Spring CleaningClearing out excess inventory can boost profits and customer satisfaction When the economic crunch first hit his business in August
2000, Mike Browe began paring down inventory at his LeConte Ltd. men’s
clothing stores in Rochester Hills and Grand Blanc.
The results? Inventory decreased by more than 20 percent.
Annual stock turns increased from around three times to between four and
five. “We’re using the vendor’s warehouse instead
of creating our own,” Browe said. Many retailers have trimmed stock levels over the past
year or more due to slower sales in a sluggish economy. A November MRA
survey showed that nearly half of Michigan retailers planned to reduce
inventory in early 2002. The wakeup call may have been overdue for many merchants.
Researchers at Stephen F. Austin State University in Texas found that
more than a third of small retailers didn’t know how to calculate
their inventory turnover, let alone know what their inventory level should
be. The researchers concluded that better attention to inventory could
prevent many small businesses from failing. Although retailers tend to neglect inventory management
in favor of the more “fun” aspects of their business, improving
inventory levels can lead to increased sales, higher profits, improved
cash flow and better customer service. Why is inventory management so important? For most retailers,
inventory is their biggest asset and their biggest expense. Insufficient
inventory leads to stock-outs and unsatisfied customers. Excessive inventory
wastes storage space, ties up dollars that could be spent elsewhere and
leaves stores with outdated merchandise. “If you invest in inventory that can’t be sold
at a profit, you’re wasting your assets,” said Jon Schreibfeder,
president of Effective Inventory Management Inc. in Coppell, Texas. “You
need the right quantity of the right product in the right location at
the right time.” Turnover “The trick is to generate higher sales with less
inventory,” said Susan Negen, a former buyer for Bloomingdale’s,
Macy’s and Mackinaw Kite Co. who runs Grand Haven-based WhizBang!
Training with her husband, Bob. “If too much money is tied up in
inventory, you may not be able to pay your bills even though your business
is apparently profitable.” To find out if your inventory level is too high, calculate
your inventory turnover by dividing your annual sales by the average value
of your inventory at retail. The resulting number tells you how many times
your entire inventory goes out the door during the year. For example,
if your annual sales are $300,000 and your average inventory during the
year is $200,000, your inventory turnover is 1.5.
Smart buying Analyzing past sales is essential for identifying which
products are successful, say Negen and Schreibfeder. Too many retailers
rely on hunches rather than facts when deciding what to buy. Negen relates how her husband and his brother, Steve,
each had a different list of what they thought were the top 10 products
in their Mackinaw Kite Co. store. When they looked at the numbers, it
turned out that neither one was right. “Until you actually get statistics that are factual,
it’s very hard to know what’s selling,” she said. “You
will be amazed at what is actually selling and not selling.” Proper buying can help you avoid getting too much inventory
in the first place. Using a yearly open-to-buy plan to set target inventory
levels and purchase amounts for each month is one of the best ways to
keep buying on track. “I don’t know how anyone can pay their bills
without open-to-buy,” said Linda Davis, of Victorian Village Market
in St. Ignace, who uses a buying plan based on sales history from her
15 years in business. Clear it out “You always want to minimize markdowns, but you’re
never going to eliminate them completely,” said Negen. “Turn
the merchandise into cash so you can buy something your customer wants.” When you do take markdowns, make them timely and significant,
says Negen. You’ll get more out of merchandise if you mark it down
while it’s still in season. Negen recommends putting clearance merchandise in a separate
area of the store to make it stand out. That practice has worked well
for retailers like Davis, who operates a sale room. “You don’t want sale stuff next to your nice
new merchandise,” Davis said. Other successful ideas include giving salespeople a bonus
for selling a clearance product; offering customers a free upgrade from
a lower-priced item to the one you want to eliminate; and selling excess
product to other retailers who need it. Bill and Craig Golden, owners of Golden Shoes in Traverse City, have developed a network of shoe retailers throughout the state who sell inventory to each other when needed. In addition to moving excess product to locations where it will sell, the network can come through in a pinch. “If I need a size 8 in time for Christmas and can’t
get it from the manufacturer, I can call one of these other stores and
usually get it the next day,” said Bill.
“Retailers might be surprised at what kinds of things
schools and charities can use,” said Jack Zavada, director of communications
for the National Association for the Exchange of Industrial Resources,
a clearinghouse for businesses wanting to donate merchandise and nonprofits
looking for low-cost goods. Gift items, for instance, might be used as
prizes for a church or school event. If all else fails, says Schreibfeder, throw away the old
product. “It’s a last resort,” he said, “but
at least you’re freeing up some shelf space, getting rid of an eyesore
and getting some value by being able to write off the cost of the material.” The biggest mistake many retailers make is becoming emotionally
attached to their inventory, refusing to admit that a product they personally
selected isn’t selling and needs to be eliminated. “Don’t fall in love with inventory,” said
clothing retailer Browe. “And don’t insult customers by keeping
old product around the store.” Technology Margaret Salyers, of McLinden Shoes in Southgate, has
been using a computerized POS system for just over a year and says it’s
been a great asset for inventory control. “I love it,” she said. “It’s really
helpful to stay on top of things that need to be changed and mark down
merchandise that’s not moving.” The system also helps with buying by providing easy access
to sales data from past years. That’s especially important, since
the store specializes in hard-to-find sizes and widths. “We always did go back and analyze sales, but it
was an awful lot more work,” she said. The wide array of POS hardware and software available
makes choosing the best system difficult. Negen recommends talking to
other retailers, especially those in your trade line, to find out what
systems they prefer. Other resources for selecting POS technology include www.pos-net.com
(an online catalog of retail technology systems from various vendors)
and Retail Technology Information for Independent Retailers (a multi-page
questionnaire for assessing your technology needs), available from the
National Retail Federation at www.nrf.com/content/retailinfo/iri.htm. Benefits In the survey, the stores with better-than-average inventory
turnover (2.9 turns) had average annual sales of $691,000 on an average
inventory investment of only $128,000 at cost. The low-performing stores
(1.2 turns) had lower average sales of $583,000 on their much higher inventory
investment of $275,000. “Many retailers will actually see sales go up when
they start inventory management,” Negen said. “When they start
paying attention to their inventory levels and what they’re buying,
they make sure they never run out of bestsellers and always have plenty
of new merchandise to show their customers.” Karl Tucker can testify to the benefits of inventory management
at Earth’s Edge, his outdoor outfitting store in Grand Haven. He
spent more than a year working with Negen to reduce inventory and develop
a buying plan. As a result, his profits increased significantly last
year even though sales were down slightly. Clearance items are scarce,
and he’s able to pay vendors and creditors on time. “It’s painful to get the system to a point where
it’s effective,” Tucker said. “But if you don’t manage
your inventory, your business is not going to be around.” Inventory Tips Buy Right Move It Smarter Markdowns Resources Jon Schreibfeder, Gerald H. Smith National Association for |
Browe
eliminated items that weren’t selling well and focused on popular
basics, purchasing lower quantities and filling in with small orders each
week to keep his assortment complete. 
If
the number is under two, you may well be overstocked. A turn rate of three
to four is preferable for many businesses. Merchants with a low markup
need even higher turnover, while very high-end retailers can get away
with a lower rate.
Another
option is donating excess merchandise to a nonprofit organization. The
business receives a tax write-off and enhances its image by giving to
the community.