How To Use Days of Supply To Improve Your Retail Operations
Your decisions are based on constant changes in consumer buying habits, or at least they should be. Navigating these changes consists of making sound decisions on any given item in stock to keep costs down and profits high. Questions like "Should we mark the item up?" or "Do we buy less of this item?" or “Does this product have the correct space allocation on the shelf?” can only be answered by looking at the invaluable wealth of direction provided by your retail data.
Both retailers and suppliers should know their KPI's and how to use them as well or better than a conductor reads and interprets their musical composition. Your data will tell you what to do next - it's just a matter of being able to read what the data is trying to tell you and putting that information into practical use. In this post, we'll cover the concept of days of supply, and how it can help you improve your retail operations.
What is Days of Supply?
Days of Supply or DOS is a term often thrown around by category managers. In simple terms, Days of Supply refers to how many days it will take for the stock on the shelf to run out if sales continue at the same rate as recent sales - often evaluated against a 30, 60 or 90-day time frame.
For example, if you have 100 units of coffee merchandised on a shelf and over the last 30 days you've sold 25 units. Based on how these units of coffee have been sold over the last 30 days, it is fairly reasonable to project that it will take another 90 days to sell the remaining 75 units. So, for these 100 items in your inventory, the DOS equals 120 days. Therefore, it analyses the most recent period of sales and indicates the number of days it will take to sell off the remaining merchandise. Retailers (and suppliers) can use this information for a host of performance enhancing tactics.
There are some complexities and confusions about DOS, though. An increase in facings means added products or capacity on the shelf which will result in an increase in the days of supply because there are more units on the shelf, but this does not refer directly to a change in the rate of sale. Changes in the rate of sale because of changes to space allocations is in "space elastic demand" territory.
What is space elastic demand?
Space elastic demand refers to the increase or reduction in the rate of sale which would arise because of a change in a products space allocation.
Now let's put this theory into practical ways which can be used to improve your retail operations:
Out of stock reduction through shelf replenishment simplification
Consider two gondola runs. The first gondola run has been merchandised in such a way that each product’s DOS are between 9 and 10 days. The second has been merchandised in such a way that DOS for each product is completely inconsistent.
The result will be that for the first gondola run merchandisers will be able to replenish the entire gondola once each week and won’t run the risk of out of stocks unless there is a significant change in consumer demand. In the second example merchandisers will feel like they are playing whack a mole trying to replenish products at random as they sell out.
Safety stock decision support
Safety stock or buffer stock is a term used by logisticians to describe how much extra stock should be held to mitigate the risk of out of stocks caused by uncertainties or fluctuations in supply and demand.
When DOS is extended beyond the shelf by including stock held at stores and distribution centres, the DOS calculation can be particularly helpful for overall replenishment. In fact, many of our customers feed information from our category management software into their replenishment software because of this very reason.
How do space planners use DOS?
Being profitable in retail is all about the expert management of inventory, and this is where space planners are the behind the scenes rock stars. As far as DOS goes space planners are the people who bring the concept to life through planograms which are then implemented in stores. If you are space planning without bringing the principle of DOS into your planograms, then we suggest that you start as soon as yesterday.
How does DOS impact the shopping experience?
During trading hours, in-store experience and customer satisfaction should be priorities for store managers and their staff. There is nothing more frustrating for a customer than to be shopping for the essentials and items on a list only to be navigating merchandisers who are constantly running back and forth trying to replenish empty shelves (remember our whack a mole example).
Although it may not seem glamorous and new, DOS is critical for retail operations and the bottom line. Take our software for a test drive to put it into action: