Retail Metrics: Key Performance Indicators (KPI’s) – Turn
By Scott Kreisberg
CEO, One Step Retail Solutions
In keeping with the theme of my last article, which was about our KPI’s (Key Performance Indicators – Days of Supply, Turn, Stock to Sales Ratio, Sell Through Percentage and Gross Margin Return on Investment), I’m going to go into more detail about this thing called inventory. In that last article, I covered Days of Supply. So, this article is about another aspect of inventory management, the next KPI you can use to better manage profitability in your store – Turn.
I used the comparison of managing a retail store to being an airplane pilot. I think that is a pretty good side-by-side comparison because when you are in a store, while you may not be navigating a jumbo jet loaded with people through the air from one point to another, your decisions about pricing, what to sell, how much of something to buy, where to buy it, who to hire, etc. do impact the lives of other people, even if it’s just you and your family. How profitable your retail store is goes hand in hand with the proper reading of the statistical data you should be getting from the metrics and reports from your point of sale system (POS). Interpreting these reports is like reading a map and making the appropriate adjustments to navigate through to the other side. And the other side in retail is being profitable.
This brings me to the next KPI which is Turn. We know that Turn is how many times an individual inventory item is replaced in the course of a year, what your average stock level is and how many times per year that amount is sold out and restocked. This is a very critical statistic to monitor because it will tell you when to order, how much to order, what to sell and how to sell it.
An easy example is if you have an average inventory of 100 jackets in a year and you sell 100 jackets every 4 months, your inventory “turns over” or is totally replaced, 3 times per year. Therefore, your turn would be 3 on those jackets. Each inventory item has its own turn over number. You can figure out the Turn by dividing the annual sales of that item by the average inventory of that same item. By knowing this formula, you can better manage an optimal Turn and work to increase your Turn as much as possible, without having to take markdowns.
Turn is often increased by reducing selling price. However, this obviously reduces profit. So if your cost on the stock of jackets is $50 and you sell them at $99.99, you have a profit of $49.99. But, if you find that you need to increase the turn and the only way is to reduce the price, you will eat into the profit of $49.99. A balance needs to be reached between the proper turn, and the proper profit margin. How do you find this balance? You can do this with the help of the right reporting from your POS.
I know I keep pushing this point about a good POS system, but a successful manager knows the way you make decisions is not only on gut instinct. You need statistical data on which to base educated and logical decisions. If a pilot used only his gut to fly an airplane, I don’t think anyone would ever want to fly with that pilot. Concrete facts are the best way to make a decision. A fuel gauge telling you the fuel tank is empty, has no emotion, isn’t upset that your top sales person called in sick and sales are down. That gauge isn’t having a bad day. It tells you like it is, with no outside influences getting in the way. Your POS reports are the same way – no emotion, just straight up raw information, unfiltered, ready to be utilized for profitability. It then is all up to you to figure out how to properly read the information you are being given to make the best possible choices you can to get the most bang for your buck.
The first things you will see on your Turn report are the inventory items you have in huge quantity that have a long turn. The piles of inventory that have a long turn have precious dollars tied up, unable to be reinvested. Now that you’ve seen that, stop ordering any more of that item, run a special, promote that item and get rid of it as quickly as you can. Move that product off the floor in whatever way you can. No one is ever happy to do a mark down, but there’s a plus side to doing a mark down and selling down that pile of inventory at a reduced rate. The plus side is that when you mark it down and the inventory starts moving, money is now coming in and can be reinvested, whereas before you did the mark down and the inventory started to move, you weren’t getting your money untangled and back in your pocket. It can be quite amazing what happens when you get an old pile of merchandise suddenly moving out of the store and how that affects the rest of the merchandise and sales. Try it. You’ll be glad you did.
Now, take this report and look at it along with the Days of Supply and see where you can be smarter in purchasing and reordering decisions. These reports are the place to start helping evaluate what your next plan of action will be. Back to the pilot reference above. There are several things you need to look at to navigate your store in the most profitable way. The Days of Supply and Turn reports are the starting points because you need to look at both of these reports and get the data from each in order to make the best decisions.
The all encompassing goal of retail is to make money and make as much money as you can with little loss. Having a good turn with the most profit is ideal. You want to get your money out of a piece of merchandise that has a long turn and get it into something that turns faster. This will get you more profit more quickly.
So, take your reports on Turn and go see what items you need to get moving out of the store and free up your money so you can reinvest it into some merchandise that will turn quicker and make more money.
Next time, I will cover Stock to Sales Ratio. Until then, let’s stay profitable!