Planned Reductions

Planned reductions are the decreases in inventory value a merchandise plan expects in a period other than sales: markdowns, employee and promotional discounts, and shrink, plus losses particular to a category, such as freight damage, floor samples or testers. In a retail-method plan they are retail value that leaves the stock without being realised as sales, so the plan has to replace it with receipts to reach its planned ending inventory. They are a term in the receipt plan and in open-to-buy, and in the merchandise financial plan they separate the markup a plan starts with from the markup it keeps.

The lines

• →Markdowns — permanent and promotional price reductions, expressed against sales as the markdown rate.
• →Discounts — employee and point-of-sale promotional discounts: the goods sell, but for less than the retail value the stock ledger carries.
• →Shrink — theft, damage and record error, planned as a rate of sales and confirmed when a physical count reconciles the book.
• →Category lines — freight damage and floor samples in home and furniture, testers and gratis in beauty, demo units in outdoor and sporting goods, listed in open-to-buy by vertical.

How they enter open-to-buy

Receipt need = planned EOP inventory + planned sales + planned reductions − BOP inventory, and open-to-buy is the receipt need less on order. Every dollar of reductions left out of the plan is a dollar of receipts not planned, and the period ends below its stock target by that amount.

The figures below are illustrative, chosen because they divide cleanly; they are not benchmarks or targets and are not drawn from any brand. One apparel department plans a month at retail: planned EOP of $900,000, planned sales of $400,000, markdowns of $48,000, employee discounts of $4,000, shrink of $4,000 and BOP of $820,000. The receipt need is 900,000 + 400,000 + 56,000 − 820,000 = $536,000. A plan that carries only the markdowns asks for $528,000; when the discounts and shrink happen anyway, the month ends at 820,000 + 528,000 − 400,000 − 56,000 = $892,000, $8,000 below its target. A plan held at cost has no markdown line, because a markdown changes margin, not cost; its reductions are shrink, damage and write-downs.

How they enter the MFP

Initial markup is taken on receipts, reductions lower the retail actually realised, and maintained markup is what remains: MMU % = IMU % − (reductions as a % of sales × (1 − IMU %)). In the example, at a planned IMU of 60 per cent, $56,000 of reductions is 14 per cent of sales, so MMU is 60% − (14% × 40%) = 54.4 per cent. A reduction rate planned too low overstates the margin the plan reports and understates the receipts it needs, both at once.

Markdown money and returns to vendor

Markdown money is not a reduction. A markdown lowers the retail value of stock whoever funds it; the vendor's allowance recovers margin afterwards and belongs in the margin plan, in the season whose markdowns it funded. Netted against planned markdowns, it shortens the receipt plan by its own amount. A return to vendor is recorded either as a negative receipt or as a reduction, never both; carried in both places, the plan replaces the returned goods twice.

Common mistakes

• →Markdowns planned, discounts and shrink left out. The receipt plan comes up short by exactly the missing lines.
• →A markdown counted twice. Taken off the stock value and also carried as a planned reduction, it lifts the ceiling on the next buy by its own amount.
• →One reduction rate across categories. Categories with testers, samples or freight damage absorb losses the rate never planned.