Is your stock investment working as hard as it should be?


As they strive to be sure never to miss a sale, some retailers try to be all things to all customers. This is a noble aspiration but sometimes this objective can be pursued to a point where it is detrimental to the organisation’s survival. It is possible that, in regard to inventory investment, less will deliver more!

A retailer who tries to stock every brand and every permutation of model, size, and colour within that brand will be overstocked and will also be using shelf space inefficiently. Therefore, both the return from selling space and inventory investment are inefficient.

In extreme cases this can be the path that leads to ruin. Too much stock with poor stock turns leads to poor profitability and cash-flow because working capital is invested in stock that is generating an inadequate return and is taking up valuable shelf space.

How can we manage stock range and shelf-space to get an optimum return?

Constructing a range of products within a category, department or classification requires not only good selection skills (‘this will be a great seller’) but also some disciplined and logical analysis. The abdication of range construction to suppliers leads some companies into stocking every option within the supplier’s brand. While it is easy to accept the pitch and take the full brand range on board, it is harder to construct a range that is unique to your business.

Constructing your own range requires a number of issues to be considered and analysed. Understanding customer behaviour is an important prerequisite but, because customers vote with their dollars, sales analysis and a few store trials will tell us a lot about how their minds work. Of course it won’t hurt if we watch and talk to some customers as well!

Do we need another product option in our range?

But there’s more to it than picking the winners and understanding customers. The big question is “Do we need another product option in our range?”

This can only be answered by careful review of the existing options that are in our range to identify if there is a gap that our customers would want us to fill. If, by adding a new item, we duplicate the features and benefits of an existing item and deliver no additional advantage to our customer (or worse confuse the customer’s buying decision) why are we adding this new item?

If there is a case for adding a new item, we then need to consider the impact on store space and any adverse impact on sales of existing products. There is a point where continuing to add products to range is like pouring a litre of water into a tea cup. The store just doesn’t have the shelf space to optimise sales from every item in the range and presentation deteriorates, sales and profit decline and cash-flow may become difficult.

How do we know when we are in this situation and how do we fix it?

Poor inventory management is like a disease; the symptoms are visible but you need to know what to look for so that the right treatment can cure the illness and ensure that it does not recur. Symptoms will include low sales, poor stock turns, poor cash flow, poor profitability and no funds to replenish stock as it is sold.

Making decisions and fixing problems all start with a simple process:

1. Define the problem.
2. Identify the real cause of the problem (and not the symptoms).
3. Develop an objective that will define the future conditions that you want to achieve.
4. Determine a course of action and set a program in place to achieve the objective.
5. Test progress at each step and modify your plan if new evidence (not a change of mind) has emerged.
6. Test the final outcome in the field before roll-out. Store trials can be of great help and get store teams and customer input if properly managed.

Supplier Relationships and Range Construction

Suppliers have a wealth of knowledge about their products and, usually, about their industry or market segment. Good supplier relationships are important to every retail organisation.

Regular meetings to review the performance of a category will benefit from informed and detailed supplier analysis. Managing this input is important and challenging because suppliers want your business to grow and you need their products but suppliers have an agenda that is broader than your business.

Opportunities to participate in promotional buy-in offers, new product launches and clearance sales all need to be considered carefully to ensure that they are compatible with category plans, space and existing product range. Modelling these offers against existing stock and making logical estimates of cannibalised sales will help to keep the category on the promotional map and up-to-date with product innovations, without deteriorating financial performance.

Suppliers must have their input and be able to suggest new products but in the end, the retail business is accountable for the healthy growth of sales and part of this accountability is the logical and successful construction of ranges. Picking the best supplier product options to build a range is challenging, demanding and delivers great results if done well.

Using Planograms and Gross Margin Return on Inventory Investment

Of course all of this planning, decision making and communication will be greatly aided by the use of professional planogram support. Planograming systems will provide the ability to view product performance in terms of space and GMROII (Gross Margin Return on Inventory Investment)* while displaying an image of the shelf segment and all of the products.

A database of product information from point-of-sale data will provide the ability to see the range as it should be displayed in stores, analyse the financial returns, test decisions to rationalise the range and communicate to stores the requirements for space allocation and presentation method.

Planograms also assist in meetings with suppliers as they provide the analysis which will lead to robust discussion about financial returns and options for range extension, rebates and a host of other initiatives.
* Gross Profit Dollars ÷ Average Stock @ Cost = Return per $ of Inventory

For example: Sales of $1,200,000 @ 30% GP = GP $ 360,000
GP$360,000 ÷ Stock on Hand $300,000 = $1.20 for each $ of Stock

Understanding GMROII

Gross Margin Return on Inventory Investment is is an index of the productivity of inventory and is most useful for assessing Category or Classification performance rather than individual products.

The methods used to calculate these figures lend great insight and are an essential tool for retailers to ensure they are on the right path.

Bob Way is the Managing Director of Retailplanners, a Melbourne based retail consulting service. Bob’s experience in retailing has covered discount, department and specialty stores in both corporate and independent environments.

Retailplanners provide extensive services in store planning, design, branding and planograms. For more information contact:
Phone: 03 9763 7511