Comment: The art of calculating supply and demand

By David Gaule, Citrus-lime

For a while now, we’ve been promoting the importance of IBD’s monitoring their stock turn to help influence sales and marketing strategies. It’s a dry but useful (and hopefully profitable) discussion. However, stock turn alone can often not be informative enough (but you’ve got to start somewhere). So in this article, we’ll shift it up a gear and look beyond stock turn, to indicators that can drive better-informed decisions. Prepare for more dryness, but if you’re a retailer and making money is your desire, read on…

To briefly summarise, stock turn essentially tells you how many times you buy your stock, sell through it, then repeat that process. So you might think the higher that number, the better you’re doing but that isn’t always the case. Having a super high stock turn probably means you’re not holding a great deal of stock, instead you are regularly replenishing a smaller stock holding. This is great in terms of not having a load of capital stuck in aged stock that you’re not profiting from but it could also mean you’re missing out on profit by being priced too low or missing sales opportunities when you’re out of stock between replenishments.

So if you’re not aiming to get stock turn either as low or as high as possible, where is the sweet-spot in the middle? It depends what it is that you’re monitoring with stock turn. So let’s take a step back and look at what you’re trying to achieve. Ultimately, you want to sell all stock at the highest possible profit margin. It’s all about balancing supply and demand. It’s best to break it down into manageable chunks, so monitoring it by brand (maybe product type too/instead) is often the best approach.

Forecasting methods and buying strategies aside, once you’ve made a buying decision, you’ve bought or have committed to a certain quantity of stock at a certain price. Simply put, to avoid digression, sometimes you’ll get it just right, sometimes you’ll miss a good thing and kick yourself for losing out on a bigger slice of the pie and sometimes you’ll buy a real stinker and want to drop it by any means before it sticks and leaves a nasty stain on your balance sheet. Fear not, beyond that buying commitment there are strategies that can be employed to maximise (or salvage) the profitability of that purchase.

Remembering we’re going to look at it by brand and/or product type, the next thing to consider is that stock generally has a finite period in which it can be sold profitably, usually a season or a year. After this time, demand drops off because it’s already been met or there’s a new exciting alternative on the horizon. If it sells too slowly throughout that time, you’ll be left with stock that more than likely needs discounting to move it. Otherwise, that stock will age ever further into the depths of obsolescence, forever tying up capital that could be better invested. The more those leftovers need to be discounted the more it decreases the overall profitability of that brand for that season. If it sells too quickly during that time, you’ll end up having zero stock before that season and demand has ended.

So how do you know if a product is selling too quickly or too slowly? You need to monitor the rate of sale compared with how much time (demand) you’ve got left to sell it. Stock turn is essentially your rate of sale but, as mentioned, it’s often difficult to interpret the number. So you can further use stock turn to measure ‘weeks cover’, i.e. based on the current rate of sale, how many weeks will your current stock holding last for? You make use of this number by comparing it to how many weeks are left in the season (or however you define that time period of saleability in which there is still a demand for those products). If you’ve got cover for more weeks than there are left in the season, this indicates a slower rate of sale than you require. If you’ve got cover for less weeks than there are left in the season, this indicates a faster rate of sale than you require. It can take a while for this data to build up, so that stock turn and weeks cover is accurate. Generally speaking, it’s not worth reviewing this more frequently than monthly.

If all the previous were to come packaged in a box, it would have a label slapped on it that reads ‘INTUITION REQUIRED’! There is no all-in-one retail report from any provider that will tell you how to run your business without you having the insight and intuition to apply reasoning to it and factor that into your subsequent decision making. However, something is always better than nothing and if you can find a provider who will give you guidance on the factors outside of the data that require consideration, you’re onto a winner.

So with the numbers assessed and intuition applied to the decision of whether you are selling at the correct pace, how do you adjust your sales and marketing strategy to influence the balance of supply and demand to maximise your profit margin? The answer to that question easily warrants a separate article. So in summary, look at your marketing and pricing, including your opposition in both.

The different formulas for stock turn and weeks cover are well documented online and I’ve got limited space on the quality paper stock of this fine publication, so I haven’t included them here. There are plenty of ways to legitimately calculate these values. The important thing is that you understand the numbers and apply your intuition to what can influence them. If you keep the method consistent you’ll have useful tools to drive your sales and marketing strategy. So useful, that one of our clients has used this strategy to help grow their turnover from £300k to £1.6m in 5 years, while simultaneously maintaining or increasing profit margin and only increasing their staffing levels from 2 to 5. Simply by balancing supply and demand.