Are outdated systems and manual processes holding your teams back? When data is scattered across departments like Finance, Planning, Merchandising, Buying, and Allocations, it becomes challenging to make informed, strategic decisions. Each department relies on the other to meet company objectives, but disconnected data and inefficient processes often lead to missed sales opportunities and poor inventory management.
In this post, we’ll walk through the step-by-step process of how Finance sets sales and margin targets based on P&L and EBITDA goals, how Planning uses those targets to create Open-to-Buy and SKU count guardrails, and how Merch, Buying, and Allocations execute on those plans. We’ll also include real-world examples of how major brands navigate these processes, while highlighting the importance of cross-functional collaboration and a shared understanding of data.
Please note: The brand examples used in this post are based on publicly available information and industry best practices, and do not imply partnerships or direct work with these companies.
Step 1: Finance Sets Sales and Margin Targets
The process begins with Finance, which plays a critical role in shaping the company’s financial direction. Using the company’s P&L and EBITDA objectives, Finance sets the overall sales and margin targets for the year, often extending these projections across a 3-5 year strategic plan. These targets establish the foundation for the entire retail operation, guiding the goals and activities of every department.
Key aspects include:
- Margin Targets: Finance calculates the required profit margins based on company objectives, determining how much margin needs to be generated per unit of revenue. This ensures that each product contributes to overall profitability while meeting pricing and cost goals.
- EBITDA Goals: These targets ensure the company generates healthy earnings before accounting for additional expenses like taxes, interest, depreciation, and amortization. Setting clear EBITDA goals provides a financial framework for the organization, helping maintain financial health and allowing room for growth.
Once Finance has established these sales and profitability targets, they pass them to Planning, which uses them to create channel and category-specific plans that align with the broader financial objectives.
Real-world example:
Nike is a prime example of a company that heavily relies on financial planning and cross-functional collaboration to hit its targets. Nike's Finance team sets detailed sales and margin goals on both a global and regional level, ensuring that each product category aligns with its long-term growth strategy. These goals are then communicated to Planning, Merchandising, and other departments to ensure that all business units are working toward the same objectives.
- Collaboration with Planning: Nike's Planning team uses these financial goals to develop regional sales forecasts and to plan inventory levels accordingly. Nike is known for having a tightly controlled supply chain, meaning any inventory misalignment could have a significant financial impact.
- SKU and OTB: Planning creates detailed SKU and OTB plans to ensure the right products are in the right regions, especially when launching new lines like Jordan or Nike Tech Fleece. With its large global reach, Nike’s coordination across finance, planning, and merchandising ensures consistent execution of its go-to-market strategy.
- Margin Optimization: Nike works with Merchandising to identify ways to improve product margins, whether through cost-effective materials, better supply chain logistics, or through its growing DTC initiatives, which have higher margin returns than wholesale.
Step 2: Planning Creates the OTB and SKU Targets
With Finance’s sales and margin targets in hand, the Planning team begins its work. Planning translates these top-level financial objectives into a detailed OTB plan and sets SKU count targets. These are the guardrails for Merchandising and Design to follow.
Key steps include:
- Creating an OTB for the Year: The OTB plan helps Planning decide how much inventory the company can afford to purchase over the year while ensuring that it aligns with the financial goals set by Finance. It’s a delicate balance between having enough inventory to meet demand while minimizing excess stock that ties up capital.
- Setting SKU Count Targets: Planning also sets the number of SKUs that Merchandising should focus on for the upcoming season. This guides Merchandising on how much product assortment is required while preventing over-assortment, which could lead to complexity and costs.
Planning plays a crucial role in ensuring that inventory investment matches sales forecasts, keeping the company within its financial boundaries.
Real-world example:
Zara is world-renowned for its fast fashion model, which allows it to design, manufacture, and deliver new products to stores within just a few weeks. This rapid turnaround time relies on close collaboration between Finance, Planning, Merchandising, and Allocations to minimize inventory risk while maximizing sales potential.
- Planning and OTB: Zara uses a unique just-in-time inventory approach, where Planning keeps a portion of the OTB open to respond quickly to emerging trends. This flexibility allows the company to stay agile, manufacturing only what’s needed based on real-time consumer demand, which minimizes markdowns and excess stock.
- SKU Count Control: Planning works with Merchandising to limit the number of SKUs each season, often producing fewer products in larger quantities, which helps achieve economies of scale and keeps costs down. Zara has a low inventory-to-sales ratio, which gives it flexibility to produce new collections without the burden of unsold inventory.
- Merchandising Influence on Design: Zara’s merchandising team works closely with its design department to ensure each product is aligned with current trends while adhering to strict cost-control measures. This collaboration helps Zara achieve its low-cost structure, allowing for frequent product launches.
