Free Articles  >>  Business And Finance >>  Page 188  >> 

Managing Retail Inventory And Maximizing Return On Inventory Investment

Copyright (c) 2014 Ted Hurlbut

It's either going to be sold and converted to cash, or it's sitting there tying up cash, costing you more cash each and every additional day it's not sold.

It's not really surprising, in fact, that each comment seems to be followed over time by the next. There seems to be a direct connection from the idea that you must have inventory in stock in order to sell it, to the pledge of being committed to having (lots of) it in stock, to the assertion that the excess, leftover, dead stock retains its value and cannot be sold for below cost.

In fact, there is a direct connection in this line of thinking, and it is characterized by one misconception followed inevitably by another. Let's take a look at these (and other, related) misconceptions.

"Our inventory is our most important asset." Inventory may be the largest asset on your balance sheet, which makes it very important, but it's not the most important asset. Your most important asset is the customer relationships which enable you to turn that inventory into cash, day after day, day in and day out.

Inventory is one of those things where more is not necessarily better. When it comes to inventory, "more" generally leads directly to "too much", which is usually the first step on the road to trouble. Ask yourself this; "If I could figure out a way to do the same sales volume with less inventory, would I?" You bet. Inventory is, in fact, an unfortunate necessity of doing business for a retailer, wholesaler or distributor.

So if inventory is an asset which may not always be an asset, how do you determine what is what? There are two key inventory productivity metrics which are widely known, but not always fully utilized. The first is inventory turnover. Ask somebody how many times their company turns its inventory and they'll probably know the number right off the top of their head. What they may not be able to tell you as quickly, however, is how that turnover compares to other companies in their industry. Or, how many times they turn the inventory of their key categories or key items. Or, quite revealingly, how many times they turn the inventory of those items which makes up the last 20% of their sales (the 80/20 rule, but turned upside down, into the 20/80 rule).

The second key metric is gross margin return on investment, or GMROI. GMROI merely factors gross margin percentages into inventory turnover data to generate a financial measure of inventory productivity, the return on inventory investment. Which takes us directly back to the question we asked above, slightly re-stated; if you could generate the same gross profit dollars with fewer dollars invested in inventory, would you?

"I can sell it if we have it in stock." I like to call this the Field of Dreams argument; if we stock it they will come. This is actually the inverse of "We can't sell it if we don't have it." This is, of course, easy for a salesman to say because he doesn't have to own the inventory personally, his company does, and if for some reason he can't sell it, he's not on the hook, the company is. But underlying these statements is an important truth about marketing: inventory doesn't generate sales, marketing does. Granted, building a reputation for having an item in stock when the customer wants it is not an unimportant marketing message, but it is clearly secondary to communicating to customers the features, benefits and value of an item. That's what truly builds customer demand. If you aggressively market it, if you aggressively sell it, they will come.

In fact, the marketing consideration that goes into the decision whether or not to stock an item is directly related to the customer's expectations. If the item is a tube of toothpaste, or a pair of running shoes, or the latest compact disc, the customer clearly expects it to be in stock, and if it's not, the sale won't be made. On the other hand, if the item is a leather sofa, or a refrigerator, or custom draperies, the customer would rarely expect to be able to take the item with them.

By the same token, why own more of it than is needed to cover sales (plus an appropriate level of safety stock) until the next vendor shipment. While there are a number of formulas that will generate the appropriate replenishment parameters for any given item, the logic is pretty straight forward; every purchase for stock must be made with the informed expectation that you will be able to sell it within a reasonable period of time.

If an item is purchased from a vendor who maintains minimum purchase quantities, renegotiate those quantities or find another vendor. And if those quantities are being purchased to nail down specific purchase or freight discounts, run the numbers. You'll quickly realize that in almost every case the discounts that are leading you to purchase more than you need at any given time are very quickly offset by the carrying costs associated with the excess inventory.

In fact, the key to understanding and evaluating these deals is the requirement to maintain inventories for the customer. The customer is very astutely managing the inventory they need to support their business back up the supply chain, and with it the risks and expenses associated with carrying that inventory. They want to be able to count on you having what they need, when they need it. How much additional inventory will you need to stock? What is the incremental carrying cost of that additional inventory? What happens if the customer suddenly decides to switch items? Factor those costs in. How profitable does the business look now?

