|Retail Successentials November 2014: Learn how to best employ your retail space to grow profits|
|Written by Bill Nielsen|
|Tuesday, 07 October 2014 02:23 PM America/New_York|
Do the math to manage stock-to-sales-to-space in your store
Take a look at your store through your customers’ eyes. See any empty or nearly empty spaces? Have you ever thought, or been told by others, that an area of your store looks too bare or another is crammed so full you need a shoehorn to restock?
Such observations can be a point of contention between store operating staff and those who handle purchasing. The typical scenario is one where the buyer(s) can honestly say that their stock levels are right in line with sales—stock-to-sales ratio is spot-on—but team members are frustrated by how there are empty shelves in one area of the store, while another area is overflowing. What’s missing in this equation?
The mistake many retailers fall into is buying to sales, but failing to align space to sales as well. Sales must be the driver of both, and a coordinated, ongoing effort to sync sales with the inventory plan and the space allotted for each department is required to make any given retail location more profitable.
Managing your stock-to-sales-to-space is truly one of the final frontiers of retail. It is almost entirely science. Let’s examine some of the basics that must be addressed before the stock-to-sales-to-space process will work.
One of the most common problems retailers face is the lack of accurate quantity-on-hand in their system. You cannot sell what you do not own. Solve this with a good annual physical inventory and periodic cycle counts.
Open Purchase Orders
It is not uncommon for every retailer to have older, unfulfilled purchase orders on their system. You cannot sell quantity on order. Solve this by looking at the dating of every open order and cancel the older orders that will not be filled by the supplier to free up open-to-buy dollars and enable accurate replenishment.
Walk through your average retail store, and you will find a bare spinner rack somewhere. Beyond sending a poor message to your customers, this is weak stewardship of the 2-4 square feet each of these fixtures takes up and on which you are paying rent. Solve this problem by making a list of every approved vendor-provided fixture or those you plan to replenish and then get rid of any fixture that is not on the list.
Secure sales history by year for the past two to three years. Do this for each department at a minimum. This will give you the sales data you need to sync your assortments and store space.
Secure by department your inventory dollars and subtract any returns in transit while adding any open purchase orders that remain after the cleansing process. This will reveal your current inventory commitment.
Obtain a layout of your store that shows available square footage on the sales floor as well as measurements for each major department/category.
Having completed all of the above, it is time to sync your inventory and space to sales. To do so, follow these steps:
First, take your annual sales and multiply by your average cost of goods percentage.
Next, take your annual cost of goods and divide by the inventory turn goal you have set. Remember, some products naturally turn faster than others, so be sure to have a separate turn goal for each department or category. The resulting number is your inventory budget for each area. The difference between your budget and current cost of goods on hand plus any open orders is your open-to-buy for each department. Staying within this budget will ensure that you do not under-buy or over-buy for each area.
Lastly, divide the above inventory budget by the average cost per unit for the product in that department. This will tell you how many units of product for which you need space. Divide this number by the average number of units that fill a shelf and you can quickly calculate how much space you need for each department. Once you have this number, allocate space and fixtures to each department based on how much inventory you expect to find.
The process can be daunting, but the disciplines of living by sales data for planning inventory levels and space allocation can yield significant incremental sales over not doing so. The upside of right-sizing may make it worth it to some retailers to reach out to a company that can help. Keep in mind, however, that this is not about a remodel, but rather a re-utilization of your space, so select outside help carefully.
Practice these Retail Successentials, and like Goldilocks, you will find your inventory levels to be just right.
NEXT ISSUE: We will look at how to optimize your supply chain and flow of goods to maximize sales and reduce freight costs.