Stock to Sales Ratios: Finding Clues to Guide Opportunities
Stock to sales is a pretty crucial metric as it measures your investment in inventory.
How much inventory do I need to meet my revenue?
It is also called inventory to sales ratio.
At a very fundamental level, it answers the question of how much inventory is required to drive sales.
The basic and simplest calculation is Beginning of the Month Inventory/Sales. We use the beginning of the month instead of average inventory to focus on meeting beginning of the month stock levels. We know from 35 years of experience, that starting each month with the desired stock levels of fresh inventory drives profitable sales. You cannot make up missed business so fresh on hand inventory to start the month is a key goal. Another key point is we always measure sales and inventory as retail to retail or cost to cost. Never divide retail sales by inventory at cost.
Let’s say BOM (beginning of the month) inventory is $35,000 and sales for that month are $18,000. The stock to sales ratio for the month is 35,000/18,000= 1.94. If you want to annualize that into a turn then go on step further and take 12/1.94= 6.18 annualized turn. It is important to remember that it is an annualized turn and can move around if the stock- to- sales changes over each month. This method does give you some guidance.
If month over month, for example, you achieve a stock to sales ratio of 2.0, then you are truly turning your stock 6 times a year. It is also a gauge that you might be missing business. Typically three months of stock to sales under 2 and sales are driven at full price or few markdowns, it is an indicator of high demand… and you might want to do a deeper dive. If it is a large volume class, it might represent an opportunity to split the class into two or more classification. This would be true for classes that typically turn at 5 times or less.
5-things to consider when looking at stock to sales ratios:
Higher volume classes usually can achieve good assortments with a higher turn. (lower stock to sales ratios). The volume exists to build a strong assortment plan.
Conversely, lower volume classes require a higher stock to sales ratio to create a meaningful assortment. Low volume classes are tricky, so if you are carrying more inventory over a longer period of time, your turns are slower and cash is tied up.
Stock to sales and turns are inversely proportional. High stock to sales ratios mean slower turns and lower stock to sales ratios equate to higher turns, as in the example above.
Higher stock to sales ratios are seen in the beginning of a season if the classification requires some amount of front loading. However as the seasonal sales peak the largest month should cash out by having a low stock to sales ratio.
Stock to sales ratios help determine how goods should land.
If your stock to sales ratio is high at the end of the season, you are looking at higher markdowns. So as you plan your season make sure the stock to sales ratios de accelerate. One of the premiere attributes of M1 planning is classification based. For example, classification like Denim, Suits, Sandals, etc, each have an M1 plan generating right sales demand but also matching it to an ideal stock to sales ratio. Every class has a cash flow goal and that is dictated by the stock to sales ratio.
There are additional considerations to ask yourself when you look at your own data…
Did I lose business because I was understocked?
Or do I have too much inventory and am I overstocked because my stock to sales ratio is so high?
Stock to sales ratios is one of the first things I look at when analyzing data.
It gives me a good perspective before I start to drill down. It is good to know for the next question, which is how fresh is my inventory? For example if my stock to sales ratio is high and it was low last month, chances are a lot of merchandise was received and my inventory is fairly fresh. If my inventory is not fresh and the stock to sales ratio is high for a few months in a row, it might be time to look at markdown strategies.
Finally, here is a little trick I have used and is a great rule of thumb…I take the fresh inventory at the BOM, and divide it by the desired stock to sales ratio and arrive at a pretty decent sales goal for the month. Rather than looking at last year or even trends, it tells me what is realistic and achievable based on my current inventory. It also indicates what amount of sales are necessary. I sometimes separate out older inventory and give that a stock to sales ratio based on the markdowns I expect to take to liquidate that inventory. I then add up the two goals for an overall target for sales in that class that month.Another good reason to look at BOM inventory.
Next time you are looking at your merchandise plan or your own data, invest some time discussing your stock to sales ratios and how they can guide you to more cash and growth.
Onwards and Upwards,
Marc Weiss