- Inventory Allocation: Allocation is based on real-time sales data from stores, allowing Zara to continuously optimize its stock levels. Unsold products are quickly transferred to other locations or sold at discounts, ensuring Zara maintains a lean inventory.
Step 3: Merchandising and Design Work within Planning’s Guardrails
Once Planning has provided the OTB and SKU count targets, Merchandising and Design teams can begin their work. The Merchandising team influences product selection, ensuring that the products align with customer preferences while staying within Planning’s SKU count limits. Design develops the line based on the product mix that Merchandising outlines, keeping financial goals in mind.
Merchandising collaborates with Planning in the following ways:
- Ensuring Assortment Alignment: Merchandising must work within the SKU count target provided by Planning while making sure the product mix aligns with customer trends and sales potential.
- Influencing Design: Merchandising guides Design to ensure that the products developed are not only creative and marketable but also profitable. This collaboration reduces unnecessary sampling costs and avoids over-designing, which can inflate both soft and hard costs.
By working closely with Planning, Merchandising ensures that the line developed by Design will meet sales forecasts without exceeding budget constraints.
Real-world example:
Under Armour is well-known for its performance-driven apparel and innovative product designs, but this creativity is tightly controlled by the financial and inventory guardrails set by Planning. By aligning the Merchandising and Design teams with Planning, Under Armour ensures that its product assortment remains both profitable and aligned with customer preferences.
- Ensuring Assortment Alignment: Once Planning sets the Open-to-Buy (OTB) and SKU count targets, Merchandising at Under Armour works within those limits to curate a collection that reflects both customer demand and the company’s focus on performance innovation. They ensure that the mix of apparel, footwear, and accessories is balanced across categories like training, running, and outdoor, all while adhering to SKU limitations that keep costs under control.
- Influencing Design: Merchandising collaborates closely with Design to ensure that the products developed are not only technically advanced but also marketable and cost-efficient. For example, Under Armour’s popular HeatGear and ColdGear lines are designed to meet the high-performance needs of athletes, but Design works within the guardrails provided by Merchandising to ensure that materials and production methods align with financial targets. This collaboration helps reduce sampling costs and ensures that over-designing does not lead to increased production costs.
- Meeting Sales and Financial Goals: By working closely with Planning, Merchandising ensures that the final product line meets both the sales forecasts and budget constraints. For example, when Under Armour rolls out new products like smart shoes or its latest apparel collection, Planning ensures that these products are developed within SKU limits and that the cost structure supports profitability goals, while Merchandising ensures that the assortment will resonate with customers across retail and e-commerce channels.
Step 4: Merchants and Buyers Align Purchases with Brand Vision and Planning’s Help
After the product line has been developed, Buyers and Merchants work closely with Planning to determine how much of each SKU to purchase. This stage is critical for ensuring that inventory levels are optimized based on expected demand and financial objectives, while maintaining alignment with the brand’s overall vision.
The key here is collaboration:
- Aligning with Brand Vision and Design Intent: Merchants and Buyers ensure that purchase quantities align with the brand’s vision and design intent, ensuring a cohesive collection that reflects the brand’s aesthetic and goals across various channels. This collaboration ensures that each product SKU supports the overarching collection strategy and resonates with the target customer.
- Ensuring a Cohesive Collection Across Channels: While working with Planning, Merchants and Buyers focus on creating a unified collection that meets the demands of each sales channel, whether it be retail stores, e-commerce, or wholesale. This ensures consistency and availability across all touchpoints.
By maintaining close collaboration with Planning throughout the buying process, Merchants and Buyers ensure that their purchasing decisions not only align with demand forecasts and financial goals but also contribute to a cohesive and compelling product offering across all channels.
Real-world example:
Ralph Lauren is recognized for its ability to align merchandising and planning with its timeless brand vision, ensuring that its collections reflect both luxury and consistency across all channels. Ralph Lauren places a strong emphasis on brand cohesion while maintaining flexibility in adapting to market demand.
- Aligning with Brand Vision: Ralph Lauren’s Merchandising and Planning teams work together to create collections that embody the brand’s iconic style while remaining responsive to seasonal trends. Planning ensures that each SKU within the collection aligns with the overall brand narrative, preserving the company’s heritage while incorporating modern elements.
- Collaboration with Merchandising: Merchandising plays a critical role in curating product assortments that reflect Ralph Lauren’s commitment to craftsmanship and timeless fashion. The Planning team supports Merchandising by ensuring that the assortment is cohesive across channels, from high-end boutiques to online platforms. This collaboration ensures that both the design intent and customer expectations are met consistently.
