Two managers, two numbers, one season

What has to be explained

A business makes less money than it did last year. The useful question is not whose fault it was. It is which of the separable decisions accounts for how much of the gap. This lesson takes one shortfall apart into the prices agreed, the quantity ordered, and which garments they were. It finds that the argument everybody had was about the smaller half.

Ashcombe's denim department made GBP 150,880 less gross margin than the year before, on a scorecard where every measure improved. Three decisions produced that number and they are separable, so separate them.

1. The cost prices Rosalind negotiated for the season.
2. The depth — how many units in total.
3. The shape — which lines those units went into.

Every line of that bridge is the same trading model as lesson 1, run on a different buy: same customer, same weekly rates of sale, same price ladder, same clearance trader at GBP 4.00.

Read the last two rows against each other, because they are the lesson. The depth cost GBP 55,244. The shape cost GBP 121,686 — more than twice as much. The argument in the February range meeting was entirely about the depth. Nobody argued about the shape at all, because the shape had already been decided by a report.

The report that chose the shape

In January, Gareth produced the post-season analysis every planner produces: last autumn's markdown, by line, in money, biggest first. It is the standard first page of a range review and there is nothing wrong with it.

The department cut roughly a third out of the top four and left the bottom two nearly alone. Given that page, it is the obvious response, and it is upside down.

Look at the middle column. Every line marked down at almost exactly the same rate — between 16.0% and 18.8%. It could hardly be otherwise. The markdown calendar is the same for all six, and the customer responds to a price cut in much the same way whatever she is buying. So the share of each line that ends up sold at a discount is a property of the CALENDAR, not of the line.

Which means the "markdown given away" column contains almost no information about which line was bad. Multiply six nearly identical percentages by six different sizes and you have ranked the lines by size. AS-2236 is at the top of that report because it is the biggest line in the department, and for no other reason.

Now rank the same season by the other loss — the units that did not sell at all, cleared at GBP 4.00 a unit against what they cost to land.

The two rankings are inverted. The jacket and the shirt hold 92.0% of last autumn's leftover units and GBP 124,862 of the GBP 135,459 lost on them, and they returned less than a pound of margin for every pound of stock they tied up. They sat at the bottom of the report that chose the cut, and they were cut by a seventh while the four lines returning three and a half times their money were cut by a third.

What markdown percentage structurally cannot see

There is a reason the jacket and the shirt looked innocent on the first report, and it is not that anybody hid them.

Markdown percentage is calculated on the units that sold. A garment that never sold at all appears in no markdown figure anywhere, at any price. The 4,396 trucker jackets that went to a clearance trader are not in the jacket's 16.5%. They sit in a separate line called terminal stock — the units still unsold when the season closes — on a different page, prepared by a different person.

So the department's single worst product decision — owning 11,500 jackets for a customer who wanted 7,104 — was invisible in the measure the department had been told to fix. The four lines that sold everything they had were the ones that showed up.

The repeat that two people refused, for two different good reasons

Week 12. The four jeans are selling exactly to their weekly rate, and Gareth's file says the high-rise skinny will be out of stock somewhere around week 21. Beykara offers 6,000 more on its quick-response programme — a short extra run made at speed, on fabric already on the machines — landing week 16, at GBP 19.50 a unit against the programme's GBP 15.90.

Price it against the trading model. Those 6,000 units would have sold — they were demanded and there was nothing to sell — and they would have added GBP 161,120 of net sales and GBP 117,000 of cost, so GBP 44,120 of gross margin. That is a margin rate of 27.4% on those units.

Rosalind said no. Gareth said no. Neither knew the other had been asked.

Rosalind is measured on intake margin, and she had a 67.0% target. The repeat lands at an intake margin of 61.0% against the programme's 68.2%, and taking it drops the department to 66.7%. Her refusal is not a preference; it is her target arithmetic, correctly done.

Gareth is measured on achieved margin and markdown. The repeat arrives in week 16 and sells through the discount weeks, so it takes achieved margin to 59.4% — under Lorna's 60.0% — and pushes markdown from 7.0% to 10.9%. His refusal is also correct arithmetic.

Four of the six measures get worse, two get better, and the department is GBP 44,120 better off. No one is being cynical. Two people did their jobs to the letter and the department gave up its most profitable remaining order of the season.

What the missing units were worth

The four jeans ran out in weeks 20 and 21. Value what they would have sold, at the price step each unit would actually have reached — not at full price, which would be a flattering fiction, and not at nothing, which is what the review implicitly did.

Take AS-2236 as the worked case, because it shows why the step matters. Of its 6,256 missing units, 544 would have gone at twenty per cent off, earning GBP 24.10 each over a landed cost of GBP 15.90. Another 3,024 would have gone at forty per cent off, earning GBP 14.10, and 2,688 at sixty per cent off, earning GBP 4.10. That is 13,110, 42,638 and 11,021 — GBP 66,770 in total, of which the deepest-discounted third contributes barely a sixth.

So the units at sixty per cent off were nearly worthless and the units at forty per cent off were not: GBP 14.10 a unit is a 47.0% margin, which is a perfectly good piece of trade. The department eliminated all three tiers together, because the measure it was managing does not distinguish between them.

I refused, or am about to refuse, an order. Here are the facts.

Quantity offered, cost price, and delivery week: [FILL IN]
My full selling price and my markdown calendar for the remainder of the season: [FILL IN]
My measured weekly rate of sale for this line at each price step: [FILL IN]
My current stock and my forecast sell-out week: [FILL IN]
The targets I am measured on, with their current values: [FILL IN]

Work out, showing the arithmetic:

1. Which weeks these units would have sold in, and therefore at which price step each one would have reached the till. Do not value them all at full price.
2. The cash gross margin they would have added, and their margin rate.
3. What taking the order does to every target I listed, one line each, before and after.
4. Whether any target that worsens is a rate. If it is, say plainly that a rate target is built to refuse profitable trade at the edges, and say how much cash this particular refusal costs.

Finish with one sentence I could say in a meeting that states the cash and the effect on the target together, without arguing for either.

What lesson 2 leaves you with

The depth was worth GBP 55,244 and the shape was worth GBP 121,686. The report that chose the shape ranked six lines by size and presented it as a diagnosis. The repeat that would have added GBP 44,120 was refused twice, independently, by two people applying their own targets correctly.

There is still an argument to answer, and it is a real one: the department released GBP 430,690 of intake money and GBP 325,870 of average stock. Money released is worth something. Lesson 3 asks how much, finds the buy that would actually have maximised the cash, and builds a scorecard that would have shown all of this in February.