Merchandise Planning: Part 2 of a Series

SALES AND STOCK PLANNING – WHERE IT ALL BEGINS!

The actual Merchandise Budgeting and Planning process begins with an estimate of the volume of business – dollars and items sales – that your store/s is/are going to produce in the next six months or year. Sales forecasting is the most critical component of the plan. Based on it you can plan your merchandise requirements and place your purchasing orders.

SALES PLANNING

In estimating your sales, you need to take into account both External and Internal Factors.

External Factors

External factors are elements external to your business which you have no control over, and which could have an impact on sales in the coming year or season. Here is a list of the most common External Factors that you need to keep in mind:

〉 Economy – a strong or less strong economy will determine whether you should be more conservative or more aggressive in your sales growth projections over last year or season.
〉 Import Laws – as most of your products come from overseas, it is key that you learn about opportunities or restrictions that are in the works or have been introduced that may affect your business and project your sales based on it.
〉 Weather – if you are located in an area subject to hurricanes or other natural phenomena, you might want to be more conservative in your projections for that season or those months.
〉 Deliveries – if you expect to be faced with delivery delays, you might also expect your sales to be less strong and might want to take that into account in your forecasting.
〉 Prices (Wholesale) – An increase or decrease in wholesales prices will determine how your sales will trend. If wholesale prices go up, your retail prices will have to increase and your sales might not be as strong as prior to the increase.
〉 Demographics – if the area where you are located experiences an influx of a new demographic segment, Hispanics or older retirees, for example, you will need to forecast your sales based on what you know of that particular segment’s interest in your product.
〉 Government – changes in laws or political decisions by our government can cause our economy to be ‘bearish’ or ‘bullish’, as they would term it in financial circles. If you are optimistic that our government’s policies will help our economy you can be more aggressive with your predictions.
〉 Competition – if competitors are moving into your market or if they are leaving it, is going to have a major impact on your opportunities for strong or less strong sales and you will need to adjust for that.
〉 Climate – climate patterns can determine how strong the running or outdoor activity season is going to be. Harsh climate conditions could make it harder for non-athletes to be as committed to running or similar activities and make their need for the product you sell less important.

Internal Factors

Internal factors are elements which you do have control over, and changes in these can result in either increases or decreases in sales. For example, planning more or fewer promotions this year than last year will have an impact on sales (higher or lower). Here are some of the most common Internal Factors that you need to keep in mind:

〉 Amount of promotions – more promotions may result in higher sales.
〉 Level and quality of in-store service – if you are cutting your staff to reduce expenses, you may expect lower sales caused by less staff available to help customers.
〉 Advertising – more or better advertising can generate higher traffic and potential for stronger sales. On the contrary, less advertising could make it more difficult to increase your customer base or business with your current customer and therefore translate in lower sales.
〉 Merchandise department re-merchandise – if you significantly change the placement of merchandise it often will lead to higher sales as customers are exposed to merchandise that they did not see before.
〉 Number of Departments/Categories/SKUs – If you increase your assortments and carry new categories, for example introduce golf or tennis shoes this could increase sales as could more stock in key categories (but it has to be the right stock, i.e. more depth of inventory in key sizes in key items).
〉 Amount of inventory – if you are planning to carry less inventory, your sales projections should adjust accordingly as you may have greater difficulty making your sales plan with significantly less inventory.
〉 Pricing – higher prices for your product will generate higher profitability for your business but it may translate in fewer sales. More price conscious Customers might decide to shop where prices are more in line with their expectations or budget.
〉 Assortments – tighter assortments could also translate in more profitable sales. However, the volume of sales might be lower and you will need to take that into account when estimating your sales volume.
〉 Staff/Hours of operation – if you are planning to open less hours than in the prior year or season because traffic is not as strong during certain hours of the day or week, you may expect fewer sales since the few sales you were making before are no longer there (but you may be more profitable because your payroll or electricity expenses may be lower).

STOCK PLANNING

Stock planning is about estimating the:

〉 Stock level (dollars and pairs) that you will need to achieve your sales estimates. How many pairs and of what value do you need to have in stock to support your sales plan?
〉 Reductions/markdowns. What markdowns are you going to incur? (Markdowns are reductions in the selling price caused by price promotions, old inventory or slow moving inventory.) Markdowns are planned at the dollar level only, not in pairs.
〉 Open To Buy (O.T.B.) budget (dollars and pairs) at the Category level. Once sales, stock level and markdowns are planned, open to buy can be calculated. O.T.B. is simply the stock (pairs and dollars) that you have to purchase to meet your sales, inventory and markdown plan.

Open To Buy (O.T.B.) Calculation

The O.T.B. calculation allows you to determine and budget for the amount of inventory (dollars and units) that you will need to purchase every month to support your sales plan and provide for markdowns. This calculation is done monthly. The O.T.B. calculation takes into account the:

1. Sales plan – you need to buy the amount of merchandise that you will need to achieve your sales plan ($50,000 in the example below).
2. Reductions/markdowns – as you are planning to reduce the price of some of your inventory, you will need to buy product to replace that value to support your sales plan ($5,000 worth of merchandise in the example below).
3. Ending stock that you will need to support next month’s business ($255,000 in the example below).

By adding the ending stock needed to support your sales plan for the month to your markdowns, you obtain the amount of inventory required for that month ($310,000 in the example below). However, since you start the month with inventory from the prior month ($250,000 in the example below), all you will need to buy is the difference between inventory required that month and inventory required for the next month ($60,000 in the example below - $310,000 – $250,000). That difference ($60,000) is your O.T.B.

The same formula is used to calculate the open to buy in pairs with the difference that with pairs you have no inventory reductions as you can only reduce the price of an article, not eliminate the article itself!

Inventory required for following month $255,000
+ Sales plan for current month $50,000
+ Markdowns for current month $5,000
= Inventory Required $310,000
- Inventory on hand at beginning of month $250,000
=Open To Buy $60,000

The above calculation is simply repeated for each month. It is wise not to spend all of your open to buy especially if there are last minute deals available. Remember, deals that you buy are often not plus retail sales, they just replace what you would have sold at regular price. So, buying a deal when you do not have open to buy can cause serious over inventory problems.
In the next issue we are going to talk about sourcing, shoe line building and assortment planning.

Comments: