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How (not) to optimise stock

Stockturn and Gross Margin Return On Inventory Investment (GMROII) is the holy grail of retail.

It’s essential that retailers know how to optimise stock levels, so that sales are not lost by having too little stock, and how to optimise the cost of holding inventory by not carrying too much stock.

Planning stockturns is not that difficult.

Take your planned annual sales and divide this by your average monthly stock at retail.

For example, if you estimate $12,000 sales in a year and your planned average monthly stock is $3000, your planned stockturn is four.

You are turning your stock over every three months. This is very much retail 101 and this applies to most categories of merchandise.

Where it falls short is when you have highly seasonal departments and planning a stockturn becomes somewhat irrelevant.

Take swimwear as an example. There is a huge peak in sales in the last few months of the year and then sales go into freefall declining rapidly. In this instance, it is virtually impossible to optimise stock levels.

A rule of thumb says you need a minimum inventory of 1.8 times the ‘final’ months sales with which to open the month. And even that is a big ask. The rest is probably best sent to the tip.

Opening next season with last summer’s swimwear isn’t really smart. The overall stockturn in a category such as this should be 10 or even higher.

In a ‘normal’ department one would be getting nervous that sales are being lost if the stockturn reached five or six, depending of course on whether you are buying locally (lower margin, higher stockturn) or importing.

The efficiency of your supply chain is another variable and the cost associated with flying goods in.

Having worked in Singapore some time ago, I was appalled at the stockturn in the crockery department. After someone investigated on my behalf, I found that we had imported a 40 foot container of rice bowls a few months before and another 40 foot container had just arrived.

I queried this with the merchandise director for homewares. She advised that she had agreed to the second 40 foot container because the price was better! Clearly stock optimisation wasn’t a factor.

Working in Indonesia I found the  stockturn in men’s shoes was low and markdowns were high. Yes – they purchased all sizes in the same quantity!

Before we scoff at our neighbours, there are examples here at home where similar atrocities have occurred, maybe not quite as radical, but nevertheless, it’s not what one would expect of a modern retailer with all the sophisticated tools available.

And yet it is these very tools that sometimes sabotage us. We do not train our people how to use them properly and therefore they distrust them and override them.

It was Dennis Eck, former CEO of Coles-Myer  who, after investing millions in systems, said that they had received no return on their investment. It then begs the question, whose fault is it if your stock isn’t optimised?


Stuart Bennie is a retail consultant at Impact Retailing www.impactretailing.com.au and can be contacted at stuart@impactretailing.com.au or 0414 631 702

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