CHAPTER 8
Preparing Buying Plans
PERFORMANCE OBJECTIVES
• Distinguish between top-down and bottom-up planning.
• Identify the purposes of merchandise plans.
• Outline a process to forecast sales.
• List and describe the components of a merchandise plan.
• Calculate planned BOM (beginning-of-month) inventory levels.
• Identify the components of planned reductions.
• Calculate planned purchases at retail and at cost.
PERFORMANCE OBJECTIVES
• Prepare a six-month merchandise plan.
• Describe basic stock planning.
• Describe the importance of open-to-buy.
• Calculate open-to-buy.
MERCHANDISING MANAGEMENT
• Merchandise plan
• A projection in dollars of the sales goals of the store or department over a
specified period of time, usually six months.
• Needed as a control device to ensure retailers meet their goals and
objectives.
• Used to project and monitor purchases so that a department or store does
not become overstocked or understocked.
MERCHANDISING MANAGEMENT
• Top-down planning
• Top-level management estimates total sales for the period
• Expected sales for each department are planned according to past
contributions to the sales of the entire store and/or company/division
MERCHANDISING MANAGEMENT
• Bottom-up planning
• Sales for the store are determined by adding together the planned
sales figures developed by each department manager and/or buyer
SIX-MONTH MERCHANDISE PLAN
• Translates profit objectives into a framework for merchandise
planning and control
• Normally conforms to two selling seasons:
• Spring–summer (February to July)
• Fall–winter (August to January)
4-5-4
Calendar
PURPOSES OF THE PLAN
• To provide an estimate of the amount • If a merchandise plan is used
of capital required to be invested in successfully, the following should
inventory for a specific period result:
• Increased turnover
• To provide an estimate of planned • Reduced amount of markdowns
sales for the period that translates into • Improved ability to maintain markups
cash flow estimates for store • Maximized profits
management and accounting personnel
• Minimized inventory investment
COMPONENTS OF THE PLAN
• Initial markup for the period
• Planned net sales
• Planned beginning of month (BOM) inventory (often calculated using the
stock-to-sales ratio)
• Planned end of month (EOM) inventory
• Planned reductions
• Planned purchases at retail
• Planned purchases at cost
PREPARATION OF THE
6-MONTH
MERCHANDISE PLAN
COMPONENTS OF THE PLAN
• Each of these components is further divided:
• Last Year (Actual)
• Plan (This Year)
• Revised (This Year)
• Actual (This Year)
PLANNED SALES
• Step 1: Obtain sales data from last year for the season and the
distribution by month
Sales February March April May June July Totals
Last Year (LY) $10,000 $12,000 $23,000 $18,000 $12,000 $12,000 $87,000
Planned This
Year (TY)
Revised TY
Actual TY
PLANNED SALES
• Step 2: Calculate last year’s monthly sales figures as a percentage
of last year’s total spring/summer sales
Month LY Monthly Sales / LY Total Sales % of LY Sales
February $10,000 / $87,000 11.5%
March $12,000 / $87,000 13.8%
April $23,000 / $87,000 26.4%
May $18,000 / $87,000 20.7%
June $12,000 / $87,000 13.8%
July $12,000 / $87,000 13.8%
PLANNED SALES
• You would plan for the following Month % of LY Sales
percent of sales to occur each month,
February 11.5%
assuming:
March 13.8%
• You detected no major changes during
the current season
April 26.4%
May 20.7%
• A sales analysis of previous years
indicates that the percentage of total June 13.8%
sales has remained fairly constant July 13.8%
PLANNED SALES (METHOD 1)
• Imagine total seasonal sales LY were $87,000 and a 10% increase
over last year is planned
• What would this year’s sales goal be?
• Method 1:
% Sales
x LY Sales = $ Sales Increase
Increase
10% x $87,000 = $8,700
$ Sales
+ LY Sales = This Year Sales
Increase
$8,700 + $87,000 = $95,700
PLANNED SALES (METHOD 2)
• Imagine total seasonal sales LY were $87,000 and a 10% increase
over last year is planned
• What would this year’s sales goal be?
