Inventory Turnover – Three Steps to
Purchasing Smarter, Turning More
and Making More Money
Paul Erickson, RMSA
Paul Erickson
Senior Vice President
www.rmsa.com
Info@rmsa com
[email protected]
inventory
y turnover
• a key indictor of how well merchandise is
performing at retail
• does not appear on a retailer’s
retailer s P&L
• accounting does not factor in the element of time
definition
• the frequency that a store sells its average
dollar inventory
• a measure of the inventory efficiency and
is expressed as a ratio
apples to apples
• retail inventories to retail sales
• cost inventories to cost of goods sold
the formulas
annual retail sales
average
g inventory
y at retail
- OR -
annual cost of goods sold
average inventory at cost
alternative concepts
turns (annual)
sell through (weekly or monthly)
sell-through
measure and track
calculating
turn goals
into sell
through
goals
turn
goal/months
or weeks in
year = sell
through goal
example:
4 turns
12 months =
33%
measure and track
calculating
turn goals
into sell
through
goals
turn
goal/months
or weeks in
year = sell
through goal
example:
4 turns
12 months =
33%
measure and track
calculating
turn goals
into sell
through
goals
turn
goal/months
or weeks in
year = sell
through goal
example:
4 turns
12 months =
33%
monthly
y
Annual Turn
Avg.
g Monthly
y
Sell -Thru
1.5
= 13%
2.0
= 17%
30
3.0
= 25%
4.0
= 33%
6.0
= 50%
weekly
y
Annual Turn
Avg.
g Monthly
y
Sell -Thru
1.5
= 2.9%
2.0
= 3.8%
30
3.0
= 5.7%
5 7%
4.0
= 7.7%
6.0
= 11.5%
turns = weeks supply
y
52 weeks / turn rate
1.5 turns
52/1.5
34.6 weeks
2.0 turns
26.0 weeks
3 0 turns
3.0
20 8 weeks
20.8
4.0 turns
17.3 weeks
52 weeks
2.0 Turns = 26 Weekk Supply
l
26 weeks to sell an item
Jan 10th | Feb | Mar | Apr |May | Jun-July10th
increase turns increases cash flow
an improvement of only 1 week
in annual sell-through increases
flow by approximately 1%
of annual sales
25 weeks to sell an item
Jan 10th | Feb | Mar | Apr | May-Jun | July
3rd
cheaper by the dozen
another view
steps
p to improve
p
cash flow
negotiate
longest
payment
terms
possible
sell at least
half before
you have to
pay
sell it before
you pay for it
steps
p to improve
p
cash flow
negotiate
longest
payment
terms
possible`
sell at least
half before
you have to
pay
sell it before
you pay for it
60 dayy terms & 3 turns accomplishes
p
this goal
g
Example
3 turns = 121
121.6
6 ddays supply
l (365 / 3)
Approximately
pp
y halff the items are sold
by the time the invoice is due
steps
p to improve
p
cash flow
negotiate
longest
payment
terms
possible
sell at least
half before
you have to
pay
sell it before
you pay for it
90 dayy terms & 4 turns accomplishes
p
this goal
g
Example
4 0 turns = 91 ddays supply
4.0
l (365 / 44.0)
0)
For all ppractical purposes
p p
the entire
inventory is sold by the time the
invoice is due
practice in action
Th $1
The
$1,000,000
000 000 BOOTS
Th $1
The
$1,000,000
000 000 BOOTS
50% Markup
Th $1
The
$1,000,000
000 000 BOOTS
$500,000
Th $1
The
$1,000,000
000 000 BOOTS
Open Doors January 2nd
$34,000 @ month operating expenses
th
24
Boots sell on December
as a last minute holiday gift
Jan | Feb | Mar | Apr | May | June
g | Sept | Oct | Nov | Dec
Jul | Aug
d o ea Income
co e Statement
State e t
End-of-Year
Sales
Cost of goods sold
Gross profit
Less expenses
(($34K x 12 months))
Net profit
$1,000,000
$ 500,000
$ 500,000
$ 408,000
$ 92,000
$500 000
$500,000
O
Open
D
Doors JJanuary 2nd
th
24
Boots sell on December
of Year 2 as a last minute holiday gift
Jan | Feb | Mar | Apr | May | June
Jul | Aug | Sept | Oct | Nov | Dec
Jan | Feb | Mar | Apr | May | June
Jul | Aug | Sept | Oct | Nov | Dec
ea 2 End-of-Year
d o ea Income
co e Statement
State e t
Year
Sales
Cost of goods sold
Gross profit
Less expenses
(($34K x 24 months))
Net loss
$1,000,000
$ 500,000
$ 500,000
$ 816,000
$ (316,000)
$500 000
$500,000
O
Open
D
Doors JJanuary 2nd
Boots
B
t sell
ll th
the
last day of
January!
do
ea s Income
co e Statement
State e t
End
of 2 Years
Sales
Cost of goods sold
Gross profit
Less expenses
(($34K x 1 month))
Net profit
$ 800,000
$ 500,000
$ 300,000
$ 34,000
$ 266,000
your call to action
three things
g
plan your sales &
inventory to
achieve faster
turns
markdown slow
selling
merchandise
within planned
month's supply
window
use MIN/MAX
and autoreplenishment
systems
three things
g
plan your sales &
inventory to
achieve faster
turns
markdown slow
selling
merchandise
within planned
month's supply
window
use MIN/MAX
and autoreplenishment
systems
three things
g
plan your sales &
inventory to
achieve faster
turns
markdown slow
selling
merchandise
within planned
month's supply
window
use MIN/MAX
and autoreplenishment
systems
outdoorindustry.org/OU
Shoulder-Season Discounting Strategies – The Eight Truths
of Markdowns – January 31
The Mysteries Behind Initial Mark-up – Pricing Strategies to
Improve Your Bottom Line – February 14
The True Measure of Retail – GMROI – and What it Takes to
Grow It – February 28
Thank You.
You
outdoorindustry.org/OU
Paul Erickson
RMSA Retail Solutions
www.rmsa.com
perickson@rmsa com
[email protected]