Merchandise Planning,

Six Month Merchandise Planning,

OTB

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 Merchandise Planning
• It first begins with the formulation of objectives, establishment of
policies & the implementation of procedures necessary to carry
out department or store objectives.

• This plan is called the merchandise budget or six-month

merchandise plan or dollar plan

• This process includes both dollar planning (budget) and unit

planning (merchandise list).

• A successful retail operation requires a merchandise assortment in

right type, in right place, at right price, in the right quantity and at
right time.

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 Why Planning is Important

• Short-range seasonal activities & Monthly sales promotions

• To beat last years’ sales figures

• Population shift, urban redevelopment, the shortage of natural

resources & other environmental factors

• To maintain their position in a complex, highly competitive and

aggressive business environment.

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The Planning Process

Objectives
1. To satisfy the needs and wants of customers
2. To earn profit

• Objectives provides the frame work for business planning.

• A business planning may be defined as the goal towards which the

management activities of the business establishment are directed.

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Policies

• Provide frame of reference for decision making that consistent

with planned objectives.

• Provide guidelines to deal with problems & issues.

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Procedure

Necessary steps that must be followed to

implement a given policy.

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 Period of plan

• The period plan may vary for a month to

an year, the usual planning is of six
months

1. The Spring Season: Feb-July

2. The Fall Season: August-January

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PROCEDURE

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Procedure for Preparing the Plan
The store’s a/c dept supplies the buyer with a planning form several
months in advance of the start of the actual buying season

On it are figures of the same department merchandising operations

during the same season last year

These goals are established by the store mgt, not by the deptl buyer

The merchandiser/buyers then using the planning form & his

knowledge of market conditions, trends, & demand cycles, prepare
figures on anticipated sales, stocks, markdowns, & purchases for his
department for the upcoming season
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The plan made by buyer is then reviewed by his divisional
merchandiser manager.

The merchandise manager then consolidates all the plans made by

the buyers of the same division into a divisional plan & submits
it to the general merchandise manager.

All the plans are reviewed by both, the store’s controller and the
general manager or president

When approved, departmental plans are combined into a master

plan for the whole store.

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Six Month Merchandise Plan/ Dollar
Merchandise plan

“ It is the specific budget that the buyer

uses to project both, sales goals and the
amount of stock that is required to
achieve the goals”.

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 Merchandise Plan
It is a financial plan allocating specific amounts of money
to each department/division for the purchase of an
appropriate assortment of fashion merchandise that will
meet consumer demand & sales goals.

It includes both –
• Cash planning in terms of Merchandise budgets
• Unit planning in terms of Merchandise lists

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The six-month merchandising plan or dollar plan
consists of two major elements;

1. An estimation of merchandise needed and

2. A control method to regulate a stock
levels

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 ELEMENTS OF
MERCHANDISE PLAN

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 Elements of The Dollar Plan
The dollar plan/merchandise plan/six month plan/six-
month merchandising plan requires an estimate of
sales & provision for an inventory of proper stock
size to support it. The essential figures or elements of
a plan are;

• Planned sales
• Planned stock
• Planned reductions

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• Planned Markup
• Planned Profit
• Planned Expenses
• Planned purchases

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 Planned sales
• It is the key element in merchandise planning.

• Careful sales forecasting is critical.

• If sales estimates are unrealistically high, there will be

too much unsold merchandise at the end of the season.

• If sales are planned too low, the buyer will not have
enough merchandise available to meet consumer
demands.
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Factors in Planning sales
Planned Sales
=
Department sales records
+
Store policies & procedures
+
Monthly Sales Plan
+
Top-down
Bottom-up

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 Monthly Sales Plan

• Merchandise plan for each of the six months on

monthly basis.

• Sales goals will be set for each month.

• Management will plan in terms of dollar figures,

and the merchandiser will plan in terms of units
of merchandise according to classification, price
line, size, color, etc.,
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Methods Used in Planning Departmental
Sales
• The top-down plan: Planning of overall sales based
on economic trends, external conditions & changes in
store policies. The sales goals thus set are further broken
down for departments.

