Inventory management: how to do it?

By Peter Cox November 20, 2015 Industry news

I am often asked by hardware merchants and retailers to nominate a software programme which will solve the perennial problem of being overstocked.

Well, there is a proliferation of point of sale and stock control software programmes in the marketplace than can help.

To assist you in deciding which software you should choose in the future, I think a programme should advise you of the following:

  • Sales per item.
  • Gross Profit per item.
  • Gross Profit per item year to date.
  • Sales trends by item.
  • Advising you of the quantities to purchase based on sales trends.
  • Items no longer popular (the “Dogs”).
  • Best sellers in a range.
  • Stock Productivity Index (SPI).

The last feature is very important. If you solely purchase software programme that will count stock, that is all you will get. If you wish to improve your margin management and your stockturns (and who isn’t with interest rates rising?), then the software will need to marry margins and stockholding.

This will advise you which products are performing well and which are not. In previous articles I have stressed the importance of the SPI in assisting you in margin management.

It can also assist you in advising how much stock you should hold. The formula for the SPI on a product is: Gross Profit Margin x Stockturns (and the higher the number at the end the better!).

For example let’s look at Product X:           

Unit cost

$25.00

Average inventory (100 units)

$2,500

Gross Profit

$2,135

Sales for the last 12 months

$6,100

           

The Stock Productivity Index (SPI) is calculated as follows:

Gross Profit ÷ Sales x 100 = Gross Profit Margin
$2,135            ÷ $6,100 x 100 = 35%

Sales for the last 12 months – Gross Profit = Cost of sales
$6,100 – $2,135 = $2,500

Cost of sales ÷ Average Stock = Stockturn
$3,965 ÷ $2,500 = 1.6 times per annum (xpa)

Gross Profit Margin* x Stockturn = Stock Productivity Index (SPI)
(*Turn the % into a whole number!)
35 x 1.6 = 56

 

If a product has a SPI of less than 100 it is what I refer to as a “dog”. 100 is a benchmark for minimum acceptable stock performance in your industry.

So Product X – with its SPI of 56 – needs to be reviewed by management. If management decides to keep Product X the stockholding will need to be cut.

Use the following formula to calculate the stock level Product X needs to be reduced to so that an SPI of 100 is obtained:

SPI Target ÷ GP Margin* = Target Stockturn
(*Turn the % into a whole number!)
100 ÷ 35 = 2.85 times per annum (xpa)

Cost of sales ÷ Target Stockturn = Stockturn
$3,965 ÷ 2.85 xpa = $1,391

Stockturn ÷ Unit cost = Optimal SPI
$1,391 ÷ $25 = 55 units

 

I hope you can see the benefits of this key management tool. If your software can not only calculate the SPI but can also advise you of the optimum stockholding, your control over the financial management aspects of your store is immeasurably increased.

If you wish to talk further about what I think is the best POS system for your inventory management needs, please contact me via my website.


 

Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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