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Hometown Business: Plan and Control Your Inventory

Jean Hamilton and Jana Hawley
Department of Textile and Apparel Management

Retail planning is known by a variety of names: dollar planning, inventory planning, dollar control or merchandise control. Whatever it is called, it has to do with knowing when to spend a planned amount of money in order to have the appropriate merchandise on hand for any specific selling time. The problems and examples presented in this publication will help to make the process of dollar planning clearer. Before getting to specifics, however, we will look at the reasons for planning and how planning in general is designed to work. Buying done without a clear understanding of how much money should be spent in the various merchandise categories can be disastrous.

Planning: What and why

Many small retailers see retail buying as glamorous. These retailers believe that choosing the merchandise for the store is what makes retailing fun. As a result, they give a great deal of attention to the content of the merchandise — its color, style, design and fashionability — but neglect the crucial first step of determining how much money ought to be spent on the various categories of merchandise. The history of modern retailing is full of cases of retail failure by entrepreneurs who were savvy about their customers and merchandise selection for those customers, but who were oblivious to the dollar decisions that must guide buying decisions.

A retail plan helps the buyer make sure that the stock is not overbought or underbought at any given time. The goal is to ensure that there is enough merchandise on hand to meet customer needs, but not so much merchandise that markdowns at the end of the season will be excessive.

The scope of the buying plan will depend on the size of the retail store. In a small, independent retail store, a plan may be developed for the whole store. In a medium to large store, planning is usually done for much smaller sections, called control units.

Even in a small store, if there is a variety of apparel and soft goods departments (soft goods is the industry term for apparel, domestics and other merchandise with a textiles base), planning may be divided into several control groups. For example, a family apparel store may divide planning into women's apparel, women's accessories, men's apparel and children's wear. In a large retail store where a large scarf department generates major sales, a different control plan may be developed for each major category of scarves.

Responsibility for planning also varies by store size. For example, in a small, locally owned and operated retail store, the store owner or one buyer may do all the planning. In a large department store, each planning unit in the store will be the responsibility of an individual control specialist. The buyers are then given plans they are required to follow; they will have had little input into the development of those plans.

Whether the store is small or large, however, it is important that the person(s) involved in buying the merchandise have a clear sense of how and why the buying plan was developed.

In the examples that follow, plans will be developed for a small, independently owned and operated retail soft goods store (Exhibit 1). Use these examples as a guide for developing a plan of your own to assist in controlling your inventory.

There are certain basic assumptions involved in retail dollar planning. Stores selling soft goods merchandise usually plan for two six-month seasons. Note that these seasons correspond to a retail calendar, not the regular annual calendar.

The seasons are fall/winter — the period from Aug. 1 to Jan. 31 and spring/summer — Feb. 1 through the end of July. It is important to use these time periods because national performance figures are based on them. You cannot compare your figures to national figures unless they are based on the same "seasons."

Exhibit 1 is a chart for developing a sample six month dollar merchandise plan for the fall/winter season. At the top is a line for seasonal sales and one for seasonal turnover. The six months of the fall/winter season are laid out in a grid across the page. Down the left hand side are the planning categories.

Exhibit 1
Six-month dollar merchandise plan

Six-month dollar merchandise plan
Seasonal sales: $________
Seasonal markdown: ________
Seasonal turnover: ________
Seasonal shortage: ________
  August September October November December January


Sales
           


Beginning-of-month stock
           
Other reductions:
   Markdowns
   Shortages
           


Planned purchases
           

The first planning category is sales. The second is inventory, commonly called stock, or beginning-of-month stock. The third is other reductions, which typically includes markdowns, employee discounts and shortages. Last is planned purchases.

Dollar planning always occurs in this order. That is, sales are always planned first. Desired stock levels result in large part from sales forecasts. Planned purchases, the last category, which is the guidepost that directs our spending, is the result of planned markdowns and other reductions, stock goals and sales forecasts.

