The Four Pillars of Success – Part 3
By Jim Lewis, CEO Enhanced Retail Solutions LLC
Welcome to part 3 in our “Pillars of Success” blog series. Financial planning is essential not only to determine the funding required to run the business, but for tracking goals as well. It has many layers- much like an onion.
Top Level Planning
Most retail financial plans are top-down, meaning executives determine the total chain revenue and profit. Then it breaks down by division and department. Feedback on those plans is essential to ensure they are realistic- that money is invested in departments that have growth potential and not wasted on declining departments. Plans at this level are usually annual and then broken down by month. They include revenue, markdowns, expenses (marketing, supply chain, etc.) and profit. Various KPI’s are tracked to monitor performance and measure
Department Level Planning
While most department level planning is done up-front or seasonally, a budget must also be maintained on an ongoing basis. That budget is often referred to as “open to buy”. In many ways it is an outdated method of managing the business. I’ve seen many retailers hurt themselves by not allowing top sellers to be replenished because money is tied up elsewhere. However, not having the top sellers in store ensures only a decline in growth. Making open to buy effective lies in execution. Taking prompt markdowns and fueling growth with new items is how to keep the business running. Good POS reporting is essential to making smart, quick decisions.
Seasonal plans are built in an assortment plan- which shows which items will be merchandised and in what depth and breadth, by color or size. This is really the heart of planning. Beyond seasonal numbers, key items are then usually planned at the weekly level in ladder plans. These provide a week-by-week plan of units, revenue, inventory requirements and profitability. It is updated with actuals every week, and the future weeks are revised based on the trend. The most important part of this planning is to determine how much and when inventory will be required. That is the main capital investment. Turning that inventory is what generates cash.
At the same time, suppliers update forecasts for replenishment items, watching the sales trends and placing buys with factories based on the production lead time. Retailer and supplier collaboration is essential to ensure an appropriate level of inventory.
There are several factors that are affecting planning right now. With increased inflation, retailers are passing on higher costs to the consumer by raising retail prices. Since financial plans are usually calculated at retail dollars (as opposed to cost), they are buying less units with the same dollars. If higher prices do not deter consumers, then they are planning below the need. Unfortunately, most products have long lead times and by the time retailers realize they should have bought more they will have left a good amount of money on the table.
The supply chain is exponentially increasing costs on many products. Whether it’s higher storage costs, shipping fees or handling, the inventory carrying costs are having a large negative impact on many businesses. Many suppliers and retailers are working together to determine the optimal method of bringing in product- domestic, indirect, or directly importing.
Next up we will focus on Data Science and the role it plays in just about every part of retailing today.
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