Inventory productivity is about efficiency not economies of scale

23rd March 2018

We’ve done some analysis on data from 28 UK based fashion retailers.  They have all filed data at the UK Companies House, an official Government Department.

The horizontal axis is annual sales measured in £000’s.  Most fashion retailers have sales under £200m, but three are larger.   The vertical axis is year-end inventory turn.  This is calculated as Cost of Goods Sold (or Cost of Sales) divided by the end of year inventory at cost.  Most fashion retailers do between 1.7 and 4.6 stock turns on this basis.  This is a wide variability.

The line on the chart is the line of best fit.  In other words, if you know the annual sales for a company and they have average inventory performance, their year-end stock turn should be the corresponding value on the line.

Based on average performance, inventory turn drops by about 5% as sales grow from £20m to £760m.  In other words there are small diseconomies of scale as a company gets bigger.  However, individual companies can improve their inventory performance from 1.7 turns to 4.6 turns by improving their efficiency.  This is a 2.7 times improvement potentially between the worst and the best.

If you are in the fashion business and you are not doing 3 turns, you have to ask yourselves why!

The sample size is small and therefore legitimately questionable for sales over £200m, but there is no doubting the results at £200m or less.

 

Do your results fit in with this analysis?  Please post a comment or question. 

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