• The bottom-up plan: Initial planning is done by

people responsible for actually implementing the plans.

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 Planned stocks
• The second step in merchandise plan is to maintain
a balanced stock in relation to anticipated sales.

• The merchandiser/buyer will plan the stock in

terms of the specific items of merchandise.

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 Stock planning includes;
1. An understanding of the various methods used to plan needed
stocks,

2. The computation of stock turnover,

3. The computation of average inventory ,

4. An understanding of methods of increasing stock turnover,

5. An understanding of the different rates of stock turnover, and

6. Stock planning for branches & store units.

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 Various Methods Used to Plan Needed Stocks
Basic stock Planned sales Average stock Average
1. method (BOM) = for month + at retail - monthly sales

• The basic stock method shows the necessity of having a basic

stock on hand at all times.

• Beginning-of-the-month (BOM) stock is determined by the

following equation:
BOM= Planned sales for the month +
(Average stock at retail – Average monthly sales)
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2. A second method of stock planning, the percentage-
variation (or deviation) method; is based on the premise
that BOM stock is increased or decreased from the planned
average stock by approximately 50 percent of the sales
variations from the average monthly sales. The formula is
as follows;

Yearly Sales
BOM stock = Average
Turnover
Sales for the month
×[1/2(1+ Average monthly sales )]

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 3. Week’s supply method
• To plan stock on weekly basis and to set stocks equal to a
predetermined number of weeks’ supply, depending upon the stock
turnover desired.
• For example, if approximately eight turnovers per year are desired,
the stock should equal approximately six & half week’s supply. The
calculations are as follows;
Week’s supply = 52 Weeks ÷ Desired stock turnover

= 52 ÷ 8

= 6.5

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 4. The stock sales ratio method

BOM Stock = Planned Monthly Sales Volume X Planned

BOM Stock-Sales Ratio

The stock-sales ratio is the BOM stock expressed as a ratio of sales. It

shows the number of months that would be necessary to dispose of
BOM stock at the rate of the sales for that month. The formula is as
follows;

Beginning Stock
Stock-Sales Ratio =
Sales

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 The computation of stock turnover
• Stock turn or stock turnover is the rate at which stock is
disposed of or depleted and replaced in a given period of
time.
Stock Turn
= Net Sales ÷ Average Stock at Retail Price
Retail basis
Stock Turn
= Cost of goods ÷ Average Cost of Stock
Cost basis sold
Stock Turn
= Number of ÷ Average Number of Units in Stock
Unit basis Units Sold
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 The computation of average inventory
• To find the average inventory, find the sum of all the inventories in a
period and divide by the number of inventories.

• Inventory on Hand at Retail

January 1 $ 30,000
February 1 17,000
March 1 22,000
April 1 25,000
May 1 + 23,000
Total Inventory = $ 117,000
Total inventory $ 117,000
= = $23,400
Average Inventory = 5
Number of Inventories
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Methods of increasing stock turnover
The following is a list of methods the buyer may use to
keep inventory to a minimum without jeopardizing
sales. Stocks may be kept to minimum by:
1. Reducing the number of price lines carried
2. Limiting the number of brands carried
3. Reducing duplicate styles
4. Carrying smaller reserve stocks
5. Avoiding the accumulation of unsalable goods
6. Eliminating unsalable goods
7. Closely following the buying plan

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The different rates of stock turnover

• Different lines of merchandise have different rates of

stock turnover

• Types of goods also influences stock turnover

• Type of retail institution influences stock turnover.

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Stock planning for branches & store units

• Planning & purchase of goods for the department in the

parent store and for the same department in a number of
branches,

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Planned Reductions
• Retail reduction may be defined as the allowance for the
difference between the original retail value of
merchandise and the actual final sales value of the
merchandise.

• It consists of three major factors;

1. Merchandise shortages & overages
2. Employee discounts and discounts for other special
groups
3. Markdowns

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Merchandise shortages
• A merchandise shortage is the difference between the
book inventory and the physical inventory when the
book inventory is larger.

