RETAIL GLOSSARY

Merchandise Planning

Merchandise planning optimises inventory by deciding what, how much, and when to purchase products to meet customer demand profitably.

What is Merchandise Planning?

Merchandise planning is a retail management process that involves forecasting consumer demand, determining the right product assortment, and optimising inventory levels to meet customer needs. It entails creating a strategic buying plan, which includes decisions on which products to buy, in what quantities, and when to buy them to maximise sales and profitability. Effective merchandise planning ensures that retailers stock the right products at the right time while minimising overstocking or understocking issues.

How Merchandise Planning works

Sales Forecasting: Retailers analyse historical sales data and market trends to predict future demand for products. This includes seasonality, trends, and special events that might impact sales.

Assortment Planning: Retailers decide which products to offer, considering factors like brand, category, price range, and style. They aim to create a balanced product assortment that appeals to their target customers.

Inventory Management: Retailers plan their inventory levels to meet customer demand while minimising carrying costs. This involves setting minimum and maximum stock levels, reorder points, and safety stock levels.

Allocation: Retailers allocate merchandise to specific stores or locations based on factors like store size, regional preferences, and historical sales data.

Open-to-Buy (OTB): Retailers establish budgets for purchasing merchandise. This budget helps control spending and ensures that they stay on track with their merchandise plan.

Replenishment: As products are sold, retailers continually monitor inventory levels and reorder products as needed to maintain stock levels that align with their merchandise plan.

Performance Analysis: Retailers regularly review the performance of their merchandise plan by comparing actual sales and inventory turnover to their initial forecasts and goals. Adjustments are made based on these analyses.

The goal of merchandise planning is to maximise sales, minimise costs, and ensure that customers find the right products in the right quantities when they want them. It's a dynamic process that requires data analysis, market research, and ongoing adjustments to adapt to changing consumer preferences and market conditions.

Pros of Merchandise Planning

Optimised Inventory Management: Merchandise planning helps retailers maintain the right balance of inventory, reducing excess stock (which ties up capital and incurs carrying costs) and avoiding stockouts (which lead to missed sales opportunities).
Improved Sales and Profitability: By aligning product assortments with customer demand and market trends, merchandise planning can lead to increased sales and higher profit margins. It ensures that the right products are available at the right time and price.
Enhanced Customer Satisfaction: When retailers accurately predict and meet customer demand, it leads to improved customer satisfaction and loyalty. Shoppers are more likely to return to stores or websites where they consistently find the products they want.

Cons of Merchandise Planning

Complexity and Resource Intensity: Effective merchandise planning involves analysing vast amounts of data, considering various factors like seasonality, market trends, and consumer behaviour. Implementing merchandise planning systems and processes can be resource-intensive, requiring investments in technology, skilled personnel, and training.
Risks of Overstock and Understock: Despite efforts to forecast accurately, merchandise planning can still result in overstocked or understocked items. Overstock ties up working capital and may lead to clearance sales or write-offs, while understocked items can result in lost sales and customer dissatisfaction.
Market Uncertainty: Retail markets are dynamic and subject to rapid changes, such as shifts in consumer preferences, economic downturns, or unforeseen events like the COVID-19 pandemic. These uncertainties can challenge the effectiveness of merchandise planning efforts, leading to the need for continuous adjustments and adaptations.

FAQ

Below you will find answers to common questions

How does merchandise planning help in improving inventory turnover?

Merchandise planning plays a crucial role in optimising inventory turnover. By analysing historical sales data, market trends, and seasonality, retailers can identify which products are in high demand during specific periods. This allows them to stock the right quantities of these items, reducing the risk of overstocking or understocking. Effective merchandise planning ensures that inventory levels align with customer demand, which ultimately leads to higher inventory turnover rates and improved cash flow.

What challenges do retailers commonly face in merchandise planning?

Retailers often encounter several challenges in merchandise planning, including:

Demand Forecasting: Accurately predicting consumer demand, especially for new or seasonal products, can be challenging. Retailers need to invest in advanced forecasting tools and data analytics to enhance accuracy.
Market Volatility: External factors like economic fluctuations, changing consumer preferences, and unexpected events (e.g., the COVID-19 pandemic) can disrupt merchandise plans. Retailers must remain agile and adjust plans in response to market shifts.
Inventory Management: Balancing the right amount of inventory to avoid overstock and understock situations is a constant struggle. Overstock ties up capital and space, while understocking leads to missed sales opportunities.
Vendor Collaboration: Coordinating with suppliers and vendors to ensure timely deliveries and accurate replenishment can be complex. Effective communication and collaboration are essential to streamline this process.

These challenges underscore the importance of having robust merchandise planning strategies and systems in place to address them effectively.