The importance of inventory turn and why you should care!
In furthering the discussion on ” Key Indicators Numbers” inventory turn rate has a direct relationship to profitability. Achieving an optimal turn rate results in an “Efficient Inventory. An efficient inventory is defined as an inventory that allows you to sell the right product and the right time at the maximum price. Stated another way it is an inventory that meets customer demand, eliminates out of stocks and reduces the need for sales and markdowns. You may never get to that perfect inventory level but the closer you get the better your bottom line.
The calculation for inventory turn can be either one of two ways:
Retail sales – divided by the value of inventory at retail
Cost of Good sold – divided by average inventory at cost
The first step in the process is to establish you current inventory turn. Once you have it try to find out how that compares to average turn rate in your specific retail vertical market. Trade associations are a good source for this information. Here are some examples of average inventory turns by vertical markets.
Book stores 2.6 – Departments stores 3.50- Pet Supply 6.7 -Supermarkets 10 Fashion speciality 6.5- – Sporting Goods 2.6.
Once you have calculated you turn rate for two or three months compare to the average rate in your vertical. You goal to is to at least reach that average. You can get sophisticated and calculate your turn by department to get a really fine tuned inventory, but that’s after you established a valid baseline.
Why should you care: Here’s a simple example of a store with annual sales of $1,000,000 and an inventory turn rate of 5X and 50% maintained margin. If they can increase their turns by one turn to 6x they bring $33,333 to the bottom line.
Retail inventories on average have doubled since 1995. A great reference of the effect on the consumer of too many choice is the ” The Paradox of Choice”, Why less is more by Barry Schwartz. A case study in the less is more concept is Traders Joe’s. They generate the highest per square foot sales of any specialty grocery chain in the US and they do with less than half of SKU’s of the typical store of their size. They double a triple face fast selling items to ensure thier always in stock. Retailers have been conditioned by suppliers that the more choices they offer the better. The opposite is true.