Merchandise Shortage = Book inventory - Physical inventory

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Merchandise overages
• A merchandise overage is the difference between the
book inventory and the physical inventory when the
physical inventory is larger.

Merchandise Overage = Physical inventory - Book inventory

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Employee discounts and discounts for other
special groups

• The employee discount is a price reduction granted to

store employees and other special groups.

Net Sales for May $200,000

Employee discount for the Month $ 2,000

Employee discount for the Month

Employee discount % =
Net Sales
$2,000
= 1%
=
$200,000
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Markdowns
• A reduction in price from the original retail price is called a
markdown.

Original Retail Price $5.00

Markdown Price $4.00
Dollar Markdown $1.00

• The markdown percent is the difference between the net dollar

markdown & the original retail price divided by the net sales.

$1.00
Markdown % = Net dollar markdown = = 20%
Net sales $5.00
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Planned Markups
• A retail buyer must sell merchandise at a price that will
cover the cost of the goods and expenses.

• Markup is defined as the difference between the cost

price and the retail price of an item.

• The formula is as follows;

Dollar Markup = Retail Price – Cost price

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• Most retail buyers think of markup in terms of percent.

• The markup equation as expressed in percent is written

as follows;
Markup
Markup % at Retail =
Retail Price

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The merchandiser/buyer should seek the following
information to plan a satisfactory markup;

• Total amount of sales for the planned selling season

• Planned expenses for the season

• Planned reductions such as markdowns, shortages, and

employee discounts

• Profit goal planned for the season

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Initial markup and Maintained markup

• Initial markup (mark-on or original markup) is the

difference between the cost price & the retail price of
goods.

• Maintained markup is the difference between the cost

price & the final retail price.

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When planning the initial markup, the merchandiser must
consider the following;

1. Covering costs & expenses and making a profit (the initial

markup formula)
2. Consumer demand: How high or how low to attract customers?
3. Types of store clientele: Low income group? Average income?
Well-to-do?
4. Kind of merchandise carried by the store: Top quality?
Discount? Prestige item?
5. Type of retail; store: Discount house? Department store?
Boutique?
6. Competition: What kind of a markup does my competition take?

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Planned Gross Margin & Operating
Profit
• Gross margin is the difference between net sales & the
cost of goods sold.

• Gross margin represents what is available for operating

expenses and profit.

• It is what is left after costs have been deducted but before

operating expenses have been considered.

• The formula is; Net sales – Cost of goods sold= Gross margin
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Operating Profit
• It is defined as part of gross margin that remains after
operating expenses have been deducted.

• Operating expenses incurred during the operation of the

department or store.

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Planned Expenses
• The sixth step in planning the merchandise budget is to
plan expenses for the store as a whole and for each
department

• The primary objective of expense planning is to make

careful & accurate forecasts of expenses so that proper
controls can be established.

• It assists in analyzing & forecasting the costs involved

in merchandising.

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Formula Used by the Buyer When Planning
Expenses

Expenses for Estimated

Planned Overall + +
= Store Branches Expenses for Each
Expenses Expenses
Units Department

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Planned Purchases
• Last step in planning the merchandise budget is to plan
the dollar amount of goods that can be brought into the
department or store during a specified period or season.

• The buyer can determine planned purchases by adding

together planned sales, planned reductions, and planned
stock (stock planned for the end of the month or for the
beginning of the next month) and subtracting from the
total needs for this month the planned stock at the
beginning of the month.
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The formula is as follows;

Planned Sales
+ Planned Reductions
+ Planned EOM Stock
= Total Needs for the Month - BOM Stock
= Planned Purchases

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OTB (Open-to-buy)

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 Open-to-buy (OTB)

The open-to-buy (OTB) is the amount of retail dollars that a

buyer is permitted to spend for merchandise inventory within a
certain time period based on formulated plans, for example, the
six-month merchandise budget.

• The buyer’s objective in using OTB planning is to avoid having

too much money tied up in inventory.

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• It contains figure agreed on by store executives in consultation with
finance & control personnel and is based on the expectations of the
merchandising division.

