Buying inventory correctly means being right; eight times

Buying inventory is more than just "open to buy"

“There is an art to science, and a science in art; the two are not enemies, but different aspects of the whole.” — Isaac Asimov

Perhaps you have the same experiences I do as a retailer; a constant barrage of emails from individuals and companies wanting to sell their services – software and advice – to handle “open to buy” or “inventory control” for your store.

If only it were that easy. As one who remembers his parents utilizing computer generated open to buy in the 1960’s, it is essentially your determining how much you want to spend at cost each month for a category, or fineline, of inventory. You make adjustments according to sales, margin, minimum dollar and/or freight requirements, delivery lag time, and especially in the current market, how much of your last order did not show up from the vendor.

That may be open to buy or inventory control in a very small nutshell. However, buying inventory is a lot more than that. And while inventory control is all about math, buying has much more as it is both an art and a science.

The biggest challenge we see in buyers is that of separating their personal likes with the anticipated likes of customers. Whether at a trade show, working with a sales representative, or shopping a manufacturer’s or wholesaler’s website, it is important to remember that the right item is what the customer will like and not necessarily what you like as the buyer for your business. Having a new item arrive in your business and not selling any of that item in the first six weeks it is on your shelf is often a sign that this is not the right item for your business.

The idea of the right price is frequently thought of incorrectly when it is said, “we can sell more if we lower our price”. Lowering the price should never be the focus; making more profit is the focus. Utilize this free calculator to see what happens when you lower your price, price change analysis as the calculator will tell you how many more you have to sell to make the same gross sales dollars. More importantly it will tell you how many more you have to sell to make the same gross profit dollars.

We have a dislike for the phrase, “customer service”. We find there is a common misconception among independent businesses that any mass merchant, big box, or online business gives poor or no customer service. Granted, you can shop these businesses and have no interaction with an employee as well as having to deal with a self-service register. “Let me know if you need anything”, is not customer service.

There are two problems with our not having the right salesmanship. The first is that we fail to create ongoing staff education programs; a meeting with all of our employees where we are teaching them the details of the products and services we offer as well as teaching them how to sell. As a first hand witness to the difference an educated employee can make, I am constantly being disappointed with independent businesses whose employees know less about their products than the customers do.

The second problem is that we pay people by the hour to be in our business. We need to be paying people to sell; not just ring up a sale. Again from personal experience, when you change your pay plan to one that includes incentives for results, you will quickly find the employees who understand what they are being paid for.

The fourth component is having the right quantity. You may stop and ask, “Wait. Isn’t that the open to buy stuff that was mentioned at the beginning?” In a very small part, the answer is yes. But on a larger scale, we suggest the right quantity should have a concept that we find few retailers utilizing.

“I am sorry. We are sold out for the season”. The uniqueness of that statement is that we planned to run out before the end of the season. Just because you see other businesses having end of season clearance sales does not mean that you have to participate.

We gave an example to a group of shoe stores of their ordering a single style of shoes in a variety of colors and sizes. Their initial gross margin (retail minus cost with the answer divided by retail) being 30%. Six weeks into the season, they took markdowns on the remaining inventory.

Another four weeks later they took an additional markdown followed by one last markdown to clear out the remaining stock. The retailers in attendance confirmed the example we created was typical of their businesses. We did the calculations of the quantities and margin at each of the four price points. The surprising news to the retailers was that their maintained margin was 16.66%.

We asked how many of them could survive if their shoe department had a gross margin of 16.66%. None of them found our calculation to be workable for them. There is however, a solution that can be easily implemented; don’t order as many shoes!

As a compromise order enough shoes to make it through the first markdown and stop at that point. We understand the stores would not have enough shoes for the entire season. However, they would have more profit and that is the name of the game.
Knowing who is the right customer for your business means that you have determined a target customer and are able to focus all your efforts on that person.

Too often a business focuses on “what” they sell. It can be toys, gifts, clothing, fabric, or any one of hundreds of focuses. For this business to be successful they have to have an extremely wide variety of products and tend to be a business that gets a few dollars from a lot of different customers.

Contrary to that tradition, a business that focuses on “who” they sell do tends to need fewer customers because they sell more to each customer. This lesson is learned from the banking industry.

When a bank sells one of their products/services (checking account, savings account, safe deposit box, debit card, credit card, mortgage, car loan, home improvement loan, line of credit, etc.) to a customer, there is a 90% chance that customer will leave that bank and take their business elsewhere.

However, if that bank can sell five of their products/services to a customer, there is a 90% chance the customer will NOT leave that bank. The focus is on the “who” instead of the “what”. Your business gets to that point when you determine the right customer for you.

“Even a blind squirrel can find a nut once in a while”, may have an appropriate place somewhere, however it is not relative to merchandising your business – be it a physical sales floor or online business. It takes having the right location or display for your customer to see what you want them to consider buying. Customers traditionally will look and walk in the same manner they drive a vehicle; towards the right.

They will do the same as they look at a paper or screen; start in the upper left corner and move to the right. There is also need to watch the sales of any item and when it begins to decrease, consider moving it to a new location if it is not decreasing because it has reached the end of its season.

Overall, when a customer comes into a business and says they know where the item is that they want to purchase, it is time for a lot of rearranging because that customer is not going to look around to see what is new.

To everything there is a season; a time to love and a time to hate; a time to weep and a time to laugh; a time to cast away stones and a time to gather stones together. This may come from the Old Testament (Ecclesiastes 3) but as a retailer you can look at each of these phrases and think of merchandise. There is a right time of year for everything in your business. And as an item, or category of items is coming to the end of its season, you need the space and the money from this inventory to produce the cash and space for a different item, or category of items that are now coming into their season.

In this digital world, getting the right message/delivery to your customer comes in a different format. A website requires the proper words in places that will cause your business to be found by search engines. In social media it requires you to know the right type of media for your target customer.

Contrary to most trade shows having classes on how to work Facebook, this is not the end all for your marketing. We would easily expect that if our customer is a much older person they are not using Facebook. And for the younger crowd they have moved on from Facebook to things like Instagram.

There is also a balance between telling customers about what your offerings are and going for the “item and discount price” format. Note that the more you use “item and discount price”, the more you are telling your customers to wait until you have a sale price.

Buying inventory is a whole lot more than just the correct numbers and calculations. You must take care of the eight “rights” necessary for your buying to be correct. You could have someone doing the buying and someone else taking care of the eight “rights”. If either makes mistakes, the buying is not going to be correct.

However, in our next time, we are going to show you how to properly calculate the numbers.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 128, Dardanelle, AR. 72834. Phone 727-823-7205. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.