Merchandise planning is the strategic management of product procurement, allocation, and sales to maximize profitability. It is a critical aspect of retail business operations as it involves determining and maintaining optimal inventory levels, which prevents stockouts (and unhappy customers) and too much cash tied to excess or aging stock.
The merchandise planning process accounts for many internal and external factors that help small businesses optimize inventory levels for success. Let’s dive deeper into the components, steps, benefits, and challenges of merchandise planning.
Merchandise Planning Benefits
Retail merchandise planning is extremely advantageous for new businesses and existing ones alike, for many reasons:
- Optimize inventory investments
- Fulfill customer demand
- Maximize profitability
- Drive operational efficiency
- Adapt to market changes
Key Components of Merchandise Planning
Merchandise planning involves several interconnected components that work together to help retailers effectively manage inventory, meet customer demand, and drive profitability. Some key components include:
Forecasting
Sales and demand forecasting predict future demand for products based on historical sales data, market trends, seasonality, promotional activities, and other relevant factors. Accurate sales forecasts are the foundation for other components of merchandise planning.
Inventory Management
Inventory management is when retailers determine the optimal stock levels to carry for each product. The goal is to have the right amount of inventory to avoid stockouts while minimizing excess inventory. Retail inventory management involves monitoring inventory turnover rates, setting reorder points, managing stock replenishment, and implementing inventory control measures, among other tasks.
Assortment Planning
Assortment planning involves selecting the range of products to offer based on market demand, target customer preferences, and business objectives. Businesses need to determine product categories, styles, brands, sizes, colors, and price points while creating a balanced and appealing product assortment.
Open-to-Buy (OTB) Planning
OTB planning is an inventory management strategy that helps retailers create buying budgets for specific periods of time. It accounts for expected beginning-of-month and end-of-month inventory, planned sales, and planned markdowns. It essentially tells retailers how much they can spend on inventory at some future date. This helps retailers control spending and ensure they invest in the right products to meet sales targets and maintain healthy inventory levels.
Allocation & Replenishment
Allocation and replenishment are when businesses distribute inventory to individual stores and locations based on sales performance, customer demand, and store-specific factors. It ensures each store has the right mix and quantity of products to meet local demand while minimizing stockouts and overstock situations.
Markdown Management
If a business has a lot of slow-moving or excess inventory, it might mark down prices to help move the product. This markdown management can stimulate sales, clear out merchandise, and maximize revenue. It requires careful planning to make sure you don’t lose too much in profit while still making sure you don’t hold on to too much old stock.
Promotional Planning
Promotional planning is when a business lays out how it plans to drive awareness, buzz, and sales for its products. This includes developing and executing marketing campaigns, offering discounts, developing cross-merchandising strategies, and creating special offers to drive sales, attract customers, and increase foot traffic. Promotional planning even includes less overt tasks like visual merchandising and planning the store layout.
During this process, businesses plan out the timing, duration, and scope of promotions. Then, they evaluate the promotions’ impact on sales and profitability to determine how to continue to move forward.
Financial Planning & Analysis
Merchandise planning also includes monitoring and analyzing various financial metrics and key performance indicators (KPIs) like sales performance, inventory turnover, gross margin, sell-through rate, and return on investment (ROI).
How to Create a Merchandise Plan
To begin effective merchandise planning, you’ll first need to analyze the market and your competitors, set business goals, and determine a product assortment strategy. Next, you’ll forecast your sales, plan your inventory levels, and allocate products and promotional efforts to your different sales channels. Once your plan is in place, it’s important to consistently monitor performance and adjust.
Here are the details:
Step 1: Understand the Market
Do some market research to understand who your target audience is, including their preferences and buying behaviors.
Consider customer demographics, psychographics, generational trends, and purchase history (if applicable) when making your merchandise selection. Also, analyze your competitors during this step and look out for market trends, gaps, and opportunities.
In other words, you won’t want to match the product assortment of a similar store in town, but maybe there is a need they are not fulfilling for your shared target demographic.
Step 2: Set Business Goals
Define clear business objectives using metrics such as sales targets, profit margins, inventory turnover rates, and customer satisfaction markers. Align your merchandise plan with these goals.
Tip: When setting your business goals, focus on the big picture. It’s tempting to look at just gross sales volume and use that number to encourage higher inventory spending. However, your net profits and bottom line should be your driving force. In many cases, pulling back on inventory spending and focusing on core products could be more profitable. But, you’ll have to maintain a budget and sales projections to know for sure.
Step 3: Develop an Assortment Strategy
Determine and refine the product categories, brands, styles, and price points that align with your target market and business objectives. Then, create a balanced assortment that caters to different customer needs and preferences—while ensuring it reflects your brand identity.
Tip: Lean heavily on your market research. When planning your product assortment, it’s easy to fall back on personal taste and preferences, but that can cause you to miss out on opportunities.
