Most retailers report inventory turnover. Far fewer manage anything with it.

That isn't because the figure is wrong. Timo Länkelä's argument is that turnover is worth measuring but isn't enough on its own. It tells you how fast stock moved. It doesn't tell you what to buy next, and that's the decision that decides the season. The work sits in open-to-buy, which needs three things forecast and kept current: purchases, sales, and where stock should be when the period ends.

This article comes from a recorded discussion with Timo Länkelä, Country Manager for Finland & Baltics at Zoined, and Sasa Moilanen, Co-founder & CEO at Zoined. Timo has worked in and with Finnish retail for many decades, and the problems below are the ones that keep recurring throughout his experience. Check out the full interview below, or continue reading for a summary of the insights. (Interview in Finnish. Can be auto-translated with YouTube to your desired language.)

What goes wrong without it

Asked what the biggest mistake in inventory management is, Timo names two sources. Budgets set too optimistically, and difficulty getting accurate information in the first place. His view is that buying is the hardest thing in retail, and the more seasonal the trade, the harder both problems get.

The sequence he has watched play out repeatedly starts there. A retailer doesn't have an accurate view of what's in stock or what it's worth. Season sales aren't compared at a fine enough level to see what's actually happening. So the buying carries on by gut feel.

"By the end of the season all the cash is tied up in stock, and the business has no liquidity left."

None of that is unusual. The retailer had a turnover figure the whole time. It just never told them anything early enough to act on.

Turnover, measured properly

Two things Timo would change about how most turnover figures get produced.

The period.

"Track inventory turn on a yearly basis. It gives the best picture, because the turn gets very high in peak season. That doesn't necessarily give the right picture."

A turn calculated across the peak looks healthy because the peak is when stock moves. Read on its own it describes a few good weeks, not a business.

The level. Turnover belongs to the product group, not the company. Timo separates service products from volume products. Service lines, the sizes, colours and specialist items you carry because customers expect to find them, will always turn worse than volume lines. That's what they're there for. Sizing the target turn for each product group is, in his words, down to the competence of the company doing it.

This isn't only practitioner experience. Gaur, Fisher and Raman looked at 311 publicly listed retail firms between 1987 and 2000 for Management Science, and found that inventory turnover varies so widely between firms and over time that it undermines its own usefulness for benchmarking and working capital management. Their fix is to adjust the figure for gross margin, capital intensity and sales surprise, the ratio of actual sales to expected sales (paper). That last adjustment is the academic version of Timo's point about the peak.

Margin

Turn says nothing about what the movement earned, so Timo pairs it with a second figure. The traditional Finnish approach is margin multiplied by turn. The modern version is GMROI (Gross Margin Return on Inventory), which measures turn and profitability at the same time.

The calculation is gross margin divided by average inventory at cost. A GMROI of 2 means every euro tied up in stock returned two euros of gross margin over the period.

Timo's thresholds, from practice:

"If GMROI is one, you can't yet call it a business. At two, it's good business. Everything above that is excellent business."

These come from clothing and leisure retail. Reference values differ by sector, so a grocery operator or a jeweller shouldn't take them as their own. He also thinks the metric is under-used in Finland relative to how well it describes a business, and offers a cross-check that costs nothing: cash flow will tell you whether your GMROI is good enough, whatever the report says.

Open-to-buy

Turnover and GMROI tell you how the last period went. Open-to-buy is the tool for the next one, and it's where Timo says the real difficulty lives.

At its simplest, open-to-buy is how much you can still spend on stock and hit your targets. The difficulty is that it depends on four budgets, not two. A purchase budget and a sales budget aren't enough. You also need sales budgeted at cost, and a closing stock target for the end of the period, all set at the level purchases are actually made. Timo's point is that many of those numbers have to be complete before the calculation can live and give you anything accurate enough to act on.

The hardest part in practice is getting purchases into the system close to real time. Seasonal trade helps here, because most of the buying is done pre-season and there's time to enter it. Once orders are booked at the moment of ordering and receipts are posted as goods arrive, the calculation becomes dynamic. Sales transactions and receipt transactions flow through it, you can see what's on order and what's been received, and the buyer sees continuously how much is left to spend to reach the target.

Asked which figures matter most, Timo lists four, in order. Actual stock. The stock target for the end of the period. Purchases ordered but not yet delivered. Sales targets. All at cost price. Together they answer the question that matters mid-season: will the goods last to the end, or not?

That question fails in two directions. Overstock at season end, which is the cash problem above. Or running out early, where stock gets too low, service capability weakens, and disappointed customers walk out.

Forecasting is what feeds all of it, and Timo is clear it's harder in seasonal trade than the systems make it look. Demand forecasts can be generated. Weather can't. If winter doesn't arrive, winter stock doesn't sell, and no forecast fixes that. What a good company can do is define the minimum the season has to deliver to carry its staff and its premises, and watch whether it's on course for that from the start.

Steering mid-season

Open-to-buy is only useful if you act on it early, and Timo watches one thing above the others for that.

"Days or weeks of supply based on actual sales is an extremely good tool. Following it should be among the most important things procurement and management do."

He watches it hardest at two moments, the start of the season and the peak, because those are the points where a deviation is still correctable.

What it surfaces is slow movers, and it surfaces them early. The Finnish trade word is hyllynlämmittäjä, a shelf-warmer. Timo's point is that they show up fairly fast if you're looking, and that they need an intervention rather than patience.

"It's an old truth that the earlier you give way on price, the smaller the damage you take."

The same applies to the closing stock target. If you start slipping from it early in the season, the response has to start early too. Waiting means bigger discounts at the end of the season with no profit left in them.

Alongside this, Timo argues for sending sell-through reporting to suppliers actively, so they can see how their own products are moving and act on it with you. Stock sitting on a shelf and then clearing at a heavy discount serves neither side.

Why the open-to-buy numbers go wrong

None of this works if the underlying records are wrong. Timo names three failures he sees repeatedly, and all three corrupt the open-to-buy directly.

Purchase orders that were never completed in one go. They get amended over time, which causes issues with the data integrations, and the incorrect data stays in place.

Undelivered orders that nobody cancels.

"If a supplier fails to deliver and those purchase orders are never removed, they all eat into the open-to-buy. The goods never reach the shelf, and they should have been replaced with something else."

The budget is consumed twice. Once by stock that never arrives, and again by the substitute that was never bought because the budget looked spent.

Gaps in the product hierarchy.

"Product hierarchies create black holes where products fall through."

When a product isn't correctly placed under its main group (footwear, clothing, bags, coats), sales accumulate against no category at all. As Timo puts it, nobody can then know the real situation in the store.

Product data itself, he thinks, is in reasonable shape at most suppliers now, because POS scanning depends on the EAN codes suppliers provide. The hierarchy sitting above that data is where things fall apart.

What this doesn't cover

The discussion was about seasonal retail, mainly clothing and leisure, in Finland. The GMROI thresholds come from that context. So does the emphasis on pre-season buying and closing stock targets.

Non-seasonal categories work on a different rhythm and were not tested here. Nor was grocery, where the turn figures and the margin structure are both different enough that the thresholds would mislead.

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