Formula:
OTB = Merchandise Needed for period – Merchandise Available

• It may be prepared weekly or monthly and provides a method of

allocating purchases so that planned stock levels may be
maintained.

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Assortment Planning

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Assortment Planning
• A merchandise assortment is a range of choices offered at a
particular time.

• Complete range of merchandise in a category planned to

various depths of inventory to meet customer demand.

• A merchandise assortment is determined by the relative number

of styles, colors, and sizes included in the line.

• Planning to determine how many separate items should be

bought, and in what quantities.
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A buyer considers the following as important principles
of merchandising assortment planning;
1. An inventory must relate to a customer group selected by mgt

2. An inventory must be consistent with policies established by

mgt.

3. Profit is a result of customer-satisfying merchandise.

4. The character of the merchandise in all fashion departments of

an organization must be related (compatibility of prices, colors,
sizes, fabrics, and silhouettes)

5. Profit-producing inventory is the result of organized &

systematic planning
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 Characteristics Of a Good
Assortment…
Quality of the merchandise for Sale

Choice of National Brand/Private Store

Price Range Good Taste Proper Timing

Product Life Cycle Variety Of Product Lines

Assortment Strategies
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 Factors Affecting Assortment
Planning Decisions

• Types Of Retail Institution

• Past Sales Records
• Consumer Wants
• Types of Goods Offered
• Elimination Of Merchandise Lines

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Types Of Retail Institution

Competition

Goods

Trading Areas

Capital

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Past Sales Records
Customer Complaints

Returned Goods

Sales Lost

Sales Made

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Consumer Wants

Increased Impulse Buying

Greater Assortment Of Goods

More Affluent Society

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Types of Goods Offered

Specialty Goods

Shopping

Convenience

Seasonal

Fashion

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Elimination Of Merchandise Lines

Storage Space Required

Financial Investment

More Items Added- Limits

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Model Stock

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A plan for a merchandise assortment according
to assortment factors; identifies how many of
each assortment factor should be included in
the assortment.

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 Planning Model Stock
• Desired assortment of stock broken down according to
predictable factors such as classification, price, material, color,
and size based on consumer demand.

• Used to plan the ideal assortment.

• A balanced assortment is one that has a well-planned variety of

styles, sizes, and colors for special appeal to specific market

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 Characteristics of Fashion
Merchandise Affecting Fashion
Assortment

• Classification
• Price
• Size
• Material
• Color

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 Retail Store Organization: Retailing Structure

Owner/CEO/
President

Store Merchand Human

Marketing Finance Technology
Operations ising Relations

Management Visual Planning, Personnel, Accounting Information

Cashier, Display, Buying, Training Credit Technology
Sales, Public Inventory
Receiving, Relations, Control
Loss Promotions
prevention

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 Fashion Retailing
• Fashion retailing is the business of buying and selling of fashion
apparel merchandise, accessories & home fashions.

• Fashion retailing is called the 5 R’s, stands for choosing;

- the right merchandise
- at the right price
- in the right place
- at the right time
- in the right quantities

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 Role Of Merchandiser In Retail

• Planning of: Fashion Trends, Market Analysis, Range

Development.
• All aspects of budgeting.
• All buying and vendor related decisions, sourcing
decisions.
• Evaluates, estimates and takes care of pricing and profit
margins.

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Continued..,

• Promotions planning, cooperating and coordinating with

the marketing and promotions department.
• Inventory management.
• Systems and administrations.
• Selling and staff training.
• Complete responsibility of store layout and visual
merchandising

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Reference books
• 6th Chapter, Merchandise Buying, 5th Edition,
M.S.Bohlinger, 3rd Chapter, Fashion Buying &
Merchandising, Sidney Packard
• 4th Chapter, Apparel Merchandising, Jeremy A.Rosenau,
• 8th chapter, Merchandise Buying, 5th Edition,
M.S.Bohlinger
• 7th Chapter, Merchandise Buying, 5th Edition,
M.S.Bohlinger

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Thank you

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