Often times there is a need for an objective way to distribute inventory between two or more stores or departments or classes or sizes, etc. Rather than using a seat-of-the-pants or traditional method (we have always done it this way) there is a mathematical model to solve this dilemma.
Let’s use some hypothetical statistics to develop the concept.
Situation no. 1: The company owns three stores which carry the same merchandise but the sale rates vary significantly. The sales history (using either units or retail dollars) is entered and totaled, the square root of each store’s sales history is computed and totaled, the percentage of the square roots is computed and totaled (to prove the calculations), the individual store percents are multiplied times the total open-to-buy:
| store no. | sales history | square root | % | open to buy |
| 1 | 4000 | 63.25 | 27.48 | 5496 |
| 2 | 6000 | 77.46 | 33.66 | 6731 |
| 3 | 8000 | 89.44 | 38.86 | 7773 |
| total | 18000 | 230.15 | 100.00 | 20000 |
To more dramatically demonstrate the effectiveness of this technique, I have made the sales history differences greater and easier to compare.
| store no. | sales history | square root | % | open to buy |
| 1 | 4000 | 63.25 | 22.65 | 7249 |
| 2 | 8000 | 89.44 | 32.04 | 10252 |
| 3 | 16000 | 126.49 | 45.31 | 14499 |
| total | 28000 | 279.18 | 100.00 | 32000 |
Note how little more of the buy is assigned to stores no.2 and no.3 as compared to store no.1 (even though the sales are 100% and 400% greater, the allocations are only 41% and 100% greater respectively). This technique (1) recognizes the retail axiom that it doesn’t take twice as much inventory to sell twice as much (due to the basic assortment requirement in even a low sales environment) and (2) it is easier to turn the inventory faster in a higher sales volume environment without sacrificing sales.
This simple technique can be used to allocate buying and inventory between two or more stores, two or more related classes (white dress shirts vs colored dress shirts or skirts vs slacks) and even sizes and colors within the same class. The only requirement for the results to be meaningful is that the time lapse between ordering and delivery must be the same. You cannot compare a class of merchandise with a vendor in-stock reorder program to a class that can be ordered only twice a year.
Try it at the next opportunity and let me know the results. Also, if your software system vendor does not provide the tools to use this technique put the pressure on.
Gerald H. Smith is a retired Retail Industry Consultant.
March 2007
