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Retail commerce | Merchandising

Merchandise Planning Made (Somewhat) Easy

Illustration of decision making within retail merchandise
3 steps to minimising risk and maximising profits

Especially for independent retailers, buying merchandise can be nerve-wracking. Buy too much of a product that performs poorly, and you can take a huge financial hit; buy too little of a product that sells out, and particularly if it's a seasonal item, you can be missing out on a narrow window of opportunity.


Point-of-sale software provider Lightspeed breaks down the inventory decision process into three steps: plan, buy, and manage, and in its white paper "The Independent Retailer's Guide to Buying Inventory," it delves deeper into each of them.



Step 1: Plan

Assuming you have at least a year of operations under your belt, begin by looking at the sales for the previous selling year. Even if you already review sales on the SKU level, for each month you should also break down sales by product category and vendor. And for the year, determine your five most profitable items, your five least profitable items, and your five most profitable categories. (If you don't have sales data from the previous year, "try to find competitive, local, or industry data that you can use as a foundation," Lightspeed suggests.)


Beyond these data, you need to look at the variables that might have influenced sales (or the last thereof). For instance, if you sell seasonal merchandise, you need to consider whether unusual weather patterns influenced sales—an unseasonably warm spring, for instance, might have resulted in higher-than-anticipated or earlier-than-anticipated sales of backyard furniture or gardening gear. Also take into account any promotions you ran during the year, any local events that may have spiked or depressed foot traffic, and any changes you might have made regarding staffing or floor space.


Using all this information, estimate how much product you think you can sell each month for your key categories, and whether you should increase or decrease the percentage of your inventory that each category makes up. If last year picture frames made up 20% of your merchandise but accounted for 40% of your sales, you might want to increase the number of frames you carry this year and cut back or eliminate your weakest sellers or even an entire nonproductive category.


Next, calculate how much inventory you'll need to meet demand. "Try to minimise the amount of inventory you'll need to carry," Lightspeed advises. "Keep enough supply to last until your next scheduled delivery date (usually two to three months) plus some safety stock."


With these estimates, you can set your budget. Keep in mind how much money is available to you, of course, as well as your margin targets and by what percentage you hope to increase sales. But also factor in market trends, anything that could increase or decrease foot traffic (the opening of a mall nearby, the completion of roadworks), upcoming holidays or local events, weather forecasts, and changes to local demographics.

"Compare your budget to the inventory plan, and determine how this figure can help you meet projected inventory levels," Lightspeed suggests. "You may need to bring in more lower-priced items to keep sufficient inventory on your shelves or buy fewer goods at a higher ticket value" to maintain your desired profit margins.



Step 2: Buy

You know what you need to do here: attend markets and trade shows, meet with sales reps, pore over catalogues. A few tips you might not know:


• Don't feel too intimidated to negotiate.

Everything—costs, minimums, delivery dates, markdowns, buybacks—is, or should be, open to negotiation.


• Ask for and incorporate feedback from store staff and customers.

Your floor staff will know, for instance, whether products from vendor X had a higher return rate due to quality issues than those from other vendors, as well as which sold-out products customers asked for the most; your store receiver will be able to tell you which vendor or products were most likely to arrive damaged due to poor packaging.


• Consider complementary and add-on items.

For instance, if you're increasing the percentage of leather accessories you carry or introducing them to your merchandise mix, you might want to also add some leather-care products.



Step 3: Manage

At least once a month—preferably once a week—review your total sales by product, by vendor, and by category. Track your sell-through rate (the percentage of inventory received that has sold) and your weeks of supply (how long you'll have inventory on hand at the current rate of sales).


Collecting these data on a weekly or monthly basis enables you to be proactive so that you can maximise sales and minimise markdowns. If you're likely to sell out of a hot product, you can try to arrange for additional deliveries before you've sold out, or you can shift your promotional efforts away from that product to a similar item. If certain items are underperforming, you can tweak your product displays or marketing to goose response, or perhaps you can cancel future deliveries.


By keeping a close eye on your inventory performance, you might be able to offer a smaller markdown earlier in the selling season rather than a steeper markdown later. Offering a 20% discount on slow-moving bikinis in early July will likely yield higher profits than selling them at half-price in mid-August; even if you do end up selling the bikinis that remain at half-price, you'll have made more money on those you sold at 20% off for the six weeks prior. Just as important, by monitoring inventory performance early and often, you'll know the fast-selling products to avoid discounting even during an already-scheduled promotion.



author: Sherry Chiger

Sherry Chiger

The editorial director of Your Commerce, Sherry Chiger is an award-winning writer and editor. She was formerly editorial director of Multichannel Merchant and Catalogue e-business magazines.


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