What is Merchandise Planning? - Definition & Process

Instructor: Sharon Linde

Sharon has a Masters of Science in Mathematics

What is a merchandise plan, how does it fit into the overall business plan, and what are the steps to create it? This lesson explains merchandise planning and shows how teachers can use this information in educating students.

What Is Merchandise Planning?

Today is Manuel's first day as the new business education teacher. He's taking over mid-year and needs to hit the ground running with a curriculum that engages his students and supports the objectives. His first topic is merchandise planning, and as a former business owner, he has a lot of background on this topic.

Manuel begins class by telling students that merchandise planning is the act of creating a merchandise plan. After writing the definition on the board, he notices students continue to stare at him with blank faces and realizes that they probably aren't familiar with that term either. So, it's time to modify.

He continues writing that a merchandise plan can refer to something as large as the entire inventory of a chain of stores for a season or as small as how many articles of clothing should reside on a single display fixture. The class talks about what merchandise they shop for and see in stores. The students seem to have a lot of experience with merchandise.

Why Use Merchandise Planning?

The next day, Manuel's objective is to teach students about how merchandise plans are used in the business world. Merchandise planning has two goals - to create the best retail shopping experience possible for shoppers and to maximize the use of company assets, resources a company owns.

Think of what you see when you go shopping, like for a new sweater. How are the sweaters stocked? Are they neatly arranged on a table according to color and size, or are they hung on hangers?

When making merchandise plans, retailers need to keep their goals in mind. After all, they want you to buy their sweaters. Would you be more likely to purchase one that is neatly stacked and easy to locate? What if they were unfolded, messy, and not arranged in any way? What impact would that have on you as a consumer?

The best merchandise plans:

  • Make use of past sales data and projected sales data
  • Maximize the use of displays
  • Employ display techniques like signage and color blocking
  • Include a picture or drawing of the final display area

Let's take a closer look at some of these aspects.

Merchandise Plan Criteria

Manuel explains that buying the wrong merchandise can lead to the business closing because merchandise is by far the largest expense for most retailers. Even if the correct merchandise is selected, buying too much or too little can also lead to business failure. So, how can retailers improve the odds of making the correct decision?

Well, the best tool is sales history, what has and has not sold in the past. If your sales history shows that your store typically sells around 200 holiday sweaters and roughly 50 non-holiday sweaters in December, then that's where the merchandise planning should start. In this case, ordering either 100 or 400 sweaters would be a mistake, as would ordering 200 non-holiday sweaters and 50 holiday sweaters. A correctly sized order is going to be around 200 holiday sweaters and roughly 50 non-holiday sweaters, unless something has changed in the last year to make that expectation go up or down.

What about new stores that don't have any sales history? Well, the only tool available to new stores is a sales projection, an educated guess about what is likely to sell, which is created by market research and experience. Existing stores use sales projections as well. Following our sweater example above, if the existing store is going to have a promotion involving sweaters, it would need to increase its target sweater order above 250 to reflect that change in plans. Or, if the company noticed a downward trend in sweater sales in the past few years, it might choose to order fewer than 250.

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