Category Compass: Making More Strategic Inventory Decisions

Category Compass seeks to answer a question: How do I make sure that the tires in my inventory are actually going to sell?

What is happening today?

Most retailers rely exclusively on their own sales history to inform their inventory strategy.

  • The good: It helps you to serve the same customers who visited you in the past
  • The bad: It It doesn’t tell you what to stock to serve other customers in your market

    • By not having a clear understanding of what the market demand looks like in your local area, you might be missing out on a lot of sales opportunities.

    How can Category Compass help me?

    Category Compass calculates the optimal inventory mix for your store:

  • Using your transaction data, we make sure to recommend your top performing tires and ensure you continue selling those going forward.
  • Using vehicle registration and ATD sales data, we calculate which tire sizes and price tiers you have the most opportunity to grow by capturing the local market demand that you’re currently missing out on.

    • By combining these two powerful datasets, our recommendations optimize your inventory for current customers and future customers at the same time. We found that a 50/50 split between the two yields great results, but you can play around with the formula yourself to find the ratio that works best for you.

    How does Category Compass come up with a recommendation?

    Calculating your sales potential

    When you review the list of recommended inventory, you will be able to compare your current inventory with the newly recommended inventory mix - your 'potential'.

    Your 'potential' is calculated based on the mix between store sales and market demand data.

  • Relying 100% on your store's past sales only optimizes based on what you have sold in the past
  • Relying 100% on market demand reconfigures your entire inventory to reflect the total sales of your market without considering your unique business
  • By combining both (50/50) makes sure you keep selling what you are good at, while also stocking more of what the market demands

    • Let's start with an example for a single tire:

    Imagine you sold a total of 50 215/55R16 Tier 1 tires in the last 12 months, 0.50% of your 10,000 sales for the year.

  • If the local market demand for this tire is 1.50%, your potential would be 150 tires in case you optimize for 100% market demand. (10,000 x 1.5% = 150). This means that you are potentially missing opportunities because your sales are less than the market (50 vs 150).
  • If you use a 50/50 recommendation formula, we will assume your potential is to sell 100, which is the mid point between your sales (50) and the market sales (150).
  • In order to calculate your profit potential for this tire, we will assume 100 potential sales rather than 50 last year sales. Multiplying 100 with a $25 margin on the tire adds up to $2,500 of potential profit.
  • GMROI is your total profit divided by your cost of inventory for this tire over the last 12 months. We generally recommend you to stock a complete set of tires. At $150 per unit, this is a cost of $600 for the set. $2,500 divided by $600 equals to a GMROI of 416%. This means that for every $1 locked up in inventory cost you make $4.16 per year for this specific tire.
  • While 50 sales in a year might not have made your stocking threshold in your current inventory, the potential of 100 sales, and doubling your profit based on local market demand, would make it a good idea to stock the tire and try to drive more sales.

    • How does an inventory recommendation get generated?

    We rank your SKUs based by potential GMROI. The higher the ranking, the more productive a tire will be in your inventory. So whether you decide to stock 50 or 400 SKUs, Category Compass will always prioritize the most productive tires first.

    How many tires should I stock?

    Although this a question only you can answer, Category Compass will give you all the information you need to make a more informed decision. Here are a few things to consider when making this decision:

  • An inventory with 50 SKUs is going to be more 'productive' than one with 200 SKUs, since it has higher average sales and profitably.
  • An inventory of 200 SKUs will meet more of the market demand than one with 50 SKUs as the amount of cars it can serve is higher.
  • The sum of the market demand for all your tires in inventory is called your market coverage. A market coverage of 50% means you can serve one of every two vehicles in your local area with your inventory on hand.
  • To decide how many SKUs to stock, you need to define the right mix of market coverage and inventory productivity for your business strategy.
  • Every SKU you add will add less market coverage and profitability than the previous one. So at some point, it doesn't make sense to keep adding more (unproductive) tires to your inventory.
  • Retailers with higher yearly sales volume will have more SKUs above 100% GMROI than retailers with lower sales volume. So if you were to decide you want to target a specific GMROI for your full inventory, you will be able to identify how many tires, and which ones, to stock to meet your inventory strategy.

    • How SKUs are selected in our recommendation

    The focus of Category Compass is to make sure you meet the demand in your market. For this, you are free to stock and sell whatever SKU you prefer.

