To avoid dead stock, a retailer will plan for the sales, stores, purchases, and reductions for a specific selling period. Retail buyers and merchandisers can use a Six Months Plan, which is a flexible monthly sales planning chart. This will help them monitor inventory sales and purchases more effectively.
To avoid dead stock, a retailer will plan for the sales, Inventory, purchases, and reductions for a specific selling period. Retail buyers and merchandisers can use a Six Months Plan, which is a flexible monthly sales planning chart. This will help them monitor inventory sales and purchases better. This article uses ‘Stock-to-Sales Ratio (SSR) values to develop the purchase plan.
Inventory planning is essential to retailing, which is a difficult activity. To achieve financial goals, the retailer needs to plan for inventory sales during a specific season. Inventory value can be expressed in two ways: Inventory at cost (purchase price) and Inventory as retail (sales price). If the Inventory is not sold, then the retailer will have to keep it in stock. In such a situation, immediate action is required. This helps determine the future course of action as well as identify the reasons for deviations. Retailers plan sales, stock, purchases, and reduction amounts for a specific selling period in advance (February-July and August-January). The Six Months Buy Plan, also known as an inventory plan or dollar plan, is used to plan this. This flexible sales planning chart can be adapted to the changing conditions during the selling period. Retailers have no control over external forces that can directly or indirectly impact retail sales. The impact of policy change, new competitors entering the market, new designs introduced, celebrity influence, and so on. The stock-to-sales ratio (SSR) method and the basic stock method can both be used to develop a buy plan. This article uses SSR values for the development of the buy plan.
The Six Months Buy Plan
The Six Months Buy Plan helps to correlate sales, Inventory, purchases, and reductions. The buyer uses it as a merchandising/inventory tool to operate a more profitable retail business. The plan is used to monitor and adjust the monthly merchandising activity in the department or store. This plan is used by the buyer and merchandiser of retail stores to keep track of monthly sales and purchases. The program also affects other expenses in the store, such as budgets for visual and promotional merchandising and operational activities. In the following sections, we have discussed in detail each component of the Six Months Buy Plan.
Initial Markup
Initial markup (IMU) helps determine the retail price for a product based on its cost. The initial markup is expressed as a percentage.
Initial markup = Retail – COGS(cost of goods sold).
IMU% = Retail – COGS x 100/Retail
COGS retail is the value of the stock purchased at the retail price. The cost of the goods purchased from the vendor. This includes:
COGS = billed or list cost, or cost quoted by vendor + freight (transportation + insurance), – cash discounts (1% to 5%) + alteration (or workroom) costs + warehouse cost and distribution cost.
IMU allows businesses to maximize sales, make significant profits, and still cover their operating costs. After careful consideration of the factors that influence the price, the retail value of the product (written on its price tag) is predetermined. IMU considers all these determinants, as described below.
Initial Markup Percentage = (Operating Expenses + Net Profit + Reductions + Alteration Costs – Cash
discounts) / (Net sales + Reductions)
Reduced prices = Stock shortages plus Discounts
The vendor offers a cash discount on the list price for the purchased goods. It could be because of several factors, such as bulk purchasing, prompt payment to the seller, or a long-term relationship. Cash discounts are only given to retailers after they have paid the full amount of the product.
The initial markup is not always constant over some time. The markup fluctuates for many reasons, including shortages, thefts, breakages, and employee discounts. The plan adjusts the sales values throughout the selling period to reach the desired sales value. Calculating the gross sales value is useful.
Gross Sales = Net sales + Reductions
Net sales
The monthly sales target is expressed as a percentage of the entire season’s net sales. Net sales are calculated by calculating the percentage change in sales from last year (LYS).
This year sales (TYS) = + ((% Increase or Decline) X LYS)
TY = planned sales – 20% of (LYS).
TY planned Sales = LYS – 20% of (LYS).
The sales forecast for the next season will determine the percentage increase or decline. This forecast is based on changes in customer buying patterns, fashion trends and product offerings, selling prices of products, market fluctuations, and other external factors.
