The discipline of merchandise planning is often misunderstood by many organizations. Time and time again Presidents and CEO’s of companies ask the question “what is the value of merchandise planning”? In order to answer this question correctly one must understand what the practice of merchandise planning is.
“What is merchandise planning and how is it different from financial planning?” Let us use the analogy of a train riding on tracks; the railroad tracks represent the financial plan with the train being the merchandise plan. The railroad tracks (financial plan) provide the train (merchandise plan) with the foundation and ultimate final destination (financial targets). The train (merchandise plan) is the engine and constantly moving (in-season forecasting) to get to the desired location (financial plan) on budget. Another way to describe it would be that the merchandise plan provides the direction and strategy for achieving the expected financial targets. It is difficult to define the scope of merchandise planning but in very general terms it can be defined as follows:
Merchandise Planning is “a systematic approach” to managing important financial targets such as sales, gross margin and turn over. The goal is to maximize return on investment through planning sales and inventory in order to increase profitability. It does this by maximizing sales potential and minimizing markdown exposure. You need the infrastructure to ensure that you have the right people, the right processes and the right technology support. Without the people and processes you will not succeed. The software is simply an enabler – the final piece of the puzzle. In fact, I often find that the premature use of sophisticated planning technology becomes a hindrance in achieving the desired objectives.
Merchandise planning is aimed at maximizing return on investment, but where is the investment actually made? Obviously there is a financial investment in inventory, but less evidently there is also considerable financial investment in people and corporate infrastructure. While financial investment is the most obvious, we cannot overlook the “opportunity cost” of the investment in time that is required by the discipline of planning.
Now to the question of “what is the value of merchandise planning? Sales and inventory are inextricably linked and finding an optimum balance is the key to success. Too much, too little; either situation presents a very real threat to the business. One needs to do more than just calculate a purchase order quantity. We need to balance the inventory requirement to support sales with the constraints and limitations imposed by store layouts, size, warehousing and transportation issues.
Merchandise planning requires an understanding of the business and discipline in order to increase profitability. Profitability is the key driver of any business. Two major areas of profit erosion in business are lost sales resulting from lack of stock and secondly forced margin reductions due to excessive stock. Effective merchandise planning delivers “predictable” (i.e. planned) margin increases directly to the bottom line. The increase in profitability is achieved by optimizing inventory thereby maximizing sales potential and minimizing losses from markdowns and stock – outs.
A profitable company has people, process and technology that can identify and support the winners while removing resources from the losers. It is important to note that the profit increase can be delivered in a sustained way. “That is the true value of merchandise planning”.