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.
Dollar Plan
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The goal of a business plan is to minimize the use of capital and maximize profit. This can be done with the help of merchandise plan. The merchandise plan consists of two major elements:
Planned stock
Planned markdowns
Planned purchases:
Since a plan is a set of financial goals, it may include planned figures for:
Workroom cost Cash discount Season stock turnover Shortage Average stock Markdown percentage of initial markon Newspaper advertising Gross margin percentage
Merchandise Planning is "A systematic approach. It is aimed at maximising return on investment, through planning sales and inventory in order to increase profitability. It does this by maximising sales potential and minimising losses from mark - downs and stock - outs." It is a "systematic approach" in many ways. You need the systems to ensure that you have the right people, the right processes and the right computerised support. Without the people and processes you will get nowhere.
It is "aimed at maximising return on investment", but where is this investment made? Most obviously we are talking about a financial outlay in stock, but less evidently there is also considerable financial investment in retail space, people and corporate infrastructure.
We achieve the goals "through planning sales and inventory". These two elements are inextricably linked and finding an optimum balance is the key to retail success.
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We put the effort into Merchandise Planning "in order to increase profitability". Profitability is the key driver of most businesses. Effective merchandise planning delivers margin increases directly to the bottom line. We achieve the increase in profitability "by maximising sales potential and minimising losses from mark downs and stock - outs". There are two major areas of profit leakage in retail. Firstly lost sales resulting from lack of stock and secondly forced margin reductions due to excessive stock.
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Merchandise Planning
This process of Merchandise Planning begins with the formulation of objectives, setting of policies and implementation of procedures necessary to carry out dept. / store objectives. It includes both Cash planning in terms of Merchandise budgets Unit planning in terms of Merchandise lists
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Six-month merchandise plan Successful retail working requires the right merchandise assortment. To achieve this, the following variables must be planned at least 6 months in advance. Receipt Plans Sales Plan Mark-up Plans Mark-down Plans Inventory shortages EOM Stock levels Weeks Supply
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Objectives : the goal towards which the management activities of the business establishment are directed. Policies: provide management with a frame of reference for decision making that is consistent with planned objectives they provide guidelines for dealing consistently with problems & issues.
Procedures: are necessary steps that must be followed to execute a given policy. Management must emphasize if the procedure is a rule / guide.
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Variables of record-keeping
Cash Disbursements Cash Receipts Credit
Expenses
oDirect: paid out directly for the dept.s benefit. E.g. salary, advertising, promotions, special events. oIndirect: that serve the whole store. E.g. electricity, rent, taxes, insurance etc.
Dept. Sales
COGS Total Direct Expenses Total
20,000
- 14000 6000 -4000 2000(indirect ex + profit)
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Sales Purchases Stocks & Inventories Profit & Loss Statement / Income Statement / Operating Statement
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= Gross Sales =
Op. Inventory (cost)
Purchase (cost)
Shipping (cost)
Gross COGS
Cash Discount
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Gross Margin
Net Sales
Net COGS
Direct Expenses
Indirect Expenses
Net Profit
Gross Margin
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Markup
Gross margin
Planning sales
External factors Internal factors Fashion trends
Planning stocks
Stock-sales ratio Stock turnover rate
Markdowns Purchases
Open-to-buy
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Planned Sales
Factors:
Economic climate Enlargement of departments Elimination of price points Scheduled promotional activities The proper market strength Any change in competitive situation
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Planned Stock
Guidelines to balance stock to sales:
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Stock turnover
Every department has its own stock turnover rate.
planned sales(for a period) = Stock turnover Planned average Inventory (for the period)
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Stock/Sales ratio
Retail stock (as of a specific date) = stock/sales ratio Sales for a given period(a month)
In monthly stock-sales ratio the period will be of a month Calculations on page 183
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Control System
Page 188/189
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= profit
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Bottom-up: initial planning is done by people responsible for actually implementing the plans.
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Net Sales
Avg. COGS
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Planned Reductions
Allowance for the difference between the original retail value & actual final sales value of the merchandise.
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Merchandise Shortage
It is the diff. between the book inventory & the physical inventory when the book inventory is larger. Special attention should be paid while inwarding stocks or transferring stocks.
Merchandise Overage
It is the diff. between the book inventory & the physical inventory when the physical inventory is larger. This is generally due to error in physical count.
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Employee Discounts & Discounts for Other Special Groups It is the price reduction granted to store employees. They are also granted to some groups like charitable institutions / bulk corporate orders etc.
Markdown & Markdown %
Reduction in price from original retail price is called Markdown. Markdown = Original Markdown Price Markdown Price Markdown % = Net Markdown Net Sales
100
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Markups
Buyer sells merchandise at a price that will cover the cost of goods & the expenses incurred for acquiring the goods & thereby also yield profit. Markup = Retail Price Cost Price Following Information is crucial for planning mark-ups:
Total amount of sales for the season Planned expenses Planned reductions Profit goal for the season
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Markups
For planning initial markups the buyer must consider the following:
Covering costs & expenses & making profits Consumer demand Store clientele Kind of merchandise Type of Retail Competition
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Markups
Markup = Retail Price Cost Price Markup% at Retail = Markup/ Retail Price
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The percentage distribution of sales by month is based on Historical data Special promotion plans
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Retail sales are very seasonal. The Christmas season often accounts for more than 40% of a retailers annual sales.
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Sales % Distribution 1. Month 6 mo. data April May 100.00% 21.00% 12.00% 2. Mo. Sales $130,000 $27,300 $15,600
Monthly sales = the forecasted total season for the six-month period x monthly sales %
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To have enough merchandise every month to support the monthly sales forecast, buyers need to consider factors that reduce the inventory level in addition to sales made to customers Markdowns Shrinkage Discounts to Employees
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Shrinkage
Inventory loss caused by shoplifting, employee theft, merchandise being misplaced or damaged and poor bookkeeping. Retailers measure shrinkage by taking the difference between 1. The inventory recorded value based on merchandise bought and received 2. The physical inventory actually in stores and distribution centers Shrinkage % = $ shrinkage $ net sales
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Reduction % Distribution 3. Month % 6 mo. data April 100.00% 40.00% 4. mo. reductions $16,500 $6,600
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June 4.4
July 4.0
Aug 3.6
Sept 4.0
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April 98280
May 68460
June 68640
July 98800
Aug 98280
Sept 8000
BOM Stock
= monthly sales (line 2) x BOM stock-to-sale ratio (line 5) = $27,300 x 3.6 = $98,280
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April 68640
May 68460
June 275080
July 98280
Aug 78000
Sept 65600
The BOM stock for the current month = the EOM stock in the previous month
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June 48406
July 26180
Aug 8670
Sept 8420
Why did performance exceed or fall short of the plan? Was the deviation from the plan due to something under the buyers control? Did the buyer react quickly to changes in demand by either purchasing more or having a sale?
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Open-to-Buy System
The OTB system is used after the merchandise is purchased Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend
PhotoLink/Getty Images
PhotoLink/Getty Images
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Open-to-Buy System
The Right Amount Of the Right Stuff At the Right Time This is where Open To Buy planning comes into play.
It helps the buyer to decide how much inventory should be on hand at the beginning of any given month and how much new merchandise should be received during the month to maintain your optimum inventory levels.
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