| Previously, I have talked about Retail Metrics and the | | | | Ratio decreases, and your sales do not decrease, then |
| importance of Key Performance Indicators (KPI's) in | | | | you will have increased profitability. |
| running your business. Let's take a closer look at how | | | | You can use this formula to calculate and manage |
| analyzing your inventory performance on a regular | | | | your stock accordingly, Averaged Units of Inventory |
| basis can keep your business on track. | | | | Available ÷ Units Sold. This will reduce your Stock to |
| A retailer has five decisions to make on any given | | | | Sales Ratio as low as possible, without losing sales. |
| item in stock: | | | | This brings us to, Sell Thru Percentage. This is the |
| 1. Mark up? | | | | percentage of stock you had available for sale which |
| 2. Mark down? | | | | was actually sold. Sell Thru Percentage is the exact |
| 3. Buy more? | | | | inverse of Stock to Sales Ratio (see above). |
| 4. Buy less? | | | | Sell Thru Percentage is especially important for |
| 5. Don't do anything? | | | | seasonal merchandise, since the goal is to be out of |
| How does a retailer know what to do and when to do | | | | stock of seasonal merchandise by the end of the |
| it? Well, the answer to that million dollar question lies in | | | | season. Therefore, you can look at your year-to-date |
| KPI's. | | | | sales of seasonal merchandise, and be sure that you |
| Let's take a look at what I consider to be the five | | | | were out of stock by the end of the season. |
| most important retail KPI's that should be easily | | | | The formula to calculate Sell Thru Percentage is, |
| generated from your software program. | | | | Average Units Sold ÷ Averaged Units of Inventory |
| The first thing I look at is Days of Supply. Days of | | | | Available, which is the exact reverse of Stock to |
| Supply is a key statistic which tells you how long it will | | | | Sales Ratio. Since this calculation primarily concerns |
| take you to sell out of your present stock, assuming | | | | seasonal merchandise, plan out the percentages to be |
| that sales continue at the same rate as recent past | | | | sold out of by month, so that you can ensure being out |
| sales. For non-seasonal merchandise which sells at a | | | | of stock by season end. This will give you better |
| relatively steady rate, you could use a longer basis | | | | control for accurate stock and sales management. |
| period, such as 30 or 60 days. For seasonal | | | | Now we look at everyone's favorite, Gross Margin |
| merchandise, the rate of sale changes rapidly, and you | | | | Return on Investment, (GMROI). For every dollar |
| would want to use a shorter period. | | | | invested, how many dollars did I get back? |
| Days of Supply analyzes the last period of sales, and | | | | GMROI calculates the return based on the gross |
| based upon that rate, gives you the amount of days | | | | margin from sales. For example, if you purchase |
| of supply left on that style. It is based upon the | | | | $2,000 of inventory, and sold it all in the same year for |
| numbers of days of selling that you tell your system to | | | | $6,000, your profit would be $4,000. The return on your |
| examine. | | | | investment of $2,000 was $4,000. The GMROI in this |
| Using this information, you can reduce your days of | | | | example is $4,000/$2,000 = 2. |
| supply to match lead times, without losing sales. | | | | GMROI is closely related to Turn as mentioned above. |
| The next piece of information I look at is Turn. Turn is | | | | If your Turn increases, your average inventory cost will |
| a measure of how many times your inventory is | | | | be lower (relative to your profit), and thus the greater |
| replaced in the course of a year. | | | | the return on your investment. Your merchandising goal |
| Example: If you have an average inventory of 100 | | | | is to increase the GMROI as high as you can, by |
| jackets in a year and you sell 100 jackets every 4 | | | | keeping turn high, at high margins. |
| months, your inventory "turns over" or is totally | | | | When trying to figure out GMROI, use this formula: |
| replaced, 3 times per year. Therefore, your turn is 3. | | | | (Sales Margin Dollars ÷ Months Passed) x 12 |
| Turn is often increased by reducing selling price. | | | | Averaged Inventory Cost |
| However, this obviously reduces profit. A balance | | | | As an additional note, always remember to set |
| needs to be reached between the proper turn, and the | | | | objectives for the merchandise you are buying. For |
| proper profit margin. | | | | example, when buying a new style of jeans, set a |
| Turn has a formula, Annual Sales ÷ Average | | | | target for how many pairs should be sold by some |
| Inventory. By knowing this formula, you can better | | | | reasonable time frame like, sell 12 pairs in the first |
| manage an optimal Turn and increasing your Turn as | | | | week. This is important so when you run your KPI |
| much as possible, without having to take markdowns, | | | | report you will know if the item is performing according |
| thus increasing your profit. | | | | to your expectations. If not, then you can take quick |
| Moving on to the next one - Stock to Sales Ratio. This | | | | decisive actions to sell off that item before you get |
| is the ratio of the inventory available for sale versus | | | | stuck with it and have to mark it down in an |
| the quantity actually sold. For every unit sold, how | | | | unprofitable fashion. |
| many units were on hand? Stock to Sales Ratio is the | | | | Using these key pieces of information and reporting, |
| exact inverse of Sell Thru Percentage (see below). | | | | you will better manage your inventory, gross |
| When getting into inventory, Stock to Sales Ratio is a | | | | profitability and have less mark downs in your store. |
| key statistic for measuring whether or not you are | | | | Your point of sale, properly set up and used will help |
| overstocked. If your Stock to Sales Ratio rises, and | | | | give you all of this information so that you can optimally |
| there is not an accompanying rise in sales, then you | | | | manage your store. So, here's to more profit and |
| are adding more stock without increasing sales, which | | | | better store management! |
| will reduce your profitability. If your Stock to Sales | | | | |