Last week we received the question “I’m a small dealer – how do I compete with the big store down the street?” This question pertaining to the ability to stock and display products. Let’s face it, a Rooms to Go and a massive 100k ft showroom with a matching warehouse has a huge advantage when it comes to what they have on hand. Let’s not discuss the cons of that – because that is another conversation altogether. What we want to discuss is how a smaller dealer with a single showroom and small warehouse going to compete when it comes to stocked offerings. Is your inventory management less than to be desired?!
Cash is king. As a dealer – one can only have so much “cash” tied up in inventory. This is always a balancing act as you want to have enough to hopefully convert every opportunity (those that won’t wait) – and at the same time, not sitting on stock that does not turn enough, or ever. If you are using debt or lines or terms this daily “act” is exponentially more precarious and costlier! Let’s focus on some best practice that we observe as we work with clients.
Burn it! I love that quote. The act of aggressively getting rid of items that are not moving. If you watch the show “The Profit”, when Marcus Lemonis works with companies; it is simple – if it’s isn’t selling, get rid of it. They are on the street peddling and making deals – getting whatever they can to move the “deadwood” and create free cash. It feels a bit “going out of business” at times – but it is done with urgency and purpose – not a simple “take an extra 10% of our already low price”. It is done to move it today! Let’s not forget that inventory – hot or not, has a carrying cost beyond cost of goods. Storage costs, insurance, damage, obsolescence, taxes and loan interest (if you borrowed) can pile up. You need to identify the items that are not moving and dump them! Make room (and cash) for the right items. Make this a very regular exercise and not an annual event.
Know your Inventory Turnover. As a retailer you need to know if your inventory is “turning”. For those that maybe don’t grasp the importance of this, many retailers “blindly stock” and then hope to sell what they have, only looking at one number – $inventory on hand. Time to dive into what it is and why it is important. Time for some math (how exciting). Let’s calculate inventory turnover.
To do this you need to know two dollar amounts for the calculated specific period:
Cost of Goods Sold (COGS) and your Average Inventory.
You can calculate your COGS for a specific period through the formula:
COGS = Beginning Inventory + Total Purchase – Ending Inventory
Note: These numbers should include the purchase prices for your inventory, and any additional costs such as shipping, storing, or handling (A true “landed cost” of all these items. A sofa that cost you $1000 and you sell for $2000 may look great, unless it costs you $450 to ship it to you, you sell it once a year, you lease a warehouse to store it, and you move it 10 times throughout the year. I think you see the picture.). Make sure you also subtract the cost of any scrapped or lost inventory. If the forklift hit it, get it off the books.
Now you need to calculate your Average Inventory for a specific period through the formula:
Average Inventory = Beginning Inventory + Ending Inventory / 2
Finally, having done above you can calculate Inventory Turnover based on the below formula:
Inventory Turnover = COGS / Average Inventory
As an extra step – you can then divide the number of days within the calculated calendar period by the Inventory Turnover Ratio, you will find the average number of days that you held your inventory.
Days Inventory Held = Days in Period / Inventory Turnover Ratio
Why do you want to know this Inventory Turnover ratio? Sorry about the math – but it is necessary. Unlike a round of golf, a low inventory turn ratio is bad. A lower number indicates that you are overstocking or stocking wrong. This could be a result of bad sales. Poor purchasing decisions. Poor pricing strategies. Where-as a higher ratio would indicate that you are selling and stocking at healthier levels. But you also need to “gain” insight to the ratios of other retailers. What might be a high(er) ratio might not be good enough (in comparison). This bench-marking activity can be very insightful. But don’t go look for those that you know are worse off. Find the leaders and compare.
Systemize. If the exercise above required you to count ticks on price tags or find all those pieces of paper to get to the figures you were looking for, it is time to automate your retail operation. Invest in a system that helps you to have those figures at the ready. If your current system is struggling – find a new system; either way, intelligence from within is a must-have if you wish to compete in retail today.
As a retailer – velocity of goods is vital. My points of burn it (figuratively obviously), knowing your inventory turn ratio and having the a systematic way of keeping on top of your retail business is just the tip of the making your business stronger iceberg. By getting a better hand on what you are currently doing – using above, should get you pointed in a better direction.