It happened again.
You worked long and hard on your sales plans. You crunched the numbers from last season. You projected into the future. You identified what inventory needed to be in stock. You nailed down the when and where of your supply chain. It all seemed so beautifully anticipated.
But here it is:
Your tenth, twentieth, maybe even thirtieth customer complaint … that the one thing they want is out of stock.
Is effective inventory management — having exactly the products you need in-stock at exactly the right times, regardless the season or trend — and therefore creating a rock solid merchandise plan an impossible task?
It doesn’t have to be.
What is Merchandise Planning?
Before we get into the details, let’s first define “merchandise planning."
Merchandise planning is a systematic approach to planning, buying, and selling merchandise to maximize your return on investment (ROI) while simultaneously making merchandise available at the places, times, prices and quantities that the market demands.
In layman terms, it means that if I want to buy product X with color Y and size Z from your shop, you have that available when I come knocking.
Problems, like losing customers because of stockouts or having excess stock after the season has ended, is exactly what merchandise planning is meant to solve.
How do you achieve that?
Developing Your Merchandise Plan
The basic concept of the merchandise planning process consists of three equally important steps:
- Post-season analysis
- Pre-season planning
- In-season adjusting
You can define a season as any time period that you prefer; it largely depends on what exactly you are selling. If it’s Christmas sweaters, your season is only a couple of months; for ice-cream, it’s year round (although demand will be higher during the warmer months).
When you’re selling merchandise with wildly different seasons, it makes sense to have separate, more detailed plans for all the product categories in which you’re active.
Other factors that affect the process include the size and structure of your organization, type of store — retail, online, multichannel, etc. — and type of merchandise.
Planning merchandise for a menswear company that has multiple retail locations around the country is vastly different than the same process for a company that is selling tea online.
With tea, your decisions revolve around the types of tea you want to sell and then stocking up on them. With menswear, you have the added fun of forecasting how many suit trousers with length X and waist Y you’re going to sell, what time of year, and then going through the same process with your whole collection.
Fortunately, while the amount of work that goes into merchandise planning varies tremendously depending on your industry, the basic concepts of how to conduct merchandise planning stay the same no matter how big or small the company.
Step 1: Post-Season Merchandise Analysis
The first step is to understand your performance during the previous sales season. Again, it’s up to you define a how long or short a season is.
What’s important here is to really dive into the data, looking at not only the total number of sales but going deeper into monthly and even weekly results on an item, category, department, and store basis.
Next, you should compare those numbers to the planned numbers from the same year to gain an understanding of how your actual results measure up. Essentially, what you’re doing is a gap analysis on sales.
It’s important to have the same data available going back multiple sales seasons as this will give you a better overview of where things are going and is crucial for planning into the future.
When looking at your past and current sales data, taking context into account. If sales haven’t grown since recently, it could very well be that it’s because of something that you did, or did not do. (For example, maybe you have closed up under performing retail shops or opened new ones.)
Whenever you’re trying to make sense of the numbers, it’s never advisable to only look at raw data without any context. Your business doesn’t live in a vacuum, everything is connected and plays a role. This means outside forces, like the economy, as well as inside forces, like marketing.
What you’ll end up with is an analysis of not only the numbers but also the context behind those numbers. This will make planning for the future a whole lot easier.
Step 2: Pre-Season Merchandise Planning
This is where the fun begins!
Using data from your previous analysis, it’s time to plan the season ahead. It’s crucial to involve your sales, marketing, and even visual merchandising teams from the very beginning.
Without their input, you’ll miss out on context. For example, you could be looking at historical data that shows steady but not exponential growth for a particular product. You’ll add that multiple and be done with it.
What you might not know is that marketing saw those same numbers, looked at the margins from previous years, and is planning to invest three times the spend this time around.
Good for sales. Not good for keeping up with product.
Another thing to keep an eye on during this phase is the impact that opening new sales channels can have on your business — most notably …
With new channels, it’s always hard to plan ahead as you have no actual sales data to back up your assumptions. In a situation like that, it pays to look at channel-specific industry sales data to get into and use that for your projections.
Even when taking all of the above into consideration, there inevitably will be situations where you find yourself with either too much or too little stock. Smart business owners (like you) plan for every eventuality and so they have backup plans for everything, and you should too.
When they run into over stock issues, they have plans for getting rid of it. That can mean creating a special newsletter with bargain prices for things that are not selling, using secondary markets like Ebay, discount scripts, or flash sales.
The concrete tactics are up to you; the idea is to have a plan for when those situations arise so you’ll know exactly what to do. When the problem is that you have more orders that you have stock, companies that dropship can be your saviour. Long gone are the days when you could only dropship low-quality merchandise. Today's dropshippers offer quality work.
Take Printful for example. They’re a Californian company that offers on-demand printing for things like t-shirts, posters, mugs, embroidery, leggings, phone cases and more. There are similar businesses for all types of merchandise.
Step 3: In-Season Merchandise Adjusting
Big-box stores like Target and others have realized that the way supply is currently managed is dead and that there are smarter ways powered by new technology to take care of that.
The technology is called “Open To Buy.” OTB for short.
OTB is a financial tool that is designed to make it easier for businesses to manage inventory. It’s designed to avoid both overbuying and under buying by making sure that the product is always available.
An OTB system looks at your current inventory, plus your planned sales and compares that data with data from your actual sales. The system then makes automatic adjustments to your future purchase orders to make sure that you never run out of or that you don’t overstock on items of which you already have plenty.
Many inventory management systems have OTB either built-in or it’s available as an add-on. As there are so many different systems, it’s hard to provide links or more concrete information on all of them. Your best bet is to talk with your system provider directly.
Merchandise planning is a crucial step for any retailer on- or offline. It enables you to take the maximum possible revenue from your inventory while at the same time making sure that you’re never under- or overstocking.
It might seem like a complicated process but in reality, it’s not. It consists of three easy steps:
- Analyze past results
- Plan for the coming season
- Adjust as needed (OTB)
By following these steps, you’ll be well on your way to managing your inventory with ease.
This post was written by former contributor, Ott Niggulis.