In order to be successful in a retail business, you need to manage your inventory. Inventory is a collection of unsold products that are waiting to be sold. You buy and sell products in a retail business, but what do you do with them between buying them and selling them? Tracking them and measuring them will help you make good decisions with your inventory which should, in turn, result in more money in your pocket.
1. Classify your inventory
In order to measure inventory by groups instead of by individual items, you want to create categories to put like products together. Eight to twelve categories are usually a good amount to use. Most inventory management systems call these departments. Your departments will vary based on the type of industry you are in. Many retailers also use classes to further define their products. An example of a department and class in apparel would be Women’s/Dresses, or Men’s/Pants. In some industries, you can also identify your items by season since you might stock an item only part of the year.
It’s also a good idea to code your inventory into A, B, and C sections. “A” would be all items that you want to have always in stock. What are the things that you never want to be without? These are “A” items. “B” would be items that you would like to evaluate before re-ordering. Rather than making an automatic decision on the item, you would like to take some time to look at its performance before making a re-stocking decision on it. “C” items are not performing well and need to be moved to a sale section. You obviously will not be re-ordering these! How do you make these divisions? By using the numbers in your inventory management system and knowing what to look for.
2. Using your inventory numbers
Here are some numbers you will want to take a look at:
Gross Margin Return on Investment (GMROI). The actual calculation for this is Gross Margin $/Average Inventory Cost. This number measures how productive you’ve been at turning your inventory into a profit. The higher the number, the bigger the profit. Retail companies often find that the majority of their money (cash) can be tied up in inventory. It can be a company’s biggest asset and biggest liability at the same time. Retailers underestimate the cost of inventory in their stores and often fail to realize that a product on the shelf that’s not selling (turning) actually costs money.
An important tool in analyzing inventory, sales, and profitability is GMROI (also known as GMROII), which stands for Gross Margin Return on Inventory Investment. The GMROI calculation assists storeowners and buyers in evaluating whether a sufficient gross margin is being earned by the products purchased compared to the investment in inventory required to generate those gross margin dollars.
Average Sales Per Ticket.
Track your average sales per ticket and try different strategies to up the value of these tickets. It could be merchandising, store training, or offering a discount for multiple items or products.
Number of Transactions.
How many sales transactions are happening per day? What are the busiest days? Think of strategies to drive more traffic. Adjust staffing as needed. Make sure you have the right technical solutions so the store is not losing business because of long wait times.
Track inventory valuation by department monthly and put it into a spread sheet. This will give you a tool to evaluate and manage inventory. Are you stocking to0 much or too little?
Expenses as a Percent of Sales.
Store and employee expenses should not exceed 39 percent of sales.
Inventory Turns by Category. The formula for this is the cost of goods sold from stock sales during the past twelve months/average inventory investment during the past twelve months. This number shows how quickly and efficiently items are moving through your store.
What do you do now that you’re armed with all of this valuable information on your inventory? You use it to tweak your buying and selling decisions.
3. Identify your fast-moving and problem items
The strategy for fast-moving items is to make sure you are never out of stock. First, you want to make sure you do not run out of these products. How long is your lead time and how long does it take to sell this amount? The store also needs a safety stock, because things happen. Second, the store needs to have accurate inventory data. Cycle count these products on a frequent basis and if the numbers don’t match, then figure out what is going wrong. Is it a receiving or a point of sale issue. Identify the weak spot and fix it.
The strategy for problem items is to move them out of your inventory quickly. You should have a separate area for items that are on sale or marked down. You should also have a pricing strategy that moves stock that is not selling and using valuable capital. Think about it, when people walk into a store, they want to see what is new and on close out. One pricing strategy you can use to get a few more points on margin is to place the products at a 25 percent discount and take off another 15 percent at the register and psychologically the customer thinks they’re getting a 40 percent discount, but it is actually 36.2 percent.