Alan Fisher offers two more useful formulas for inventory control and sell-through performance.
Okay, so I’ll bet you thought he couldn’t possibly have another formula for us. Well, I’ve got two. The first one is a stock-to-sales ratio. And they both need to be cost figures.
Let’s say you have £1,000 in an inventory category on 1 July and that you sold £150 (£100 at cost) in June. If you divide the £1000 by the £100, the stock-to-sales ratio is 10.0. What that says is that at last month’s rate of sale, you have ten months supply on hand. That is true if every month is similar to June.
Would you really run out of inventory in ten months? Highly unlikely. Once you get down to an unacceptably low level of inventory, customers stop buying due to lack of selection.
While this simple calculation may not be entirely accurate for several reasons, it should scare you into action when you see very high and very low numbers. A stock-to-sales ratio of greater than 12.0 means you have over a year’s supply and are likely to attain a stock turn rate of less than 1.0. And a ratio of 1.0 to 2.0 could indicate a lack of selection, unless you have the ability to replenish quickly.
Even though it is not completely ‘truthful’, it serves as an indicator of where markdowns are warranted and where additional inventory is needed. But as a word of caution, the month that you use in the calculation needs to be somewhat typical or average. If you calculated 10.0 months supply of sweaters based on June sales in the desert in southern California, it would not be a good indicator. During the selling season, that might be a two week supply of sweaters. So take into account whether or not these categories are in their prime selling season.
I recall conducting a buyer-training seminar several years ago at a US resort. They had multiple retail shops in addition to the golf shop. We were reviewing reports and got to how to read this particular ratio. The report listed high to low numbers. When the ‘report runner’ brought me this report with their statistics, the top of the list had a ratio of over 170! I could not professionally hold my surprise. At the current rate of sale, this category, yardage books, would last over 14 years! Even worse, the course was only open seven to eight months of the year and the course architect had made some changes including filling a waste area with water. By the way, the purchaser of these items did not return for the second day of training.
The second formula is a little more complex to calculate, but still valuable. It is called sell-through and should be reviewed near the end of the season, BEFORE you get to significant markdown periods.
It is calculated by taking the beginning inventory at the start of the season plus all purchases you have made since that time. This is your total available stock you had to sell. Then take your sales at cost and divide by the total available stock.
This helps you determine how successful you were at mostly full-price sales. If you can take some key categories like Men’s Golf Shirts and perform this by supplier, it becomes both a great negotiation tool with the sales rep while also helping to point you away from suppliers whose products don’t perform well.
Part of being successful is being willing to walk away from some suppliers. It should not matter (but it does), how friendly your relationship has been in the past. You are running a business and need to make decisions that benefit you, not your friendship.
Ok. Next month, we’re going to try to put it all together in a summary and timing format. My thanks to those of you who have provided feedback to me. So keep your comments coming!
Alan Fisher is a US-based retail consultant focusing on open-to-buy, inventory analysis and profitability strategies. He works with golf shops, retail apparel and gift shops. He can be contacted at: firstname.lastname@example.org or call: 020 3289 4653.