Retail Metrics: Key Performance Indicators (KPI’s) – Stock-to-Sales Ratio
By Scott Kreisberg
CEO, One Step Retail Solutions
Alright, so in my last two articles, I’ve covered the first two KPI’s, Days of Supply and Turn. Now it’s time to get into the third one, Stock-to-Sales Ratio.
When getting into inventory, Stock to Sales Ratio is a key statistic for measuring whether or not you are overstocked. You can see when someone has too much inventory because their inventory is all over the place. Look in your stock room. Do you have a bunch of merchandise that’s been sitting there for a while or even been sitting there for years? If you said “yes” to that question, that is the sign that you’ve got too much inventory! And when you’ve got too much inventory in the store, sitting around not doing anything but collecting dust, your money is tied up in that inventory not able to be reinvested. It’s time to move that stuff because you need to purchase other inventory that will actually turn.
How does Stock to Sales Ratio work? Stock to Sales Ratio is the ratio of the inventory available for sale versus the quantity actually sold. For every unit sold, how many units were on hand? For every single sale I made of that particular item, how many did I have in stock at that time? Stock to Sales Ratio is the exact inverse of Sell Thru Percentage which will be covered in its own article. Simplified, this means that if I had 30 dress shirts in the store room when I sold 10 out of the 30, then I know that in order to sell 10 dress shirts, I would always have to have 30 of those dress shirts in the store room. You’ve got to have a certain amount of an item in inventory in order to sell a certain amount of that item. Knowing this about each inventory item keeps your inventory at the right level, not too high and not too low.
If the Stock to Sales Ratio rises, with an increase in inventory and there isn’t an accompanying rise in sales, then you are adding more stock without increasing sales. It’s kind of interesting how that can happen. Obviously increased stock without the accompanying increase in sales will reduce your profitability. If this happens, that is the time to hold off on purchasing any more of that item and work on selling down the quantity on that item until it’s time to reorder based on the Turn report and lead time to restock it.
Use the Turn report to help you keep the proper balance of inventory to sales when both of the above scenarios happen. It’s all pretty simple, really. Don’t over complicate it. It’s really that simple, I promise you.
Now, you can have a situation where your inventory went too low and there is a scarcity of that item out on the floor because you just don’t have enough to put out. This can happen if you don’t monitor your Turn on that particular item and what the restock lag is. Now that item isn’t available to be sold because you don’t have enough on the floor to sell. This seems like a backwards way of thinking because if an item sells normally and you start to run out, you’d think it would just keep selling. Well… in retail, it doesn’t work that way. If you have a shortage of an item, the backwards rule comes in and that item will stop selling. It’s funny, but this situation makes customers less willing to buy that item for the seemingly obvious reason that it’s just not there in enough quantity to be sold. Weird, I know, but I’m sure you’ve seen this happen. Consumers walk into a store, see there is a scarcity of merchandise because your stocks are low and they think you don’t know the business you’re in.
For instance, if you sell women’s apparel and you only have medium shirts in one color, the customers coming into the store are gonna think you don’t know anything about women’s apparel. There just isn’t enough of a choice and variety to entice the customer to buy from you. It comes down to not enough inventory to make any sales. People don’t want to buy anything if there isn’t enough of it left on the shelf or enough options to choose from. And if you lower the price too much, it won’t sell either. This goes the other way, too. If you price it too high, it won’t sell either. It’s a balancing act to keep the prices within the range that will sell as well as keeping the inventory just right.
This is also important because it is your check and balance. How do you know if you have too much inventory? Or too little inventory? You can’t walk into the stock room and look at your shelves of merchandise that can be put out on the floor and guess whether or not you have enough inventory. The Stock to Sales Ratio report from your POS will tell you where you stand regarding too much or too little. Keep an eye on the Turn of your inventory, then cross check it with Stock to Sales Ratio and the lead time to restock. Balance those things and you will keep the right amount of inventory on hand.
You can use this formula to calculate and manage your stock accordingly: Averaged Units of Inventory Available ÷ Units Sold. This will reduce your Stock to Sales Ratio as low as possible, without losing sales.
Keeping an eye on this report will help keep your money out of slow turning stock and into merchandise that will turn over quickly. The best way to get this information is from your POS. Having the right kind of POS will only return dollars back into the store and your pocket because you get the information you need to keep profits high and costs down. I can’t stress this enough.
In the next article I’m going to cover Sell Through Percentage. Good stuff to know so you can make good business decisions.