Merchandising planning is the cornerstone of effective inventory and sales management in the retail sector. By using strategic tools and techniques, retailers can balance demand and supply, optimize stock levels, and maximize profitability. This article walks you through the core concepts of merchandising planning, using a real-life example from Studio Rama, a boutique studio specializing in fashion and traditional Indian wear. The example will help illustrate the implementation of key tools like Open to Buy (OTB) and the Dollar Plan.
What is Merchandising Planning?
Merchandising planning is a comprehensive approach to managing sales and inventory, designed to ensure that the right products are available at the right time, in the right quantities, and at the right price. The main objective is to maximize sales while minimizing financial risks such as overstocking (which incurs holding costs) or stockouts (which can lead to missed sales).
Merchandising planning typically involves:
- Sales Forecasting: Predicting future sales based on past data and market trends.
- Inventory Management: Deciding on the quantity of products to purchase or manufacture, based on the sales forecast.
- Budgeting: Ensuring that purchases align with financial targets using tools like Open to Buy (OTB) and the Dollar Plan.
Key Concepts in Merchandising Planning
1. Open to Buy (OTB):
The Open to Buy (OTB) system is a key budgeting tool used by retailers to manage inventory purchases. It ensures that inventory levels are aligned with sales forecasts and prevents overspending. OTB helps determine how much new inventory can be purchased within a given period while maintaining an optimal stock level.
OTB Formula: OTB=Planned Purchases−(Current Inventory+On-Order Inventory)
Example: Suppose Studio Rama has planned purchases worth ₹50 lakh for the month. If the current inventory is ₹30 lakh and the on-order inventory is ₹20 lakh, the OTB is calculated as: OTB=₹50 lakh−(₹30 lakh+₹20 lakh) =₹0 lakh
In this case, Studio Rama would not be able to buy any new inventory until they sell or reduce the existing stock.
2. Dollar Plan:
The Dollar Plan is a financial tool used to allocate budgets for purchasing inventory. The goal is to ensure that purchases remain within the allocated budget, avoiding overspending while aligning with sales targets.
Steps in the Dollar Plan:
- Budget Allocation: Allocate a specific budget based on the sales forecast for a given period (monthly or quarterly).
- Tracking: Track actual purchases to ensure that they stay within the allocated budget.
- Adjustments: Make adjustments to future purchases based on actual sales and stock levels.
For example, if Studio Rama’s budget for the quarter is ₹1 crore and it has already spent ₹70 lakh on inventory, only ₹30 lakh remains to be spent in the next period.
3. Planned Purchases:
Planned Purchases are the amount of inventory a retailer needs to buy to meet sales goals while maintaining an optimal inventory level. The formula for calculating planned purchases takes into account sales forecasts, inventory reductions (markdowns, shrinkage), and the required beginning and ending inventory levels.
Formula for Planned Purchases: Planned Purchases=Planned Sales+Planned Reductions+Planned EoM Inventory−Planned BoM Inventory
Where:
- Planned Sales: Expected sales for the period.
- Planned Reductions: Expected markdowns, returns, or shrinkage.
- Planned EoM Inventory: Desired inventory level at the end of the month.
- Planned BoM Inventory: Desired inventory level at the beginning of the month.
Example: Let’s assume that Studio Rama forecasts:
- Planned Sales: ₹60 lakh
- Planned Reductions (markdowns, returns, etc.): ₹3 lakh
- Planned EoM Inventory: ₹20 lakh
- Planned BoM Inventory: ₹25 lakh
Using the formula: Planned Purchases=₹60 lakh+₹3 lakh+₹20 lakh−₹25 lakh=₹58 lakh
Therefore, Studio Rama needs to purchase ₹58 lakh worth of inventory to achieve the desired sales and inventory levels.
4. Gross Margin Return on Inventory Investment (GMROII):
GMROII is a key metric used to assess the profitability of inventory. It tells retailers how much profit they are generating for every unit of currency invested in inventory.
Formula for GMROII: GMROII=Gross Profit/Average Inventory Investment
Where:
- Gross Profit is the difference between sales and the cost of goods sold (COGS).
- Average Inventory Investment is the average cost of inventory during a given period.
Example: If Studio Rama generates ₹60 lakh in sales and has a gross profit of ₹24 lakh, with an average inventory investment of ₹20 lakh: GMROII=₹24 lakh/₹20 lakh=1.2
This means that for every ₹1 invested in inventory, Studio Rama generates ₹1.2 in profit.
Studio Rama: A Real-Life Example
Now, let’s apply the concepts of merchandising planning to Studio Rama, a boutique studio specializing in high-quality kalamkari kurtas, kaftans, and jackets. Below is a six-month merchandising plan for Studio Rama, which will help in understanding how the above concepts are applied.
Step-by-Step Merchandising Plan for Studio Rama
| Step | Details | Example Data |
|---|---|---|
| 1. Analyze Last Year’s Figures | Review sales and inventory from the previous year to get a baseline. | Sales: ₹10 crore, Avg. Inventory: ₹2 crore |
| 2. Planned Sales | Set a 10% growth target for the upcoming year. | Planned Sales: ₹11 crore (₹1.83 crore/month) |
| 3. Planned Reductions | Account for markdowns, discounts, and unsold stock. | Planned Reductions: ₹55 lakh (5% of sales) |
| 4. Planned Inventory Levels | Determine beginning and ending inventory for the month. | BoM Inventory: ₹1.5 crore, EoM Inventory: ₹1.4 crore |
| 5. Inventory Stock Turns | Improve stock turnover rate. | Goal: Increase stock turns from 6 to 8 times/year |
| 6. GMROII (Gross Margin Return on Inventory Investment) | Target a return of ₹1.5 per ₹1 invested in inventory. | GMROII Target: ₹1.5 per ₹1 invested |
| 7. Planned Purchases | Calculate inventory purchases needed to meet sales goals. | Planned Purchases: ₹11.85 crore |
| 8. Planned Markup | Ensure 40% markup on inventory purchases to achieve desired profitability. | Markup: 40% on all purchases |
| 9. Gross Margin | Estimate the margin from planned sales. | Gross Margin: ₹4.4 crore (40% of ₹11 crore) |
| 10. Execution Using Dollar Plan | Track purchases and expenses to ensure they stay within the allocated budget. | Use OTB and Dollar Plan to monitor monthly purchases |
Results After Six Months
By adhering to the merchandising plan, Studio Rama experienced significant improvements in several key performance metrics.
| Metric | Before Implementation | After Implementation |
|---|---|---|
| Stockouts | High | Reduced by 25% |
| Inventory Holding Costs | ₹20 lakh | ₹10 lakh |
| Sales | ₹10 crore | ₹11.2 crore |
| GMROII | ₹1.2 | ₹1.6 |
Conclusion:
The merchandising plan adopted by Studio Rama highlights the importance of structured planning in retail management. By leveraging tools like Open to Buy (OTB), Dollar Plan, and GMROII, Studio Rama successfully reduced stockouts, minimized inventory holding costs, and increased sales and profitability. Retailers, whether small boutiques or large chains, can benefit from these practices by optimizing inventory, boosting sales, and maximizing returns.