Consider factors like seasonality, trends, and product life cycles when planning your assortment. For example, summertime months call for more summertime products—tank tops, water sports accessories, and sunscreen—so make sure you plan to purchase and promote those items at the appropriate time, usually about six months ahead of when you want to start selling, though this timeframe is shortening as trend cycles are also moving faster.
Step 4: Forecast Sales & Demand
Use historical sales data, market trends, and seasonality patterns to forecast demand for each product category. Tap into sales forecasting tools or spreadsheets to estimate future sales volumes accurately. You can adjust forecasts based on factors such as marketing promotions, new product launches, and external events.
Step 5: Plan Inventory Levels
Determine the optimal inventory levels for each product based on sales forecasts, lead times, and desired service levels. Then set reorder points and safety stock levels to ensure timely replenishment and avoid stockouts.
When doing this, consider factors like storage space, cash flow, and supplier reliability. If your supplier needs a lot of lead time and is often unreliable, you’ll want to set more conservative safety stock levels than for products you can receive more quickly and reliably.
Step 6: Allocate Merchandise
Allocate inventory to different sales channels based on historical sales performance, customer demand, and geography. Balance inventory allocations to optimize sales opportunities and minimize stockouts and overstock situations.
For example, you might promote winter products to your wholesale customers before you promote them to your Amazon customers. That’s because wholesale clients will likely look to stock up on those products in time to promote them to their own customers.
Step 7: Monitor Performance & Adjust Strategies
Track KPIs like sales, inventory turnover, gross margin, and sell-through rates—start by benchmarking your data and then track it over time to monitor progress and performance. Regularly review your merchandise plan and adjust strategies based on data, market changes, and customer feedback. Check in regularly to stay agile.
Challenges of Merchandise Planning
Merchandise planning can pose several challenges for small businesses, including:
Limited Resources
Dealing with limited budgets, teams, and technological capabilities? You’re not alone. Small businesses can find it tough to set aside time or delegate these planning tasks compared to larger retailers that have dedicated resources.
Smaller budgets make it harder to invest in the advanced inventory management systems, data analytics tools, and experienced staff needed for effective merchandise planning as you grow.
Data Availability & Accuracy
You might not have comprehensive historical sales data, market research, and forecasting tools available to you, especially if you’re a new small business. This limited data makes it challenging to accurately predict future demand and plan inventory levels. The result? Inaccurate forecasts, resulting in stockouts or overstock situations.
Tip: Use a point-of-sale system with solid inventory tracking and built-in data analytics. While not perfect, the right POS system gives you a starting point at a relatively lower price point.
Seasonality & Demand Variability
It’s tough to plan for external and uncontrollable things like seasonal fluctuations, changing consumer preferences, and unpredictable market trends. Demand varies. This variability makes merchandise planning a bit more complicated and increases the risk of excess inventory and stockouts.
Competition
It can be difficult for small businesses to compete with big box brands and well-known retailers, especially as they adopt many of the same tactics small businesses use. Competing with larger competitors that have more resources, economies of scale, and sophisticated marketing strategies can make it challenging for small businesses to differentiate themselves and capture sales, especially when starting out.
Multichannel Logistics
Small businesses may struggle to streamline operational processes such as sales forecasting, inventory management, and order fulfillment. Inefficient manual processes, lack of automation, and reliance on spreadsheets can impede productivity and hinder merchandise planning efforts.
As ecommerce continues to grow and become accessible to businesses of all sizes, operational logistics also become more convoluted and complicated. It can be challenging for small businesses to manage inventory across all these sales channels. Integrating online and offline inventory systems, fulfilling orders efficiently, and maintaining consistent product availability are often complex and resource-intensive.
Cash Flow Management
Balancing inventory investments with cash flow constraints is a common challenge for small businesses. Tying up capital in excess inventory can strain cash flow and hinder growth opportunities, while underestimating inventory needs can lead to missed sales opportunities and dissatisfied customers.
Frequently Asked Questions (FAQs)
Here are some of the most commonly asked questions about merchandise planning:
The merchandise planning process involves strategically determining what products to sell, in what quantities, and at what time to meet customer demand while maximizing profitability. It typically includes a combination of sales forecasting, inventory management, assortment planning, allocation, replenishment, and financial budgeting.
Merchandise planning involves several key activities, such as:
- Overseeing the merchandise planning process within a retail organization
- Analyzing sales data, market trends, and historical performance
- Forecasting demand
- Developing strategic merchandise plans
- Setting inventory levels
- Optimizing product assortments
- Monitoring KPIs related to sales, inventory turnover, and profitability
Bottom Line
Merchandise planning sets you up for retail success, especially if you’re a small business in a competitive market. Merchandise planning empowers you to strategically manage inventory, meet customer demand, maximize profitability, and drive operational efficiency. Effective merchandise planning processes can help you achieve sustainable growth and profitability.
