WSSIs (Weekly Sales Stock and Intake) sometimes called Merchandise Financial Planning – (MFP) are a core tool for merchandising. They connect the past, present and future for the key metrics that commercial, merchandising and buying are responsible for.
The hot debate is whether the focus should be on cost value or retail value metrics. While most modern WSSI systems will allow you to work in either and calculate the other along with units, it remains a bone of contention whether cost or retail should be the common “language” in commercial. So, what are they?
In simple terms, a retail based WSSI values all metrics at the customer facing selling price which means that markdown/promo cost is a key metric – the WSSI will record and require a forecast for any permanent devaluation of stock or temporary reduction of the selling price. It will use this value in the Open to Buy and profit calculations.
A cost based WSSI values all metrics at the price paid for the items, with sales shown in both what the retailer paid for them and what the customer paid for them. Because stock is valued at cost, the markdown / promo cost is not required, instead the margin is captured and forecast. Releasing Open to Buy requires stock to have been sold.
Ask any merchandiser and they will be very clear and non-negotiable about which one is “right” depending on which one they have used and feel comfortable with. Of all the change journeys we deal with, switching methods is one of the very hardest, so entrenched are merchandise planners.
So, which one is best? Liz and Victoria look at their favourite.
Fashion retailers have always favoured the Retail value WSSI, it has stock and sales both valued in retail so that they are directly comparable and can be used to calculate cover/weeks on hand, both flat and forward, enabling you to easily see months in advance whether you will have the right amount of stock. In fashion where your lead times can be many months, this is really important.
Customer focused
The retail method is customer focused, customers see:
- The value of the stock at the price on the ticket – retail
- The value of the markdown reduction at retail – the new ticket price
and therefore, the commercial, merchandising and buying teams are focused on actions which are customer facing.
Finance are involved in the agreement of stock levels to ensure cashflow and risk are appropriate and they sometimes have influence over markdown spend timings but the driver for commercial, merchandising and buying is cover, connecting stock and sales absolutely, right through the process with autonomy of stock ordering always with commercial, merchandising and buying – the customer facing teams.
Markdown
In fashion (and many other categories such as home) product has a clear line life, when it’s bought there is a planned exit, after one phase where it is part of a colour or look story or at the end of the relevant spring/summer or autumn/winter season. It is rare that a line sells through 100% so it will have to be marked down to clear what is left. On a retail WSSI, the stock is devalued by the cost of the markdown – sales and stock remain aligned because they both move to the new price. This helps to ensure that the terminal stock target will be met at the end of the season – no one wants a party dress in January, so we need to be out of that type of product by a set date and clearing the decks for fresh wanted product. On a bad season I may have to increase the markdown spend to make it sell and get to the terminal target, reducing my profitability, but I am being pushed to action, it is forcing me to drive the stock to a value at the end of the season.
Commercial teams have to balance short and long-term profitability. It may hurt to take markdown action, but if there is failure in the range it is often much cheaper to get out of it quickly, than let it take up valuable selling space and become less and less wanted. Cost based WSSIs tend to focus on calculated profitability ahead of appropriate commercial action, whereas Retail WSSIs balance the competing drivers.
Promo Markdown
Promotional markdown is similar but a little bit more complicated, with the stock only devaluing as the promotional sale goes through – I’ll concede that if your business is very promotionally driven with a very dynamic customer price cost WSSI might be worth a look – it’s why they work in B2B businesses well.
But for own buy, own brand fashion, the retail WSSI is far superior. It is simple with directly comparable metrics that drive customer facing actions, and there are minimal off tool calculations.
Open to Buy
This way of working also means the Open to Buy (OTB) calculation is very simple:
OTB = Target closing stock + Sales + MD – Opening stock – Purchase orders(intake)
With the retail method, the stock does not need to sell in order to release OTB. This is very important when product is on a long lead-time – I need to be able to buy product months ahead of it selling, I need to bring in newness alongside reduced stock, balancing my offer to the customer.
