Unveiling the Secrets of Retail Success: Advanced Inventory Management

The Five Critical Decisions for Retail Inventory Management

Retailers face a series of pivotal decisions regarding their inventory:

1. Should prices be increased (mark up)?
2. Is it time for a discount (mark down)?
3. Do we need to order more stock (buy more)?
4. Should we reduce our orders (buy less)?
5. Or is it best to maintain the status quo (do nothing)?

The answers to these questions are embedded within the data of KPIs.

The Five Most Important Retail KPIs

Days of Supply: The Inventory Countdown

Days of Supply is a vital metric indicating the time it will take to deplete current stock based on recent sales velocity. For consistent, non-seasonal items, a longer historical sales period, such as 30 or 60 days, can be used. In contrast, seasonal items require a shorter period due to fluctuating sales rates. By analyzing past sales, Days of Supply helps retailers align their inventory levels with lead times, avoiding lost sales due to stockouts.

Inventory Turnover: The Revolving Inventory

Inventory Turnover, or simply Turn, measures how often inventory is sold and replaced within a year. For instance, if you sell 100 jackets every four months and maintain an average inventory of 100 jackets, your Turn is 3. The formula for Turn is Annual Sales ÷ Average Inventory. A higher Turn can be achieved by lowering prices, but this may impact profit margins. The goal is to find a balance that maximizes both Turn and profit.

Stock to Sales Ratio: Balancing Act

The Stock to Sales Ratio compares the inventory on hand to the quantity sold. It's calculated using Averaged Units of Inventory Available ÷ Units Sold. A rising ratio without an increase in sales suggests overstocking, which can erode profitability. Conversely, a falling ratio with stable sales indicates improved profitability. Retailers aim to minimize this ratio without sacrificing sales.

Sell Thru Percentage: Seasonal Strategy

Sell Thru Percentage, the inverse of Stock to Sales Ratio, represents the proportion of available stock that was sold. It's particularly important for seasonal merchandise, where the goal is to sell out by season's end. The formula is Average Units Sold ÷ Averaged Units of Inventory Available. Planning sell-through percentages by month ensures that seasonal items are sold in a timely manner.

Gross Margin Return on Investment (GMROI): The Profitability Gauge

GMROI assesses the profit generated for every dollar invested in inventory. It's calculated by dividing the gross margin from sales by the average inventory cost. For example, if you invest $2,000 in inventory and sell it for $6,000, your GMROI is 2. A higher GMROI is achieved by maintaining a high Turn with substantial profit margins.

Setting Merchandise Objectives

It's essential to establish clear targets for new merchandise. For example, setting a goal to sell a certain number of units within a specific timeframe allows for prompt action if sales fall short, preventing unprofitable markdowns.

Conclusion: Harnessing KPIs for Retail Excellence

By utilizing these KPIs and reports, retailers can better manage inventory, increase gross profitability, and minimize markdowns. A well-configured point-of-sale system is a powerful tool that provides all the necessary information for optimal store management. Here's to higher profits and enhanced store management!

For further insights into retail KPIs and inventory management, consider exploring resources from the National Retail Federation (NRF) and Retail Dive (RetailDive), which offer a wealth of information and up-to-date statistics on retail trends and best practices.