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Mattresses, wines and inventory
Learning to do a better job of controling inventory
When discussing the challenges that the businesses on Main Street face with regard to controlling and moving their inventory, there are two comparisons that come to mind. Speaking with several Main Street managers, they astutely observe these challenges, but often struggle with finding a way to convince the business owner to do something about it. This month’s article will provide you with insight and information so that you can assist the business in becoming more profitable.
The first comparison is the person that in difficult times decides to hide their money under their mattress. Of course, when they return to get their money from under the mattress, the amount they take out is the same as what they put in. While the stock market might not be a good place to put your money, at least a savings account at the bank would produce some interest.
Then there is the thought of buying bottles of wine and that old adage that wine improves with age. And for many wines, that scenario is true; up to a certain point.
Lastly, we will compare the money under the mattress and the aging bottles of wine with inventory. Simply said, there is no true comparison of inventory to wine and mattresses from a positive standpoint that justify what we see many businesses on Main Street doing, which is holding onto inventory long after it needs to be sold.
Unlike the money under the mattress, as the inventory sits on the shelves of businesses, it does not have the same value after several months. Consumers are always looking for the latest, greatest and most fashionable as they shop. Therefore as inventory ages it has less value to the customer because of what is more recently available. In addition, the inventory on hand becomes more costly because it represents money that in a simple form could have been sitting in a saving account at a bank earning some interest.
More importantly, the key factor in the profitability of a business is the ability to turn the inventory. As an example, a business purchases a product with a cost of $25 and decides to ‘keystone’ it, selling it for $50 and producing a 50% gross margin (this is not markup).
Each time the business sells the item and reorders it, this is considered a ‘turn’. And each turn, produces $25 in gross profit. However, if the item does not sell because it was not a popular item, or because the business ordered too many, the money will be sitting on the shelf in the form of unsaleable inventory. It will in essence, be like the money under the mattress - not producing any income.
The resolution would be to get rid of the inventory on hand, even with no gross profit, so that new inventory could be purchased in the expectation it would have multiple turns. While you are likely to have businesses challenge your logic, the math will back up your suggestion.
Using the business owner’s process, the $25 will sit on the shelf until someone eventually walks in the door. If it takes a year, the business owner will have a gross profit of $25. Following the suggestions you would give, if the business owner will sell the item for cost and then buy another item, as soon as they achieve a two time turn, the business owner has exceeded their own plan.
While we can easily solve this mathematically, it is the logic of the business owner that seems to baffle the Main Street manager. So that we can achieve the confidence of the business owner, we should take a look at the situation from the business owner’s position.
Many of them have opened their business in your community because they are already living there. They did not choose the community because it would be the best place to open a business; they simply did not want to move to another town. The second component is to look at the business they own. It may be a jewelry store, sporting goods shop or clothing store. Why did they choose this particular industry?
If they are the succeeding generation in the family business, it is easy to see; they grew up in the business. For many others, they choose the industry because they happen to like the products they sell. They did not open the business because they thought the products and services would sell in the community. They just wanted to sell things that they liked. And therein lies the problem with the inventory. The business owner often has a hard time understanding that they have to separate their job of buying inventory from their personal interests.
Many of them buy inventory that they like as compared to buying inventory they think will sell. In selecting the inventory, you can tell them they have two choices; they can select inventory they think their customers will like or they can try to find customers that like what the business owner likes.
The concept of marking down merchandise becomes a situation of which the markdown is representative of customers saying they do not like the person that owns the business. For the small business owner, a markdown is a defeat; it is a personal situation in which they begin to ask out loud what is wrong with the residents of the community. “What is wrong with these people? Don’t they like me? Don’t they recognize good merchandise when they see it?”
As a Main Street manager attempting to help the businesses through this challenge, you may find yourself wearing several hats. In addition to being the manager of the district, you are now going to become a part time psychologist as well as a part time mathematical analyst.
While one aspect of the inventory question is dealing with the issue of getting rid of merchandise that is sitting on the shelf, another aspect is to ask the business owner to examine how they got into that problem in the first place.
As we mentioned, one solution is understanding how to buy what will sell as compared to buying what you like. Buyers in large retail operations probably do a good job of grasping this concept, and a second component that all of the buyers in large retail operations have working for them is they have a system of controlling their inventory.
These full time professional buyers make projections of their sales according to groups of inventory and the months of the year. As an example, the jewelry store buyer creates a plan for the sales of men’s watches, lady’s watches, wedding bands, necklaces, earrings, and all of the other groups of products they sell. As they project their anticipated sales they consider their gross margin and using those two numbers accurately calculate how much inventory they need on hand for each month to produce the sales they expect.
These buyers know they will rarely make a selection of products in which all of the inventory sells for the full price. As they order their merchandise they establish a calendar which cause them to re-examine their inventory at certain dates as well as certain points of sell through. As an example, they may re-examine the inventory at the point it has been in the store for 60 days, or at the point they have sold 30% of the inventory received.
As they cross these points they have already established guidelines as to how much they are going to mark down that item. With a calendar containing multiple examination points, they are able to accurately project what their overall ‘maintained gross margin’ will be for this item.
In the first part of this article, I mentioned our comparing inventory to both money hidden under mattresses and bottles of wine. Here is the second comparison; bottles of wine often have a year marked on the label that is indicative of which vintage year the wine comes from. To enjoy the wine at its’ best point requires allowing the wine to sit at the proper temperature for a period of time, allowing it to age so that the grapes produce the finest possible taste.
There was an advertising campaign by one of the wineries in which they said, “We will sell no wine until it is time”. While that may be an appropriate statement with regard to wine, it does not apply to the inventory within the businesses of your Main Street district.
With inventory, it does not get better as it ages. And simply stated, “it’s time!”
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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.
Profits Plus Solutions, Inc.