Adventures in Leardership

“Turn turn turn, see whats become of me” was prophetically written by Simon and Garfunkel over 40 years ago.  I am not sure if they were thinking of retail at the time but truer words could not be sung.  Retail is based on buying goods and then selling them for more than you paid for them.  If you only do that one time you do not make much cash.  The more times you can sell your inventory, the more cash you make.  Every time you sell your inventory you have “turned” it one time.  The more times you turn your inventory, the more cash you put in your coffers.  Turn turn turn and see what will become of YOU!

Turn is the relationship between inventory and sales and determines the success a retailer has in generating cash.   Just like any measurement, to be useful the measurement must be applied at the right place to have meaning.  Although a general indicator of a store’s success can be indicated by overall turn, a much more useful application of turn occurs at the classification level.  Every class should have a targeted turn based on the store’s location and character, the type of inventory (staple, fashion, hard goods etc), the season and many other variables that are all part of an effective merchandise plan.  When a classification is turning too fast, it could likely indicate that sales are being lost due to lack of selection, sizes or depth. If a classification is turning too slowly, there is too much inventory due to overbuying, old goods or other reasons that are taking up cash, space and focus while not generating sales.  Unless you have the right target, you don’t know what is too fast or too slow!

The Formula

Turnover is calculated over a continual 12 month period of time.  It is 12 months of retail sales divided by the average retail inventory over a 12 month period.  A good estimate of  turn rate can be calculated by  taking the first of month inventory amount for 12 consecutive months plus the ending inventory at the end of the 12^th month and dividing this number by 13.  This will yield the average inventory amount.  Now divide the total sales for the same 12 month period by the average inventory amount to get the annual inventory turnover rate. In a seasonal business, annual turn is the best way to analyze turn.  We  also do a 12 month rolling average turn to get the most recent data but still including a year’s worth of data.

Why is Turnover rate Important?

The questions turn answers is whether you would like surplus inventory sitting on your racks or more cash in your bank account.  Too much inventory on the racks, ties up cash, yet not enough inventory results in lost sales.  Turn is the relationship between the inventory and the sales and when done at the class level, helps you find the right balance for your store.   Since turn generates cash, your challenge is to increase sales without increasing inventory. That is the goal of the science of merchandise planning! The secret lies within the art of sales forecasting for each classification. The skill lies in arriving at the right target turn rate for each classification in each store.  The results come from adhering to the right plan.

Simon and Garfunkel got it right. Turn is the key to your success.  Focus on it. Manage it. Plan for it. See what will become of you.

What’s the Point?

By Evan Wise

Managing Director

Management One®

Look at any sport. Read the instructions for any game. The first thing you want to know is, “What’s the goal?” In football they are so blatant as to call it the goal line. In baseball it is called home plate. In checkers it is to capture all of the other persons pieces. Whenever there is a situation where you win or lose, success means identifying the goal and achieving it.

The problem is in many real world situations the goal is not clear. Choose the wrong goal and even if you achieve it, you can lose. Regardless of your view on what should be done now, most would agree that the U.S. chose the wrong goal in Iraq in 2003. We declared, “Mission accomplished” because we achieved the goal we set but it was the wrong goal. The same situation happens in businesses all the time. A goal is set to launch a new product and money, time, emotion and effort are poured into achieving the goal. The product is launched and sits on the shelves unsold. Wrong goal achieved!

What are the goals you have set for your business? If you said to make a profit you are wrong. Profit is what happens when you choose the right goals. Profit is what happens when you achieve the right goals. Profit is what happens when you manage your business effectively. Making a profit requires skill in so many different areas that it is much too broad to be a goal. So what is a goal? How do you create a good one? When we are hired to implement Winning@Businessâ„¢ we work hard with our clients to help them choose the right goals and achieve them. The following are some good guidelines to establish goals.

1. A goal must be simple and clear to everyone who has a part in achieving it. Too often a goal is only in the mind of the owner. Other times the goal is too all encompassing to be achievable (like profit). When the goal is not simple, the impact that each person has on the goal is not clear and direct. There are too many other factors that affect the outcome; no one really owns the goal.
2. If you can’t measure it, you can’t achieve it. When goals are subjective, everyone can have a different opinion about whether it was achieved or not. For example, “We want to make customers happier,” sounds like a great goal for any business. Unless you measure with surveys or repeat business, there is no definitive answer as to whether you were successful or not. Every goal must be stated in measurable terms.
3. Your steering team must own the goal. At Management One® the first endeavor is to replace an owner driven company with a team driven company. The owner still navigates but the team steers. Training and implementing that steering team to work effectively is important in the success of the business. The steering team must own and embrace the goal in order for it to be achieved. If not, and the owner is the only one that embraces the goal, the owner will need to be there constantly to be sure the actions are taken to achieve the goal. When the owner begins to micromanage he emasculates all his employees and he becomes the critical part of the business. He works 80 hours a week and is married to the business!
4. The steering team must create accountability for achieving the goal. Each steering team meeting includes follow-up and review to be certain the goal is being achieved.
5. Communication is always a huge part of every successful company. We work hard with clients to improve their communication processes and skills. When setting goals and achieving them, effective communication to every employee is important. The communication should also include an understanding of how the goal affects the way that person does his job. If the goal does not effect different actions, different results will not be achieved!
6. Give the goal a deadline. Goals that are open-ended are meaningless. That is why there is a goal line in football! Will you reach the measured goal in 3 months or a year? Try not to go longer than a year unless the goal truly demands that much time. (i.e. if you are building a nuclear power plant as the goal, it may take 7 years!)

There are other important keys to effective goal setting but these key steps will move a company in the right direction. A good consultant will help identify the right goal, help you state it in the right way and then stick around to be sure you achieve it.