Planning sales

Planning sales, also called sales forecasting, is always first because all other planning follows logically from it. Careful sales forecasting is critical. The accuracy of the plans made in the other areas depends on realistic sales forecasting. If sales estimates are unrealistically high, there will be too much unsold merchandise at the end of the season. If sales are planned at too low a level, the retailer will not have merchandise available when customers come in for it.

Unfortunately, sales forecasting is more subjective than planning stocks, reductions or purchases. Accurate sales records from previous years are helpful for predicting future sales.

An established retailer can look at the previous year's sales figures for the year, season or month and decide whether there is any reason to expect sales to be either higher or lower for the corresponding time periods of the current year.

For retailers opening new stores, it is usually possible to get fore-casting advice from local banks, the Chamber of Commerce, or from noncompeting retailers (retailers who carry the same kinds of merchandise but who are located in towns or cities outside of your market area). Sales forecasting can be made more realistic by careful consideration of both external and internal variables that affect sales in your store.

External and internal variables

External variables are factors that the retailer cannot control, but that do have an impact on the retail operation. A significant external variable is the weather.

Many retailers record the weather each day so that when they compare their sales the following year they can decide if weather was a factor. Other external variables include the general state of the economy, employment opportunities in the community, population or demographic shifts in the trading area, changes in the competition, and shifts in transportation services available to consumers.

It is important each year to compare current conditions to the previous year. Ask yourself whether there have been shifts in the community that may cause sales to be higher or lower this year than they were last year. Consider also whether these factors might have an effect on particular merchandise categories, but not others. For example, a major reduction in public transportation services may be important if the store carries merchandise for an elderly population that generally does not drive a car. If, however, the target market is younger and more mobile, the availability of public transportation may have little impact on sales.

Internal variables are those factors the retailer can control. These are the decisions that the retailer makes because he or she believes they will increase sales. For example, an increase in the advertising budget could result in an increase in sales. Similarly, adding a new line of merchandise or a new merchandise category, or reallocating floor space to a more profitable merchandise category are all internal variables that the retailer would expect to affect sales.

In the following examples, we will plan for women's apparel. We will assume that sales in women's apparel for our store were $375,000 last year. This year, however, we have made some shifts in advertising and the use of floor space. Further, the economy in our area has experienced a slight up-trend. As a result, and after consultation with the commercial loan officer at the bank, we decide that we can expect an increase in sales of about 6.67 percent (Table 1).

Table 1

Sales last year $375,000.00
Percent increase expected this year (6.67 percent) x 0.0667
Dollar increase expected = $25,012.50
   
Sales last year $375,000.00
Dollar increase expected + $25,012.50
Sales expected this year = $400,012.50

To find our predicted sales figure for this year we multiply the $375,000 from last year by the predicted percent of increase (6.67 percent) and add them together.

The result is a sales forecast figure for this year of $400,012.50. For this example we will round to $400,000 for simplicity. When you plan for your own business use the exact sales forecast figure.

The next step is to divide the new yearly forecast figure between the two seasons. The question is, "How much of the $400,000 are we likely to generate in the fall/winter season as opposed to the spring/summer season?" Few retailers have equal sales in the two planning seasons. Many have far higher sales in the fall/winter season, which includes major holidays and back-to-school sales.

Retailers of all types should think carefully about how holidays, weather and other major seasonal events affect sales. A bicycle shop, for example, would probably have much higher sales in the spring/summer season than in the fall/winter season.

Past experience is the best indicator of how to divide the total $400,000 between the two seasons. New retailers will want to talk to non-competing retailers or to the bank for advice.

For apparel it is generally true that sales are greater in the fall/winter season. For our example, we will predict that the fall/winter season this year will generate 60 percent of our yearly sales forecast of $400,000. We multiply the $400,000 forecasted sales figure by 60 percent (0.60) to arrive at a predicted fall/winter sales figure of $240,000 (Table 2). This amount is entered at the top of the "Six-month dollar merchandise plan" on the line for "Seasonal sales" (Exhibit 2). On the basis of past experience or good advice, we now distribute that $240,000 across the six months of the selling season.

