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Stockholding - Optimisation
Tuesday, November 13, 2018, by Chris Boydell, comments (Disabled)


It would not be revealing a great secret of stock management to discuss the relationship between ordering cycles, lead time and rate of sale in everyone’s Point of Sale (POS) systems. Even if you don’t have a POS and are working it out by hand, it is generally well understood that the ideal re-order quantity is the ordering cycle in months plus the lead time multiplied by the monthly rate of sale (demand). Add this quantity to the minimum stock level you are prepared to have in store [also called safety stock ](1 piece, 1 box, full display) and you have your maximum stock level.

ROQ = (Cycle Length + Lead) x Demand

This is the basis of inventory strategy for regular re-ordering cycles. There are some different calculations in systems which use a re-order trigger point - but the basic principles are the same. Your stock level is proportional to the rate of sale.

Your chosen display size is your minimum variety offering

Safety stock level in reading glasses should be considered to be a full display - See Why So Much Choice to fully understand the need for variety.

If you are talking about stock levels for Juicy Fruit and PK chewing gum, the monthly re-ordering is pretty easy to work out and if you have a POS it’s going to let you know very accurately how much to order.

Where these systems are vulnerable to inaccuracy is when the Demand becomes very low - especially if it becomes less than one. Imagine if you are selling Gulfstream Private Jet Aeroplanes and you only sell 1 per year. The formula doesn’t work very well.

How do you maintain variety without over or under stocking?

The same situation occurs when the product you are selling comes in many varieties (see Why So Much Choice). Thinking about reading glasses and sunglasses. With a stand full of product. Probably more than 100 different items. It's possible that one might sell 30, 50 or even 100 pairs each month - but which ones. The average sales per item in this situation will be less than one (1). [For it to even be one (1) the stock turns must be 12 - see Stock Turns for more information on this].

Lets say 30 pieces were sold from 100 pieces on display. On average that's 0.3 pieces of each item - so how do you deal with it?

Is simple replacement a good strategy?

Most commonly, a POS system will just seek to replace. However, think about it - if on average only a third sell each month - isn’t it unlikely to be the same third next month - or if it is, why do we have the other two thirds? How do you know which one you could have sold three times in the month if you’d had the stock and which one you have had for a year and it has finally found it’s customer?

Every order is an opportunity to refine and perfect your offering

Most commonly, a rep without a stock management system, will just fill it up as much as you will let them. The more the better (good for them - bad for you!)

An Account Manager using the On the Nose stock management system will give insight into the products which are selling. In the main, not by individual style although they will point out your best sellers - the ones that do sell each month. They will demonstrate how sales are distributed between men’s, unisex and women’s styles; between the various price points and in the case of reading glasses between the 6 different magnifications. By grouping the sales in this way, Demand becomes a larger positive number, and starts to make sense and gain accuracy in calculation of re-order quantity.

Shape your stock holding to match your demand

What becomes evident is that there are different segments of the general population that enter each store. Looked at in this form it is clear that there are some segments that have a faster turnover than others. With this information in hand its possible to increase the product display of popular segments and decrease the display of the less popular segments. This we call Dynamic Merchandising.

Coupled with targeted re-ordering, On the Nose can increase turnover whilst minimising  stock holding, getting rid of dead stock and most crucially, working on stock turns. For more information on the vital importance of stock turns see Stock Turns.






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