Determining the Merchandise requirements

Planning is essential to provide direction and serve as a basis of control for any merchandise department. In order to be able to provide the right goods to the consumer at the right place and time, one needs to plan a course of action.

Planning in merchandising is at two levels:

1) The creation of the Merchandise Budget, and
2) The Assortment Plan

There are two methods of developing a merchandise plan. They are top down planning and bottom up planning. In top down planning, the top management works on the sales plan and this is passed down to the merchandising team. On the other hand, in bottom up planning, individual department managers work on the estimated sales projections. These are then added up to arrive at the total sales figures.

After the sales forecasting exercise has been completed, inventory levels need to be planned. The merchandise budget is the first stage in the planning of merchandise. It is a financial plan, which gives an indication of how much to invest in product inventories, stated in monetary terms.

The Merchandise Budget usually comprises of five parts:

1) The sales plan, i.e. how much of each product needs to be sold this may be department wise, division or store wise.
2) The stock support plan which tells us how much inventory or stock is needed to achieve those sales.
3) The planned reductions, which may need to be made in case the product does not sell.
4) The panned purchase levels i.e. the quantity of each product that needs to be procured from the market
5) The gross margins (the difference between sales and most of goods sold that the department, division or store contributes to the overall profitability of the company).

The Assortment Plan on the other hand, details the merchandise that will be sold in each product category i.e. the complex mix of products that will be made available to the consumer. This is the next stage after having determined the money available for the inventory. At this stage, it is also necessary to be clear about some of the constructs commonly used in merchandising parlance.

The Merchandise Hierarchy:

Every retail organization has a merchandise hierarchy which is an indicator of the manner in which product classification is done. It is in a logical manner depending on the manner in which the customers are likely to buy the products. Let us take the example of a supermarket to understand the concept of merchandise hierarchy.

The first level of identification is the store itself. Depending on the product needed by the customer, he would decide on the store that he wishes to visit. After entering the store the customer looks for a particular product – the first point of demarcation here is the category or the department from where the product is likely to be available. Let us assume here, that the customer wishes to buy a shampoo and groceries.

Typically, within a supermarket the classification of merchandise would be:

1) Fresh groceries
2) Ready to eat – snacks, biscuits etc
3) Additives / Masalas / Pickles
4) Personal hygiene products
5) Cooking aids – like ready pastes etc
6) Necessities like dal, sugar, salt, oil, atta, etc
7) Soft drinks / juices and the list continues

This would be the fist level of merchandise hierarchy. The next level of classification would be the various categories of products that the retailer offers in every department. For example in ready to eat, the product offered could include biscuits, chips, wafers, branded snacks like Haldiram’s etc. This is classification at the category level – the next level in the merchandise hierarchy. Many retail organizations refer to this classifications refer to this classification as merchandise class.

Now, within chips and wafers the products could be salted wafers, branded wafers, wafers in different flavors etc. This is the next level which is termed as the sub category. Typically at this level, merchandise is separated on the basis of the features that it has. Organizations, which refer to the earlier level of classification as class would refer to this level of merchandise hierarchy as the sub class.

The next level of classification could be on the basis of style / pack size and / or price point. Pack size would be the size in which the products retailed – 100 gms, half kg, one kg etc. Price point obviously refers to the price that the retailer has fixed for the product. The final level will be that of the end Stock Keeping unit or SKU. The SKU is the basic level of identification of merchandise and helps the buyer understand the complete break up of the quantities needed in each and every product that needs to be purchased. Product planning has to be done for the complete merchandise hierarchy.