Table 2

Sales planned for year $400,000
Seasonal percent of sales (60 percent) x 0.60
Seasonal sales = $240,000

Exhibit 2

Six-month dollar merchandise plan
Seasonal sales: $240,000
Seasonal markdown: ________
Seasonal turnover: 2
Seasonal shortage: ________
  August September October November December January
Sales 15 percent =
$36,000
16 percent =
$38,400
14 percent =
$33,600
20 percent =
$48,000
26 percent =
$62,000
9 percent =
$21,600

Beginning-of-month stock
           
Other reductions:
   Markdowns
    Shortages
           

Planned purchases
           

We determine, for example, that we can expect 15 percent of our seasonal sales in August; 16 percent in September; 14 percent in October; 20 percent in November; 26 percent in December (the major holiday selling month), and only 9 percent in January, (generally a slow month noted for an increase in markdowns). Based on seasonal sales of $240,000, 15 percent for August gives a planned sales of $36,000. Work through the planned monthly sales for the months of September through January and compare them to the percentages and dollar amounts shown in Exhibit 2.

Remember that sales planning is difficult because it is subjective. Experienced retailers can become quite skillful at allowing for the effects of both external and internal factors when making sales forecasts.

Inexperienced retailers will improve their forecasting by making use of national and/or regional sales averages, and sales figures from previous years, along with consideration of the effects of internal and external variables.

Planning stock

The next step is to plan our stock (also called inventory) levels. Smart stock planning depends first on determining a turnover goal that is reasonable for the kind of merchandise you are selling. There are several methods for planning stock — also known as beginning-of-month stock. We will look at two of the more commonly used methods. First, however, we need to understand what turnover really means.

Stock turnover

Stock turnover refers to the number of times during a period that the average inventory is sold and replaced. In our example, we said that last year we recorded retail sales of $375,000. Further, each day we were open last year, we had stock available for sale in our store.

Let's say, for example, that the average amount of stock on hand every day throughout the year was $125,000 at retail. That is, if someone had taken inventory every day during the year, the average amount of inventory on hand would have had a retail value of $125,000.

Finally, if we divide our sales of $375,000 by the average inventory of $125,000 we would see that the number of times we sold and replaced our average inventory was three times. In other words, we turned our stock three times and our stock turnover figure is 3 (Table 3).

Table 3
Stock turnover

Sales   Turnover goal   Average inventory
$375,000 ÷ 3 = $125,000
$375,000 ÷ 3.25 = $115,384

From this example, it is clear that every retailer has a stock turnover figure, whether or not he or she understands the idea or knows how to compute it.

The key concept here, however, is that instead of merely having some turnover figure that is the mathematical result of dividing sales by average inventory, the prudent retailer first sets a turnover goal, which in turn controls stock levels.

If the retailer in our example had decided that he or she expected sales of $375,000 and set a turnover goal of three, the resultant average inventory would have been $125,000. However, if this retailer had determined that a turnover goal of 3.25 would be more appropriate, then the sales figure of $375,000 would be divided by 3.25 resulting in an average inventory of $115,385, nearly $10,000 less (Table 3).

Different turnover goals result in different average inventories. Let's look at three different types of stores, each with sales forecasted at $400,000 (Table 4).

Table 4
Average inventory

  Store A Store B Store C
Sales $400,000 $400,000 $400,000
Turnover 4 50 1
Average inventory $100,000 $8,000 $400,000

Store A has a turnover goal of 4, resulting in an average inventory (or average dollar retail value of the inventory on hand) of $100,000. Store B has a turnover goal of 50, resulting in an average inventory of $8,000. Store C predicts only one turnover per year, resulting in an average inventory of $400,000, equal to the total dollar sales expected for the year. All three stores expect sales of $400,000, however, the different turnover goals result in dramatically different amounts of average inventory on hand at any one time.

