Interestingly enough, small changes in the timing of your receipts can have a tremendous impact on your inventory turnover.
A big challenge finance has with merchants is convincing them that they don’t have to bring in all their inventory upfront. This is even more pronounced with apparel, and even more so with luxury apparel where leadtimes can exceed 9 months or more. But there is a way. In this article, I will demonstrate the impact the timing of your receipts has on your overall turnover.
Here are the strategies and results I’ll demonstrate using a fictitious but realistic example:
To get a quick backgrounder on inventory turnover, you can see the introduction to inventory turnover article.
Here’s some data for us to use for illustration. Say a merchant has 100,000 USD of seasonal/basic product she wants to bring in for the Spring season. Since the program is to last 20 weeks, the floorset would require 10,000 USD, and because the merchant doesn’t want to hassle with open stock or replenishable size prepacks, there might be a temptation to bring in the entire assortment upfront which would result in a 1.37 cumulative turnover after 20 weeks. Not so good. Here’s what that looks like:
How To Double Your Turnover
We can do much, much better. I’ll introduce three scenarios. The first two will use the same 100,000 USD receipts. The third will buy slightly less.
- Scenario A: Ensure the floor fixtures , or planogram, is sufficiently supported with inventory until the season is winding down. The fixtures will always look good to the customer.
- Scenario B: Time the receipts as close to the sales as possible with enough inventory to support sales until the next receipt. No stock outs.
- Scenario C: Don’t buy the markdowns.
This scenario is fairly normal to see for most apparel retailers. The deliveries are broken up but notice how the receipts still significantly precede the sales. The turnover on this flow is 1.65 after 20 weeks which is rather typical, maybe a bit better than average. But there’s so much more that can be done.
In this scenario, we’ll bring in 25,000 USD to start which is more than enough for our 10,000 USD floorset and plenty more in case sales trend higher than expected. The remaining receipts will be delivered every four weeks and will support the next four weeks sales. Note: We will still buy the same product, or 100,000. The 20 week turnover jumps to 3.07.
Now what happens if we don’t buy that last receipt which is markdown sales anyway? Wow. Wow. Turnover jumps to 3.63, more than double from scenario A.
We didn’t lose any sales. In fact, in the last scenario, we increased our overall gross margin because we didn’t have to sell product at markdown. That should make someone in Finance very happy.
In this article I assumed that we had good sales forecasts. If you want to learn more about some terrific ways to forecast your sales take a look at the forecasting primer.
In future articles I’ll show you how impressive the financials look when we look at retail KPI’s like GMROI.
For help on how to adapt this inventory method to your company’s needs, contact Retailitix for more information.