Whitepaper - ETP-Merchandise Planning

RETAIL SOFTWARE SOLUTIONS

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Delivering the right product at the right price to the right locations in the right quantities at the right time.

Merchandise Planning


White Paper | Merchandise Planning Getting It Right In Retail | 2

Executive Summary

Is retail really as simple a business as it is often perceived to be? Is it merely about buying, displaying and informing bystanders about goods? In an industry which continuously challenges itself to evolve and expand, the variables to optimize in the retail business are effective strategizing and efficient planning.

This is where Merchandise Planning helps retailers plan and allocate resources to attain business goals. It is a balance act where, on one hand, they need to enhance KPIs like Contribution Margins, Service Levels, Sell-through Ratios, and on the other, they need to maximize return on investments in the working capital by improving gross margins and reducing mark downs.

Merchandise Planning is an ongoing process, the flow of which is represented in the diagram below. The central merchandise plan is derived from the annual sales plan of the company. As the year progresses, this plan can be broken down to revise its different segments e.g. Assortment Plan, Option Plan, OTB Plan, based on market feedback.

KPI’s- Merchandise Planning

∙ Sales performance∙ Like-to-like sales

∙ Promotion performance

∙ Like-to-like stock∙ Months-on-hand inventory∙ Aging

∙ Category performance∙ GMROF

∙ Style/Size/Colour performance

∙ Sell-through∙ Fill-rate

∙ OTB control

MerchandisePlanning

Budg

etin

gShrinkages

Forw

ard

Cove

rs

(Lea

d tim

e)Inventory Levels

Assortment Mix

Mer

chan

dise

Mix

Planning Period

(seasons)

Planned MarginsOptions Planning

Allocation Plans

OTB Controls

Analysis

Pricing

Markdowns

Promotions

Location M

ix:

Channels/Form

ats

/Grades/N

ew Stores

∙ Channel performance∙ Store performance

∙ GM %∙ GMROI %

∙ Product profitability

∙ Markdown %



In this white paper, we are going to discuss the significance of Merchandise Planning and present its most important factors for consideration, using a hypothetical example of a retailer - Retail Success Ltd. (RSL), which retails apparel for men, women and children with 800 stores spread across Asia – in Singapore, Malaysia, Thailand, Indonesia, Philippines, Japan, Korea and Taiwan. We shall outline and understand the Merchandise Planning process at RSL.

Merchandise Planning Hierarchies

In order to successfully manage large volumes of merchandise across all stores, RSL has categorized its product portfolio basis customers’ buying behavior. The merchandising team has structured the portfolio to ease category management. This enhances both financial control and iterative planning, allowing top-down and bottom-up workflows.

In retail, Merchandise Planning involves three key dimensions – Location, Time and Merchandise. Primary inclusion of these hierarchies is essential to precisely design and develop business plans.

1. Location hierarchy: Factors like Catchment Area, Expected Sales, Store Size, Store Type (e.g. High Street, Shopping Mall, Stand-alone) are considered to arrive at the location hierarchy. The company’s stores are defined as per region, market type, etc.

2. Time hierarchy: The performance and merchandise time-buckets are continually monitored to match the devised merchandise plan. These can also be based on various seasons, occasions or special events e.g. Christmas, Chinese New Year, Super-Bowl Football etc. At RSL, this is planned down to the week level.

3. Merchandise hierarchy: The seamless segmentation and supply of merchandise as per different assortments and levels is planned and executed through hierarchy. Factors like Category Management, Assortment Management, Options Management etc. come into play here.

At every stage of planning, one needs to adopt a three-dimensional view and consider the Location / Time / Merchandise hierarchy.

Key Dimensions of Planning

Merchandise Hierarchy• Brand (Brand X, ....)• Division (Footwear, Apparels, Accessories, ...)• Group (Children’s Apparel, Sports Apparel, ...)• Category (Dress, Shirt, ...)• Product flag (Direct)

Time Hierarchy• Planning Calendar• Year (2013, 2014, ...)• Season (SS, FW)• Sub-season (Spring,

Summer, Fall, Winter)• Month (Jan, Feb, ...)• Week (Wk1, Wk2, ...)

Location Heirarchy• SBU (Active)• Concept (Sports,

Children, Golf, ...)• Region (Jakarta, Bali, ...)• Store (Bandung

Supermall, ...)