Store A represents our hypothetical women's apparel store with a turnover goal of 4 and an average inventory of $100,000. Remember, this does not mean that on every day of the year the inventory is $100,000, but that the average retail dollar value of each day's inventory is $100,000.

Store B might be a delicatessen selling cheeses, fresh meat and pastries. With an average inventory of only $8,000, Store B turns its merchandise almost weekly. In fact, a delicatessen may turn pastries and fresh meat every day — otherwise no one would buy them — but turn cheeses and preserved meats only every four or five weeks.

Store C, with a goal of only one turnover each year, represents a different kind of store. Its average inventory is equal in dollar value to the total sales expected for the whole year. Such a store might sell fine jewelry.

The speed at which retail stock is sold and replaced (turnover) is considered an important measure of the profitability of the store.

Buying merchandise in smaller amounts and replenishing it more frequently results in a higher stockturn figure for the store. There are a number of good reasons why retailers are encouraged to set healthy turnover goals. For example:

  • When merchandise is sold and replaced more frequently, there is new stock coming in to appeal to the customer who is always looking for new things.
  • New stock provides excitement for the selling staff who get tired of trying to sell the same old merchandise day after day.
  • When inventory is kept reasonably low, merchandise is less likely to be damaged from being handled excessively by customers and sales staff. Thus, markdowns in general can be kept at reasonable levels.
  • Insurance costs on less average inventory will be lower.
  • It is important to minimize the capital investment tied up in unsold merchandise. Lack of available capital can be a particular problem when, for example, a vendor offers a special discount for merchandise purchased at a specific time. If the retailer has no cash flow flexibility because too much money is tied up in unsold merchandise, he or she will not be able to take advantage of this opportunity.
  • The retailer who borrows money to buy merchandise must pay interest charges that increase the price of the merchandise and lower profits.

Even a slight shift in turnover goals can make a major difference in profitability for a soft goods retailer. Table 5 shows three women's apparel stores, all having sales of $400,000. Store 1, our store, has four stockturns per year; Store 2 has three stockturns per year; Store 3 has two stockturns per year.

Table 5
Average inventory

  Store 1 Store 2 Store 3
Sales $400,000 $400,000 $400,000
Turnover 4 3 2
Average inventory $100,000 $133,333 $200,000

Sales-divided-by-turnover figures result in markedly different average inventories for these three stores. Store 3 has twice as much inventory on hand at any one time as Store 1. With twice as much inventory on hand, Store 3 has to be larger and the rent will be higher. Because the merchandise will be handled in the store for a longer time, it may become worn and look old before it is sold. This results in higher overall markdowns.

Store 1, on the other hand, buys merchandise more frequently and in smaller amounts. Fresh, new merchandise comes into the store regularly. Why would the owner of Store 3 choose to operate with such a low turnover figure? Perhaps the owner is worried that customers might not find what they want and he or she might fail to make a sale. This may be true, but the costs associated with carrying such a large inventory will be much higher than the cost of an occasional lost sale.

Healthy turnover goals are determined by looking at industry averages and seeing what profitable retailers who sell similar kinds of merchandise are achieving.

In women's apparel, about 3.5 turns a year is usually optimal. Retailers selling fashion forward merchandise or targeting the junior size market may have four inventory turnovers a year.

For our example store we have set a yearly turnover goal of 4. Note that the seasonal turnover goal is half of the annual turnover goal. To reflect this, we have recorded a seasonal turnover figure of 2 on our Six Month Dollar Merchandise Plan (Exhibit 2).

Now that we have completed our sales planning for the season and the months, and have established our turnover goals, we are ready to do our beginning-of-month stock planning.

BOM inventory levels

Beginning-of-month inventory figures tell the retailer how many retail dollars worth of stock he or she needs to have on hand at the first of the month in order to achieve the turnover goal that has been set, assuming that monthly sales forecasting has been accurate.

