The focus for many buying and merchandising teams, particularly on a Monday morning, is to review and analyse how their product category performed during the previous week.
And the ‘go to’ measure is Sales: How much money did we take? Was it in line with forecast? Were we up on last year…? How about versus our plan?
As well as drilling down the hierarchy to find out more detail about the performance of categories, products and selling locations, the critical piece of information is to review the sales performance alongside the stock positions. It’s immediately clear that even if a product is selling well, if you don’t have enough stock, it will be a short-lived success.
Which metrics measure and manage stock?
Retailers have to manage all sorts of different stock measures. Some use opening stock, others closing stock; there is store stock, eCommerce stock and warehouse stock; free stock and committed stock as well as numerous stock measures around intake, allocations and despatches – before you start to consider whether to work in units or value.
To help measure and manage stock retailers usually work with analysis and reporting and use a number of key calculations and metrics to give them this insight: cover, and stock turn, rate of sale.
Read on as we explain what each of these metrics is, how they are calculated, and how they help you make better decisions when it comes to managing your stock.
Cover (flat and forward)
Cover is one of the most common stock metrics and is a measure of how long stock will last in relation to sales. It is usually expressed as a number of weeks.
There are 2 different cover calculations which are used in different ways: flat cover, and forward cover.
How to calculate flat cover
Spot or flat cover is most commonly used as a trading tool to review stock levels in relation to sales performance, where cover is calculated as stock on hand divided by the sales for that week, with the answer expressed in weeks.
Stock on hand ÷ sales for that week = # (weeks)
So, a product with a stock holding of 5250 units and sales for the same week of 875 units is turning on 6 weeks cover.
If you buy no more and sales continue at the current rate, the product in question will be sold out in 6 weeks’ time.
- A product with high sales in relation to the stock will have a relatively low cover figure. This is also called a fast cover.
- A product with low sales in relation to the stock will have a relatively high cover figure. This is also called a slow cover.
How to calculate forward cover
Forward cover is more commonly used for planning the stock you need to buy and hold now, to cover the sales performance you anticipate in the coming weeks or months.
For example, if a retailer plans to operate on a forward cover of 12 weeks, it will add up the value of the sales forecast (some retailers also include markdown) for the next 12 weeks to calculate the value of stock it needs to hold now, to ensure there is sufficient stock to achieve those sales.
It can be useful to plan for managing volatile changes in the sales pattern which would not be apparent using the spot method.
Consider peak times like Christmas where in December spot covers can be very low, but in many cases the stock required to deliver those sales has to be planned and bought weeks earlier due to product lead times. If the retailer waited until the spot cover suggested they need to buy more, they could miss the lead time and therefore miss the sales.
The forward cover method is dependent on reasonably accurate forecasts so is trickier to get right but can be invaluable for retailers with peaks and troughs throughout their trading year.
Stock turn
Stock turn refers to the number of times a business turns over, or sells, its entire stock in a given period, usually a financial half or year.
It provides an average measure of the performance of the stock over time and indicates the amount of money tied up in stock.
How to calculate stock turn
The calculation for measuring Stock Turn is:
Average annual stock ÷ annual sales = annual stock turn
So, a business holding an average of £10m of stock with annual sales of £2m is operating a stock turn of 5 – they will turn their stock five times in a year.
As with so many retail metrics, stock turn is both a planning measure and a performance indicator – and in both cases expresses how quickly you will have a return on your investment of stock.
- A low stock turn indicates a heavy stock investment to achieve sales
- A high stock turn suggests the stock is working hard and efficiently to deliver the sales
It can be a useful indicator of levels of newness and range change, as businesses which regularly refresh their product ranges will usually operate on a higher stock turn.
As with cover, stock turn is also connected to the lead-time for the products stocked by the retailer. If your inventory levels are low on products with long lead times you risk out of stocks, whereas high inventory levels on product that can be ordered or produced fairly quickly means you are tying up capital unnecessarily.
In fact, stock turn has a direct connection to cover, and it is common for commercial teams to use cover rather than stock turn, and for finance teams to use stock turn to express the fiscal health of a business. Blending commercial finance and merchandising capability can be a powerful combination.
Rate of sale (ROS)
Rate of sale (ROS) is well known as a measure of sales performance, but it is also widely used as a stock measure as it describes the speed of sales relative to how many selling locations the product is held in and how long it has been selling for. In simple terms, it measures the average number of units sold per week and to optimise the ROS you need to be holding sufficient stock
Whilst it is best practice to use ROS as a planning measure pre-season, particularly for determining the volume of stock you will plan to buy and sell during range planning, it’s also common to use it to measure performance in-season relative to the stocks held.
ROS can be applied to an individual product or group of products, and to a store, group of stores or any other sales channel like a website.
How to calculate ROS
To work out the Rate of Sale (ROS) once the season has begun to trade, the calculation is:
Unit sales ÷ number of weeks on sale ÷ number of stores/locations = rate of sale
For example, if you have sold 3300 t-shirts over the past 6 weeks and they are stocked in 50 stores, then the rate of sale is 11.
There is no stock metric within the calculation itself, so best practice is to take into account the ROS for a period of time when the product in question was fully in stock in the sales channels you are reviewing. This way you get a real read of the potential and a good indicator of how much stock is the right amount to generate that sales performance.
Bringing the retail maths to life
Of course, these metrics are just the beginning. The real skill of the merchandiser is in understanding the data they have and the story behind the numbers, and then making decisions to address any poor performance or to maximise the success of strong performance.
Build confidence and capability in B&M
If you’re just getting started in your B&M career, you may find our Beginners Guide to Retail Buying and Merchandising a useful read. You can also learn more about measuring and managing sales performance in our partner “retail jargon-busting” article.
If you need a helping hand with margin terms and calculations, we also have a handy toolkit which includes a glossary of over 300 retail terms and acronyms explained, along with bite-sized video explainers for 14 essential retail calculations.
Already got the basics covered? In that case, you may be interested in our Merchandise Planning course – which can help you work how much stock to buy as a plan, or our Order Management, Allocation & Replenishment course, which looks at the decisions you make when bringing stock into the business.
Our In-Season Management course takes it a step further and explores the decisions you need to make once the selling season is up and running.
You can find full details of all our expert-led courses and classroom-based workshops in the First Friday Training Academy.
