Stock Turn

Stocks (Inventory)
The inventory of a retail store represents the largest single element of its total assets. The sale of goods from this inventory is the retailers chief source of operating profit. Thus, the way in which this merchandise investment is put to work is of utmost importance in achieving a profitable operation. To illustrate, a retailer may carry an average retail inventory of Rs. 200000 with sales of Rs 400000 resulting in a 2.0 Stock Turn Rate. If this retailer had the same Rs 400000 sales but a 3.0 Stock Turn Rate, the average retail inventory would be Rs 133,300. This is a difference of Rs 66,700 at retail or approximately Rs 32,000 at cost. A number of studies have shown the cost of owning excess inventory at approximately 2% per month, or 30% per year. This is due to increased expenses such as interest, insurance, buying expense, receiving department expense, property taxes, markdowns and shrinkage. Therefore, a retailer can reduce these expenses by reducing his average inventory level. In the example above, the annual savings would be approximately Rs10000 (Rs 32,000 times 30%). All other things being equal, a higher stock turn rate tends to lead to higher sales and a higher profit, which should be an essential goal of every merchant

Stock Turn - Meaning

Stock Turn is defined as the number of times average stocks is sold during a given period, usually a year. It is a measure of how fast merchandise is sold and replaced. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. It is also known as inventory turn, inventory turnover, stock turns and stock turnover. Stock turn is really an expression that defines stock productivity. It is a measure of the efficiency of a department or store, and of the buyer and margin involved. The Stock Turn Rate ratio measures the effectiveness of inventory planning control. A Stock Turn Rate that is too low indicates poor planning and lack of control. A classification having a very low Stock Turn Rate usually will not be achieving its sales potential due to having too much old merchandise in stock and too little new, fresh merchandise. It is also likely to have higher than normal markdowns, thereby reducing Gross Profit. Stock Turn Rate can also be used to calculate the proper beginning-of-month inventory level for each classification for Open-To-Buy purposes. Stock Turn Rate is an important ratio used to measure the effectiveness of merchandise planning and control. To furnish such a measure, however, latest turnover results needs to be compared to: Turnover figure in prior periods (to show whether performance is better or worse), and (When making comparison between firms, it's important to take note of the industry, or the comparison will be distorted. Making comparison between a supermarket and a car dealer, will not be appropriate, as supermarket sells fast moving goods such as sweets, chocolates, soft drinks so the stock turnover will be higher. However, a car dealer will have a low turnover due to the item being a slow moving item. As such only intra-industry comparison will be appropriate.)

Turnover figure for other comparable departments and stores.

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Inventory Turnover Equation

The formula for inventory turnover (Value) :

For Inventory Turn (in units)

The formula for average inventory:

Cost of Sales
Cost of sales yields a more realistic turnover ratio, but it may often be necessary to use sales for purposes of comparative analysis. Cost of sales is considered to be more realistic because of the difference in which sales and the cost of sales are recorded. Sales are generally recorded at market value, i.e. the value at which the marketplace paid for the good or service provided by the firm. In the event that the firm had an exceptional year and the market paid a premium for the firm's goods and services then the numerator may be an inaccurate measure. However, cost of sales is recorded by the firm at what the firm actually paid for the materials available for sale. Additionally, firms may reduce prices to generate sales in an effort to cycle inventory.

Low Stock Turn

A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or shortages. Low Stock Turn implies: Either, We have too much stocks Or, Not enough sales,
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Or more likely, a mixture of both.

An item whose inventory is sold (turns over) once a year has higher holding cost than one that turns over twice, or three times, or more in that time. Stock turnover also indicates the briskness of the business. The purpose of increasing inventory turns is to reduce inventory for three reasons.

i. ii. iii.

Increasing inventory turns reduces holding cost. The organization spends less money on rent, utilities, insurance, theft and other costs of maintaining a stock of good to be sold. Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant. Items that turn over more quickly increase responsiveness to changes in customer requirements while allowing the replacement of obsolete items. This is a major concern in fashion industries.

