Plan at cost or retail? | IR News

Plan at cost or retail?

Posted Date: 10/08/2012

By Stuart Bennie

Some time ago I came upon a major fashion retailer who was running its merchandise planning division at cost.

I impressed upon them that planning at retail was now commonly accepted as good business practice, especially in fashion.

To my somewhat surprise they challenged this advice and I was commissioned to explore the advantages and disadvantages of each method.

I quickly learned after discussions with several retail CEOs and CFOs (some of the latter being CAs) that there was widespread confusion on the question.

Many seemed to regard planning at retail as being synonymous with the Retail Inventory Method (RIM) and I confess to ending up a little confused myself.

In order to get RIM out of the way, let’s take a quick look at it.

It is essentially a method of valuing inventory, accepted by the IRS in the States but no longer accepted by the ATO. Hence, if you use RIM here, you need both cost and selling.

RIM can become very involved with markdowns, markdown cancellations, mark ups, mark up cancellations, different versions of cost and so on, however, basically the system requires that the following are kept:

* Total cost and sell of all purchases
* Total cost and sell of all goods available for sale
* Sales for the period.

So whether your CFO chooses to use RIM or the direct cost method (or any other method) to account for inventory, is really up to him.

From a planning perspective in a fashion environment there seems to be no contest. Retail is the way to go. (This does not stop you from adding in a row at cost which will assist with cash flow projections).

There are a few minor disadvantages to planning at retail which are far outweighed by the advantages.

These are as follows:

The cost of sales includes markdowns so shrinkage is understated by that percentage, eg. if markdowns are 20 per cent and shrinkage is 1.5 per cent, actual shrinkage is closer to 1.8 per cent (this is not usually an issue because shrinkage is generally looked at on a comparative basis).
For high volume low margin operators such as supermarkets (where markdowns are not usually built into planning) the cost method is easier, whereas planned markdowns are an integral part of fashion retailing.
Stockturn is slightly inflated because a reduction in the value of inventory at retail will increase stockturn. However as per shrinkage above, this is not usually an issue because stockturn is generally looked at on a comparative basis.

However advantages are numerous and significant:

It facilitates markdowns and discounts to be included in the planning and these to be used as strong promotional tools.
It allows for the purchasing of goods to cater for these markdowns and discount promotions so that there is not a shortage of stock.
It best facilitates OTB.
It allows markdowns to be used as a vehicle to hold back OTB if required, thus ensuring planned stock levels are achieved together with facilitating freshness of stock.
It allows for the altering of forward sales, markdowns and/or purchases needed, in order to reach targeted closing stock (this is not possible at cost).
It recognises problem stock in the business when the problem occurs and it affects gross profit at that time.
It breaks down GP into components in a tidy package.
It is very easily understood by buyers/planners and is widely considered as industry best practice.
If exceptionally good margins are achieved, the stockholding is not inflated (if buy quantities are maintained). And vice versa.
There is congruence between the buying division and the stores division. They are both operating on retail budgets (which should be the same).

So if you are in the fashion business and/or if you have significant markdowns, promotional or otherwise, think seriously of changing to retail if you are working at cost.

Stuart Bennie is a retail consultant at Impact Retailing. Email Stuart for more information.

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Comments:

Friday, August 10, 2012 by Kelly Martin

I think that taking the time to evaluate each collection and make very informed decisions on what is happening in that market area is one of the better "New" ways of deciding price points and recognizing that how you view & price one collection is not how all of them should be marked up the same. We have to keep on our toes!!! ~kelly

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