To stock or not to stock that inventory?

EOQ-inventory-manager-in-warehouse.jpg

Retail Managers are responsible to ensure stock availability to customers by replenishing stocks regularly. At the same time, they are also responsible for profitability of their category or division, leading to questions on – whether we should carry that product and how much inventory should we carry on hand? This is where it gets interesting. Because if you want to cater to all customer demand, then theoretically you must carry infinite inventory so that you cater to all customers who may or may not come. And, carrying infinite inventory is a loss-making proposition, leading to unhealthy inventory and write-offs. Let us understand this through an example below.

Let’s say the product you are going to sell costs $6 and you will sell it at $10, making a profit of $4. However, if you cannot sell that product then you will incur a loss of $6 (product cost).

Therefore, the tradeoff here is between:

a). the profit that you’d earn if the customer walks in and you have it in your inventory

b). the loss that you’d incur if you stock and the customer doesn’t turn up

To make the right decision of whether to hold that extra unit of inventory or not, you need to understand the probability of selling that inventory (say one unit) denoted as Px.

  • If the probability of selling that extra unit is 100% (P100), then you should surely stock it and make a profit of $4.
  • If the probability of selling that extra unit is 25% (P25), then the payoff is

25%*$4 + 75%*(-$6) = -$3.5 (negative payoff). Since this is going to make a negative payoff, you shouldn’t stock that unit of inventory.

  • If the probability of selling that extra unit is 80%(P80), then the payoff is

80%*$4 + 20%*(-$6) = $2 (positive payoff)

  • If the probability of selling that extra unit is 60%(P60), then the payoff is

60%*$4 + 40%*(-$6) = $0 (critical point). So, as long as the probability of selling that extra unit is 40% or above, you should keep stocking inventory. Most auto-buying systems are designed in this way to stock inventory until the probability of selling that unit of inventory goes below the critical point.

Also, the probability of selling that unit is within what time period? It is within the planning cycle (order cycle time plus lead time from PO to delivery). Your days on hand should always be as lean as possible and close to the planning cycle. Credit period is the maximum limit of the planning cycle, but ideally shorter the planning cycle the better the benefit is for the business

The one mistake that we did in the above calculation is we wrongly assumed that profit that we will make out of the sale is only from that particular unit. We should also include the profit that we could’ve made by that particular customer in all future purchases at our store – customer lifetime value (CLV). So, the tradeoff has to be between the customer lifetime value of the customer vs. the loss you’d incur if the customer doesn’t turn up at all. Also, the above calculation should take ‘time’ into account in the form of cost of capital (inventory holding costs) because many times the loss is not the entire cost of the product.

In conclusion, the value of having that inventory in stock changes basis a lot of parameters such as CLV, importance of that category or brand to the image of the retail store, brand equity of the store, type of store and many other business parameters.

The one question that we are yet to answer is: how do we determine the probability of sale?

Intuitively you know that the probability of selling that first unit of a TV is 100%, the 100th unit is say 80%, 500th unit is 40% and 1000th unit is 10%. Probability changes by quantity.

To get the probability you should simulate a demand distribution basis past historical sales data. Demand in retail scenarios are usually normal distributions. So, we will need the average and standard deviation. It is what we learnt in our MBAs – you will calculate the probability for the random variable (sellout of a TV model) to take the value 500 units and that is P (X=500). One of the ways is for you to calculate the Z value =  (500 – average)/SD and then lookup for that Z value in the Z table to get the probability. There are many ways to get this accurate estimate basis various distribution fits, which I will write in the next article.

Thank you.

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Credit Card & Bajaj EMI card penetration in India

By the end of Mar 2016, India had 24.5 million credit cards and 661 million debit cards in operation (not issued).

credit card total number of cards added

debit card total number of cards added

The total number of transactions on credit cards grew by 27% while it rose by 48% for debit cards for the year ending March 2016. In March, total number of transactions through credit cards were 72.22 million while the figure for debit cards was 112.87 million.

The average amount transacted on credit card is 2.5x higher than that of debit card.

average amonunt per transactions

Which banks have the largest credit card base?

HDFC Bank and ICICI Bank lead in the total credit card base.

Credit Card issued status bank wise

 

Which cities have the highest penetration?

