What is the ROI for an organization engaged in merchandise planning?
The discipline of merchandise planning is often not understood by many organizations. What is the ROI that can be expected from a planning organization? In order to answer this effectively you must understand what the practice of merchandise planning is and how it is different from financial planning.
Using the analogy of a train riding on railroad tracks; with the railroad tracks representing the financial plan and the train being the merchandise plan. The tracks provide the train with the foundation and ultimate final destination. The train is the engine and constantly moving to get to the desired destination on time and on budget. Another way to describe it would be that the merchandise plan provides the direction and strategy for achieving the expected financial targets. It is difficult to define the scope of merchandise planning but in general terms it can be defined as follows:
Merchandise Planning is the process of managing important financial targets such as sales, gross margin and turn over usually at department, category or class level. The goal is to maximize return on investment through planning sales and inventory in order to increase profitability. Profitability increases by maximizing sales potential and minimizing markdown exposure. Sounds logical, doesn’t it! It is not rocket science after all. Unfortunately it is not as simple as it sounds. It is absolutely critical to have a defined infrastructure with the right people, the right processes and the right technology. Keeping in mind that the software is simply an enabler!
Merchandise Planning is aimed at maximizing return on investment, but where is the investment actually made? Obviously there is a financial investment in inventory, but less evident there is also considerable investment in people and corporate infrastructure. You cannot overlook the opportunity cost of the investment in time that is required by the creation of a planning organization.
Sales and inventory are inextricably linked and finding an optimum balance is the key to success. Too much, too little; either situation becomes a liability and a very real threat to the business. We need to do more than just calculate a purchase order quantity. We need to systematically balance the inventory demand generated by sales within an omni-channel environment with the constraints imposed by store size and layouts and the limitations of our supply chain infrastructure.
Merchandise Planning requires a deep understanding of the business and a strong discipline in order to increase profitability. Two major areas of profit erosion in business are lost sales resulting from lack of stock and secondly forced margin reductions due to excessive stock. Effective merchandise planning delivers “predictable” (i.e. planned) margin increases directly to the bottom line.
Delivering profit increases in a sustained way is the “true value, the ROI of merchandise planning”.