To anyone from a merchandising background, it is incomprehensible that the function planning and managing sales would not also plan stock, but we regularly meet retailers who divide ownership of these metrics.
We often see buyers/merchants tasked with driving sales, and finance focused on controlling stock. On the surface this seems like a good idea:
- Give the people with the most understanding of numbers the ownership of the budget
- Give those who are most connected to the product the ownership of what to spend that budget on
In businesses that function this way, Finance tend to agree a high-level sales budget with the commercial teams and then give those teams an Open to Buy (OTB) number at the buy phase of the season, based on a cashflow-driven view of how much stock the business should hold at any one time.
Whilst the underlying financial requirements of a business, such as cashflow, are critical to success, the output should not be the driver. Ultimately, planning stock is not the application of a blunt rule, it is a highly complex, multi-dimensional activity.
Understanding how much stock is needed
We all know you cannot sell what you do not have, so sales must be what we use to calculate how much stock we need. 
Weeks’ Cover (or Weeks of Supply) are the industry way to describe this multiple, and like many things in the commercial world, the right number for Weeks’ Cover will depend on several factors:
- Lead-time
- Reliability of supply
- Speed of distribution
- Number of stores/points of purchase
- Space/display
- Predictability/risk
- Health/longevity of stock
If the lead time of a product is 12 weeks, and it takes 2 weeks to get from a distribution centre (DC) to stores, then 14 weeks might be considered an appropriate target for stock (i.e., 14 times the sales each week, because it will take 14 weeks to get new stock into the business).
If the product is a predictable long-term seller with virtually no risk and being available to the customer is critical, then having 16 or 18 weeks might be better. Missing sales due to lack of availability of stock on these areas would be silly.
On the flip side, if a line is new and risky you might plan only to have 8 weeks of stock – after all, you might be wrong, and it might not sell well. (Therefore 14 weeks’ cover is an average not a rule.)
Similarly, if the space allocated to the product would take 26 weeks’ worth of stock to fill, then you either have too much space or the wrong lines to fill it.
It is a constant balancing act between maximising sales and minimising stock which requires a full understanding of the risk you take each time you buy stock.
Maintaining a healthy stock
Best practice is to divide stock into seasons or life stages. These are ways of ensuring the health of the stock is understood and visible, that it is clear when stock should be building and when it should be reducing, and that appropriate action is taken both pre- and in-season to achieve this.
In Fashion, for example, you don’t want to have a lot of high summer stock going into the winter season, or vice versa.
Weeks’ Cover is a key indicator of this health when related to season stage. For example, in October, as stock is built for Christmas it will turn slowly, but by the week before Christmas it should be turning very fast; the stock will be unwanted very shortly.
Ensuring there is not too much stock left post-Christmas means product turning too slowly should have action applied – cancel forward orders, run a promo, mark-down, agree return to vendor, etc.
The need for action
Action is part of why stock and sales are symbiotic – if sales don’t come through as planned there is a direct impact on stock and actions need to be taken on both stock and forward commitment.
When we split the 2 metrics, we decrease the actions and almost always end up missing sales and carrying too much stock.
The Buying and Merchandising (B&M) teams should be reviewing performance against plan and the year every week, and adjusting their actions, their intake and their OTB as the situation changes.
When OTB is set at the beginning of the buy phase for a season it is too static, it is not agile enough to adapt to the changing circumstances and the best results will not be delivered.
Accountability drives behaviour
Ownership of metrics drives behaviour, so we must think carefully about what behaviour we want to drive when we set accountability:
Responsibility for sales but not stock, results in: 
- A tendency towards buying too much
- Wanting to spread risk so buying too many options
- Bringing orders in early to maximise the time on sale,
- Not promoting or markdown slow lines
Responsibility for stock but not sales, results in:
- A tendency towards buying too little
- Not worrying about how many options there are
- Wanting to keep stock flat throughout the season
- Not worrying too much about what the stock is made up of
The consequence of splitting the responsibility is the worst of all worlds:
- Minimal interrogation of missed sales due to stock outages
- Flat buying which never maximises best-sellers
- Minimal trading to get the most sales out of every piece of stock
- Poor newness delivery for customers (likely reducing visit/buy frequency )
- Over-optioning leading to higher markdown
- Poor planning of differential sales and stock approaches
- Lack of incentive to reduce lead times which increase agility
Achieving balance between sales and stock
Sales and stock are symbiotic because they are 2 sides of the same coin: the connection between the 2 drives so many of the disciplines which lead to good cashflow management, strong profit delivery and ultimately a healthy business.
It’s why good commercial tools, such as WSSI and reports, include both and articulate the relationship between them at each stage.
Being 20% up on the year on sales seems like a great result… until you know that you have 40% more stock than the year. Then it seems like a problem.
We must always keep these 2 metrics together and in the commercial function, keeping balance between them.