Assortment Plan for the Season

(Range Plan)

OTB for the Season

Options Plan for the Season

(with Base stock levels per store)

Periodic/Season-wise Sales Forecast

Merchandise Plan for the Season

(Purchase Budget)



Merchandise Planning: Process Flow

Final Category Plan

Set up of Actual vsForecasted Sales, Margin,

Markdownand Shrinkage Plan

StrategicBusiness

Plan

WSSI Setupfor Plan

parameters

Sales plan ratioSales planOTB Plan

Assortment RatioAssortment Plan

Option Plan

RangeWidthPlan

WSSI (OTB Management)

OptionAnalysisReport

PerformanceAnalysisReport

No (Re-Align Plan)

No (Re-Align Plan)

FinalConsolidated

CategoryBusiness

Plane

Current Market Trends(Fashion Trends,

Economic Scenario)

Qualitative Information (Past experience wrt

Vendor relation, Prodcut movement etc)

Quantitative Information(Past Performance, Sales, Margin, Sapce

Productivity etc)

FinalCommonBusiness

Plan

Yes

Phase IPre-Planning Stage

Mer

chan

dise

Pro

cess

Flo

w

Phase IIPlanning Stage

Phase IIIControl Stage

The above diagram illustrates the key phases in merchandise planning:

• Pre-Season Planning• In Season Planning• Re-Planning

A balanced strategic plan is designed to reinforce company’s business objectives, expansion graph and profitability. This is usually prepared using the Top-Down Planning (TDP) method. A more tactical approach is administered for the category-level business plan through the Bottom-Up Planning (BUP) method. In most organizations, the corporate team does the strategic planning whereas the Buying and Merchandising (B&M) team does the Category-Level Planning (CLP).

In order to arrive at the common goal of the company, the TDP and BUP are reviewed by both teams to finalize the annual business plan.

Once the business plan is ready, the merchandise plan is created by the team at RSL. The inventory management technique used by RSL is the Weekly Sales Stock and Intake (WSSI) technique. In this, week-wise planning is devised for sales, margins, opening/closing stock, purchases, etc., for a specific season. These are used to manage the Inventory and Open to Buy (OTB) processes for a category. The phasing of the sales plans to all the categories is based on the sales plan ratio. The week-wise distribution is based on the time hierarchy ratio distribution.





Integrated Planning

An integrated and comprehensive merchandise plan is imperative for a multi-locale-product-hierarchy business operation.The above diagram illustrates the complete planning process. Each step requires participation from various departments of the company.

All the functions from procurement, inventory- management, store operations, sales channels, merchandise management, marketing etc. are not only integrated but also inter-dependent.

Methods of Planning

An Integrated Planning process could involve three different possible methods, which are described below:

1. Base-stock based planning: As the name indicates, this method is based on the Base-stock, which is derived from the rate of sale and the forward cover. This forms the basis of the auto replenishment process, which in turn triggers transfer orders and purchase orders.

2. Forecast based planning: This method is based on the dynamism of sales projections. During periodic sales performance \reviews, the forecast is corrected. The changes in this forecast form the basis of the auto replenishment process, which in turn triggers transfer orders and purchase orders.

3. Hybrid planning: This is a combination of the above two planning processes. One can use both methods based on the requirements. The Base-stock based planning can be used for In-Season Planning, while the Forecast based planning can be employed for the Pre-Season planning process.

Control Measures

Pre-season planning helps retailers create the accordant blueprint for every category/product, with the target demographics in mind. But equally important is the regular evaluation and course-correction of the same. Business objectives are accomplished with a well-structured plan that is continually strengthened with the right inputs. In retail, a day is too short a period to plan and act, and a month is too long a period for introspection, as the potential opportunity of loss is huge. Hence, a week is the perfect duration for any analysis and reaction. The three key tools used for planning and analysis are:

1. Merchandise Plan – This plan takes a comparative measure of the sales and margin performance of the current plan with the previous year’s data. It helps in identifying the weak and strong categories to appropriately re-align the business goals between the same accordingly.

2. Options Plan – This is a style-wise option analysis which helps in identifying the best or slow movers as per sell-through percentages and total contribution. Thus an action plan is created to replace slow movers at the right time and maintain stock availability of fast moving styles, to minimize the opportunity loss. Simultaneously, options plan ensures that the base stock is maintained at each store. It is also useful in managing the contribution margin based on vendors.

