Merchandise planning and open-to-buy, explained

What merchandise planning is

Merchandise planning is the financial plan a retailer builds for a category before it buys anything: how much it intends to sell, at what margin, how much markdown it will take, how much inventory it will carry, and what that leaves it free to purchase in each period. The plan is stated in dollars by category by month, and its output is the open-to-buy, which is the amount of new receipts a buyer can commit to without breaking the inventory target.

The reason it matters to anyone selling into retail is that the buyer's answer to your pitch is usually an open-to-buy answer wearing an assortment costume. I once had a line accepted on merit in April and shelved until August, and the reason was $60,000 of unplanned markdown taken in the department two months earlier. Nothing about my item had changed.

Merchandise planning versus assortment planning

They get used interchangeably and they answer different questions. Assortment planning decides what to carry: which items, how many SKUs, which packs, which stores. Merchandise planning decides what the category is worth: the sales, margin, markdown and inventory dollars it is expected to produce. The assortment sits inside the merchandise plan, and when the two disagree the money wins. A buyer who loves your item and has no open-to-buy is not going to take it, and telling them the item is great does not create the dollars.

Four lines make up the plan, and they are planned in this order because each one constrains the next.

The open-to-buy arithmetic

Open-to-buy is a residual, not a budget somebody hands out. Stated at retail:

OTB = planned end-of-month inventory + planned sales + planned markdowns - beginning-of-month inventory - merchandise already on order

Here is the supplements department of a nine-store natural grocery chain for March, which on the 4-5-4 calendar is a five-week month, so the sales plan carries five weeks of demand rather than four.

Walk it: $324,000 + $186,000 + $9,000 = $519,000 of retail value the department needs to have flowed through it. Subtract the $312,000 it starts with and the $95,000 already committed, and $112,000 of open-to-buy is left. At the department's planned 38% margin that is $69,440 at cost, which is the number a buyer actually spends. If you are pitching in, that figure is your real addressable opportunity for the month. The open-to-buy is 60% of the sales plan, and the cost figure behind it is a little over a third.

Plan versus actual, and why next month gets worse

The plan is only useful if it is read against actuals every period. Here is the same department when March landed.

Receipts were the $95,000 already on order plus the $112,000 of open-to-buy, which the buyer spent in full. Ending inventory is $312,000 + $207,000 - $171,000 - $14,500 = $333,500, against a $324,000 plan.

The department missed sales by 8.1% and finished 2.9% over on inventory, and those two facts compound. April's open-to-buy now starts from a beginning-of-month position $9,500 higher than planned, so unless the April sales plan is raised, April's OTB falls by that $9,500 before the buyer opens a single line sheet. This is the mechanism behind a category that quietly stops taking new items for two quarters. It is not a strategy shift. It is a merchandise plan working off a bad month.

Markdown is the line that most often does the damage, because it takes margin and leaves inventory position roughly where it was. A department that plans 4.8% markdown to sales ($9,000 on $186,000) and delivers 8.5% ($14,500 on $171,000) has given away 3.7 points of the category's retail margin without freeing the shelf space that was supposed to pay for it.

What good merchandise planning looks like in practice

• Plan at the level you can act on. Category by month is the working unit. Chain-total by quarter is a board number and cannot be bought against.
• Plan the markdown before the season, not after. A markdown line of zero is not an optimistic plan, it is an absent one, and the actual markdown arrives regardless.
• Reforecast monthly. A plan built in January and never touched is a budget. The value is in the variance, and the variance is only useful while there is still a period left to correct in.
• Watch inventory productivity, not just the inventory level. A department can hit its EOM dollars exactly while the mix underneath rots. Turns and GMROI are the two checks that catch it.

Where Scout fits

Scout does not hold your merchandise plan. There is no open-to-buy worksheet in the product, no plan versions, and no place to type a markdown target. What Scout supplies is the other half of the loop: actuals on sales, margin, markdown and inventory by category and by store, on the same period structure your plan is written in, so the variance is a report rather than a month-end reconstruction in a spreadsheet. Where Scout runs the back office it holds the item file and the inventory balances that those actuals come from. It does not raise or transmit purchase orders and does not hold your order guide, so the buy itself stays in the purchasing system where it belongs.

The short version

• Merchandise planning is the financial plan for a category: sales, markdown, inventory and open-to-buy in dollars, by month.
• Open-to-buy is a residual. Planned EOM plus sales plus markdowns, minus beginning inventory and merchandise on order. $112,000 at retail on this department, $69,440 at cost.
• Missing sales and overspending markdown both shrink next month's OTB, which is why a category can stop taking new items without anyone deciding to.
• Assortment planning picks the items. Merchandise planning decides whether there is money to buy them.