Saturday, May 31, 2008

Seminar in Madison III

Turn Rates

At a trade show a couple years ago I sat in the hospitality suite between two store owners who both did a million dollars a year in sales. One store owner had a turn rate of 6 while the other had a turn rate of 1. What does this mean? The turn rate is how often you sell through, or "turn" your inventory in a year. The guy with a turn rate of 1 had a million dollars in inventory (retail). The guy with a turn rate of 6 had $167,000 in inventory. Put a different way, the guy with the 1 turn rate was sitting on $833,000 in inventory that wasn't performing for him. That's a lot of money that could be in his pocket. I don't think anybody plans to do a million dollars in sales with a million dollars of inventory, it just creeps up on you over the years. Who has that kind of money?

Those of us starting out have limited inventory dollars. Every dollar needs to count. Inventory needs to perform in a timely fashion or else get dumped like a bad employee. You need to be ruthless with your inventory. We can determine if our inventories are performing well using various tools, but one I like to use is turn rate analysis. You divide sales by the retail value to come up with a number, usually between 1 and 8. So what's a good number?

Old school retail sources say that 4 is a good turn rate. I think this is a good overall number, but some things in the game trade turn faster or slow than this. For example, the collectible model is known for a small amount of inventory that sells continuously. You might have a turn rate of 6-10 on collectible miniatures or trading cards. On the slower end of the spectrum are things like paint. You probably won't get a high turn rate out of your paint department unless you've limited your selection drastically. Everything else is in between, but aiming for a turn rate of 4 is a good practice.

Having a very low turn rate, overall, clearly wastes money. Those inventory dollars could be put into better inventory or into your pocket. A very high turn rate, overall, is also a danger. It could mean that you're losing out on sales and you're running too lean. Adding more inventory in those areas might increase your sales.

Your trusty spreadsheet is the tool you'll need to perform turn rate analysis. Here's one I did recently, removing departments that are less than a year old. It's got some excellent performers and some real dogs:

Department Inventory value Sales Turns
Trading Card Games $6,086.38 $ 62,358.22 10.2
Snacks $1,415.95 $ 10,937.64 7.7
Collectible Miniatures $4,484.53 $ 32,910.95 7.3
Role Playing $9,923.92 $ 45,276.85 4.6
TCG Supplies $1,815.34 $ 6,750.44 3.7
Dice $2,573.20 $ 8,754.92 3.4
Card Games $6,280.93 $ 18,949.66 3.0
Tactical Minis $31,349.07 $ 85,140.38 2.7
Board Games $18,717.86 $ 45,001.21 2.4
Paint $7,949.84 $ 18,025.49 2.3
Flames of War $7,736.43 $ 11,827.88 1.5
Miniatures $9,089.09 $ 8,662.81 1.0
Classic Games $7,440.71 $ 6,190.49 0.8
Puzzles $2,989.10 $ 1,911.00 0.6

Total $117,852 $ 362,697 3.1

The numbers from this spreadsheet come directly from my point of sale machine. It can run a report on annual sales by department and a report on inventory value, but it lacks the ability to crunch these two numbers together.

What does it say? The most important number, I think, is the overall turn rate. It's 3.1 on this analysis, which tells me I have room for improvement to get to my target number of 4. We moved the store in October and increased inventory by 65%, so there is still a lot of room for performance improvements. Still, turns are up by about 20% from last year.

The blue items are very good, as the highest turn rate items are mostly collectibles and food. I could look at the numbers for role-playing and decide I could loosen up the inventory there, taking a few more chances since the turns exceed 4. It's probably the only department in this report that warrants increasing inventory.

The green items are average, but might need some attention. I was concerned with dice last year, so I made some changes. I down-sized my dice collection by about 50% from the year before and sales went up 25%, doubling the turn rate and providing me $1,000 to spend on other things. You can have too much inventory and a reduction of slow sellers or dead product can often increase visibility of your good product.

The purple items are in need of attention. Miniatures have dropped over the last couple of years, and we're slowly reducing slower sellers, hoping that D&D 4th Edition will pick up sales. We've tried to become the local source for board games, so we've allowed the board game inventory to grow at a rate beyond what's justified by their sales. Our main board game competitor closed up shop recently, so we'll look at this again in another year to see if it improved. Departments like classic games and puzzles have been disappointments. They mostly exist in our store because people expect them, but we're trying to visualize the store without them. A better visualization? How about $5,000? That's roughly the inventory dollars these two departments suck up that could be spent on things that sell.

Caveats. This is just a tool. You can use turn rate analysis by department, by game category, and by item. When I'm re-ordering items, I check the turn rate and drop things that aren't performing. Beginning stores will likely see a fairly slow turn rate, possibly 1.5 the first year, 2 the second year, 3 the third year, etc. We're in our fourth year and I would be very happy with a 3.5. It's important to give your inventory a chance and to avoid dumping a product lines before you really know what your customers want. That could take as long as 18 months. Also don't be afraid to gradually bring things back that you dropped early on.

You might also allow slower sellers to remain out of a sense of cohesion. For example, we made a point of stocking every Dungeons & Dragons book in print because we wanted to be the local D&D source. The key here is that you want it to be a conscious decision, not something you do on instinct or because you're a gamer.

Finally, one of the most important things this analysis can do for you is allow you to be nimble with your ordering. If you see a game declining, you can begin shifting inventory dollars to something that's performing better. This keeps you from having a lot of inventory dollars captured by dying games and having to spend your valuable time liquidating inventory on eBay or in-store sales.

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