In a previous post I discussed the reasons why a larger turn number is not always considered a healthier turn number. The first reason involved negative profit margins. The second reason was high out of stocks.
There is a close relationship between turnover and inventory levels. Turnover is essentially a measure of how efficiently a retailer is utilizing their inventory in creating sales. Looking at the turnover equation (Annual Sales/Average Inventory – see Inventory Turnover: Retail, Cost, or Unit?), it is easy to see that there are only two ways for a retailer to improve their turn numbers. They can increase sales or lower inventory. For now, let’s concentrate on the latter.
Smart merchants spend a great deal of time studying their category’s in-stock (aka on-shelf availability) levels. These numbers tell the retailer whether any particular product is in inventory. When an item is 95% in-stock, the retailer may assume that 95% of the time that product was in the store and available for the customer to purchase.
Retailers typically lower their inventory levels (and improve their turn numbers) in healthy ways, by cutting excess inventory or dropping SKU’s for which there is little demand. These changes should not impact the products in-stock levels.
However, when a product’s both a product’s inventory level and in-stock level drops, this is a bigger concern. This means that for whatever reason – the retailer is not able to keep enough inventory on hand to satisfy customer demand. In other words, products are not being replaced when they sell out.
The resulting increase in turnover rate is considered unhealthy for two reasons:
- If the product had been in-stock, customers could have purchased it and sales would have been higher.
- If customers wanted the product but couldn’t find it, they may have decided to purchase it at the competition instead.