- Too much of anything left languishing on a shelf creates cash flow problems. CREDIT: Lance Lekander
Order less and buy more often.” That’s smart advice for efficient inventory management in any economic environment. With today’s consumers pulling back, it’s doubly important to make sure your retail stock doesn’t get out of hand.
“When demand slows, inventory tends to build,” warns James Dion, president of Dionco Inc., a Chicago-based retail consulting firm.
The big problem with burgeoning inventory, of course, is cost. Tie up too much money in product and you incur a higher cost of goods sold. “At the end of the year you will more than likely have too much inventory, and you will be forced to lower prices to free up some cash,” notes Richard Clodfelter, professor and interim chair of the department of retailing at the University of South Carolina, Columbia.
Find a Balance
Maybe we all know we should cut back on inventory, but it’s tempting to let the matter slide. Service, after all, comes first.
“Inventory levels have a negative effect at either extreme,” admits Clodfelter. “Too much inventory and you have a cash flow problem. Too little and you upset your customers.”
Finding the right balance between service and savings can be as much of an art as a science. Here are some steps you can take to keep your own inventory at an efficient level.
If eliminating five or six slow-moving items would cause your profits to zoom by 20%, would you do it? Too often, under-performing merchandise is out of mind and out of sight. “Many retailers are happy just to bring in more money than they spend every month,” notes Clodfelter. “But in many cases, slow-moving items are really dragging down profits.”
That’s not all: positive cash flow can turn negative when consumers start slowing down sooner than you soft pedal your own ordering. So it’s more important than ever to eliminate slacker items. Computers can help with this. Consultants advise generating an aged inventory list. How much merchandise do you have that’s more than six months old? A year?
Sometimes just eyeballing your shelves can do the job. “If you ordered 12 items and you still have eight of them two or three months later, you can see it’s not working out,” says Clodfelter, who advises moving quickly. “Do a ‘half off’ sale if you need to. At some level most everything moves out the door.”
Got some goods that won’t move even at reduced prices? Widen your pool of customers by using the Internet. “eBay is a wonderful relief pressure valve to get rid of old inventory,” says Dion. “You may have items that local customers have rejected that people across the country may find fascinating.” Another benefit to Internet sales is that you don’t have to discount inside your store, an act that might affect the sale prices of your other goods or even your image.
Clearing old merchandise carries another benefit: customers won’t be turned off by it. “In times like this, just getting the customer in your store is a great thing,” says Dion. “If the customers who do come in see old inventory, they are not likely to come back for another visit this year.”
- “Just because you like something doesn’t mean you have to buy it,” cautions Bob Phibbs, CEO of The Retail Doctor in Long Beach, Calif.
Pause Before Buying
Unloading merchandise addresses one end of the supply train. Closing the front door to excessive new merchandise takes care of the other. “Good inventory management is the art of maintaining just the right stock levels, and to a large extent that means controlling your open-to-buy,” advises Bob Phibbs, CEO of The Retail Doctor in Long Beach, Calif. “Control your impulses. Just because you like something doesn’t mean you have to buy it.”
One way to avoid inventory bloat is to match purchases with sales, says Clodfelter. “Suppose you sell $500 in a certain category one month. Keep your purchases in that department to $500 the following month. That will hold your feet to the fire and put you on budget.”
Run Physical Inventories
Tracking item movement by computer is a great way to identify your best moving items. But you can’t say for sure just how far your real inventory differs from your documented one. Have errors been made in receiving? Or in sales entered at the registers? What about shoplifting? Letting the results of these problems accumulate can lead to a real mismatch between what you have and what you need.
Measure the disparity by reviewing stock on hand. “Physical inventory can be an eye-opening experience,” says Phibbs. “It may be that you don’t have much of the stuff you are really making money on, but you are swamped with stuff that’s not moving.”
To a large extent, your inventory levels represent your expectations of what customers are going to do. “If you knew exactly what your customers would buy today, you could maintain that exact number of items on hand,” notes Dion. Of course, that’s not realistic. “We all carry inventory ‘just in case,’ even though the ideal is ‘just in time.’”
Trimming inventory is great. There’s more you can do, though, to help your inventory sell. “Moving your store around every two or three weeks can save you,” says Clodfelter. “Your customers will not see the same thing in the same place. Make the store look different so inventory has a chance of looking better.”
The more aging inventory you have, the more important it is to spruce up its appearance. “Clean every item and shelf and add lights,” advises Clodfelter. “That will help make the merchandise seem like new. Do that every week if you need to.”
Though tracking merchandise movement may not be as exciting as engaging customers, it’s a necessary support task in today’s world. “Maybe you didn’t get into your business thinking about turns of merchandise, but you have to start,” warns Clodfelter. “Otherwise you end up with a store full of merchandise that gathers dust, and you’ll lack the cash to finance new merchandise that will really sell.”
This article was first published in the Summer 2008 edition of NICHE magazine. Phillip Perry, a frequent NICHE contributor, writes on a variety of business and management topics.