Merchandise planning decides what stock a retailer should have. It sets how much to sell, buy and hold, by category and month, for the season ahead. Inventory management records and controls the stock the retailer actually has, down to each unit by style, color and size, in every location, along with what it is worth. The two meet at open-to-buy, the figure that tells a buyer how much is left to spend once current stock and existing orders are counted against the plan. Island Pacific's SmartSuite runs both from one stock ledger, so fashion, apparel, footwear and specialty retailers plan their buys from the inventory they actually hold.
| Merchandise planning | Inventory management | |
|---|---|---|
| The question it answers | What should we have? | What do we have, and where? |
| Time frame | The coming season | Today, and every movement up to today |
| Level of detail | Category, class or style, by month | Style, color and size, by location |
| Measured in | Mostly value: sales, margin, purchase budgets | Units and value |
| What it produces | The seasonal plan and the open-to-buy budget | The stock ledger, transfers and replenishment |
| What it needs from the other | On-hand stock, stock on order and actual sales | The plan, to judge whether stock levels are right |
What does Merchandise Planning decide?
Merchandise planning is the process of setting future goals for sales, inventory and financial performance, and then tracking actual results against those goals. In fashion retail that work follows the season. A planner forecasts sales month by month for the season ahead, sets the stock needed to support those sales, and sets the closing stock the next season will open with.
From those figures come the purchase budget for each category and month, the allowance for markdowns, and the margin the season is expected to earn. Most of this happens above the level of the individual item. A plan says how much women's knitwear should sell in October and how much stock it should carry going in. It does not say how many size 12s of one cardigan belong in one store.
When the plan is expressed in sales, margin and stock value and agreed with finance, the discipline is usually called merchandise financial planning. It is the part of planning that turns a range of products into a budget the business can hold buyers to.
What does Inventory Management do?
Inventory management is the process of tracking inventory across an organization, including its stores, warehouses and other locations. Most definitions stop there and move on to cycle counts and holding costs. In fashion and specialty retail the job is harder, for two reasons.
The first is variants. One style in five colors and eight sizes is forty separate items to track in every location. A chain that knows it holds a style, but not that it holds the wrong sizes in the wrong stores, cannot act on what it knows.
The second is value. A retail stock ledger records every receipt, transfer, sale, return and markdown in both units and value, so merchandising and finance work from the same inventory figure. That figure is the one the plan is built on, which is why its accuracy matters well beyond the stockroom.
The two disciplines also work at different levels of detail. Research on Nike's apparel replenishment found that forecasts were made at style and color level and then split into sizes using historical size curves, and that forecast error grew at size level, most of all in the low-volume fringe sizes. Plans are made at style and color, but stock is held at size, and inventory management is where that gap shows up.
Where do Merchandise Planning and Inventory Management meet?
They meet at open-to-buy. The American Marketing Association defines open-to-buy as what remains of a period's purchase budget once receipts and merchandise already on order are subtracted. The budget comes from the plan. Receipts and orders come from the inventory record. Open-to-buy is the arithmetic that joins the two, and it is the number a buyer actually spends against.
The planned purchases figure itself depends on both sides. It is built from planned sales, planned markdowns and the stock the plan wants to end the month with, less the stock it expects to start the month with. Every term except the sales forecast is a statement about inventory.
The handoff also runs the other way. Once the season starts, actual sales and stock movements flow back from the inventory record into the plan. A planner compares them with the targets, reforecasts the rest of the season, and the open-to-buy moves with the new forecast. If a style sells faster than planned, the reforecast raises its open-to-buy. If stock comes in higher than expected, it lowers it. Planning sets the direction, and inventory data keeps correcting it.
The handoff is also where fashion's size problem lands. A plan built at style and color needs size-level stock from the inventory record before receipts can be allocated to stores, and a size mix that is wrong at allocation is a common route to markdowns later in the season.
How is Inventory Planning different from Merchandise Planning?
Inventory planning is a loosely used term, and most of the pages that define it belong to ecommerce and replenishment software vendors. In retail it is best understood as the bridge between the two disciplines. It takes the targets set in merchandise planning and turns them into stock levels and reorder points for each item and location. Merchandise planning works top down, in value, for a season. Inventory planning works bottom up, in units, for each item and location.
Two activities sit in that middle ground. Allocation decides how to distribute merchandise to individual stores to maximize sales and minimize markdowns, which makes it the first point where the plan meets the reality of store-level demand. Replenishment reorders product on a recurring basis to meet expected demand. It works best when automated, because the number of item and location combinations is too large to manage by hand.
What goes wrong when planning and inventory run apart?
The plan is only as good as the inventory record it reads. In a study of nearly 370,000 inventory records across 37 stores of one retailer, 65% did not match the stock physically on hand. The finding is about records, not shelves. A plan built from those records inherits their errors, so an open-to-buy calculated from a wrong on-hand figure is wrong before anyone places an order.
Markdowns are where the cost shows up. A 2018 Coresight Research survey of 200 US retailers attributed an estimated 53% of unplanned markdown costs to misjudged inventory decisions, and named overbuying as the primary cause of 30% of all markdowns. Apparel retailers were more likely than the wider sample to cite buying the wrong type of product, at 37.1% against 26.5%. The markdown lands on the inventory side, but the decision behind it was made in the plan.
Separate systems add a timing problem. When the plan lives in a spreadsheet or a standalone tool and reads an inventory export, it is working from stock as it stood when the export ran. Each reforecast then starts with a reconciliation, and every day of lag is a day the open-to-buy is out of date.
Do Merchandise Planning and Inventory Management need to be in one system?
Not necessarily. What matters is that planning reads current stock, stock on order and actual sales without anyone rebuilding the numbers by hand, and that actuals flow back into the plan as the season runs. Two systems can do that with a tight integration. The questions to ask of any integration are how often it syncs, what happens when a sync fails, and who owns the reconciliation when the two records disagree. A single system takes those questions away, because there is only one record to read.
In Island Pacific's SmartSuite, inventory management is the core of the merchandise management system, and merchandise planning reads stock and sales from the same stock ledger to set budgets and buys. The open-to-buy a buyer spends against is calculated from the inventory the business actually holds.
If you are choosing systems for a growing chain, the order matters. Settle the inventory record first, then choose the planning layer that will read from it.
Merchandise Planning and Inventory Management questions
What is the difference between merchandise and inventory?
Merchandise is the goods a retailer buys in order to sell. Inventory is the stock of those goods held at a point in time, counted in units and valued in money. Merchandise describes what a retailer sells, and inventory describes how much of it is on hand and where. A buyer thinks in merchandise. A stock controller thinks in inventory.
Is open-to-buy part of planning or inventory management?
Both. The plan sets the purchase budget, and the inventory record supplies the receipts and orders that are subtracted from it. Open-to-buy is the figure where the two meet.
Can you do merchandise planning without inventory management software?
You can build a plan in a spreadsheet, but it still needs accurate on-hand, on-order and sales figures to work from, and those come from the inventory record. The weaker the link between the two, the more of the planner's time goes on reconciling numbers instead of planning.
Which should a retailer fix first?
The inventory record. A plan cannot be more accurate than the stock data it reads, and an open-to-buy built on wrong records sends buyers in the wrong direction from the start.
Does your plan read from the live record?
When your team sets the open-to-buy, is it reading stock from the live inventory record, or from an export that was current as of last night, or last week? If it is an export, the plan is buying against a position that has already moved, because receipts have landed and stock has shifted between stores since it ran.
If you want to see how planning and inventory work from the same stock ledger, book a demo and we will walk through it using your own categories, sizes and store count.