web site updated 3 July 2007

What is Missing in Retail Systems

Last month, I pointed out that most retail systems were focused in the wrong direction when it comes to inventory management. So what is missing? A lot of valuable statistics, that’s what. But if I could only have one statistic from a retail package, it would be the Stock Turn Rate (STR) and you should hear the Hallelujah Chorus in the background when these words are spoken. It measures how many times an invested dollar is sold over a year.

To simplify the understanding of this, let’s look at the life of one solitary item in a fictitious shop. The buyer selects a supposedly great golf shirt that costs $25 and she (since most great apparel buyers are female) intends to sell it for $75 (a planned margin of 66.7%). However, that shirt sits untouched in the golf shop throughout the entire year until someone comes in on Christmas Eve and buys it as a last minute gift for an unloved relative. On the gross margin report, the buyer can pat herself on the back about how it earned that planned $50 and 66.7% profit. Since STR is not a part of the system reporting, it looks good for profit percentages. However, a second buyer bought the same shirt for her shop and, after four months, decided that the shirt was a mistake. So she reduced it to $40 and was able to sell (unload) it. However, this shop was able to pocket $15 in profits and reinvest the original $25 into some product that had a higher likelihood of selling at a reasonable profit. The second product sold at $60, earning another $35 in profits and giving the shop the opportunity to reinvest a third time. At the end of the year, this shop actually looked worse on the gross margin report because it only earned 53.1% in profits. However, there was $85 in profits instead of $50. The second shop had a STR of roughly 3.0 while the first shop had 1.0. Interestingly, the inventory levels at both shops stayed the same throughout the year.

This is the same concept as investing the stock market. As soon as you realize that your investment is not going to earn the return by the time you need it, you dump it and reinvest in something that can accomplish the return in an acceptable time. The application of Stock Turn Rate for inventory management leads to increased profits while attacking gross profit margins lead to decreased profits.