High Stock Turn

In retailing it is important to realize a large volume of sales on as small an inventory investment as possible while maintaining sufficient inventory to meet customer demands. Also, it is important, as fashions and seasons change, to turn the inventory quickly so as to avoid excessive markdowns or carryover of out-of-season inventory. Another advantage is that a fast Stock Turn Rate will actually increase sales due to the increased flow of fresh new merchandise into the store to create excitement for the sales staff and a reason for the customers to come back frequently. Higher turnover can play a substantial role in increasing profits. This is the greatest incentive for emphasizing on store turnover. However, a high turnover rate may indicate inadequate inventory levels or stock shortage, which may lead to a loss in business. (Loss of sales due to inadequate assortments)

Faster Stock rotation leads to following benefits: It increases sales due to quicker flow of new merchandise. It increases the return on merchandise investment (ROI) and allow the cash released to be invested (if required), in further stocks.

Faster Stock turn reduces expenses like rent, utilities, insurance, theft and other costs of
maintaining a stock. Faster stock rotation reduces the possibilities of mark downs. It reduces the incidence of sales returns as the customer would buy more fresh / contemporary products. It keeps stock clean and fresh and therefore more attractive to customers. Limitation of Higher Stock Turn: Possibility of low sales due to stock out position, particularly in fast moving lines.
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Increased cost of purchases, for carriage inward cost and Quantitative schemes and offers are missed. Increased cost due to increased number of transaction i.e correspondence, handling cost, clerical cost etc.

Optimum Level Stock

Different categories of merchandise and retail firms make for different number of stock turns. A higher or lower turnover rate in comparison to other stores does not necessarily mean that a particular store is doing a better or worse job. Differences in stock turnover can arise due to: The size of the store, The presence or absence of good local wholesaler The distance from sources of supply, or

Differences in operating and merchandising policies.(say policy to carry wide assortment)

There are three ways to optimize Stock Turn Rate: i. Increase sales without increasing the average stock assortment. Decrease stocks without interfering with sales. Increase sales and at the same time reduce stocks.

ii. iii.

The approach used depends on the circumstances. Probably the surest way to increase Stock Turn Rate over a period of time, is to increase sales volume without a proportionate increase in inventory levels. However, since a retailer has greater control over his inventory than over his sales, this should be where attention should be given first. The first step to increasing Stock Turn Rate and sales, incidentally, is the preparation of an Open-To-Buy. This should be based upon planned sales, planned markdowns and planned Stock Turn Rate. Once the Open-To-Buy has been prepared, the retailer can turn his attention to taking the necessary steps to reduce the actual inventory on hand to bring it in line with the planned inventory on the Open-To-Buy. A few suggestions on how to do this follow:

i.
ii. iii. iv.

Buy more frequently, in smaller quantities. Reduce number of assortments (vendors, styles, colors, sizes, prices). Eliminate slow-selling merchandise. Buy closer to the selling season.

Other Important points

It is not the actual number of times a physical stock of goods is bought and sold during a period. (Say if opening stocks or closing stocks or both is nil). Retail-calculated stock turns rates tend to be lower than those calculated at cost

The important issue is that any organization should be consistent in the formula that it uses.

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Stock Cover (Stock Holding)

Stock cover indicates the number of days / week / month of trading / consumption which the current (closing) stock can cover. For example, if the stock is 30 units and if the daily average consumption is 5, then the stock cover is 6 days. Alternatively, the Stock Cover in days may be calculated as follows:

Stock Cover co-related to sales

.When Sales fails to reach planned levels, the sale forecast will normally be reduced, and this will
automatically increase the forward weeks cover that the stocks represent.

When sales go down, stocks cover in days will go up.

Being overstocked reduces open to buy. Reduced open to buy will restrict the intake of new stocks in the business. Reduced stock intake may dilute the planned margin and have an adverse impact on sales.

Stock Aging
Stock movement should be done on First In First Out (FIFO) basis so that the product does not become obsolete or over aged. Retailer should know the aging of their stocks so that due care can be taken for over-aged stocks.

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