3. OTB Plan / WSSI Plan – This tool helps in re-forecasting based on the actual performance and becomes critical during the re-distribution of the purchase budget amongst performing categories.



Business Planning for Different Retail Formats

In the high-stakes competitive retail environment, retailers endeavor to adopt a business format which is sustainable and delivers a unique value to the customers. Once done, it requires constant vigilance to explore opportunities and expel threats in tandem. Different planning strategies need to be applied to individual retail business formats, to preserve and bolster them further. These formats adopt contrasting modes to tailor the merchandise hierarchy:

In the above matrix, it is apparent that each format operates uniquely e.g. in a department store, the first step of category planning is as per the brand whereas in other formats, the brand name may or may not form a part of the main hierarchy but rather, customer age groups might take the lead position. It has been observed that price points form a key factor for planning in hypermarkets.

Let us look at location hierarchy that may be used in planning. A specialty chain with stores spread across a continent cannot afford to do store-wise planning. So, it has to consider store categorization based on classification. In this case, the better the store profiling, the more accurate would be the merchandise plan.

The business franchise model is a widely used retail format, usually by global super brands. The key to success here, is effectively planning margins for multi-locale chain stores. However, in the case of a hypermarket, it is very important to look at each location specifically and separately because its target customers are from a specific catchment area and cannot be generalized. Here, demographics and customer profiles play an important role in a store’s approach to merchandise planning.

Moreover, planned reductions also have to be considered in merchandise plans. Planned reduction can accommodate various discount and event based offer models across different time buckets such as special promotions, membership incentives, and time-based offers. e.g. happy hours on weekdays when the footfall is low or on weekends when the opportunity for walk-in conversion is higher. Festive occasions are also important times not only to factor in reductions but also to individually set targets and parameters for sales, procurement, margin planning, etc. in the merchandise plan.

To conclude, Merchandise Planning is the science of numbers forged with the art of intuitively perceiving customer interest, trends and buying patterns.



ETP Retail Suite

Merchandise Planning is an integrated part of the ETP Retail Suite V5. ETP Merchandise Planner is a powerful and intuitive solution that can be used across various levels and departments of the organization.

It ensures the top management always has complete control and visibility of the merchandising process in the company. This makes it easier to successfully plan and deploy the sales and merchandise plans, achieving set targets and desired profitability. This solution helps convert strategic plans into tactical ones, designed to the minutest detail, helping buyers track the OTB for each SKU, across all stores.

The combination of sales and stock data ensures that all buying decisions are made with adequate information and post undertaking risk analysis. Moreover, since the ETP Retail Suite is an integrated system, this information can be further transferred into the ETP Supply Chain to track and control buying decisions better.

The solution allows access to real-time and accurate sales data across the chain of stores and different merchandise categories. This makes planning and re-planning of OTB very easy. Better inventory management leads to higher stock-turns, positively impacting the bottom line. One can easily re-plan in-season, thus minimizing mark-downs and stock-outs considerably. Further, ETP Analytics makes tracking of retail KPI’s like GMROI (Gross Margin Return On Inventory) and GMROF (Gross Margin Return On Footage), across the hierarchies, a quick and easy process.

The ETP Retail Suite makes it possible to effectively plan ahead and be proactive retailers.

ETP Store

ETP vListen

ETP Reporter

ETP Accelerator

ETP Supply Chain

ETPUpdates

ETP Analytics

ETPMerchandise

Planner

In-store Systems In-store & HO Systems HO Systems

ETP Mobile Store

ETP Integrator

ERP Systems

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ETP EAS Enterprise Application Server



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Copyright© 2015. All rights reserved.

Founded in 1988, ETP is the leading Retail Software Solutions company headquartered in Singapore

and present in 20 countries across Asia Pacific, India and the Middle East. ETP’s solutions are

adopted by market leaders in Retail, Distribution and Manufacturing. ETP has executed over 500

enterprise software projects in over 20 countries at 25,000+ stores and 100+ warehouses and

factories. ETP’s unique value proposition is its ability to deliver, create innovative products and

the domain expertise delivered by hundreds of its consultants embodying ETP’s best practices.

For more information, email: [email protected]

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