Benchmarks - A Focus For Effective Retail Inventory Management

Benchmarks - A Focus For Effective Retail Inventory Management

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The successful independently minded retailer in today's challenging market place has learned that the retail store is a business not a hobby. Many retail owners opened their doors because of the love they had for the products. But they soon found out that to be successful they need to run it like a business to survive. What are some of the tools retailers use for success? There are many of them, but one of the keys for successful businesses is benchmarks.

 

What are Benchmarks. A benchmark is simply a goal that needs to be reached for success. Benchmarks are set each year and reviewed at least monthly. Without benchmarks to guide the retailer, business becomes tumbleweeds in the wind. How the retail store measures up against a benchmark can give valuable direction for corrective actions.

 

How to set Benchmarks. To set benchmarks the store manager needs to have store history and industry standards. Store history gives the manager a feeling of past and present performance for the benchmark. Industry standards give the manager a feeling of what has been achieved by others in the same industry. These two factors tempered by local economic conditions and resources availability allows the manager to make wise benchmarks.

 

Benchmarks are like Golf. The scoring of golf is a perfect example of how to use benchmarks. Golf is scored so that the player is always trying to improve their own scores. The golf course marks each hole with a Par score. This is the goal for very good golfers. Golfers keep accurate record of their own score for each hole. To determine how well the golfer did, the actual score is adjusted by an individual's handicap and then compared to Par. 

Golf   Benchmarks

Par Industry Averages

Handicap Adjustment for local economy and store characteristics.

Strokes Taken Actual store results

Like golf scores, benchmarks are targets that focus you on improvement.

 

Two Levels of Benchmarks . The successful retailer understands that there are two levels of benchmarks. The first level, are benchmarks that apply to the store as a whole. The second level, are benchmarks that apply to each individual department. In many cases the store level benchmark is simply the sum or average of all the department benchmarks.

 

Store Benchmarks. A good beginning set of store benchmarks would include the following:

 

Store Traffic - The number of people that actually come into your store

Capture Rate - The percent of those coming in that actually buy something

Sales - Total of all sales

Maintained Margin % - The percentage of sales dollars that is margin (Sales-Cost)

Turnover Ratio - The ratio of annual cost of goods divided by the average inventory

Projected inventory - The calculated value of the optimum inventory value at cost

 

Department Benchmarks. A good beginning set of department benchmarks would include the following:

 

Sales - Total sales for that department

Maintained Margin % - The percentage of sales dollars that is margin ( Sales - Cost)

Turnover Ratio - The ratio of annual cost of goods divided by the average inventory

Projected inventory - The calculated value of the optimum inventory value at cost

 

Store Traffic Benchmark

Store traffic is simply the number of people that come into the store for the month. It is expressed as a number. Example 1,250 for July and 1,310 for August. It can be tallied by purchasing a simple electronic device that counts each person that enters and leaves the store. You will need to divide by two to get the count. Store traffic is a measurement of how effective your marketing activities are. Advertising, signage, events, word of mouth, flyers and promotions are all aimed at bringing people into the store. Be careful not to judge store traffic by sales dollars, there are other factors that affect it.

 

Capture Rate

The capture rate is expressed as a percentage. It is the percentage of people that came into the store that actually bought something. It is calculated by dividing the number of invoices by the number of people that came into the store for the same time period. Example: 1,250 people came into the store in July and 463 invoices were written up, 463/1250 = 37%. This ratio expresses how effective the merchandising is once a person comes into the store. The right product, the right price, service, display and store comfort are all factors that affect the ratio.

 

Sales

Sales are expressed in dollars. It should be net of returns, discounts, and adjustments. This benchmark should be set department by department. The store benchmark is a total of all departments.

 

Maintained Margin %

Maintained Margin % is a percentage of sales that represent margin. Margin is sales dollars less actual cost of goods. The maintained adjective means that it is for a period of time, not just one item or day. This benchmark should always be set department by department. Example; July sales for the notions department were $ 2,650, associated costs were $ 1,276. The Maintained Margin for the Notions department for July is 52%. Calculated as follows: $ 2,650 - $ 1,276 = $ 1,374 in margin. $ 1,374 / $ 2,650 = 52%.

The factors that affect maintained margin are sales price, cost, mark downs, adjustments, and discounts.

 

Turnover Ratio

The turnover ratio is a key benchmark in determining effectiveness in managing inventory. It is always a department-by-department calculation. It is expressed in the form of a ratio as if the period where over a year. The ratio is simply how many times, on the average, inventory for the department was purchased and sold during the year.

Example: The cost of sales for the notions department in July was $ 1,374. The On Hand report showed that the average inventory for July was $ 4,550. If everything was consistent we may assume that the yearly cost of goods sold would be $ 16,488 ( $ 1,374 x 12). If our inventory stayed at the same level we would have turn it 3.62 times. ( $ 16,488 / $ 4,550 ) If the ratio is lower than benchmark it may suggest; overbuying, unappealing product, unattractive pricing. If the ratio is higher than benchmark then it suggests you may be spending to much time buying or you may be losing sales due to lack of product.

 

Projected Inventory

This benchmark is expressed in dollars. It is simply the total cost of inventory that you should have on hand for a department based upon the previous three factors. Once you have set benchmarks for sales, maintained margin % and turnover ratio it is just a matter of calculation to determine the optimum value of inventory that you need for the department.

 

Example: The benchmark for July for the Notions department is:

 

Sales $ 2,700

Maintained Margin % 55%

Turnover Ratio   4

 

To calculate the Projected Inventory do the following:

 

1. Determine cost of goods sold $ 2,700 x (1-.55) =

   $ 2,700 x .45 =   $ 1,215

 

2. Determine annual cost of goods sold $ 1,215 x 12 = $ 14,580

 

3. Determine Projected Inventory $ 14,580 / 4 = $ 3,645

 

This benchmark gives you a target when buying product. You want to maintain your inventory levels at the $ 3,645 level unless one of the other benchmarks change.

Use a Point-of sale (POS) System

One of the best ways to plan for inventory management is to use a POS system. A good POS system will provide you with all the data that you need to set and track these benchmarks. A basic POS system automates this process by using computer and software technology to record sales to customers, purchases from vendors and give you reposts on the results. You then can control your inventory based on hard numbers rather than "gut instinct".

 

There is a sign on personal watercraft that says, "Know before you go." Benchmarks are the, "know before you go" for retailers. Don't open the door before you know where you are going, and where you have been. You can make it happen.