What is Merchandise Planning?

One way to think of merchandise planning or merchandise financial planning (“MFP”) is that it’s about determining how much money to put in each buyer’s wallet.  Buyers, in turn, go to market or work with in-house design to buy/obtain the right products for all their sales channels to sell to customers. The monthly/period allocation of the MFP budget for each buyer is commonly referred to as open-to-buy (OTB).

In the Merchandise planning process, MFP works synchronously with assortment planning, providing the strategic financial framework that forms the buyers’ shopping list. Just as buyers use assortment planning to construct their product vision and create beautiful assortments to entice customers. Merchandise Planners use MFP  to ensure the buys from assortment planning meet the strategic financial goals of the business.

Background

When I started in the retail industry more than 25 years ago, merchandise planning was just emerging as a new hot topic for retailers. It began to gain traction in the US in the late ’80s as retailers began to seek technology and automation tools to address needs spreadsheets simply can’t fulfill.

Before that, retailers had financial budgets which were very much driven by the finance department. Inventory was an expense line much like any other financial budget line items such as salary or rent. Those of you who were already working at leading retailers might remember Lotus 1-2-3, the predecessor to Excel spreadsheets. OK, I’m really dating myself now ☹. But in those early days, the “data geeks” took the budget line items from the P&L. Each planner created their own spreadsheets for more detailed insight into inventory planning, all in the pursuit to more accurately determine how much to put in the buyers’ wallets. That was the genesis of merchandise planning.

The fundamentals of merchandise planning haven’t changed much from those early days. At the most basic level, it is about

1. anticipating demand planning, then
2. planning your inventory needs to meet that demand while
3. satisfying the company’s financial objectives – to maximize profit.

MFP Today

What has changed is the level of planning complexity and the amount of data available to the “data geeks” today.

The explosion in customer choices, both in the number of product selections as well as where and how the customers shop today, has increased planning complexity enormously. Twenty-five years ago, brick-and-mortar stores dominated the retail landscape and were the primary buying channel for customers. Today’s shopping landscape has drastically changed customer behavior, giving them many more choices on where they can shop. Mobile and e-commerce are now mainstream digital channels, while brick-and-mortar stores adapt to a new way of doing business. With concepts like entertainment, experiential, and personalization themes, new services like buy online, pick up in-store (BOPIS) are now mainstream. Retailers are testing and evolving their stores to stay relevant in this new retail-age.

In addition, the digital transformation has also supplied retailers with terabytes of data about their customers not imaginable 25 years ago. Retailers now have unprecedented insight into their customers’ preferences, shopping behavior, product affinity, and more. And they are data-mining all of this in an effort to understand their customers better.

Adapting for the Future

So while the fundamentals of merchandise planning haven’t changed, I believe the way we do it today must change to adapt to the new retail realities. It’s too simplistic to point out the obvious and say, “sure, we now must plan by the multiple customer channels” and call it done. I believe MFP must rethink and reinvent itself to meet today’s challenges.

Vice presidents of planning and allocation need to make systemic changes at the grass-root level. Planners can no longer hide away in the comfort of their spreadsheets, producing open-to-buy plans to pass over the wall for buyers to fulfill. In this age of data revolution, doing that will surely lead to their demise and obsolescence. After all, data mining and AI technology will replace the “data geeks” with faster and better computer prowess.

The time is now to transform your planning process. Planners need to leverage their inner geek and embrace technology to make it work for them. Let computers do the data mining, but focus your valuable planning resources on understanding, interpreting, and making use of the data. That is the human advantage. Planners and buyers must now work more collaboratively than ever before. They need to spend less time working the numbers on the spreadsheet, and more time understanding the qualitative aspect of the data. In other words, strive to understand the art of merchandising.

See also: daVinci’s introductory training series on MFP