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Part 2 of 7 · Stock transfer planner series ~5 min read

When a transfer is actually worth it

The arithmetic is straightforward and it is almost never done, which is why stock transfer is one of the more reliable ways for a multi-site business to spend money without noticing.

Key takeaways

  • Cost is picking, packing, transport share, receiving and putting away. All five.
  • Benefit is margin on sales protected, discounted by whether they would happen anyway.
  • Low-value, low-margin items essentially never qualify.
  • A transfer that would reverse within a quarter should not happen at all.
  • State the arithmetic on every proposal so it can be argued with.

Both sides of the sum

The cost of one stock transfer on a dedicated trip and on an existing movementA stacked bar chart with three bars in pounds. Five series: picking in orange, packing and paperwork in pink, transport share in purple, receiving and putting away in red, and margin protected in green. Cost on a dedicated trip: four pounds picking, two packing, thirty-two transport and four receiving. Cost on an existing movement: four picking, two packing, one transport and four receiving. Benefit: twenty-eight pounds of margin protected. A note says the same transfer fails on a dedicated trip and clears on Thursday's van.£0£20£40£60£80~£42Cost, dedicated trip~£11Cost, on a movement~£28BenefitPickingPacking and paperworkTransport shareReceiving and putting awayMargin protectedThe same transfer fails on a dedicated trip and clears on Thursday's van.
Fig 1. One transfer costed two ways against its benefit. Transport is the swing factor and it is almost entirely a scheduling question.

The four fixed costs

Picking, packing, receiving and putting away are labour and they do not scale down. Moving one unit costs almost the same as moving twenty, which has a direct consequence: small transfers are almost never worth it and the system should propose meaningful quantities or nothing.

The figures do not need to be precise. Somebody estimating that a pick takes five minutes and receiving takes five minutes, at a stated hourly cost, produces numbers good enough to separate the transfers that obviously pay from the ones that obviously do not, which is most of them.

The benefit is not the stock value

This is the error that makes almost every transfer look worthwhile. Moving twenty-two units of a fourteen-pound item is not a three-hundred-pound benefit; the stock is worth the same wherever it sits.

The benefit is the margin on sales that would otherwise not happen, and it needs two discounts applied to it.

How the real benefit of a stock transfer is calculatedA vertical chain of five steps entered by a box labelled Units to move, twenty-two. Step one asks how many sales would be lost, giving sales protected. Step two multiplies by margin rather than selling price. Step three discounts for substitution, asking whether customers would buy something else, with a side box saying often yes, a similar product. Step four discounts for the stock selling anyway, eventually, at the source. Step five gives the real benefit, usually much smaller. A note says both discounts are judgements, so state them rather than burying them in a coefficient.AWS ACCOUNTUnits to move22Sales protectedhow many would be lost?Times marginnot selling priceDiscount: substitutionwould they buy something else?Often yesa similar productDiscount: it sells anywayeventually, at sourceThe real benefitusually much smallerBoth discounts are judgements. State them; do not bury them in a coefficient.
Fig 2. How the benefit of a transfer is computed. The two discounts are where an apparently large benefit becomes a modest one.
  • Compute
  • Management
  • Analytics
  • Front-end & mobile

Substitution matters most

In a business where products have close substitutes, a stockout frequently costs nothing at all: the customer buys the next size, the other colour, or the equivalent brand. In a business where they do not, a stockout is a lost sale and sometimes a lost customer.

That is a judgement about the product range and it should be set per category by somebody who knows it, visible in configuration. A single global substitution assumption will be wrong for half the range in one direction or the other.

Ping-pong

A stock transfer that reversed itself within two monthsA horizontal row of five boxes. March: A to B, because B was low. B sells three, not the nine expected. May: A is low, having sold through. May: B to A, the same units. Cost: eighteen pounds, benefit: nothing. A note says both transfers were justified on the day and together they were pure cost.THE TRANSFER THAT REVERSEDMarch: A to BB was lowB sells 3not 9 as expectedMay: A is lowA sold throughMay: B to Athe same unitsCost: £18benefit: nothingBoth transfers were justified on the day. Together they were pure cost.
Fig 3. A ping-pong transfer. Each leg passed the test on its own and the pair achieved nothing, which is why the check has to look backwards.
  • Compute
  • Management
  • Analytics

The prevention is simple: before proposing a transfer, check whether the same item moved in the opposite direction between the same two sites within the last quarter. If it did, either the demand estimate at one end is wrong or the item is being managed by stock level rather than by sales, and both are worth investigating rather than transferring again.

It is worth counting reversed transfers as a metric. A business where ten per cent of transfers reverse within a quarter has a demand estimation problem that is costing more than the imbalances are.

Next: not breaking the site it came from.

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