"We've built up a lot of dead inventory, but we're not going to just give it away." "We may have had it for several years", (with no activity but the accumulating layers of dust), "but we paid $10.00 dollars a piece for it when we bought it" (three years ago), "and it's still in very saleable. There's no reason to let it go for less than a 20% margin. Besides, somebody might come in and need it tomorrow."

Where to start with thinking like this?

First, the $10.00 spent three years ago is sunk and not relevant to any analysis today. The value of the inventory today is related to what potential customers might be willing to pay for it, which bears no relationship to what it originally cost. In fact, if you were to continue to try to market it at a price that would recover the costs associated with it, you would need to include in the cost basis the carrying costs that have been incurred since it was purchased, typically around 25% annually of the average inventory value. If these carrying costs were fully accrued, the cost value of our $10.00 item after three years would be $19.53. It would have to be sold at $24.41 to yield the desired 20% margin (compared to a selling price of 12.50 with a $10.00 cost base).

This is clearly absurd. Almost all inventory depreciates in value over time, anywhere from 20% to 50% a year. We understand this inherently; if a potential customer felt the inventory was fairly valued and desirable at a price of $12.50, they would have bought it long ago. The fact that it has still not sold clearly establishes that the market does not value at $12.50! There've already been plenty of tomorrows for customers to have bought it!

This may seem long-winded, but you can't put too fine a point on it. Dead inventory is a problem for most every retailer, wholesaler and distributor at one time or another. It happens. When it does the key to maximizing your recovery is to act quickly, be clear headed and sober in your assessment of what it will take to liquidate the inventory, and take your medicine. Just the opportunity cost alone associated with management's attention being diverted from constructive activities, like growing the business, argues persuasively that dead inventory cannot be allowed to build up until it's like a lead weight the company is dragging around. I'll say it again; take your medicine, learn from it, and move on. Don't worry about what you once paid for it, or how much you're carrying it on your books for. It's not relevant.

Conclusion Don't fall in love with your inventory. It's not likely to love you back. It's amazing how the investment in inventory can take on an emotional, almost passionate quality. But, if you think about it, it is understandable. For many owners and executives, especially those with an entrepreneurial investment in the business, their inventory is made up of products which represent a life's passion.

About Author Ted Hurlbut :

Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise and proven retail know-how, Get his FREE report "The 16 Essential Elements of a WINNING Independent Retail Strategy" Visit: <a href="" target="_blank"></a>

Article Source:
Article Url:

Article Added on Saturday, July 19, 2014
Other Articles by Ted Hurlbut

A Retail Inventory Management Key Think of Inventory in Terms of Time
What's the value of your inventory on hand? This is one of the first questions that I ask a prospective client during our initial conversation. And they can almost always give me a straight-forward answer. Then I ask, How many weeks of supply is that? Silence. For many small retailers I speak with, thinking of inventory in terms weeks of supply is a new concept. They can easily talk about inventory in terms of quantity, units, cases or casepacks, as well as how much inventory they need...

Inventory Carrying Costs The Hidden Costs of Independent Retail
Copyright (c) 2012 Ted Hurlbut If you're like most independent retailers, inventory represents your single largest investment. Your customers know you in large part by your inventory, your merchandise, by those categories and items you choose to carry. And, if you're like many independent retailers, you feel naked if your store doesn't feel fully stocked with broad assortments and deep, impactful displays of core merchandise. When I work with my clients, I make sure they understand the full...

The Coin of the Realm
Why inventory management is of critical importance to small retailers. You know, for several years the business seemed to come so easily and we were growing so fast, I guess we sort of lost track of some of the fundamentals. Sales were up, the company was profitable; we re-invested our cash in more merchandise to keep the business growing. Then when sales leveled off, wham! Where had all the cash gone? If you're a small retailer, it's easy to focus on sales, and assume that if you are...

Retail Inventory Turn and GMROI Measuring Retail Inventory Productivity
Sales, profitability, and cash flow are directly linked to a small retailer's ability to manage inventory productively. When I'm meeting for the first time with a potential client I occasionally tell the story of the best year I ever had as a buyer. It was a year I ran a 2% decrease. Don't get me wrong, I ran plenty of increases over the years, but that was the year I did my best work. I was buying men's woven shirts, and boy, was it a knit shirt year! It was one of those duck for cover...

