Zylonmule - -
The question of retail inventory turns is very interesting, as
inventory is an area where a company can tie up great amounts of cash
and be performing poorly - - even while showing excellent
‘profitability’.
All inventory management software has critical points built in for
things such as minimum stock, economic order quantities (often called
EOQs), and lead times. These give you strong indicators of what can
happen with your last question:
‘Is there a problem with having too high a stock turn?’
The problems with a high stock turn are:
1. the possibility that you’re not getting the best volume discounts.
Given the costs of freight, it may be that transportation charges are
exorbitant for ordering small quantities.
2. product may not be available when you’re ready to order.
3. customers with high demand will suddenly put you out-of-stock.
4. customers with immediate needs will be unhappy about waiting until
goods on-order arrive.
Inventory turns have improved over the past 10 years due to
computerization.
A December 1999 study by Pittiglio Rabin Todd & McGrath, a consulting
firm in Waltham, MA, said that U.S. companies have inventory turns by
more than 12% during the 1994 - 1998 period to an average of 5.4
annual turns. However, it’s important to note that this consulting
study reported on ALL enterprises.
Computerworld
‘Inventory Turns’ (May 7, 2001)
http://www.computerworld.com/industrytopics/retail/story/0,10801,60182,00.html
While a manufacturer with inventory turns above 10 is generally
considered good, retailers often have a wide range of results due to
business models. This article - - published before K-Mart entered
chapter 11 proceedings last year -- notes that the retailer was
turning its inventory 5 times per year; Wal-Mart was at 8 turns; and
Amazon.com at 16 turns per year:
Kewill ERP
‘Inventory Turns in Retail and the Web’ (March 2002)
http://www.micromfgsys.com/solutions/vol10no3/scndart.html
WHAT’S AVERAGE?
=================
There are several good sources for average inventory turns for a
variety of retail businesses. Rather than a general retail number,
it’s usually much more helpful to look at both category and size of
the retailer. After all, your local car dealer is forced by
competitive conditions to have lots of new cars on-hand for you to
test drive - - unlike Amazon.com.
One of the easiest to use is Bizstats, which has excellent data on a
variety of retail stores, even breaking down sales per store for major
chains; for mall locations; and sales per square foot:
Bizstats
http://www.bizstats.com/
Inventory turn information is in the Bizstats pages on ‘Profitability,
Operating, Balance Sheet & Financial Ratios’. Taking the profitable
Clothing & Accessory stores, you’ll find that stores in the $500K-$1
million range have:
1. average sales of $581,000
2. sales to assets of 4.5
3. inventory as percent of assets = 58.5%
4. inventory turns of 7.7
Compare that to the large retailers with sales over $100 million:
1. average sales of $864,148,000
2. sales to assets of 1.5
3. inventory as a percent of assets = 24.6%
4. inventory turns of 6.1
Clearly the large retailers are using volume purchases and other
techniques to remain profitable, which smaller retailers are
concentrating on better inventory management.
The excellent Bizstats database uses public financial reports; trade
association information and also the 1997 Economic Census, done by the
U.S. Census Bureau on American businesses every 5 years. The 2002
Census is currently being conducted and little data will likely be
available until 2004 at the soonest.
The retail portion of the 1997 database is available as an Adobe
Acrobat file and is in a 178 page document on business expenses. It
is much more detailed than the Bizstats database, having many more
categories in it (such as ‘used motor vehicle’). In Table 14 (page
55) of the Acrobat document you’ll find that total retail sales in the
U.S. are $2.6 trillion with $1.8 trillion in inventory. Average
inventory turns across ALL retail sectors is 5.51 (based on inventory
on-hand at the end of 1997):
U.S. Census Bureau
“Business Expenses - - 1997 Economic Census” (December 2000)
http://www.census.gov/prod/ec97/e97cs-8.pdf
Looking through the table you'll be able to get inventory turns for
dozens of classes of retailers.
WHAT’S GOOD?
===============
Anything that increases profitability is good. Analysts generally
like to do comparisons with a business’s direct competitors - - those
with the most-similar business model. The previously-mentioned
Pittiglio Rabin Todd & McGrath study noted that the 12% increase in
annual turns translated into purchases being turned into cash 10 days
sooner in a 100-day cycle, obviously a dramatic increase in the
efficiency of the use of capital.
INVENTORY BREAKDOWNS
=======================
It is very common to break inventories into categories for comparison.
Some pockets of inventory can be extraordinarily slow moving, such as
repair parts or spare parts which a retailer might still be stocking
for discontinued equipment. Here’s an excellent case study which
talks about a drilling company’s spare parts turns being only 1.25 - -
a situation that’s actually quite common with any maintenance repair
operation (MRO) departments but which could bankrupt the rest of the
firm:
Demand Solutions
‘Varco Case Study’
http://www.demandsolutions.com/articles/varco.html
Equally significantly, different managers can be more adept at working
with vendors and customers to hold inventory levels to a minimum, so
comparing departments and adjusting to different turn levels will
provide better results. For example, a retailer of sporting goods can
expect very different turn rates for skiwear or swimwear, depending on
the season.
OTHER READING
===============
One of the dramatic changes of the 1990s was the shift of business
models caused by customer-relations management or CRM software. Where
retailers once considered their daily sales proprietary, organizations
like Wal-Mart began to ask suppliers to manage the pipeline - -
keeping shelves full while reducing management and warehousing costs
to Wal-Mart.
Sam Walton started it when he said to P&G, "The way we do things is
way too complicated. You should automatically send me Pampers, and I
should send you a check once a month. We ought to get rid of all this
negotiation and invoicing."
It developed into a continuous replenishment process that had unique
results:
* it gave P&G access to Wal-Mart inventory for the first time
* it eventually gave the supplier access to retail point-of-sale
information
* just-in-time delivery to stores -- avoiding warehouses
CIO Magazine
‘It All Began with Drayer’ (Aug. 1, 2002)
http://www.cio.com/archive/080102/drayer.html
CIO Magazine actually has a collection of articles on Supply Chain
Management that discusses how companies have handled inventory turns:
CIO Magazine
‘Supply Chain Management Research Center’
http://www.cio.com/research/scm/
Google search strategy:
“inventory turns” + retail
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Best regards,
Omnivorous-GA |
