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"Order less and buy more often." That's smart advice for efficient inventory management in any economic environment. With today's consumers pulling back, though, and with talk of a recession in the air, it's doubly important to make sure your retail stock doesn't get out of hand.
"When demand slows, inventory tends to build," warns Jim Dion, president of Dionco, 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. That means lower profits. "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, interim chair of the department of retailing at the University of South Carolina. "And if you drop prices beyond a certain level you incur a loss for the year."
Maybe we all know we should cut back on inventory, but it's tempting to let the matter slide. Service, after all, is paramount. In times when every shopper counts, no one wants to be out of stock when a valuable customer wants something.
"Inventory levels have a negative effect at either extreme," says Clodfelter. "Too much inventory and you have a cash-flow problem because your money is all tied up. Too little and you upset your customers, and you don't know whether they will ever come back. Maybe there's no way you can hit the ideal and make everyone happy, but you do try to get to that middle ground."
Finding the right balance between service and savings can be as much an art as 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 percent, would you do it? Most likely, your answer is yes. Too often, though, under-performing merchandise is out of mind, as well as out of sight. That's particularly the case when your attention is focused on maintaining a positive monthly cash flow. "Many retailers are happy just to bring in more money than they spend every month," says Clodfelter. "But in many such 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 slow your 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 old stuff do you have? Over a year old? Six months?
Sometimes just eyeing 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 pretty much see it's not working out," says Clodfelter, who advises moving quickly to unload the dogs. "Do a 'half-off' sale if you need to. At some level, most everything moves out the door." The idea is to free up some cash to get the inventory your customers really want.
Got some goods that won't move even at reduced prices? Widen your pool of customers by using the Internet. "eBay is a wonderful pressure-relief valve to get rid of old inventory," says Dion. "You may have items that local customers have rejected but people across the country may find fascinating and wonderful." Another benefit is that with eBay you do not have to discount inside your store, an act that might affect the sale prices of your other goods or even your image.
If you're not up to speed on how to use eBay or don't want to spend the time, third parties can help. "In every community, there are eBay stores that will handle your merchandise and post your listings," Dion points out. "They charge a couple of percentage points, but it's a lot easier."
Clearing out the stinkers - even if you end up giving them away to charity - carries another benefit: Customers won't be turned off by old goods. "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, dusty inventory they are not likely to come back for another visit this year."
Pitching the deadwood out the back door 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, a retail consultant in Long Beach, Calif. It's easy to overbuy when your enthusiasm overcomes your prudence. Maybe you like the sales rep or the supplier. "Control your impulses. Just because you like something doesn't mean you have to buy it," adds Phibbs.
And there's another possibility: Maybe you take an "I buy what I like" approach, with the feeling that an idiosyncratic mix of goods distinguishes your store and expresses a unique marketing statement. "A lot of retailers say, 'It's my store, and we love this stuff and that's why we are strong,'" says Clodfelter. "And at one level that's true. But everyone today is double thinking what they are buying, so if your store continues to have the same stuff that is not appealing to your customers, your sales are going to fall."
One way to avoid inventory bloat is to match purchases with sales, according to Clodfelter. "Suppose you sell $500 in a certain category one month. Then keep your purchases in that department to $500 the following month. That will hold your feet to the fire and put you on budget," he says.
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. What have been the effects of errors made in receiving? Of entering sales at the registers? Of shoplifting? Letting the results of these problems accumulate can lead to a real mismatch between what you have and what you need.
You can 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 just 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.'"
The more aged inventory you have, the more important it is to spruce up its appearance. "Clean every bottle and shelf and add lights," advises Clodfelter. "That will help make the merchandise seem like new. Do that every week if you need to."
While tracking merchandise movement is not as exciting as dealing with 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," says 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."
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