While I don’t have the exact city-wise penetration data, CIBIL research shows that maximum number of credit card applicants came from Mumbai, Delhi and Bangalore. An indicative numbers on city-wise credit card penetration is as below.

  • Coimbatore – 12.5%
  • Jaipur – 12%
  • Chennai – 11.7%
  • Delhi – 11.6%
  • Nagpur – 11%
  • Mumbai – 9%
  • Bangalore – 9%
  • Surat – 8%
  • Ahmedabad – 7.7%
  • Pune – 7.6%
  • Faridabad, Kolkata, Chandigrah – 7.5%
  • Kanpur – 7%
  • Amritsar – 5.4%
  • Ludhiana – 5%

On usage, CIBIL data shows that Delhi, Ahmedabad, Pune and Mumbai have a higher usage of credit cards than Kolkata, Bangalore, Chennai and Hyderabad.

Bajaj Finance EMI card too witnessed a steep rise in its number of EMI cards to a total of 9.8 million cards in India.

Credit card & EMI card penetration has largely been low in India for ages. Certain retail categories such as large appliances and other high value purchases are bought a lot on credit and hence it is imperative for ecommerce and offline retailers to look for other opportunities of offering credit to customers for growth in these categories.

Thank you.

Source: http://www.business-standard.com/article/companies/sharp-rise-in-bajaj-finance-s-emi-card-user-base-in-past-12-months-117092300497_1.html)

 

 

 

Are You Losing Money By Calculating Margins Wrong?

I spent time on Friday helping a client update spreadsheets and Excel reports that used an incorrect formula to calculate the margin on bids for construction jobs. While this particular client was looking for a margin of 25%, he was actually getting one closer to 20%. On a $100,000.00 bid, that can be the difference between profit and disaster.

I see sellers new to retailing make this same mistake over and over again.

The seller wants a “mark up” of 30%

So they take their cost (the wholesale price), multiply that by 30% and add the result to the wholesale cost to find the retail, or selling price.

Wrong!

You can certainly find a retail price that way, but it won’t give you a 30% margin. The confusion stems from

  1. Confusion about calculating percentages
  2. The difference between margins and mark ups

YOUR MARK UP IS NOT YOUR MARGIN

Although it is less important, let’s talk about mark up vs margin first.  Many people use these terms interchangeably to mean the difference between what you pay for goods and what you sell them for – that is, gross profit. However, they are not the same thing. Misunderstanding the nature of mark ups and margins can make it easier to calculate them incorrectly – which cuts deeply into your bottom line.

A margin is, most simply put, the percentage of the selling price that is the profit.

  • If you pay $6.00 for an item and you sell it for $10.00, you made a gross profit of $4.00.
  • $4.00 is 40% of $10.00 – so you have a margin of 40%
  • Notice this important distinction- the 40% margin is 40% of the final selling price, not of the wholesale cost.

A mark up is the percent of the cost you add to the wholesale price to get to the selling price.

  • If you pay the same $6.00 and sell the item with a 40% mark up, you make a gross profit of only $2.40
  • 40% of $6.00 is just $2.40
  • A mark up of x% will yield a smaller profit than a margin of x% because the mark up is a percentage of the lower wholesale cost.

IT DOESN’T MATTER IF YOU MIX UP THE TERMS AS LONG AS YOU DO THE MATH RIGHT

Many people say “mark up” when they mean “margin.” If you are fussy about language, this is annoying but it will not lead to financial disaster. It’s just words.

However, if you’ve confused the two concepts and are calculating your margins by mutliplying the wholesale cost by the margin percentage, you could be headed for trouble.

Just remember – you want to calculate your profit as a percentage of the final value, not as a percentage of the original cost. When a customer hands you $10.00, you need to know how much goes into your pocket and how much goes to your vendor.

Do you need a 40% profit margin to survive? Then you want to keep $4 out of every $10.

Also keep in mind that this is a gross profit margin. It does not take into account overhead, fees, etc. You may put $4 into your pocket, then have to turn around and give $1.00 to the landlord, 75¢ to the tax man, 15¢ to the bank for processing fees, etc.

