Inventory Planning: Top-Down Versus Bottom-Up
At the end of a season, a planner must perform an evaluation of their business in order to gain an understanding of what happened and what the company should do differently in the coming year to capitalize on missed opportunities. This evaluation often includes evaluating top-down versus bottom-up planning. The most effective planning uses a combination of the two
Setting pre-season sales and inventory plans can be a daunting task, but if you’ve consistently been analyzing your business, then you’re already set up for success. After analyzing a season, the next step is to develop pre-season sales and inventory plans for your business at the lowest level of categorization that makes sense for your company.
Top-down inventory planning involves setting a sales and inventory plan at a high classification level and pushing it down to a more detailed level—from the top, down. The lowest level of classification that a plan is set to depends on the company. For example, a retailer who manages multiple categories across a women’s business may set their sales and inventory plans at a very high level—tops, bottoms, and accessories. If this company’s highest revenue driving category is bottoms, they may set sales and inventory plans for that area at a deeper level of classification (pants, skirts, shorts etc).
Bottom-up planning involves setting a plan at the most detailed level of classification and then rolling up the plan to a higher level of classification. Bottom-up planning requires creating a buy plan (down to the size level of an item) that contains a sales forecast and the quantity of units that need to be manufactured or purchased in order to hit the planned sales for each style.
All companies perform top-down planning to a certain extent, but not all companies have the resources or stability to build a bottom-up plan. Whichever method a business chooses, sales and inventory plans are ideally developed at the weekly level for a season. However, some companies plan at the monthly level (again, this depends on the company’s resources).
Top down planning is easier to execute and common amongst smaller, leaner companies—or companies who have massive SKU counts. Bottom-up planning requires that very detailed assortment and financial plans be developed pre-season, which can be very time-consuming. Given the level of detail required in bottom-up planning, a company will likely need a sophisticated inventory planning system in order to track these granular level sales and inventory plans.
Note that these planning methods are not mutually exclusive—a company who does top-down planning will most likely set bottom up financial targets for their basic/core/evergreen product(items sold consistently throughout the year regardless of the season) and use these targets to inform inventory buys. A company who plans bottom up also performs top-down planning during the preseason process. In fact, it is these preseason top down plans that guide the bottom-up planning decisions. It would be accurate to say that all companies perform top-down planning, but not all companies bottom-up plan.
One of the benefits of top-down planning is the flexibility to react to the business based on in-season trends. One of the major challenges can be in filling the Open to Buy, the budget, with compelling product for a season or time period in a timely manner. When a retailer purchases product from vendors and resells them to consumers, the product they sell depends on what their vendors have to offer (they’re at the mercy of the market). So, if a retailer can’t find the right product, they may not have enough inventory to support sales. Or, they may be forced to buy into less compelling product that doesn’t perform well.
When product is purchased, rigorous thought isn’t necessarily given into how long an item should live, when it should go to markdown, or what sales volume can be expected of an item. This can make it difficult to evaluate a product’s performance and know when to take promotional or markdown action. It’s fairly straightforward to tell when an item is selling either very well or very poorly, but, evaluating the performance for those items that fall in between can be a challenge when there’s no plan to compare it to.
Top-Down In-Season Challenges:
Issuing reorders on product that is performing well can be a problem as the vendor may not have any inventory left for the retailer to purchase, or the lead times for a reorder may be too long and seasonality will have passed.
If an item isn’t selling well, it’s time to take promotional and markdown action. However, if a retailer invested a high amount of cost and units into a poor performing item, this will negatively impact margin. Further, sometimes markdown action does not help an item sell significantly better, especially if fit is the issue.
Performingbottom-up planning is a time-sensitive effort that requires collaboration with various stakeholders. Designing and manufacturing product requires a much longer pipeline with a rigorous schedule.
Planning sales and inventory at the style color level (also known as buy planning) can be a very messy, long process, primarily because plans must be reconciled (rolled up) multiple times to ensure they are hitting the tops down sales plans. Further, if any changes are made to the assortment plan during the buy planning process (if styles are either removed or added), sales plans must be reworked throughout this process. There is a mandatory pencils-down date for buy planning in order for purchase orders to be passed off to the production team.
Bottom-Up In-Season Challenges:
Reacting to variances from an item’s sales plan can be very difficult for retailers who have long lead times (again, most companies who have the resources to bottoms up plan have long lead times). Chasing into product that is outperforming its sales plan can be a challenge, as can pushing out or canceling orders. Usually, companies are committed to the purchase orders already issued, and if an item has too much inventory, in-season promotional levers must be pulled to generate sales.
The Ideal Approach
Forecasts are more accurate at a higher level of taxonomy than at the more detailed level. However, the more detailed a buy plan, the easier it is to track and manage sales and inventory.
The simplest reason for choosing how a company creates plans comes down to the type of company and its resources. In an ideal world, every single item that a company sells has a sales forecast associated with it that informs the inventory investment and allows the planner to evaluate how the item is performing. The aggregated sales forecasts from all of these items roll up to an achievable sales plan rooted in reality.
However, a company that constantly sources new product with a quick turnaround usually does not have the time to develop style level sales and inventory plans. Companies who manufacture their own product usually know what items they can produce for a season several months ahead of time and have the information necessary to develop style level sales plans. That being said, a company who manufactures their own product may not have enough bodies or bandwidth to develop detailed, style level plans.
A blend between the two methods of planning is generally the best approach, even if you’re a small retailer with limited resources.
To learn more about inventory planning, please download A Guide to Inventory Planning.