Weeks of Supply (WOS), is a key performance indicator (KPI) that all retailers should watch closely to understand the health of their inventory. WOS is a measure of how many weeks the inventory for a particular item or a category will last at the current or forecasted Rate of Sale (ROS).
Looking at inventory levels in terms of WOS is a much better way to evaluate your inventory than absolute inventory levels because of a few reasons:
- WOS gives a measure of whether current inventory levels are healthy or not, i.e. are we carrying too much inventory or too little inventory? It would not be possible to answer this without comparing inventory levels to Rate of Sale (ROS).
- WOS allows you to compare inventory levels across different types of products. For example, a retailer might carry thousands of units for a fast moving product like socks. However, they may only carry tens of units for a slower selling item like outerwear. Using a metric like WOS provides a standardized KPI that can be used across all product categories.
How to calculate WOS
There are two main ways to calculate WOS. We will cover both formulas below and provide examples to help you better understand them.
1. Weeks of Supply Formula
Weeks of Supply = Beginning of Period Inventory in Units / Weekly Rate of Sale in Units
WOS = BOP Units / ROS Units
Let’s assume that we are calculating WOS for a Basic White T-Shirt, of which we currently have 250 units on hand (Beginning of Period Inventory) and we do not have anything on-order. In this case BOP Units = 250.
Now, let’s look at the ROS Units (Rate of Sale Units) for this T-Shirt. Let’s assume that this item has sold at a weekly average of 50 units per week in the trailing 4 weeks. In this case, ROS Units = 50.
Using these metrics, the WOS will equal to 250 / 50 = 5, meaning that at this Rate of Sale, our inventory will last us for another 5 weeks.
A few questions naturally arise from the calculation above:
- Is 5 a good value for WOS?
- Why are we looking only at the trailing 4 weeks?
- How many weeks back should we look at in general?
- What if our business is very seasonal, and the trailing 4 weeks is not a good proxy for the upcoming weeks?
We will cover the answers to these questions in the rest of this post. One thing to highlight is that the calculation above for WOS makes the assumption that trailing weeks are good indicators for the future, which is not necessarily true for highly seasonal products.
For example, most fashion retailers will see their sales spike during the holiday season, so leading into the holidays, trailing 4 weeks will not be a good indicator for the past. The right way to calculate WOS is to use a forward looking demand forecast, instead of historical rate of sale.
2. Forward Weeks of Supply Formula
Weeks of Supply = Beginning of Period Inventory in Units / Forecasted Weekly Rate of Sale in Units
FWOS = BOP Units / Forecasted ROS
As you can see in the formulas above, the main adjustment has been on the ROS line, which has been adjusted to be forward looking, instead of backward looking. FWOS will be a lot more accurate and actionable than WOS, since our forward looking demand forecast will be a much better proxy for the future, than the historical Rate of Sale.
Looking at the example from above, if we forecast that we will be increasing our Rate of Sale to 60, say due to the inherent seasonality in that product’s sales, the Forward Weeks of Supply, will instead be 250 / 60 = 4.2, i.e. we really have 4 Weeks of Supply left, instead of 5.
Since FWOS is the more accurate and reliable metric to use, you may wonder why people still use WOS. There are a few reasons:
- WOS is a much simpler metric to calculate with the data that is readily available to most retailers. All that is needed is current inventory level and historical sales.
- FWOS, on the other hand, requires a forward looking demand forecast. We will cover how to generate demand forecasts in future posts. It is important to keep in mind that inventory planning platforms like Toolio can help automate demand forecast generation and give real-time visibility into FWOS.
At what level of granularity should I track Weeks of Supply?
First and foremost, WOS should be tracked on all of your items at the SKU level. An inventory planner should know the WOS for core items, which are always meant to be in stock. Planners should track deviations from the desired levels, and make adjustments in one of two scenarios:
- If WOS numbers are dipping below target → place additional Purchase Orders (POs)
- If WOS is higher than expected → push out/delay or cancel existing POs
Even though it’s most effective to track WOS for products at the SKU level, tracking every SKU can be very challenging for retailers that carry thousands of SKUs. Therefore, it is important to track WOS at Class, Department, Division and Company level as well. Looking at WOS at the Company level over time will help a retailer understand if they are over-inventoried, under-inventoried or carrying just the right amount of inventory.
How to set a Weeks of Supply target
Now that we have established why to use WOS, different ways to calculate WOS and the granularity at which we should track WOS, let’s review how to set a WOS target for a particular item.
The optimal WOS target will depend on the following:
- Demand Variability
- Supply Variability
- Cost of Carry
- Cost of Stockout
Demand Variability looks at the variation in Demand, or how much the Rate of Sale (i.e. Demand) varies from forecast. For fashion items or products that you don’t have enough historical data on, Demand Variability will be high, since you don’t have an accurate way to forecast demand for them. This will also be the case for products in which demand is heavily reliant on external factors, such as weather.
Supply Variability covers variations in procurement processes, such as Lead Time variability (i.e. inaccuracies in delivery dates) and Fill Rate fluctuations (i.e. inaccuracies in delivered quantities, which would include no deliveries at all).
Cost of Carry is the storage costs and inventory depreciation costs associated with carrying each unit of inventory.
Cost of Stockout is the cost associated with running out of stock on a particular item. Note that, Cost of Stockout includes but is not limited to Missed Opportunity of not being able to sell a particular item. For example, some products are bundled with others for promotion offers. In this case, stockouts on one product within a bundled promotional offer could result in a missed sale on multiple products.
A mathematical formula to calculate the optimal WOS based on the concepts above is beyond the scope of this post. However, the heuristics to apply are: increasing Demand Variability, Supply Variability and Cost of Stockout all increase the optimum WOS target to use, whereas increasing Cost of Carry decreases the optimum WOS target.
Weeks of Supply vs. Turn
Another way to think of WOS targets can be in terms of Turn targets. Turn, is a metric that retailers typically use to determine how fast they should be moving through inventory and generating cash. If you have specific Turn targets for your organization, you can think about WOS in terms of Turn, using the formula below.
WOS = 1 / Turn
Even though the right WOS target should be set on the SKU level, the formula above will provide a quick heuristic to see if item level WOS targets will allow the retailer to achieve its Turn targets.
To see average Turn targets across retailers in different categories, please see the results of a survey of publicly traded retailers from a paper by Gaur, Fisher and Raman in 2005, You can see the average Turns achieved by different retailers, and the WOS targets the Turn numbers would imply.
Summing it all up
In this post we have covered how Weeks of Supply is as an indicator of inventory health, explored different ways to calculate it and reviewed how different inputs can impact the optimal Weeks of Supply target to use. Setting WOS targets depending on your inventory type, monitoring inventory levels and responding frequently by adjusting receipts is a key part of inventory management.
If your organization has reached a point where managing this manually has become too cumbersome or you do not have the granularity that you need, Toolio’s Item Planning module automates the process of setting and monitoring inventory targets and adjusting receipts to maintain optimal inventory levels. To learn more about how Toolio can help better manage your inventory, request a demo with our team today!