You might end up keeping only $1.50 (net profit) of the original $4.00 (gross profit). Which is why calculating your margin by incorrectly using the wholesale price can be such a disaster. You can actually lose money with every sale!

WHAT’S THE FORMULA?

Now that you know you want your margin to be a percentage of the final cost, how do you actually figure it out?

Relax – as long as you have a calculator handy, it is easy.

Say you want a 40% margin. We know that 100% less 40% leaves 60%. So your wholesale cost represents 60% of the final value. To find the remaining 40%, divide the wholesale cost by .6

  • If  you want a 90% margin – divide the wholesale cost by .1
  • If  you want a 80% margin – divide the wholesale cost by .2
  • If  you want a 70% margin – divide the wholesale cost by .3
  • If  you want a 60% margin – divide the wholesale cost by .4
  • If  you want a 50% margin – divide the wholesale cost by .5
  • If  you want a 40% margin – divide the wholesale cost by .6
  • If you want a 30% margin – divide the wholesale cost by .7
  • If you want a 20% margin – divide the wholesale cost by .8
  • If  you want a 10% margin – divide the wholesale cost by .9

As long as you follow this formula for calculating retail price, you will get the margin you want.

Talk. Listen

Archu's Scribbles

123456

It takes courage to say something to someone. Be it anything. From simplest things to difficult life changing decisions. People try to convey what they want to say. At times it maybe a success or a fail. Communication is the key. Above all that we need courage to communicate what we want to say all the way from the heart.

It also takes a person courage to listen. Listen to the other person what he wants to say from bottom of his/her heart. To listen and understand what the person is trying to communicating so courageously. It takes a heart to listen to a person and its a big deal. It wouldn’t be necessary for us to take action but just listening is so important and effective.

People today don’t have the time to listen. So many things come in between. Maybe lack of prioritizing. Maybe lack of interest. But…

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Steps to Take When You’re Starting to Feel Burned Out – HBR

It’s the opposite end of the spectrum from engagement. The engaged employee is energized, involved, and high-performing; the burned-out employee is exhausted, cynical, and overwhelmed.

Research shows that burnout has three dimensions: emotional exhaustion, depersonalization, and reduced personal accomplishment. When you’re emotionally exhausted, you feel used up—not just emotionally, but often physically and cognitively as well. You can’t concentrate. You’re easily upset or angered, you get sick more often, and you have difficulty sleeping. Depersonalization shows up in feelings of alienation from and cynicism towards the people your job requires you to interact with. One of my coaching clients summed it up like this: “I feel like I’m watching myself in a play. I know my role, I can recite my lines, but I just don’t care.” What’s worse, although you can’t imagine going on like this much longer, you don’t see a feasible way out of your predicament.

It’s this third dimension of burnout — reduced personal accomplishment — that traps many employees in situations where they suffer. When you’re burned out, your capacity to perform is compromised, and so is your belief in yourself. In an insidious twist, employers may misinterpret an employee suffering from burnout as an uncooperative low performer rather than as a person in crisis. When that’s the case, you’re unlikely to get the support you desperately need.

Research shows that burnout occurs when the demands people face on the job outstrip the resources they have to meet them. Certain types of demands are much more likely to tax people to the point of burnout, especially a heavy workload, intense pressure, and unclear or conflicting expectations. A toxic interpersonal environment—whether it shows up as undermining, back-stabbing, incivility, or low trust—is a breeding ground for burnout because it requires so much emotional effort just to cope with the situation. Role conflict, which occurs when the expectations of one role that’s important to you conflict with those of another, also increases risk of burnout. This might happen, for example, when the demands of your job make it impossible to spend adequate time with your loved ones, or when the way you’re expected to act at work clashes with your sense of self.

If you think you might be experiencing burnout, don’t ignore it; it won’t go away by itself. The consequences of burnout for individuals are grave, including coronary disease, hypertension, gastrointestinal problems, depression, anxiety, increased alcohol and drug use, marital and family conflict, alienation, sense of futility, and diminished career prospects. The costs to employers include decreased performance, absenteeism, turnover, increased accident risk, lowered morale and commitment, cynicism, and reduced willingness to help others.

