Optimizing Merchandise Financial Planning for Your Brand
By: Rola Losco
Your merchandising or retail organization's profit margins and profitability depend, in large part, on your ability to optimize the way you purchase, store and sell goods. This is where merchandise financial planning (MFP) makes its mark. It's a key process to make sure you're using your budget in a way that will maximize your results in the marketplace. While hard-to-predict market forces and disruptions can threaten to undermine your profit margins, effective MFP will help you stay one step ahead.
Today, you don't have to handle the business of MFP in a purely manual or inefficient way. Planning tools like Anaplan have given companies a more streamlined and effective way to get their merchandise planning efforts off the ground. But while technology makes MFP easier to embrace, it still requires human intervention to get the best possible results. Your actions — from selecting and implementing the right planning platform to creating a suitable, customized strategy — will determine the success of your MFP efforts.
The 4 Components of Merchandise Financial Planning
To truly understand MFP, it pays to break the methodology down into four components. This clearly shows the individual processes that go into a best-practices MFP program.
Each of these practices takes separate inputs from your operations and uses them to achieve a similar set of overall objectives. By focusing on each in turn, you can defend your bottom line against shifts in the marketplace, reading indicators from your audience, as well as up and down the supply chain.
Category Top-Down Planning
When you need to start from the macro level and get more specific about your merchandise, you can turn to category top-down planning. This process begins with setting financial goals for each of your product categories and then allocating those objectives more precisely by department, subcategory and product line.
When you follow this process, aided by the right automation-rich technology tools, you can better align your financial objectives with your overall business goals. With this kind of planning accomplished, you can determine which resources deserve priority, identify opportunities for growth across categories and allocate your budget effectively for growth and profit.
Open-to-Buy (OTB) Tool Use
Harnessing OTB tools allows you to manage your inventory levels and purchasing decisions more effectively than would have been possible without technology. An OTB tool calculates how much merchandise you can and should purchase during a specific time frame.
OTB tools use sales forecasts, current inventory levels, desired turn rates and profit margin goals as their raw materials. By crunching this data, it's possible to generate insights that will help your decision-making. Consulting OTB systems over time allows you to adjust your purchasing strategy on the fly, ordering the correct amount of inventory according to the latest indicators.
Style or Productivity Planning
Getting more granular than category top-down planning, you can engage in style planning, also known as productivity planning. This means going beyond the merchandise category level to see which styles of individual products are outperforming or underperforming expectations. When you use data to determine exactly which items are most successful, you're better able to plan for the immediate future.
Having up-to-date style planning data means you can see customer trends as they're ongoing, and determine your audience's preferences in real time. With this information in hand, it's possible to optimize your product assortment, putting the exact right number of each style or variety into the marketplace and maximizing your profit margin.
Effective Margin Planning
This style of analysis is based directly on monitoring and optimizing profit margins from your merchandising mix. Actions that affect profitability — such as managing pricing, costs and markdown — fall under this category of planning. When you accomplish this kind of planning effectively, you'll maximize your profitability, all while keeping prices competitive and hitting your sales goals.
The margin planning process involves setting initial targets, but then adjusting your approach based on the facts. This type of MFP begins with a set of markup targets. From there, you monitor the sell-through rates for goods and tweak your pricing strategy and markdown strategy over time, all based on sales performance in the marketplace. The end result is an optimized profit on every sale.
Impactful Methods Working Together
Rather than just embracing one or two kinds of MFP, you can embrace all four of the mentioned methods. Who will be in charge of these processes? When you have a financial planning platform like Anaplan, you can spread the responsibility effectively across teams and functions, breaking down silos and getting more eyes on the important business of planning.
Implementing Effective Merchandise Financial Planning
Getting an organization up to speed isn't an instantaneous process, even if you have the right technology for the job and a good strategic grasp of the situation. There are simply too many moving parts for that kind of push-button approach.
With that said, there is a step-by-step process that can get you from Point A to Point B, giving you the refreshed MFP approach your brand needs.
Analyze your historical data: Previous performance information about sales, inventory and profitability can help you plan for the future. Once you've crunched the numbers, you can pick out trends, patterns and target areas for improvement.
Set financial targets: Your financial goal-setting can go by merchandise category. At this category level, you can lay out targets for sales, inventory turnover, gross margin, and profit. Rather than existing in a vacuum, these goals should align with your business strategy.
Allocate budgets: Intelligent budgeting by department, subcategory and product line should come from your top-down planning. These numbers can be set based on growth opportunities, market trends and your analysis of the competitive landscape in your sector.
Monitor and adjust OTB: Your open-to-buy tools are useful for keeping an eye on sales, inventory and purchasing decisions. You can use OTB tool analysis of sales performance, market conditions and inventory turnover goals to set an ideal purchasing strategy.
Conduct style and productivity analysis: This step of the MFP implementation process is where you can start regular evaluations of your items by style and individual product. By getting more granular than the category level, you can craft a perfect assortment strategy.
Develop effective margin strategies: After setting market targets and ideal sell-through rates, you can tweak your pricing and markdowns over time for maximum profit. Factors at play include market demand, competitor performance and customer brand perception.
Regularly review and revise your MFP strategy: One of the key traits of MFP is that it's designed to evolve over time for maximum results. Market conditions, customer behavior and your overall corporate goals will shift, and your strategy should iterate to keep up.
At the beginning of the MFP implementation process, your organization can get in touch with its past performance data and set out its intentions. By the time you've followed the framework, you'll be iterating and adjusting your strategy as the business moves forward and the market changes around it.
The marks of a successful MFP adoption are worth striving for. You'll find it easier to achieve your overall goals and financial targets, as there are now specific processes in place to adjust the pricing, selection and inventory level of your products, all aligned with overall business objectives.
By slicing your merchandise planning down from the category level to individual lines, styles and items, you can harness the power of automation and data analysis to deliver a carefully tailored approach to merchandising. As your organization matures, attribute based metadata may also be infused for more robots planning considerations. In an unpredictable and competitive retail space, this level of precision may represent a competitive edge.
The Right Solution for Your Merchandise Financial Planning
Achieving such a high level of MFP success means combining internal best practices with highly effective technology. Specialized planning solutions are capable of enabling a data-enriched MFP strategy in a way that could strain legacy solutions.
Without that symbiotic combination of ideal strategy and well-tailored technology, it can be hard to achieve true category top-down planning, effective OTB tool use, style analysis and margin planning. This is the logic behind using a tech platform like Anaplan — and not just using it, but customizing the implementation to meet your exact needs.
Out of the box, planning software is somewhat of a blank slate. To achieve a true connection between these technology tools' capabilities and your retail or merchandising organization's unique set of corporate objectives, products and customer needs, you should work with experts to customize your solution and ensure the feature set is tuned to your users.
This is where Allitix enters the picture, providing a customized Anaplan implementation to act as the backbone of your company's new MFP effort. This software platform can be the engine that delivers insights for better-informed decisions, allows you to make more detailed plans and ultimately drives profitability.
Ready to take the jump into a modern era of MFP strategy? Talk with Allitix experts today.