There are two commonly used methods for determining beginning-of-month inventory levels: the Basic Stock Method and the Stock-to-Sales-Ratio Method.

Basic stock method

The Basic Stock Method is based on computing a "basic stock figure." Once computed, basic stock will be the same for each month in the season. To generate the Basic Stock figure, we first find our average inventory and subtract the average monthly sales from it (Table 6).

Table 6
Basic stock

Average inventory $240,000 ÷ 2 = $120,000
Less average monthly sales $240,000 ÷ 6 = $40,000
Basic stock $120,000 - $40,000 = $80,000

Average inventory is equal to seasonal sales ($240,000) divided by seasonal turnover (2). In this example, average inventory is $120,000. From this we subtract average monthly sales ($240,000 divided by the 6 months in the season, or $40,000). The resulting Basic Stock figure is $80,000.

To find our beginning-of-month stock figure for each month, we simply add the sales for each month to that basic stock figure. Projected sales for August were $36,000, so the beginning-of-month stock for August is $116,000.

Exhibit 3

Six-month dollar merchandise plan
Seasonal sales: $240,000
Seasonal markdown: ________
Seasonal turnover: 2
Seasonal shortage: ________
  August September October November December January
Sales $36,000 $38,400 $33,600 $48,000 $62,000 $21,600
Beginning-of-month stock (80,000)
$116,000
(80,000)
$118,400
(80,000)
$113,600
(80,000)
$128,000
(80,000)
$142,400
(80,000)
$101,600

Other reductions

  • Markdowns
  • Shortages
           

Planned purchases
           

Exhibit 3 shows the completed beginning-of-month stock figures for each of the 6 months in the selling season. The amount in parentheses represents the basic stock figure. For each month, the forecasted seasonal sales figure has been added to the basic stock figure to give the beginning-of-month inventory figure.

If we buy merchandise consistent with our beginning-of-month stock figure, we will be buying merchandise based on what we believe is an accurate sales forecast and an appropriately set turnover goal. The $116,000 beginning-of-month stock level for August, then, is a helpful guideline. If more or less than $116,000 in merchandise is purchased for August, it will probably mean that the turnover goal will not be achieved.

If the forecasted sales figure turns out to be much too high or too low at the end of a month, it should be adjusted and a new beginning-of-month stock figure for the next month calculated. Many retailers do this adjusting by hand at the end of every month when sales figures for the previous month are known. Retailers with access to computer technology have the advantage of having the computer calculate these adjustments for them.

Sales ratio method

The second major way to plan beginning-of-month stock levels is called the stock-to-sales-ratio method. This refers to the proportion, or ratio, of merchandise on hand to the expected sales in a given period.

A stock-to-sales-ratio of 2-to-1 means that at the beginning of a month there should be twice as much stock on hand as expected sales. A ratio of 3-to-1 would mean three times as much inventory on hand as expected sales. Retailers wishing to use the stock-to-sales-ratio may want to look up industry averages in the Merchandise Operating Report provided by the National Retail Federation (Merchandising and Operating Results of Department and Specialty Stores in 1988. New York: National Retail Foundation).

Planning other reductions from stock

The concept of reductions from stock refers to the ways in which the retail value of the inventory is reduced.

The most significant way to reduce the retail value of inventory is to sell it. Every time something is sold to a customer, the dollar retail value of the inventory is reduced by the amount of that sale.

The other ways that retail value of inventory is reduced are

  • Marking it down, including employee discounts
  • Having it stolen or damaged

To ignore these, or to underestimate them, is one of the most significant mistakes a retailer can make.

Planning markdowns

Planning for markdowns is simply part of good retail dollar planning. Some retailers naively believe that taking markdowns on unsold merchandise is a sign of failure. They believe that unsold merchandise shows that they have poor buying judgment. In fact, no retailer should ever assume that everything he or she buys will sell at the original retail price.