To get back to thriving, it’s essential to understand that burnout is fundamentally a state of resource depletion. In the same way that you can’t continue to drive a car that’s out of fuel just because you’d like to get home, you can’t overcome burnout simply by deciding to “pull yourself together.” Rebounding from burnout and preventing its recurrence requires three things: replenishing lost resources, avoiding further resource depletion, and finding or creating resource-rich conditions going forward. Many resources are vital for our performance and well-being, from personal qualities like skills, emotional stability, and good health, to supportive relationships with colleagues, autonomy and control at work, constructive feedback, having a say in matters that affect us, and feeling that our work makes a difference. Try these steps to combat burnout:

Prioritize taking care of yourself to replenish personal resources. Start by making an appointment with your doctor and getting an objective medical assessment. I encourage clients to take a lesson from the safety briefing provided at the beginning of every commercial flight, which instructs passengers to “secure your own oxygen mask before helping others.” In other words, if you want to be able to perform, you need to shore up your capacity to do so. Prioritize good sleep habits, nutrition, exercise, connection with people you enjoy, and practices that promote calmness and well-being, like meditation, journaling, talk therapy, or simply quiet time alone doing an activity you enjoy.

Analyze your current situation. Perhaps you already understand what’s burning you out. If not, try this: track how you spend your time for a week (you can either do this on paper, in a spreadsheet, or in one of the many apps now available for time tracking). For each block of time, record what you’re doing, whom you’re with, how you feel (e.g., on a scale of 1-10 where 0=angry or depressed and 10=joyful or energized), and how valuable the activity is. This gives you a basis for deciding where to make changes that will have the greatest impact. Imagine that you have a fuel gauge you can check to see what level your personal resources (physical, mental, and emotional) are at any moment. The basic principle is to limit your exposure to the tasks, people, and situations that drain you and increase your exposure to those that replenish you.

Reduce exposure to job stressors. Your condition may warrant a reduction in your workload or working hours, or taking some time away from work. Using your analysis of time spent and associated mood/energy level and value of activity as a guide, jettison low value/high frustration activities to the extent possible. If you find that there are certain relationships that are especially draining, limit your exposure to those people. Reflect on whether you have perfectionist tendencies; if so, consciously releasing them will lower your stress level. Delegate the things that aren’t necessary for you to do personally. Commit to disconnecting from work at night and on the weekends.

Increase job resources. Prioritize spending time on the activities that are highest in value and most energizing. Reach out to people you trust and enjoy at work. Look for ways to interact more with people you find stimulating. Talk to your boss about what resources you need to perform at your peak. For instance, if you lack certain skills, request training and support for increased performance, such as regular feedback and mentoring by someone who’s skilled. Brainstorm with colleagues about ways to modify work processes to make everyone more resourceful. For instance, you might institute an “early warning system” whereby people reach out for help as soon as they realize they’ll miss a deadline. You might also agree to regularly check in on where the team’s overall level of resources is and to take action to replenish it when it’s low.

Take the opportunity to reassess. Some things about your job are in your capacity to change; others are not. If, for example, the culture of your organization is characterized by pervasive incivility, it’s unlikely that you will ever thrive there. Or if the content of the work has no overlap with what you care about most, finding work that’s more meaningful may be an essential step to thriving. There is no job that’s worth your health, your sanity, or your soul. For many people, burnout is the lever that motivates them to pause, take stock, and create a career that’s more satisfying than what they’d previously imagined.

Empathy vs. Perspective

Empathy helps you understand what a prospective donor is feeling. 

Perspective helps you understand why they are feeling it.

Empathy keeps relationships on track.

Empathy helps you remember that your supporter lives on the west coast while you are on Eastern time. Thanks to your empathy you’ll avoid calling her when you first get to the office at 8 am (5 am for her). In that case empathy is a very good thing to have.

Perspective is more intellectual.

Perspective-taking is exclusively the process of taking an alternate point-of-view. With perspective you can understand your supporters’ viewpoints, needs, desires, goals and aspirations. If the need is urgent and you know that the supporter has been waiting for an opportunity to fund (for example) an airlift to rescue dozens of refugees in a far off land, then you will call and awaken her at 5 am. Your perspective assures you that the donor will be happy you did.

However, the perspective-taking process does not necessarily lead to feelings of empathy.