Elements of a Successful Merchandising Plan

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. Above is 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.

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.

This is another measure of your profitability and there are industry standards that you may use for comparison.

Return on investment (ROI) refers to your profits in relation to your inventory investment or

Gross Profit /Inventory investment

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.