The rate at which your business turns its stock is an indicator of its health. The faster your stock turns, the healthier your business. Of course, it’s easy to sell a lot when you carry a lot of inventory. It’s not so easy when you minimise your stock holding to only the inventory you need and still achieve great sales.
What is stock turn?
Also known as inventory turn or inventory turnover, stock turn is defined as a “ratio showing how many times a company's inventory is sold and replaced over a period of time”.In layman's terms that simply means it’s a measure to understand how your products are performing in your business over a specific time period. Ensure that the right amount of periods is used when calculating stock turn in order to give an accurate indication of performance. You should also take note when including periods that are peak season for your business i.e. Christmas for a toy retailer and end of school holidays for stationary.
That said, before we go any further, it’s important to note that you shouldn’t measure the overall performance of your business using your stock turns alone. Why not? Imagine trying to build a planogram, for example, using only one KPI. While you’ll definitely have a planogram, that doesn’t mean it will be correct. In fact, you’re guaranteed that it will be wrong because there is no context.
It’s only when your stock turn KPI is used in conjunction with other KPI’s such as Sales, Units, Profits, ROI etc. This will assist you in being able to understand the overall performance of your business.
How does stock turn affect business?
When it comes to stock turn and attempting to understand it’s importance, a good starting point is to consider the actual formula.
Inventory turnover equals your annualised sales divided by your average stock on hand. What does that look like in practical terms? And especially at store level? Here’s an example: if your business has annual sales of 5000 and stock of 1000, your stock turn is 5.
And when you have a stock turn number greater than one, it means the value of your sales is greater than your stock.
On the other hand, if you have annual sales of 500 and stock of 1000, you’ll quickly note that you have too much stock on hand. That equates to a stock ratio of lower than one. And when your stock level is greater than the value of your sales, you have a problem. And it filters into all parts of your business.
Also, it means you’re effectively upping your inventory cost. And as anyone working in retail knows, cost of stock is a business killer.
Having too much stock on hand can be caused by bad ranging decisions and this doesn’t mean that you should follow a close-minded assortment strategy by simply ranking products by sales and cutting out the bottom X%. It butchers the process because such an exercise is usually done with one KPI in mind and ignores all the others.
Just imagine what would happen when you have a product within your top selling list that consists of a range of three items? They complete each other. Let’s take Hair Care Products category as an example. The sales of your shampoo is high while for the conditioner, it’s low. And because your conditioners are at the bottom, you derange them.
By doing that, you’re affecting the sales of your top sellers. Even worse, you could take yourself out of a sub-category completely.
How to boost your stock turn
When it comes to boosting your stock turn, there are a bunch of exercises you can do. Mind you, it’s not about only doing one specific thing, which will result in a boost.
Rather, the science of bringing you stock turn ratio to a healthy number is a result of pulling a few different levers. It’s also about understanding which levers you should pull.
One lever has to do with your ranging. More specifically, it’s effective ranging or localised assortment planning. Exactly the opposite of butchered ranging where you rank your category top to bottom according to one KPI and slice the bottom X% off.
More than that, it’s about actually understanding what you’re ranging for. When you range, how much are your sending into your stores?
Let’s say, for example, you’ve been tasked to range for a large retailer and it’s for a stationery range. This particular store happens to be in a shopping mall right next to a destination store for stationery. Another destination store for stationery is around the corner too. In that case, it wouldn’t make sense to carry a destination range. Rather go for a convenience range instead.
As a result of this smaller range, you will reduce your required stock and this in turn will match your rate of sale, thus increasing your stock turn.
Having tighter control over your replenishment engine
Another lever to pull revolves around your replenishment engine. And you need to have tight control over it. Why? In short, if you don’t manage and control your inventory, you’ll end up with either out of stocks or a major overstocking issue. And that’s only the beginning.
How will you know if you don’t have proper control? One way to figure it out is to have a look at your stock ratio. If it’s lower than one, it could indicate a problem with your replenishment engine. It could be over ordering by too large a factor. In that case, you need to correct that to ensure the rate at which new stock enters your store is slowed down.
A more efficient replenishment results in just in time stock and ultimately better stock turns.
This, in effect, ensures that only the required amount of funds are tied up in stock, leaving cash flow for the rest of your business needs.