This article is written by Sweta Singh.
In the previous article, Apparel Buying and Merchandising in a Nutshell—Part I, I highlighted a few major perspectives on fashion buying and merchandising. In this article, I’ll cover the technical and numerical perspectives of buying and merchandising and some of the day-to-day usable formulas.
These are vital perspectives because mathematics, statistics, and analytics come into the picture to help organizations perform a number of planning, tracking, and monitoring tasks.
Technical Perspective
The technical perspective is generally regarding the software systems, tools, and different technological resources that support the process perspective. Here we are talking about the Information and Communication Technology (ICT).
In buying and merchandising there are dedicated information technology tools that are focused on the day-to-day administration of these systems and tools. There are many applications that must work with on a regular basis like Spreadsheet Application, Enterprise Resource Planning (ERP) System, Pulling data from various systems, company portals, etc.
In an ideal situation if we have single integrated software tools in which you can do pretty much everything you need to accomplish all the business processes that we talked about in the previous article, would be the best solution. But in the practical world, it is never the case.
The biggest of all systems in buying and merchandising and other industries as well is the Enterprise Resource Planning (ERP) System. It is a software solution comprising various modules for supporting business processes like Product Life Cycle Management (PLM), supply chain management (SCM), and inventory management. For example, at your distribution centers or warehouses, there is a management of your customer base what’s known as Customer Relationship Management (CRM), Finance and Account Management for example invoicing, payroll and etc. Business intelligence (BI) for analyzing huge data and Human Resource Management.
Numerical Perspective
In my previous article. In the process perspective section, I mentioned some of the matrices. Here we’ll look into the calculation of those matrices, which require some basic mathematics to understand.
- Profit Margin
- % Profit Margin
- %Gross Margin
- Net Margin
- % Net Margin
- Open to Buy (OTB)
First, we’ll discuss about margin or percentage margin. To discuss margin we need to talk about profit, which is basically, the difference between the selling price and the cost price.
Profit= (Selling price-Cost price)
Then we have the concept of percentage profit, basically, the profit divided by the cost price multiplied by 100 to get the percentage.
% Profit = ((Selling price-Cost price)/(Cost price))*100
When it comes to calculating the profit margin, we can work on two types - Gross Margin and Net Margin. The gross margin is equal to the equation for profit. However, unlike % Profit, gross margin percentage is a kind of measure of profitability that uses the basis of selling price. This means we can express the % Gross margin as below:
% Gross Margin = ((Selling price-Cost price)/(Selling price))*100
Net Margin works slightly differently. As a definition, we shall say that the net margin is the total achievable margin after the trade discount and settlement terms have been added, subtracting any markdowns or markups. It is the measure of the true profitability of the product. For example, we factor in value-added tax (VAT), which is actually the amount that goes out of your pocket, you end up with the net margin as below:
Net Margin = Selling price-Cost price-VAT
If now we convert this into percentage value, we can represent the % Net margin as in the below equation:
% Net Margin = ((Selling price-Cost price-VAT)/(Selling price-VAT))*100
The next matrix in our focus is OTB i.e. Open to Buy.
OTB is the amount of money made available for the buying team to spend. Simply put OTB is the difference between how much stock is needed and how much is available, and this considers like available stock, in transit stock and so on. Here it might sound a little confusing that OTB on the one hand I am saying the amount of money and on the other hand I’m referring to it as stock.
Well, when I say stock that means the money equivalent to that stock. The planning team must be tracking the stock on a weekly or monthly basis as per the business requirement. The equation for calculating OTB is as below
OTB = (Target closing stock+Planned sales+Planned markdowns+Adjustments )-( Opening stock+Forcast intake)
Calculations related to the performance of the stock
When it comes to accessing the performance of the stock, there are three main matrices; Stock turn, Sell-through, and Stock cover.
Stock Turn:
Number of times you change the stock on offer to the customer during the course of the trading year. Stock turn is calculated as below:
Stock Turn = ((Average sales value)/(Average monthly stock value))
Sell Thru:
Sell-through refers to the percentage of a product that is sold by a retailer after being shipped by its supplier, typically expressed as a percentage. It is calculated using the following formula.
Sell Thru = ((Cumulative sales to date)/(Quantity delivered))*100
Stock cover:
The number of weeks anticipated considering the opening stock and the sales for the previous week. It is the figure that is tracked on a weekly basis which is expressed below:
Stock Cover = ((Opening Stock)/Sales)
In practice, there are a lot more equations and all sorts of levels of details in merchandise planning. I will discuss those topics in my upcoming articles.
About the Author:
Sweta Singh has done B.Tech from GCETTS in Apparel Production and Management and completed postgraduate in fashion technology from NIFT, New Delhi, India. She is currently into Fashion Retail in Buying and Merchandising, taking care of the product from the development stage to sales monitoring. She is passionate about fashion technologies and new trends in the apparel industry.