The total of the monthly sales is equal to the net sales for a given season. Monthly sales can then be calculated as a percent of the net sales value, taken at 100 percent.
Reductions
Retail sales are reduced due to shortages/overages of merchandise, markdowns including employee and customer discounts, shrinkage (losses due to theft and damage), refunds and returns, as well as corporate discounts. The Maximum Retail Price of the product is always reduced. Reductions are calculated in percentage of the net sales value.
Reduction percentage = $ Reductions multiplied by 100/$ Net Sales
Gross Margin
The net sales value is used to determine the gross margin of a retailer. Gross margin is used to make strategic decisions about business expansion, new product lines, new stores, recruitment, salaries of staff, marketing plans, and other strategies. The gross margin is calculated by subtracting COGS (costs of goods sold at retail) from net retail sales.
Net sales – COGS = Gross Margin
Operating expenses are also an important component of the gross margin. The retailer will arrive at the net profit margin after subtracting the operating expenses from the gross profit margin. The net margin or profit determines the profitability of a business. Operating expenses include all direct and indirect expenses that the retailer must bear in order to conduct business each day. This includes rents, salaries, utilities, warehouse costs, and transit costs.
Gross margin = Operating Expenses – Net Profits
Operating expenses = direct + indirect expenses
In order to achieve a significant profit, the retailer must manage inventory levels in order to reduce Inventory holding costs, unsaleable products, older stocks, and so on. The Six Months Buy Plan can be used to monitor stocks.
Monthly Stock Levels
Stocks or Inventory are required to reach sales targets. Store Sales Ratio (SSR) tells us how much stock is needed to achieve a certain volume of sales. The store-to-sales ratio is calculated by using the data from LY for the same period or published industry data. The stock levels in a given month are directly related to the sales planned for that particular month. SSR is used to calculate the opening or beginning of each month’s stock levels.
Stock to sales ratio for a given month = Opening stock for the period (BOM)/Planned sales for the period.
Inventory Control & Purchase
During a given month, different vendors or suppliers are contacted to purchase monthly stocks. This ensures that the best stores are available to achieve planned sales or reductions and carry over additional stock into the next month.
Monthly inventory purchase plans at retail = Sales + Reduction – EOM – BOM
Planned purchases @ cost = Pl. Purchases @ retail X (1-IMU percent)
Where sales + reduction + EOM = how much stock is needed by the retailer throughout the month.
BOM (Beginning Of Month) is the amount of stock that the retailer has at the beginning of the month.
The total of Purchases @ Cost planned for a given period gives the buyer the total amount he has to invest in the inventory acquisition from time to time. OTB allows the buyer to control the distribution of money over purchases.
Stock for EOM and BOM
EOM is the stock that closes a given month. This stock is then carried forward to the beginning of the following month. BOM stock is what you have on hand at the beginning of the month.
The EOM for the previous month is equal to the BOM for the current month.
The BOM for the following month is equal to the EOM of this month
Say that EOM for February is BOM for March
EOM = BOM for April
Calculating the average inventory value or stock value is easier when you know your stock values at the beginning and end of each month. This value is used to determine the intermediate inventory level at any given time during a sales period.
For six months (n=6)
Avg. Inventory = (sum of BOM stock values for six months + EOM stock values for 6th month)/ (6+1).
Open to Buy (OTB),
Open to Buy (OTB) is a great way to control Inventory. Controlling new purchases within a given month is important. The value of the planned monthly inventory purchases for a given month shows how much money is available to buy goods in that particular month. This figure still does not reflect the money distribution throughout the month. Buyers who are experienced will spread their purchases out over the month. They do this by calculating the remaining funds that can be used to make new purchases. Thus,
OTB= Planned Purchases for the Month – Orders that are in transit and will be delivered during that month
This Budget (OTB) helps to
* Replace or reorder items that are selling fast.
* Fill out the stock so that you can offer complete stocks.
* Be competitive when purchasing special items and exciting new products as they become readily available.
* New items are being tested.