Simple and accurate
The original WSSIs didn’t have margin on them, they were a pure stock management tool with profit calculated elsewhere. All modern software WSSIs now include margin – intake and exit as standard – and the calculations here are one of the biggest benefits of going with software over a pragmatic excel tool. The user enters simple known numbers – sales, cover, intake margin, markdown (cost or %), stock targets, intake etc., and the software does the more challenging profit calculations. This simplicity is one of the biggest reasons the retail method is the best, it focuses commercial, buying and merchandising teams on action-based scenarios, and calculates the profit implications. In the cost method the user has to calculate the impact and feed that in – requiring greater capability.
Sales at Retail Value or Cost Value
There is a common misconception when working with a cost based WSSI that sales must be reported at cost. However, whilst Merchandisers will become familiar with what their Cost of Goods value is over time, there is no requirement for it to become a key management metric.
The key metric that does link sales to stock in a cost based WSSI is net margin (the margin achieved when the sales goes through the till) which links into the conversations around the WSSI remaining customer focussed, whilst balancing the financials of the business.
Price changes
In a dynamic pricing business, cost is the universal unit of measure, because the value of stock remains constant through all retail price changes. This is because the original full retail price and intake margin get lost when a business brings in products that change price, especially when trading with a High/Low strategy.
In businesses which are more complex than buying Own Label products a season at a time, a cost WSSI provides far greater control than a retail WSSI.
Markdown Action
The key focus of markdown action is the impact on sales margin and profit rather than the loss of retail sales value. This ensures that the Commercial teams are keeping an eye on the ‘bottom line’ at all times, a process that delivers profitability through the till because it is not hidden within a ‘retail sales’ number.
Generating Open To Buy
When using a cost based WSSI, the owner of the WSSI has the power to generate OTB. This works because it has been agreed by the business how much cash can be tied up in stock. So long as the WSSI stays at or below this value, the autonomy of stock ordering sits with the Commercial team.
This works with long lead time products too, because the Buyer & Merchandiser agree the forecasted sales number from the products that they are ordering a year in advance, and utilise the OTB that is generated from the forecasted sales. The accountability for accurate sales forecasting is on the shoulders of the Commercial teams, rather than being at the mercy of financial budgets.
Clearing to Zero
One of the key areas when working with a cost based WSSI, is ensuring that stock clears to zero units. Leaving products that are no longer selling with a stock at cost value ties up valuable OTB. Regular clear outs, balancing sales, margin and stock provision from Finance, are an important step within the product cycle.
This action is also beneficial to the physical operation of the business in cycling through old stock, which ensures that the Commercial teams must think through the full impact on the business of the decisions they are making.
Stock Calculations
Managing stock at cost value when talking about sales at retail value is straightforward when an Intake to Sales Ratio is used. This metric runs well alongside a stock cover calculation for long lead time products. Having stock reported at cost rather than retail does not negate the ability to manage these calculations.
Cash Flow
Using a cost based WSSI aligns the conversations between Commercial and Finance teams because everyone is talking the same language. The discussions are around the value of cash that will go through the till and the value of stock that is required to achieve those sales. The difference between the two (excluding VAT) is the value of profit cash that the business will make from sales, which is the most important element of running a Retail business.
Conclusion?
A passionate case made for each! Liz and Victoria are in full agreement that the WSSI is the best tool for commercial, buying and merchandising to plan and trade, connecting sales to stock, and action to profitability right through the retail cycle.
And it’s clear that cost and retail based WSSIs are most effective when deployed in the appropriate business model, being open to both and investing time in understanding what truly works best for your business model and your people is the key to deriving the benefit.
We regularly work with businesses wrestling with this dilemma and can support you to make the most effective choice for your business, helping you deploy a pragmatic tool and/or select the best software for your needs. Learn more about our Retail Consulting services, or get in touch to speak with one of our retail experts.