The total amount of markdown that is reasonable depends on the kind of merchandise being sold. Many retailers in soft goods, such as women's apparel, are surprised to discover that markdown figures are often as high as 29 percent of sales.

It is foolhardy to try to reduce markdowns by refusing to reduce the price of merchandise that is not selling. Remember, the longer merchandise sits on the sales floor, the more dated it becomes, and the greater will be the eventual markdown needed to finally sell it.

Exhibit 4

Six-month dollar merchandise plan
Seasonal sales: $240,000
Seasonal markdown: 25 percent ($60,000)
Seasonal turnover: 2
Seasonal shortage: 2.2 percent ($5,280)
  August September October November December January
Sales $36,000 $38,400 $33,600 $48,000 $62,000 $21,600
Beginning-of-month stock (80,000)
$116,000
(80,000)
$118,400
(80,000)
$113,600
(80,000)
$128,000
(80,000)
$142,400
(80,000)
$101,600

Other reductions

  • Markdowns
  • Shortages

$8,000

  • (22 percent)
  • $520

$5,000

  • (13.02 percent)
  • $660

$5,000

  • (14.88 percent)
  • $800

$9,000

  • (18.75 percent)
  • $1,100

$15,000

  • (24.011 percent)
  • $1,540

$18,000

  • (83.33 percent)
  • $660
Planned purchases            

In Exhibit 4 we have now added our seasonal markdowns expectation to the information at the top of the chart. In our example, projected sales are $240,000, and we have planned for a healthy markdown of 25 percent. In other words, we expect dollar seasonal markdowns to be 25 percent of seasonal sales of $240,000 or $60,000.

As with sales and stock, the markdown for any individual month will vary. For example, January is typically the month of high markdowns. But, over the six-month fall/winter season, the total dollar amount should add up to 25 percent of the $240,000 seasonal sales figure, or $60,000. On Exhibit 4, typical markdown percents and dollar amounts have been entered.

In August, the markdown figure of $8,000 represents only slightly more than 22 percent of August's sales of $36,000. While January, a typical month for sales and thus a month representing a large markdown value, has a markdown figure of $18,000 representing about 83 percent of January's sales. The $7,000 markdown figure in October may represent a special coat promotion.

Planned shortages

Shortages are planned in the same way. Shortages represent the dollar value of merchandise lost to the retailer because of damage or customer or employee theft. Reasonable shortage percents depend on the kind of merchandise sold. For women's apparel, a typical shortage figure is around 2.4 percent. For furs and fur garments, shortages are typically lower, around 0.03 percent. For small leather goods, shortages are typically much higher, often about 5 percent. Monthly shortages are also included under "Other reductions" in Exhibit 4.

For our example store, we will assume shortages of about 2.2 percent, slightly below the average of 2.4 percent. The dollar shortage figure for this season, then, would be 2.2 percent of the projected seasonal sales of $240,000, or $5,280, which is distributed over the six months.

It is common for more than 50 percent of shoplifting losses to occur in the busy months of October, November and December when shopper traffic is high and sales staff are unusually busy. Exhibit 4 shows a typical six-months shortage distribution. The shortage percents per month vary, but they add up to $5,280, which is 2.2 percent of the seasonal sales figure $240,000.

So far, we have planned sales for the season, stock turn for the season, sales for each month, stock level for the beginning of each month and markdowns and shortage dollar figures for each month. Remember that all of these figures have been based on retail values and have not taken into account the cost of merchandise to the retailer. We are now ready to plan purchases.

Planning purchases

The planned purchases figure tells the retailer how many dollars to spend on new merchandise for a given period of time. When we go to market, or when a manufacturer's representative shows us new merchandise, our planned purchases figure tells us whether it makes good financial sense to spend money on new stock purchases. In fact, the reason for all the previous steps is to get to this point.

