Merchandise planning: Meaning, Criticisms & Real-World Uses

Merchandise planning is a systematic process within retail operations that involves strategically selecting, buying, presenting, and managing products to maximize sales and profitability while meeting consumer demand. It is a crucial component of a retailer's overall financial planning and involves forecasting consumer preferences, optimizing inventory management, and ensuring the right products are available at the right time and place. Effective merchandise planning helps businesses avoid common pitfalls like overstocking, which ties up capital and leads to costly markdowns, and understocking, which results in missed sales opportunities.²⁴

Merchandise planning spans various activities, from high-level financial targets to granular product-level decisions, encompassing aspects such as assortment planning, pricing strategies, and promotional activities.

History and Origin

The roots of merchandise planning are as old as commerce itself, initially relying on intuition and experience. In the early days of retail, store owners made purchasing decisions based on their gut feelings and understanding of local community demand. This approach was highly reliant on the individual retailer's subjective judgment and lacked precision.²³

As retail scaled with the emergence of department stores in the 19th and early 20th centuries, the complexity of merchandise planning increased. Retailers began to pay more attention to trends and customer behavior, albeit still heavily relying on past sales data that was slow and labor-intensive to process. The introduction of Point of Sale (POS) systems in the late 20th century marked a significant shift, enabling retailers to track sales in real-time and begin a more analytical approach to merchandise planning.²² The digital revolution and the rise of e-commerce further transformed the landscape, providing access to vast amounts of online analytics that allowed retailers to track not just sales but also customer behavior on their websites, profoundly influencing merchandise planning strategies.²¹

Key Takeaways

Merchandise planning is a strategic retail process that ensures the availability of the right products, at the right time and place, to meet customer demand and optimize financial outcomes.²⁰
It involves comprehensive activities, including demand forecasting, budget allocation, and inventory control.¹⁹
Effective merchandise planning mitigates financial risks such as excess inventory and stockouts, directly impacting a retailer's profitability.¹⁸
Modern merchandise planning increasingly leverages data analytics, artificial intelligence, and predictive modeling for more accurate decision-making and agility.¹⁷,¹⁶
The National Retail Federation (NRF) plays a significant role in providing industry insights and frameworks for retail planning.¹⁵

Formula and Calculation

While merchandise planning doesn't adhere to a single universal formula, it involves several key calculations and financial metrics to guide decisions. One fundamental calculation is for Planned Purchases, which helps determine the quantity of merchandise to buy for a specific period to meet sales targets and maintain desired inventory levels. This often considers planned sales, planned markdowns, and desired ending inventory.

A simplified representation of planned purchases at retail (dollars) can be expressed as:

\text{Planned Purchases (at Retail)} = \text{Planned Sales} + \text{Planned Markdowns} + \text{Planned End of Month (EOM) Stock} - \text{Beginning of Month (BOM) Stock}

Where:

Planned Sales: The anticipated revenue from merchandise sales for the period.
Planned Markdowns: The expected reductions in the selling price of merchandise.
Planned End of Month (EOM) Stock: The desired inventory level at the end of the planning period.
Beginning of Month (BOM) Stock: The actual or projected inventory level at the start of the planning period.

This calculation is critical for managing the flow of goods and ensuring that retailers maintain optimal inventory levels throughout a selling season.¹⁴

Interpreting the Merchandise Plan

Interpreting a merchandise plan involves assessing its various components to understand the strategic direction for product procurement and sales. A robust plan will detail expected sales by category or department, desired gross margin targets, and inventory turnover goals. For instance, a high planned inventory turnover rate suggests a strategy focused on rapid movement of goods, which can reduce holding costs and minimize the risk of obsolescence. Conversely, a lower turnover rate might indicate a strategy for high-value items or seasonal goods that have longer selling cycles.

Analysts evaluate the plan against historical performance, market trends, and overall business objectives to identify potential risks or opportunities. Deviations between actual results and planned figures prompt adjustments to in-season strategies, such as promotions, reorders, or inventory transfers. Effective interpretation helps ensure that the merchandise plan supports the company's financial health and customer satisfaction.¹³ The use of key performance indicators (KPIs) is crucial for this ongoing evaluation.

Hypothetical Example

Consider a hypothetical clothing retailer, "TrendSetters," planning for their fall season. Their merchandise planning team aims to stock sweaters.

