Merchandising Plan directions
What Is a Merchandising Plan?
A good merchandising plan is essential to insure smooth and stable growth, especially when a company is young and running on slim inventory reserves. With a merchandising plan you are able to answer many questions that might arise as sales begin to grow and change.
While the merchandising plan is mainly a retail or internet concept, it also should be adapted for service industries. In general it is a plan to have the right inventory, at the right time in the right amount to maximize your sales, profits and returns. Your plan needs to include a variety of information and concepts. And yes it is mainly numbers that are necessary to understand for the success of your business.
Elements of a Good Merchandising Plan
Your Product Listing
The merchandising plan starts with listing each product or SKU (stock keeping unit) that you are selling. This SKU list must be broken down by style, flavor, size, color, width etc.—whatever the variables are for your products, they must be on your list and they must be track-able. There are differences in describing products. A yogurt shop might have 10 flavors, 20 toppings and five sizes and customize the product for each customer. However they really only stock 35 “core ingredients” and then they customize those into thousands of combinations.
In contrast a shoe store may have 20 styles, six colors, six lengths, and four widths which multiply to over 2500 different SKUS. Managing those SKUs when less than about 100 probably represent 80 % of the sales is the challenge in that product category.
The main caution is to remember to review carefully all the options you need to sell. The listing also requires a style number and usually a UPC code. Listing all that information on a chart is critical to developing the plan. Here are just a sample of products and some variations:
In service businesses the list is frequently called a schedule but is equally important. How many people do you need at what hours to perform what tasks?
Determining Your Costs
You also need to detail the parameters of each SKU in terms of cost, wholesale if applicable and retail if applicable. Cost should include everything like freight, fees, distribution costs, etc. If your products are frequently promoted you need to review both the regular price and the average promotional price.
Estimating Your Quantities
Determining the quantity of each product you carry begins with knowing how much you plan to sell in a given period, be it monthly, quarterly or annually. This part of your plan must also be detailed by seasons, peak buying periods (e.g., Holidays) or promotion and sales events. Your quantity plan should be estimated by both units and dollars.
Typical ways to estimate unit and sales numbers are to consider individual estimates by product, history, or percentage estimates of the total. I recommend the later if there is no history because it forces you to understand the totals and the breakdown to individual products and categories.
Planning Your Number of “Turns”
The next number required for your merchandising plan is to determine your inventory requirements based on frequency of demand. These numbers are calculated by estimating your “turns”–the number of times in the period your item sells. For example if you are planning to sell $1 million in a year and have two turns you will need about $500,000 of inventory (with some in reserve). However, if you turn your products four times you will only need $ 250,000 in inventory during any period. There are numerous ways to increase your turn rate, such as stocking more of the high volume items, reducing order times, reducing shipping times and managing seasonality. These efforts may be somewhat offset by minimum purchase requirements, especially when you are starting out and can’t afford to buy at the volume levels of much larger companies.
Designing Your Analytics and Reporting
One of the main reasons for a carefully-designed merchandising plan is to enable you to analyze your performance. Reliable reporting will not only enable you to manage your inventory more efficiently and profitably, but it will allow you to make information clear for partners and suppliers.
The first question you will want to answer with your analysis is whether or not your sales and inventory plans are realistic, profitable and affordable. Unless you are purchasing physical assets such as real estate, your inventory is frequently your largest investment and often represents a majority of your cash flow. There are ways to minimize the negative impact of inventory financing, such as direct shipping of your products from your suppliers to your customers. “Just in time” parts and ingredient management is also a tool to keep your cash outlays in line with sales.
Your analytics will also allow you to determine how profitable each product is for your business. Gross profit calculations may be made by item, by category, by location, and many other variables, each of which may be critical to your success.
Gross profit—or “Gross Margin” is calculated simply by the following equation:
Gross Profit = (Sales – Costs) / Sales
For example, if you sell a pair of shoes at retail for $100 and they cost you $30 to produce, your Gross Profit is equal to ($100 – $30)/$100 or 70%. Each industry has standards for Gross Profits that must be met in order to have enough cash flow to meet payroll, other operating expenses, marketing, and still make a profit.
Return on investment (ROI) refers to your profits in relation to your inventory investment or
Gross Profit /Inventory investment
This is another measure of your profitability and there are industry standards that you may use for comparison.
You also need to plan sales, purchases and inventories over a period. This should be updated on a weekly or monthly basis depending on your “turn rate”. You also need to consider lead times, delivery commitments, minimums, stock outs and returns in these calculations. Ask your vendors when and how you can modify orders, their terms and their capabilities.
Sample Merchandising Plan
A simple merchandising plan is provided on the spreadsheet e. This spreadsheet is “live”, enabling you to test it using your own products and numbers. The spreadsheet is without the long term planning element, which should be separate
Conclusion
In summary the merchandising plan is really the engine that quantifies your products, their financial impact on your entire business and the marketing plans you will need to support sales. On the one hand, being in stock with the right items is critical to success, profits and customer service. On the other hand being in stock with obsolete or slow selling inventory is a frequent cause of excess investment requirements and lower than projected profits.
Managing that balance can be facilitated by planning, working with suppliers, managing lead times, and optimizing retail sales based upon analysis.
Please Download this Excel Spreadsheet as part of this lesson:
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