Navigating Retail Challenges: Effective Strategies for Business Continuity, Customer Retention, and Cost Management

Understanding Stock-to-Sales Ratios

Ritchie Sayner

One of the most important and often misunderstood metrics in the retail business is the stock-to-sales ratio. This article will discuss what s/s ratios are how they are calculated how they are used and how they relate to inventory turnover.

What is a Stock-to-Sales Ratio?

A stock-to-sales ratio is exactly what the name implies: a relationship or ratio between inventory and sales. It is calculated on a monthly basis and can be used for store department classification or even style planning.

Understanding Turnover

Turnover on the other hand is calculated seasonally or annually and tells us how quickly the average inventory is sold and replenished during the desired period. The calculation for turnover is net sales divided by average inventory @retail. You might also see turnover defined as cost of goods sold divided by average inventory @cost. It might help to remember that s/s ratios are the inverse of turnover. In other words if you have a s/s ratio of 4 every month for a year the inventory turnover will be 3X.

Formula for Stock-to-Sales Ratios

The following formula is how stock/sales ratios are calculated:

Stock/sales ratio = First of Month Inventory @Retail ÷ Monthly Sales $

Hosiery Class Inventory Planning

Let’s use the hosiery class as an example. Assume that you would like to plan a 3X inventory turn for this category. Given the formula above if our First of Month (FOM) retail inventory is $60000 we would have to sell my keyword5000 worth of socks to achieve a s/s ratio of 4. A stock-to-sales ratio can be looked at as the number of months of inventory to have on hand.

In this example we have four months of supply. If we had a four month’s supply every month for the entire year the category would have a 3X inventory turn. In the real world when planning inventory levels using stock-to-sales ratios it wouldn’t be realistic or even practical to have exactly a four month’s supply each month. During the slower months a retailer might end up with five months of supply but during the busier months for example the holiday season the s/s ratio could drop as low as 2-2.5. However since the monthly volume is generally higher at that time of year the amount of inventory would be sufficient to support the planned sales.

Managing Stock-to-Sales Ratios

If the s/s ratio is 2 for example a merchant would need to sell half of his inventory in that particular month to be “on plan”. If the classification is turning too quickly the s/s ratios will be too low and the merchant might be in jeopardy of missing sales and thus out-perform the inventory. If the turnover is planned too low the s/s ratio will be too high and the class could become overstocked leading to higher markdowns and a lower gross margin.

Current Client Situation

I currently work with a client that has a women’s running shoe category that does over one million dollars per year with an annual stock turn of 4+ times.

Supply Chain Challenges

Thanks to current supply chain interruptions deliveries until recently have been abysmal; everything from being late to incomplete shipments to downright cancellations.

Future Order Strategy

Additionally this merchant has been advised that if future orders aren’t placed through the end of the year there is a very good chance that the products will not be available.

In order to protect the business in this important classification it was decided to overbuy the classification by approximately 60%. While on the surface this might seem irresponsible close attention is paid to the monthly stock-to-sales ratio. As long as the ratio stays within range of the planned s/s the annual turn figure will be achieved.

Contingency Plans

If business slows for some reason which is actually beginning to show signs of happening in this category orders can be modified or cancelled. The other positive is that the price of all of the future orders is locked in.

Conclusion

Given the unique set of circumstances that the supply chain has handed us this strategy seems prudent at this time.

Inventory Management Exercise

Try this exercise in any classification in your operation. Divide the first of month retail inventory by the planned stock-to-sales ratio and compare the answer to your current sales forecast for that class.

If you end up with a number way above your current planned sales you have too much inventory. This would be your clue to take action. Incentives to salespeople remerchandising stock balancing with vendors or markdowns on older goods need to be considered initially.

If this scenario becomes a recurring issue you either have an inaccurate merchandise plan or you’re an over-buyer.

On the other hand if the number you get is way below your planned sales number and you don’t have a sufficient quantity of new goods landing in time to ensure achieving the sales target you could have a problem. On an extended basis you would end starving the classification which would result in the class not hitting its true potential.

I hope this article sheds some light on how useful stock-to-sales ratios can be in merchandise planning. It all starts with a quality sales and inventory forecast. If the plan is wrong the results will be wrong. If you still have questions or would like to review your merchandise planning procedures I am happy to help.

Ritchie Sayner

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