. This can be done by integrating people planning into a company’s financial planning process.

Savvy businesses know that their people are a reflection of their brand. Satisfied employees are powerful ambassadors for a company and contribute to its overall financial success. For this reason, part of the financial planning process should be the evaluation of financial outlay to employees.

The ability to analyze payroll, benefits, and tax implications helps finance pinpoint factors that can affect a retailer’s overall performance. Including benefit planning and financial modeling for decisions like whether to offer employees merit increases should, practically speaking, be part of the financial planning process.

Strong FP&A software can also help finance track employee headcount on a geographical basis. This helps to inform financial and organization decision-making when considering the ability to hire or downsize.

Scenario planning best practices by o9 Solutions

o9 Solutions offers a range of best practices for Merchandise Financial Planning, helping businesses optimize their financial strategies and drive profitability. These practices encompass data-driven insights, demand forecasting, inventory management, and pricing strategies, allowing organizations to make informed decisions and achieve their financial goals.

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About the author

o9 Solutions The Digital Brain Platform

o9 Solutions

The 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.

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