• Method 2:
% Sales Increase
x LY Sales = This Year Sales
+ 100%
110% x $87,000 = $95,700
PLANNED SALES
Month Planned % of Planned Planned
Total Total Sales Monthly Sales
Feb. 11.5% x $95,700 = $11,006
March 13.8% x $95,700 = $13,207
April 26.4% x $95,700 = $25,265
May 20.7% x $95,700 = $19,810
June 13.8% x $95,700 = $13,207
July 13.8% x $95,700 = $13,207
PLANNED SALES
• These figures would then be entered on the six-month merchandise
plan as follows:
Sales February March April May June July Totals
Last Year (LY) $10,000 $12,000 $23,000 $18,000 $12,000 $12,000 $87,000
Planned This
$11,006 $13,207 $25,265 $19,810 $13,207 $13,207 $95,700
Year (TY)
Revised TY
Actual TY
PLANNED BOM INVENTORY
• Stock-to-sales method
• There must be an adequate opening merchandise assortment to meet
anticipated customer demand
• Buyer must define the relationship between:
1. The planned BOM inventory for a given month
2. The planned sales for that month
Stock-to-Sales Planned
Planned Sales x =
Ratio BOM Inventory
PLANNED BOM INVENTORY
• Calculate stock-to- Month Stock-to-Sales Ratio
sales ratios from trade February 3.1
sources and an March 2.8
examination of past April 2.0
years’ sales and May 1.8
inventory data June 1.8
July 1.8
PLANNED BOM INVENTORY
• Calculate planned BOM inventory using stock-to-sales ratios and planned
sales for the current year
Month Stock-to- Planned Planned
Sales Ratio Monthly Sales Monthly BOM
Inventory
Feb. 3.1 x $11,005 = $34,116
March 2.8 x $13,207 = $36,980
April 2.0 x $25,265 = $50,530
May 1.8 x $19,810 = $35,658
June 1.8 x $13,207 = $23,773
July 1.8 x $13,207 = $23,773
PLANNED BOM INVENTORY
• These figures would then be entered on the six-month
merchandise plan as follows:
BOM February March April May June July Totals
Last Year (LY) $31,000 $33,600 $46,000 $32,400 $21,600 $21,600 $186,200
Planned This
$34,116 $36,980 $50,530 $35,658 $23,773 $23,773 $204,830
Year (TY)
Revised TY
Actual TY
PLANNED EOM INVENTORY
• The EOM stock for BOM EOM
any month is the February $34,119 $42,588
planned BOM stock March $42,588 $40,730
for the following April $40,730 $41,601
month May $41,601 $36,980
June $36,980 $36,980
July $36,980 $33,000
PLANNED EOM INVENTORY
• Because the BOM stock for August is unknown, the planned
EOM for July is estimated
EOM February March April May June July Totals
Last Year (LY) $33,600 $46,000 $32,400 $21,600 $21,600 $20,000 $175,200
Planned This
$36,980 $50,530 $35,658 $23,773 $23,773 $21,000 $191,714
Year (TY)
Revised TY
Actual TY
PLANNED REDUCTIONS
• Retail reductions include:
• Markdowns
• Employee discounts
• Shortages
Planned Retail Reductions
Planned markdown % = 6.8%
Planned shortage % = 2.1%
Planned employee discount % = 1.1%
Total Reductions = 10.0%
PLANNED REDUCTIONS
• Estimates are based on past experience and are presented as a
percent of planned sales
• Total reductions in dollars
• Total planned sales multiplied by the reduction percent
• $9,570 ($95,700 x 10%)
Planned Sales x Reduction % = Planned Reduction $
$95,700 x 10% = $9,570
PLANNED REDUCTIONS
Month % of reductions
• Based on past records, February 11.5%
you have determined
that reductions each March 7.0%
month have occurred April 15.0%
according to the
following breakdown
May 18.5%
June 22.1%
July 25.9%
PLANNED REDUCTIONS
• Calculate planned reductions for each month
Month % of Total Planned Planned Monthly
reductions Seasonal Reductions
planned for Reductions
month
Feb. 11.5% x $9,570 = $1,100
March 7.0% x $9,570 = $670
April 15.0% x $9,570 = $1,436
May 18.5% x $9,570 = $1,770
June 22.1% x $9,570 = $2,115
July 25.9% x $9,570 = $2,479
PLANNED REDUCTIONS
• These figures would then be entered on the six-month merchandise
plan as follows:
Reductions February March April May June July Totals
Last Year (LY) $1,001 $609 $1,305 $1,609 $1,923 $2,253 $8,700
Planned This
$1,100 $670 $1,436 $1,770 $2,115 $2,479 $9,570
Year (TY)
Revised TY
Actual TY
PLANNED PURCHASES AT RETAIL
• Purchases must be planned at retail first because all the other
figures are based on retail
Planned
Planned Planned Planned Planned
+ + - = Purchases at
Sales EOM Reductions BOM
Retail
PLANNED PURCHASES AT RETAIL
• Using the formula and the data that you already have, planned
purchases at retail can be calculated
Planned
Planned Planned Planned Planned
Month + + - = Purchases at
Sales EOM Reductions BOM
Retail
Feb. $11,005 + $36,980 + $1,100 - $34,116 = $14,969
March $13,207 + $50,530 + $670 - $36,980 = $27,427
April $25,265 + $35,658 + $1,436 - $50,530 = $11,829
May $19,810 + $23,773 + $1,770 - $35,658 = $9,695
June $13,207 + $23,773 + $2,115 - $23,773 = $15,322
July $13,207 + $21,000 + $2,479 - $23,773 = $12,912
PLANNED PURCHASES AT RETAIL
• These figures would then be entered on the six-month
merchandise plan as follows:
Planned February March April May June July Totals
Purchases at
Retail
Last Year (LY) $13,209 $25,705 $11,009 $9,123 $14,253 $19,100 $92,399
Planned This
$14,969 $27,427 $11,829 $9,695 $15,322 $12,912 $92,154
Year (TY)
Revised TY
Actual TY
PLANNED PURCHASES AT COST
(100% - Initial Planned Purchases Planned
x =
MU %) at Retail Purchases at Cost
PLANNED PURCHASES AT COST
• From the seasonal data, initial markup for the period is planned at 46.3%
Planned
(100% - Planned
Month x Purchases at =
Initial MU %) Purchases at Cost
Retail
Feb. (100% - .463) x $14,969 = $8,038
March (100% - .463) x $27,427 = $14,728
April (100% - .463) x $11,829 = $6,352
May (100% - .463) x $9,695 = $5,206
June (100% - .463) x $15,322 = $8,228
July (100% - .463) x $12,912 = $6,934
PLANNED PURCHASES AT COST
• These figures would then be entered on the six-month
merchandise plan as follows:
Planned February March April May June July Totals
Purchases at
Cost
Last Year (LY) $7,093 $13,803 $5,912 $4,899 $7,654 $10,257 $49,618
Planned This
$8,038 $14,728 $6,352 $5,206 $8,228 $6,934 $49,486
Year (TY)
Revised TY
Actual TY
PREPARATION OF
A 6-MONTH
MERCHANDISE PLAN
• Each month you must enter actual
figures to help you with:
• Future planning
• Making revisions
PART 2
• Basic stock planning
• Open-to-buy planning
