the single largest investment a retailer makes. Understanding how to manage inventory can mean the difference between 5c to 35c in each dollar dropping to your bottom line profit. How can your business replicate the world’s fittest retailers, always accurately managing stock levels, thereby avoiding unplanned markdowns along with maximising cash flow and profits, while others just buy what they think will sell, then cross their fingers and hope for the best? How many of us, as retailers, really understand the significant impact that a well managed stock position will have on increased sales, liquidity and profitability? Retail performance varies depending on a number of key contributing factors. These factors can include economic confidence, weather, competitive environment, and the day of the week on which Christmas falls. Recording and analysing factors influencing these key events in your retail diary is the first important step to take. While we can’t influence the weather, and our inventory at this time of the year has most likely been purchased, any opportunity to maximise stock profitability now depends on good management. Such management is made a lot easier by good systems (both computerised and manual) and the discipline of a market leader who measures sales, margin, and stock position in both detail and composition. Working your systems for profit Here are some of the tools that you will need to maximise your stock management effectiveness (and therefore profit). Have a product budget Formal product management often works within a concept known as Open to Buy (OTB). Plans for performance of product groups are noted in terms of dollars and unit sales, with corresponding levels of purchases, discounts, and delivery periods etc. If sales are trending up you need to buy more. Discounts can be used to increase units sold in order to reduce closing stock target where applicable. A good OTB system will balance all these factors – with a view to assessing if the retailer is heading toward their planned closing stock position – even though that position may still be weeks or months away. Whether you run a formal OTB via a retail management system, computer spreadsheets or even manually, the key is to ensure that you are now heading towards the planned closing stock positions you want. Finding the right stock levels to sales is really a large balancing act. Having a product budget is an invaluable tool for a retailer to manage closing stock positions. It can help map your predictions regarding your customer purchases, sales, discounts, and delivery times and ensure these positions are achieved. Whether formal or informal, now is the time to consider your right stock levels for coming weeks. Average margin Retailers should try to differentiate between the concepts of first margin and average margin. First margin is the difference between the initial sales price and cost of the item (that is the buyer’s margin). Your average margin will reflect the various prices at which stock items are sold during an overall period and takes into account various discounts and/or changes in cost during that period. Ultimately it is average margin which is reflected in the profit and loss, however, many best practice retailers engineer better average margins by proactively managing first margins and discounts – across the whole trading period. While a discount may reduce your average percentage margin for part of your range, the increase in sales may increase your dollar margin. The art of good retailing is to balance these positions in a manner that leads to the desired outcome without compromising your required dollar margin. By proactively managing your discounts, you will avoid average margins being below plan. Accordingly, do not get too hung up on protecting margins irrationally when the end of season is approaching. It is important to bite the bullet and use your imagination to engineer attractive offers, rather than hanging on to dead stock which is unlikely to be more attractive to buyers in subsequent weeks. As we know retail creates moving targets (especially in fashion) and there is no one size fits all solution. Our ultimate imperative is finish a sale period as close as possible to a logical position both in terms of closing stock and average margin – having achieved the desired level of sales. The best retailers will always focus on sales, margins, and closing stock positions and retailers who focus on sales only may well be selling themselves short. In order to assist in establishing similar processes, consider the following formal measures of stock performance used within some of the world’s best retailers: Sell through: This is one of the most important statistics for products that have a finite life. The core measure is defined as sales (during a period of time) divided by stock available to sell. For example if you sold 20 items out of 80, the sell through is 25 per cent. Week’s cover: This statistic is similar to the above in that it measures sales and stock, except week’s cover is the reciprocal of the sell through. From our previous example, with stock at 80 and one weeks sales of 20, week’s cover is four. Stock turns: This statistic measures your investment in stock as well as sales, but is more appropriate to core items that are in stock for longer or reordered frequently. For example, if the 20 sold above occurred over one month, the extrapolation of sales for a year is 240. Once again, the average investment in stock is 80 per month. Therefore the stock turns are three and indicates how much time the stock would turn in a 12 month basis. Stock turns provide a very handy ready reckoner as to the relative fitness of a retailer’s stock. Best/worst sellers: Without a stock position a best or worst selling item can hide underlying stock positions that are dangerous. For example, selling 100 items may sound good, but if the stock was 1000 items, the rate of sale is potentially not enough to clear this stock by season’s end. Ideally, the system will allow you to measure such best and worst with your investment in stock within these categories as an underlying factor. These statistics must be used with care and commonsense (a retailer’s intuition) and a merchandise management mindset. In isolation, each statistic is potentially irrelevant. The art of good retailing is to compare performances within appropriate parts of our business. For example: * If a product is turning eight times per year at store X and only three times a year at store Y, you could consider sending stock from store Y to store X – to balance supply and demand. * If your sell through on product group A is 25 per cent in week one of December and only 15 per cent on product group B, you may have a potential problem in either product. * If your week’s cover of accessories was 10 in the first week of December ’11 and three in December ’12, you may be running short on stock (assuming you closed ’11 cleanly). The correct balance will be assessed by comparing performance relative to an objective benchmark point. That benchmark point may be similar stock, it may be last year, it may be across branches, but if you rank your performance across logical sub-sets of our business, the items that appear as worst and best sellers need our most attention! If a stock item is a problem, is there a way to avoid a discount? Is it viable to move this item to another store? Can you engineer a conditional offer that will benefit broader sales while solving your problem? Will your supplier assist? If you do need to discount your item, can you gain a strategic advantage by making this a loss leader in your sale period? It is better to consider these questions sooner rather than later. If you make such plans and monitor performance diligently, it may be that you can avoid the effects of subsequent vicious discounting. Retail is a very competitive business. To compete you need a plan to defeat. Every retailer is trying to entice customers to spend more in their store(s). Use your stock statistics, in a manner that allows you to gain additional sales, but still achieve required margins, and ensure your finishing stock level is logical, both in terms of cash flow and the stock you want to start next year with. There is little point hanging on to dead stock ‘just in case’. Your Christmas/summer sale period is the best opportunity in the annual calendar to clean stockrooms. Use it to your advantage, but use it logically and plan your management now. Failure to plan is a sure fire plan to failure. The best retail plans are based on understanding historical and current statistics and forecasting the future accordingly. If your current systems cannot assist you in this regard, you should change systems. Furthermore if you have no stock turn measurement systems currently in place then there is no better time than the present to institute one that sets your retail business on the road to your holy grail of retail success. Happy Fit retailing * Brian and Retail Doctor Group can be contacted on (02) 9460 2882 or by email on businessfitness@retaildoctor.com.au. For more information, visit www.retaildoctor.com.au.