Sales Forecasting: Based on historical data, current fashion trends, and economic outlook, TrendSetters forecasts $500,000 in sweater sales for the fall season. This involves robust demand forecasting to estimate customer appetite.
Markdown Planning: They anticipate $50,000 in markdowns for end-of-season clearance.
Desired EOM Stock: To prepare for the subsequent winter season and avoid stockouts, they aim for an ending inventory of sweaters valued at $100,000.
BOM Stock: The summer season ended with a beginning inventory of $20,000 worth of sweaters.

Using the Planned Purchases formula:

\text{Planned Purchases} = \$500,000 (\text{Sales}) + \$50,000 (\text{Markdowns}) + \$100,000 (\text{EOM Stock}) - \$20,000 (\text{BOM Stock})

\text{Planned Purchases} = \$630,000

This means the merchandise planning team at TrendSetters needs to purchase $630,000 worth of sweaters at retail price for the fall season to meet their sales goals and maintain healthy inventory levels. This figure then informs the buying team's negotiations with suppliers.

Practical Applications

Merchandise planning is fundamental across various facets of retail and finance:

Retail Operations: It is the backbone of efficient retail operations, guiding what products a store will carry, in what quantities, and when. This includes decisions related to individual stock-keeping units (SKU) and broader product categories.
Supply Chain Management: Merchandise planning feeds directly into supply chain management by dictating procurement schedules and distribution needs, ensuring products move efficiently from vendors to consumers.
Financial Performance: It directly influences a company's financial statements, impacting revenue, cost of goods sold, and inventory valuation. Strategic merchandise planning aims to optimize metrics such as gross margin return on investment (GMROI).
Data-Driven Decision Making: Modern merchandise planning heavily relies on retail analytics, leveraging vast datasets to forecast trends, analyze customer behavior, and optimize product assortments. The use of advanced analytics and digital solutions is transforming next-generation retail merchandising by providing better decision models and algorithms.¹²

Limitations and Criticisms

Despite its importance, merchandise planning faces several limitations and criticisms, especially when traditional methods are employed or when data integration is insufficient.

One major criticism is the reliance on historical data, which may not accurately predict future consumer behavior due to rapidly changing trends, economic shifts, or unforeseen global events. This can lead to inaccurate demand forecasting and subsequent overstocking or stockouts.¹¹

Implementing advanced, data-driven merchandise planning systems can also present significant challenges. Retailers often face hurdles such as cultural resistance to new technologies, organizational silos that hinder data sharing, and a lack of talent capable of bridging business insights with analytical capabilities.¹⁰ Legacy technology systems and issues with data quality and management also pose significant barriers to maximizing the potential of modern merchandise planning.⁹ Over-reliance on "gut feel" rather than data continues to be a limitation for some retailers, hindering their ability to adapt to fast-changing consumer tastes.⁸

Merchandise Planning vs. Inventory Management

While closely related and often conflated, merchandise planning and inventory management are distinct functions within retail.

Merchandise planning is the broader, strategic process that determines what products to stock, how much to buy, when to introduce them, and at what price to sell them, all aimed at achieving financial objectives like sales and profit targets. It is forward-looking and involves macro-level decisions about assortments, budgets, and overall merchandise flow.⁷

In contrast, inventory management is a more operational function focused on the efficient tracking and control of physical goods once they are purchased.⁶ It deals with the how-to of storing, moving, and fulfilling merchandise, ensuring that stock levels are optimized to meet demand while minimizing carrying costs and preventing stockouts. Inventory management ensures the availability and accessibility of products determined by the merchandise plan. Therefore, merchandise planning sets the strategy, while inventory management executes the logistical aspects of that strategy.

FAQs

What is the primary goal of merchandise planning?

The primary goal of merchandise planning is to align product offerings with customer demand to maximize sales, optimize inventory levels, and achieve profitability targets for a retail business.⁵

How does technology impact merchandise planning?

Technology, particularly retail analytics, artificial intelligence, and predictive modeling, significantly impacts merchandise planning by enabling more accurate demand forecasting, optimizing product assortments, automating tedious tasks, and providing data-driven insights for better decision-making.⁴,³

What is the difference between open-to-buy and merchandise planning?

Merchandise planning is the comprehensive strategic process of determining overall product assortments, budgets, and sales goals. Open-to-buy (OTB) is a more specific, in-season financial control tool used within merchandise planning. OTB calculates the amount of money a buyer has available to purchase new inventory during a specific period, ensuring they don't overspend and that inventory levels remain aligned with the overall merchandise plan.²

Why is forecasting important in merchandise planning?

Forecasting is crucial in merchandise planning because it helps retailers anticipate future customer demand, allowing them to make informed decisions about purchasing, production, and allocation of products. Accurate demand forecasting helps prevent both costly overstocking and missed sales opportunities due to understocking.¹