  • SKUs are grouped in SKU groups, which is a basket of SKUs with the same size and tier(e.g. 215/55R16 Tier 1) When you see market demand or potential sales, we refer to this SKU group, not a specific brand or style.
  • To make our recommendations more actionable, we provide you with the SKU (brand and style) you sold the most of in the last 12 months.
  • A recommendation might include a brand you used to sell in the past but you have shifted to another brand since. In order to fix this, you can deselect your old brand/style in your preferences to make sure it gets excluded from the recommendation.

    • What is my 'local market' and how is it defined?

    Torqata uses the zip codes from your transaction data to create an area which is defined as your local market. In case your transaction data doesn't include customer data, we use the zip codes in a 10 mile radius around your store.

    In order to estimate demand for different tiers within a certain size, Torqata looks at the age of vehicles as well as ATD sales data to come up with a prediction of sales across different tiers, enabling you to optimize your good/better/best strategy to the demand in your local area.

    FAQs

    Market Coverage is the amount of vehicles in your area you can serve with your inventory on hand.

    Your current market coverage refers to your current inventory. If this is 0 it means we didn’t get your inventory data from your POS provider.

    Your recommended market coverage is the coverage you would get if you were to implement all of the recommendations within Category Compass.

    GMROI is the acronym for 'Gross Margin Return on Inventory'. This is a common concept for retailers to evaluate and optimize the productivity of their inventory. GMROI optimizes for both sales volume as well as margins.

    Your GMROI is the total profit of your inventory divided by the total cost of that inventory. 100% GMROI would mean your profit on the tire is the same as the cost to hold the set you have on hand. We use a GMROI calculation for each SKU to rank their relative productivity.

    A tier is a classification of brands based on their perceived quality and price point and aligns with the concept of good/better/best.

    If you have tier designations in your POS, we will use those, if not, we default to the ATD classification.

    Category Compass creates a recommendation that is not just based on your past sales, but also based on Market demand data.

    Since it is not guaranteed you will be able to sell exactly what the market sells without additional sales and marketing efforts, we refer to it as a potential.

    When your potential is lower than your current sales, it means that you are selling more of that size/tier than the average retailer in your local area. This doesn’t mean your sales will drop, but that if you sell more of other tires, these numbers will get closer to each other.

    To help you optimize your inventory, we look at the sales and profits your inventory drives, and allow you to compare it to your potential future inventory as generated by Category Compass.

    When we say ‘from inventory’ we really mean ‘from the tire size/tier combinations you have in your current inventory’

    Our sales data uses your trailing 12 month data. Meaning will look backwards from today to the last 365 days of sales data.

    The retail price is the average price you sold the tire for during the last 12 months, based on your transaction data. If you haven’t sold the tire in 12 months, we use the 12 month average retail price across all Torqata customers.

    The cost of the tire is the average cost at which you acquired the tire for in the last 12 months based on your transaction data. If you don’t have the tire in your POS system, we use the average cost of the tire across all Torqata customers.

    Your margin is calculated by your average retail price and cost. If we don’t get data from your POS, we use national averages across all Torqata customers.

    To calculate your profit we multiply your margin by your total sales in the last 12 months.

    Turns (SKUs) are based on sets of 4. So we take your total sales from inventory and divide it by your amount of SKUs in inventory multiplied by 4.

    Turns (units) are used to calculate to aggregate turns of your entire inventory by dividing your total sales from inventory by the quantity on hand (based on your current inventory).

    Category Compass assumes you stock one set per SKU unless you sell more than a given threshold (default is set to 20 sales per month), in which case we recommend as second set. If your strategy is to stock more than that (e.g. if you buy in bulk or promotions), you should lower the amount of units or SKUs in your input to account for the space you need for that additional inventory.

    Your local market is defined by the zip codes of customers who have transacted in your store in the last 12 months.

    Category Compass allows you to add a dollar value or percentage to a specific brand to reflect the extra margin you make from your reward programs. This is a simple method to make sure the GMROI and profit calculation are closer to your actual numbers.

    Some retailers will charge an additional service fee to install a set of tires independently from their price. So when you charge $10 per tire, your lower tier tires will become more profitable for your business than when you only make money on the product margin. You could also use this field to add any additional up-sell value you believe you can get from each customer sale.

    To not overwhelm you, we only show the most essential columns on default. There is an icon on the bottom left corner of the table that allows you turn columns on or off so you can make sure you have the most relevant data points available to you.