KPI

and Reporting Rules of Thumb

Retail is a data-driven business. As a merchant or planner, your customers give

you a report card every day on how well you predicted and met their needs. You
need to use that information every day to determine what actions you should
take in the short-, medium- and long-term to better meet their needs.
Thus, it’s no surprise that so much of your time is spent looking at reports and
analyzing your key performance indicators (KPIs).
For something that is core to running your business, it is not always clear WHICH
KPIs matter and how to use them to make decisions. Unless your information
systems have crashed, you are constantly awash in data.

Being able to make sense of what you see and avoid “analysis paralysis” is essential to becoming a
better merchant or planner.
Before we dive into specific KPIs and how to use them to understand and
run your business, you need a solid understanding of the basics:
• What each KPI measures and what drives them
• What “good” looks like
• Definition of a limited number of meaningful KPIs to focus on -
“Less is More”

What Are You Looking At?

The first step is to be sure you fully understand each of the measures you see on a report or that you
create for yourself out of a set of data. Some organizations and systems are better than others at
defining and communicating each measure clearly, but it’s better to ask rather than assume how each
number is calculated.
Let’s just look at one example:

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The first question is whether or not the calculation is based on units, retail value or cost value. Does this
matter? Yes, it can.
If you are looking at “sell-thru” for a group or class of items that have a wide range of values, then unit
sell-thru is the most accurate measure.
But retail sell-thru is often easier to calculate and use, and is just as accurate if you
are looking at a single item rather than a group of items.
So you can decide that sell-thru will be based on retail value, but then you have to be
aware of the potential distortions when looking at the sell-thru for a group of items
because you may actually have sold a high % of units at lower price points, which will
make your retail value sell-thru lower than your unit sell-thru.
And if that weren’t complicated enough… you also have to know the data used for the denominator in
this equation. When the period is more than 1 day – which is often desirable – how you define the
“inventory available to sell” could have a drastic impact on the resulting sell-thru figure. The three most
common options are:
• Inventory at the beginning of the period
• Inventory at the beginning of the period + receipts in that period
• Inventory at the end of the period + Sales
Let’s look at the impact of each of these definition choices on the sell-thru calculation:
Denominator Calculation Implications
Inventory at the • Easy to calculate
beginning of the period • Does not take into account receipts within the period that were
also available for sale
o Therefore, accuracy increases with shorter periods (e.g., week
or month vs. season or year)
• Accurate for single-delivery businesses or items
Inventory at the • Takes into account all inventory possibly available for sale
beginning of the period + • Well-suited for seasonal item sell-thru and more accurate over
receipts in that period longer time periods
• Actual timing of intake not accounted for
Inventory at the end of • Takes into account all inventory possibly available for sale
the period + Sales • Well-suited for both seasonal and basic item calculations and more
accurate over longer time periods
• Actual timing of intake not accounted for

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 The point here isn’t that any specific option is right or wrong, but that you must
understand how each calculation was defined so that you understand its biases
and when they are the best choice to understand your business.
It also means that when you want to look at a calculation two or more different
ways, you need to use differentiated names so that everyone understands which
calculation option you are referring to.

Some of the calculations that tend to need clarification are:

KPI Questions
Sales Is this gross sales or net sales?
Gross Margin What elements are included in the margin calculation?
Are there different types of margin to account for different elements? (e.g.,
merchandise margin vs. gross margin, vs. net margin, etc.)
Sell Thru Is this in units or value?
How is the inventory available to sell (denominator) defined?
Weeks of Supply Is this a backward-looking or forward-looking (forecast-based) calculation?
(WOS)
If backward looking, what is the period considered in defining the average weekly
sales?
Aged Inventory Is this in units or value?
Do re-orders of the same item update the “last receipt” date for all of that item’s
inventory?

These are only samples, and your organization is sure to have many other KPIs that you need to fully
understand to use correctly in managing your business.

What Are the KPIs Telling You?

Once you fully understand the measures you are looking at, you still need to know
what “good” looks like, and when those KPIs are NOT meeting expectations and
deserve more investigation and reaction.
Sometimes the answer is obvious, and sometimes the signals about the strengths
and weaknesses of your business are more subtle.
The best place to start is to have a clear understanding of how these KPIs will reflect
your strategies and tactics for the business.
For example, before you can say whether or not your weekly sell-thru is good or bad, you need to know
what sell-thru your original strategy and buy assumed was needed to deliver on your seasonal sales and
margin targets.

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Also keep in mind that a higher sell-thru than expected may not actually be a “good” thing: It might
mean you’re going to be out-of-stock too soon and risk disappointing and disengaging your customers
later in the season.
What do you need to monitor? You need to monitor KPIs that are erratic or
giving you mixed signals. Sometimes you need another week or two to see if
an anomaly or deviation from your expectation is a blip or a trend. But don’t
wait too long. In most cases, after 2 or 3 weeks, you have enough information
to start making decisions based on these trends.
And when do you react? You need to react to KPIs when they indicate a
threat to your original strategy and plan – things like too much inventory, not
enough inventory, slower than expected sales or higher than expected
markdowns.

Balancing Analysis with Decision-Making

In order not to drown in the sea of data, you need to adopt a “less is more”
strategy. This will help you focus on a few meaningful metrics on a regular basis.
Think of this as “taking the temperature” or doing a health check on your
business. Your core set of KPIs is designed to give you a sense of the business
health and alert you to areas that need a deeper dive and more in-depth analysis.
One of the most important things for you to determine is:
What Are You Trying to Measure?
Examples can be: profitability, stock productivity, stock quality, customer reaction to assortment
choices, customer reaction to pricing, etc.
Once you know what you are trying to measure then you can:
Determine which KPIs best suit that need
Remember, how the calculations are defined and what time period they cover may make some of them
better or worse suited to alert you to opportunities or problems with your business plan.
Define your key metrics and focus on them every single week. Select and use the KPIs best suited to the
time or product level, what you are trying to measure and what can provide you with actionable insight.
Remember that KPIs can be more or less important based on the type of product you are managing.
Weekly sell-thru, for instance, is going to be more relevant for short lifecycle product.
You can also shift your focus among KPIs depending on where you are in the process… focusing on Turn
during pre-season financial planning, but monitoring WOS in-season on replenishment items.
And finally, don’t succumb to analysis paralysis.
It is better to act, and then look for the impact of those actions
in the coming weeks than to delay action so that you can gather
and analyze more and more data… data which may or may not
be able to add more clarity as to what is happening with your
business

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