Learning to Love Stock Turns: Part One

Whether they know it or not, retailers live and die by stock turns. The magic ratio of (Annual Sales / Average Inventory) is the primary engine of retail profitability, the alpha and omega, the Shiva of the Shelves. As we’ve been working with publishers and retailers, we’ve been surprised at how much attention is focused on margin (“An extra 1% of margin! I win!”) or sell-through (“Another 500 copies sold! I win!”) and how little is focused on turn.

If stock turn allows grocery retailers to live off the single-digit margins offered by canned goods, frozen peas and fresh produce, surely it could be of some help to the 40%+ world of book retail*. Yet bizarrely, many bookstore POS systems don’t report turns at the item-level or even at the category level! Since stock turns feature prominently in BNC Prospector and have now been released for Peer-to-Peer data in BNC SalesData [insert frenzied cheering here] it seemed like a good time to talk about why they’re important and how they can be used.

I’d hazard a guess that the book industry’s neglect of stock turn has a few causes: Min/max inventory control, a favourite of both chain and independent inventory control systems, focuses on maintaining pre-set inventory levels, on the reasonable assumption that every time a copy sells, another one is ordered. I may be out of stock, but hopefully not for long. So my inventory system will keep me from running out of books that are selling. Excellent. A sharp buyer or sophisticated forecasting algorithm may look at how quickly the book sold and order more. Even better. On the other side, returnability lowers the risk of overbuying. Order too many? Send ‘em back. As long as more books are sold, what’s not to like?

What makes stock turns so great is that they add two other concepts into the mix: efficiency and opportunity cost. In other words, “How many copies did I have to stock to get those sales?” and “What sales did I lose by taking up space with things that weren’t selling, or by being out of stock of a book that was selling well?” How much of my stock is moving, how much is just sitting there, and is some moving so quickly that I’m probably missing sales? An article from The Retail Management Advisors gives a concise explanation of the economic impact of stock turns. It isn’t book industry specific, but it gives a good overview. (Tellingly, I couldn’t find a write-up on stock turn for book retail on the whole Interweb.)

Coming Up

Part 2: Using Stock Turns

* And rather than duck-and-cover into the traditional “books-are-different” disclaimer, I’d suggest that great bookstores rock their turns. It’s what gives a good bookstore that not-overstocked-not-bare-shelves-always-something-new-to-see quality that keeps you coming back.

(In all things stock-turn related, I am indebted to the inimitable Mike Shatzkin, whose lectures on the importance of stock turns in the book industry are without peer.)