We have calculated the beginning-of-month levels, forecasted sales to arrive at a end-of-month (EOM) figure, and planned stock for the period. Based on these calculations we can determine how many retail dollars to spend on new merchandise to be delivered during that time. If we spend more than the calculated amount, the average amount of stock will be larger than we want, and we will not achieve our turnover goal. Furthermore, we may spend more money then we have available.

Merchandise is often ordered several months in advance of the time you want to put it on the sales floor. You specify a shipping date and plan to pay for the merchandise after it arrives. Once that merchandise is ordered, you must consider that money spent. You deduct the amount of a particular order from the total amount you have planned for purchases for the time period in which you plan to pay for the merchandise.

When planning purchases, it is important to keep focused on the month for which you are figuring the planned purchases. From the formula (Table 7) we see that planned purchases are equal to the end-of-month) stock figure, plus sales for that particular month, plus other reductions from stock (markdowns and shortages), less the beginning-of-month stock figure for that month.

Table 7
Planned purchases for August

August end-of-month purchases $118,400
August Sales + 36,000
Other reductions for August + 8,520
Subtotal: = $162,920
August beginning-of-month purchases - 116,000
Planned purchases for August = $46,920

A quick look at our six-month plan shows us that the end-of-month figure for a particular month is the same as the beginning-of-month figure for the following month. This means, for example, that the end-of-month figure for August is the same as the beginning-of-month figure for September.

Reviewing our formula in figuring the planned purchases figure for August (Table 7), we start with the August end-of-month figure of $118,400 (the same as September's beginning-of-month figure). To that is added August's sales of $36,000 plus other reductions — the markdowns ($8,000) and shortages ($520). The total of these is $162,920. From this figure we subtract the August beginning-of-month figure of $116,000, which leaves a planned purchases figure of $46,920.

This method for determining the Planned Purchases amount is based on the assumption that forecasting has been careful and accurate, that a reasonable, healthy turnover goal has been set, and that markdown and shortage percents are realistic. If these amounts are reasonably accurate, it is possible to know how many dollars worth of new merchandise will be needed in order to have the desired inventory level at the beginning of the following month. Exhibit 5 shows the computed planned purchases figures for each month in the season.

Exhibit 5

Six-month dollar merchandise plan
Seasonal sales: $240,000
Seasonal markdown: 25 percent ($60,000)
Seasonal turnover: 2
Seasonal shortage: 2.2 percent ($5,280)
  August September October November December January
Sales $36,000 $38,400 $33,600 $48,000 $62,000 $21,600
Beginning-of-month stock (80,000)
$116,000
(80,000)
$118,400
(80,000)
$113,600
(80,000)
$128,000
(80,000)
$142,400
(80,000)
$101,600

Other reductions   

  • Markdowns
  • Shortages

$8,000

  • (22 percent)
  • $520

$5,000

  • (13.02 percent)
  • $660

$5,000

  • (14.88 percent)
  • $800

$9,000

  • (18.75 percent)
  • $1,100

$15,000

  • (24.011 percent)
  • $1,540

$18,000

  • (83.33 percent)
  • $660

Planned purchases
$46,920 $29,260 $53,800 $72,500 $38,140 ?

Open-to-buy

The planned purchases figure tells us how many dollars we need to spend for new merchandise to sell during the month. Open-to-Buy tells us how much we have remaining to be spent after each new purchase in the same way a quick look at the remaining balance in our personal checkbook during the month tells us how much we have left to spend. So far, we have determined that our August planned purchases amount is $46,920 at retail. Let's suppose that in July, a favorite vendor offered us a special assortment, with a retail value of $19,920, to be delivered and paid for in August. With $19,920 of our August planned purchases committed, our August open-to-buy is now only $27,000 ($46,920 — $19,920 = $27,000) (Table 8).