Looking Ahead to the Retail 4th Quarter
Copyright (c) 2012 Ted Hurlbut There was a Dow Jones piece that appeared yesterday on The Wall Street Journal's website, Concerns Mounting Retailers May Not Have Very Merry Christmas, that linked expectations for 4th quarter business with retailer's inventory plans. The poor numbers may force retailers to reduce already spartan inventory plans further to avoid the 2.8% drop in holiday sales they rang up last year and the margin crushing markdowns they had to take to move excess inventory....

Putting A Retail Open To Buy To Work
With a retail Open-to-Buy, you'll gain better insight -- and better revenues -- into how much inventory you need to acquire and sell each month. Published by The situation we were confronted with wasn't very rosy. My client, a highly seasonal small retailer, was just coming out of their busiest season, hadn't made their sales numbers, was sitting on far too much inventory, and were projecting to be short on cash within the next few months. Not good. A unique scenario? Hardly....

Sales Forecasting and Inventory Management for Independent Retailers
Copyright (c) 2012 Ted Hurlbut When my clients come to me with inventory management issues, the problem usually boils down to one of two things: out-of-stocks and overstocks. At first glance, the two issues appear unrelated out-of-stocks resulting from unexpectedly high sales, and overstocks from unexpectedly low sales but they are really the flip side of the same problem. Both result from inadequate planning and sales forecasting. All too often, before they've reached out to me for...

Talking Retail Cash Flow Blues
Cash flow is the most serious issue small retailers struggle with. Cash flow. Whenever I get a call from a small retailer looking for help, they often are most concerned about cash flow. They may describe it in different terms -- their sales are flat, margins are off, expenses are up -- but in the end what they're talking about is cash flow. This is no small matter. Without question, cash flow is the most serious issue small retailers struggle with. Where has all the cash gone? The answer...

Dealing With Retail Assortment Creep
In selecting new items it is critical that you are actually growing sales, and not just your inventory. Published by Business Know-How Like Godzilla through Tokyo or King Kong climbing the Empire State Building, the dreaded Assortment Creep terrorized the Company, consuming valuable dollars, unbalancing the Balance Sheet, and causing panic in the streets. Well, not exactly... although a recent client reminded me of the negative impact that retail assortment creep can have on a retailer...

Retail Trick or Treat
Copyright (c) 2012 Ted Hurlbut As Halloween approaches and retailers prepare for the holiday selling season, most are planning their stock levels very cautiously. For retailers, it's a prudent approach, but it's not the only strategy they can pursue. In my travels last week, I visited a major mid-tier department store. It was the first time I'd been able to get into their stores since before Labor Day. What I saw caught me a bit by surprise. In the last month, nearly every other retailer...

Click here to see More Articles by Ted Hurlbut
Publishers / Webmasters
Article ID: 479161
DELINK URL from Authors Bio
REMOVE Article
Tell A Friend
Leave A Comment!
Download this article in PDF
Report Article!
Search through all the articles:

237 Users Online!!
Related Articles:
Latest Articles:
Business And Finance >> Top 50 Articles on Business And Finance
Category - >
Advertising Advice Affiliate Programs Automobiles
Be Your Own Mentor Careers Communication Consumers
CopyWriting Crime Domain Names DoT com Entrepreneur Corner
Ebooks Ecommerce Education Email
Entertainment Environment Family Finance And Business
Food & Drink Gardening Health & Fitness Hobbies
Home Business Home Improvement Humour House Holds
Internet And Computers Kiddos and Teens Legal Matters Mail Order
Management Marketing Marriage MetaPhysical
Motivational MultiMedia Multi Level Marketing NewsLetters
Pets Psychology Religion Parenting
Politics Sales Science Search Engine Optimization
Site Promotion Sports Technology Travel
Web Development Web Hosting WeightLoss Women's Corner
Writing Miscellaneous Articles Real Estate Arts And Crafts

Disclaimer: The information presented and opinions expressed in the articles are those of the authors
and do not necessarily represent the views of and/or its owners.

Copyright AwareINDIA. All rights reserved || Privacy Policy || Terms Of Use || Author Guidelines || Free Articles
FAQs Link To Us || Submit An Article || Free Downloads|| Contact Us || Site Map  || Advertise with Us ||
Click here for Special webhosting packages for visitors of this website only!
Vastu Shastra

Bulk Mailing Solution Provided By AwareIndia

Company IDS