- Ensuring a Cohesive Collection: Ralph Lauren’s Merchants and Buyers work closely with Design to ensure that each product reflects the brand’s aesthetic, while also being tailored to the specific needs of different sales channels. Whether it’s a capsule collection for flagship stores or a broader assortment for department stores, Planning ensures that the collection remains cohesive and resonates with the target audience across all touchpoints.
- Allocation Strategy: Ralph Lauren’s Allocation team ensures that products are distributed strategically across various regions and stores based on store profiles and sales forecasts. For example, more exclusive pieces may be allocated to flagship stores, while bestsellers are pushed to high-volume retail and online channels. The Allocation team adjusts stock levels in real time, ensuring that underperforming products are moved to more profitable locations, maintaining overall inventory efficiency.
Step 5: Allocations Execute on the Buy
Once the buy is finalized, the Allocations team steps in. Their role is to ensure that the products purchased are distributed across stores in a way that optimizes sales and minimizes excess inventory.
Collaboration is key here, as Allocations works with Merchants and Planning to ensure that:
- Inventory is Distributed Effectively: Allocations takes into account the demand forecasts set by Planning and ensures that each store receives the right products in the right quantities to meet local demand.
- Real-Time Adjustments: If actual sales differ from the forecast, Allocations adjusts inventory distribution to reflect these changes, ensuring that underperforming stores aren’t overstocked and that top-performing stores don’t run out of key items.
Real-world example:
Uniqlo, a leader in affordable, quality basics, is renowned for its operational efficiency and real-time inventory adjustments, allowing it to optimize stock levels and maintain profitability in a highly competitive space.
- Sales Targets and SKU Control: Uniqlo’s Finance and Planning teams work together to set tight SKU limitsand inventory levels that align with their low-cost strategy. By limiting the variety of products offered, Uniqlo achieves economies of scale with higher volumes per product, reducing production costs.
- Collaboration with Merchandising: Merchandising is tasked with ensuring that each product line stays true to Uniqlo’s brand identity of simplicity and functionality. Products like the HEATTECH line are developed with a clear understanding of cost structure, ensuring that even innovative products fit within financial targets.
- Allocation Adjustments: Uniqlo’s Allocation team uses real-time sales data from stores and e-commerce to adjust inventory allocations weekly. If a specific region has a higher demand for certain products (such as lightweight outerwear in colder climates), the Allocation team can swiftly transfer stock to match the demand, ensuring that popular products are always available where needed.
Step 6: The Importance of a Shared Understanding of Actuals and Planned Data
Throughout this entire process, a shared understanding of data is critical. Whether it’s Finance’s sales targets, Planning’s forecasts, Merchandising’s product line, or Allocations’ execution, all teams need access to the same real-time data. This level of visibility helps avoid missed opportunities, misalignment, and inefficiency.
Disconnected systems and manual processes can slow down decision-making, but with a centralized platform like Toolio, teams can have real-time access to both actuals and planned data, which allows them to collaborate more effectively and respond to market changes as they happen. By having a single source of truth, teams can streamline processes, making better decisions that ultimately drive profitability.
Real-world example:
Target is widely recognized for its ability to leverage real-time data to improve cross-departmental collaboration and execution across Finance, Planning, Merchandising, and Allocations.
- Data-Driven Planning: Target’s Planning team relies on real-time data dashboards to adjust its forecasts as needed. By tracking consumer behavior, sales, and trends, Planning can update its OTB and inventory forecasts regularly, ensuring that they match actual demand.
- Merchandising Collaboration: Merchandising uses this real-time data to select products that are trending with customers. They work closely with Planning to ensure that inventory levels match demand, avoiding the pitfalls of over- or under-buying.
- Vendor Relationships: Merchants at Target focus on creating strategic partnerships with key vendors to secure bulk purchase discounts and reduce COGS, all while ensuring that the product assortment remains aligned with the brand’s value-driven ethos.
Allocation Flexibility: Target’s Allocation team uses the same data sets to optimize product placement in stores. If certain products are selling out in one location but not performing as well elsewhere, Allocation adjusts stock levels, ensuring the right products are available in the right stores..
A Collaborative Ecosystem with Shared Data
Cross-functional collaboration between Finance, Planning, Merchandising, Buying, and Allocations is essential to hitting retail targets. By leveraging a centralized platform like Toolio, teams can have real-time visibility into sales data, inventory levels, and financial targets, enabling them to make informed decisions that drive profitability and growth. Without this shared understanding of data, teams risk misalignment and inefficiency, resulting in missed sales and higher costs.
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