Table 8
Open-to-buy at retail

Planned purchases for August $46,920
Money already committed - 19,920
Open-to-buy at retail = $27,000

Open-to-buy at cost

When dealing with vendors, however, money is usually referred to in cost dollars, that is wholesale, rather than retail dollars. Therefore, we must convert the retail open-to-buy to a cost open-to-buy in order to know how many real dollars we can spend. The amount of cost dollars depends on the mark-up percent we choose to apply. In dry-goods retailing, the mark-up percent is almost always expressed as a percent of the retail price, rather than cost dollars. Sales refers to the amount of money we generate when customers pay us for merchandise. Therefore, it is retail dollars supplied by customers, rather than the cost dollars to the retailers, that form the basis on which our planning has been done, and on which measures of good business operations are based.

For example, if something costs $5, as shown in Table 9, and the retailer adds another $5 to it for markup, the retail price of the item will be $10. The $5 markup is equal to 50 percent of the $10 retail price, and we describe this item as having a 50-percent markup.

Table 9
Markup

Cost $5.00
Markup + 5.00
Retail price = $10.00

The $5 markup is equal to 50 percent (or half) of the retail price of $10.

In the above example, when our vendor visited us in July, we committed to purchase merchandise with a retail value of $19,920, leaving a retail open-to-buy of $27,000. As Table 10 shows, if we routinely apply a 50-percent markup percent, then 50 percent of the $27,000 open-to-buy at retail, or $13,500, will go to providing our markup, and the other 50 percent of the $27,000 ($13,500) is cost. In other words, we still have $13,500 to spend on merchandise for the month.

Table 10
Open-to-buy at cost

Retail open-to-buy $27,000
Markup (50 percent) x 0.50
$ Value of markup = $13,500
   
Retail open-to-buy $27,000
Less markup - 13,500
Open-to-buy at cost = $13,500

Similarly, if we were to apply a 55-percent markup, 55 percent of the $27,000 ($14,850) would go to provide markup, leaving only 45 percent of the $27,100 ($12,150) of open-to-buy cost dollars to be spent for the month.

Summary

Exhibit 5 shows a six-month plan that is now complete. In this example, we cannot determine January's planned purchases until we know February's beginning-of-month figure, and because February is the first month of the spring/summer season, those figures are not yet available. In reality, of course, the spring/summer season's plans would have been developed as early as the previous September.

Notice that in December, the biggest selling month, the Planned Purchases figure is the smallest for the period. That is because January is a big markdown month, also noted on our plan for January, and dollar sales values and inventory level are expected to be lower. December's low planned purchase expectations, therefore, accommodate January's lower sales expectations. Similarly, the largest planned purchases month is November in which merchandise is purchased in a way that allows the December beginning-of-month figure to be at the high level needed for the Christmas selling period.

Success in retailing depends on taking charge of your business. Developing and following a merchandise plan is merely sound business practice designed to increase the retailers' chance of healthy profit. It is based on fundamental and carefully considered calculations. The first is sales forecasting, which we have done thoughtfully. The second is the yearly and seasonal turnover figures, which are consciously set goals, suited to the kind of merchandise the retailer carries. The retailer who follows such a plan, adjusting for shifts in sales and shifts in markdown/shortage percents, maintains control over his or her business and is assured that by the end of the season and the end of the year the store is a profitable and viable retail operation.

Copy Worksheet 1 and Worksheet 2 to use for your 6-month retail plans:

Worksheet 1
Retail planning form for Spring/Summer season

Six-month dollar merchandise plan
Seasonal sales: $________
Seasonal markdown: ________
Seasonal turnover: ________
Seasonal shortage: ________
  February March April May June July


Sales
           


beginning-of-month stock
           
Other reductions:
   Markdowns
   Shortages
           


Planned purchases
           

Worksheet 2
Retail planning form for Fall/Winter season

Six-month dollar merchandise plan
Seasonal sales: $________
Seasonal markdown: ________
Seasonal turnover: ________
Seasonal shortage: ________
  August September October November December January


Sales
           


Beginning-of-month stock
           

Other reductions

  • Markdowns
  • Shortages
           


Planned purchases
           

 


MP676 Hometown Business: Plan and Control Your Inventory | University of Missouri Extension