The secret to retail success is the right inventory. Location, marketing, décor, music, and displays all matter, but the heartof your business remains what you choose to put in it.
Inventory management can be a tightrope walk. Excess inventory ensures you don’t run out of stock, but it also causes its own set of problems:
- It prevents you from bringing in fresh stock.
- It increases your carrying costs (rent, interest, utility costs, insurance, taxes).
- It overwhelms your customer with too much choice, which studies have shown to lower sales.3
Excess inventory is particularly dangerous for your store’s financial health. “Retailers face higher risk of bankruptcy when carrying excessive inventory,” 4 say two prominent professors of operations management. Too much inventory can also lead to excessive discounting, which eats into your profits.
On the other hand, not carrying enough inventory will cause you to miss sales opportunities, leading to lower revenue and dissatisfied customers. A recent study by IHL Group showed that worldwide, retailers collectively lose an estimated $800 billion a year due to mistaking low sales for low demand, 5 making it one of the more damaging, yet preventable, issues facing retailers.
The good news: managing inventory isn’t as hard as you think.
We’ve laid out 7 best practices to help you get the perfect inventory balance in your store.
1. Track Inventory
2. Set up Information
3. Monitor Profit Margins
4. Manage from a Single System
5. Minimize shrinkage
6. Monitor sell-through
7. Managing Aging Stock
1. Track Your Inventory
The first crucial step is to start keeping track of your inventory data. This data is your secret weapon; it gives you the information you need to make smart, informed decisions.
Tracking inventory information accurately allows you to:
- Build a data set that you can analyze before making future buying decisions.
- Provide evidence to support you during negotiations with suppliers.
- Have more predictability in your business.
You can track data in several ways:
- Manually with pencil and paper, using pre-printed inventory cards.
- Manually on a computer, using spreadsheet applications.
- With a POS system that includes inventory management features.
Many retailers think doing this work manually saves them money. However, doing calculations by hand can increase operations costs in a number of ways:
- Information is not available in real-time. You’ll often find that by the time you’ve got your report, the information is old and no longer relevant.
- It is vastly more error-prone. The speed and volume of information multiplies your chances for error.
- It is extremely time-consuming.
An automated system requires some investment, but can save you hundreds – if not thousands – of hours and greatly minimize inconsistencies.
Once you have a system in place, you can use it to apply best practices for inventory management. These can help you achieve the perfect balance of inventory in your stores, and ultimately improve sales and profitability.
If you have good inventory and product information in your POS, your sales team can use it to quickly look up items for customers across store locations along with seeing suggested alternatives and up-sells. Eighty percent of retailers who have implemented mobile inventory lookups say that these tools have increased sales.6
2. Set Up Information Properly in Your POS System
Whichever system you decide to use, it’s crucial to set it up properly from the beginning. If you fail to capture information accurately and completely, you’re more likely to make illinformed decisions. Take the time to be thorough, and it will pay huge dividends later on.
Each item in your store has multiple types of information attached to it, and every bit of it is useful: it helps you keep track of what’s happening in your store, and it gives you data you can use to see current trends and predict future ones.
Information to track on every item:
SKU (Stock Keeping Unit)
Vendor-specific information, such as Reorder SKU or Vendor ID
Any other criteria useful to your business (season, color, name of designer, customer preferences, etc.)
Many suppliers provide automatic downloads of their catalogs to POS software, saving you time. Access to supplier catalogs simplifies system set-up and purchase order submission by eliminating the need to manually enter product descriptions, costs, and selling prices.
3. Keep an Eye on Total Costs, Not Just Quantity
Managing inventory is not just about managing the items themselves: top-performing retailers also manage inventory based on profit margins.
To manage inventory by margin, you need to know not just what’s selling the most, but what’s producing the highest profits. To calculate margin on an item, subtract the cost from the sell price of an item.
That sounds easy enough, but costs can vary for the same item, depending on a number of factors:
Changes in Supply Chain
To know an item’s cost, check the original purchase orders. For a picture of total costs, take an average of all these costs. Or, you can assess by individual unit costs.
You also need to know the sell price of your items, including any discounts applied to the item. A good POS takes care of this automatically, providing reports that quickly show profit margins on inventory items and categories.
With this information, you can:
Focus on brands and vendors that yield the highest profits.
Know top and worst performing products by quantity and by margin
Better manage your discounts with a precise account of item cost
4. Manage Inventory From a Single System
Managing your inventory from multiple systems is a huge time-sink and highly error-prone. Opting for a single inventory management system makes it easier to not only understand how your inventory is moving, but to expand to other locations or onto the web later on.
Centralized inventory systems enable you to:
Enter and maintain all your inventory information just once, instead of repeatedly entering information for every location, including your online shop.
Reduce errors caused by selling the same inventory twice or other types of clerical errors.
Fulfill orders more efficiently.
Monitor inventory levels by location. If sales are higher in one location, you can easily transfer stock from one location to another.
Research shows that in-store pick up for online orders can lead to an increase of 1.8 percent in total sales7. A centralized system that synchronizes your in-store and online inventory makes it easy for you to offer this option to your customers.
5. Keep Shrinkage to a Minimum
“Inventory shrinkage” is inventory lost to damage, theft, misplacement, or mismanaged paperwork.
In 2012, the National Retail Security Survey (NRSS) found that industry-wide average shrinkage was 1.47 percent for retailers.8
Inventory shrinkage can reduce your margins significantly, depending on the type of business you run. According to one study, the typical net profit margin for privately held retailers in 2011 was 4 percent.9 With margins this slender, the need to reduce losses caused by shrinkage is all the more critical.
According to the NRSS, 15.3 percent of inventory lost to shrinkage was caused by clerical errors.10 While you may not be able to easily prevent theft or merchandise damage, you can keep full control over clerical processes. Keeping your data correct and current can help reduce your shrinkage, consequently increasing your profits.
A good way to keep track of inventory is using an automated inventory management system. It is possible to track inventory movement, as well as costs and other related data, on spreadsheet applications or by pen and paper. However, pivot tables and retail calculations are complicated and prone to error when updated manually. An automated system can dramatically reduce these mistakes.
6. Monitor Your Sell-through to Avoid Running out of Stock
According to one Harvard study, “retailers can lose nearly half of intended purchases when customers encounter stock-outs.”11
You can’t sell what’s not in your store. Of all the problems retailers can encounter, running out of inventory too soon is one of the most hazardous.
You can better predict buying needs and ensure that you’ve ordered enough for the season by examining historical sales, and bringing this information with you when you meet with suppliers.
Having sell-through and weeks of supply reports at your fingertips will better prepare you going into buying meetings. If you run the type of business that favors “lean operations” − or “just-in-time” inventory delivery − you can use these calculations to keep inventory topped up at all times, with a minimum amount of inventory in storage.
Here are a few things to look at to better support your decision-making for nonseasonal and core items:
Look at your top selling items. Are they selling faster than expected? You may need to put in a special order to take advantage of a hot trend.
Calculate your sell-through rate to see how far you are through your inventory.
Sell-through % = units sold/(units on-hand + units sold).
Calculate your weeks of supply to see how much inventory you’ll have left if you continue selling at your current rate.
Weeks of supply = total inventory on hand/average weekly sales.
Look at lead times for your items.
Compare weeks of supply to lead times. This will help you to determine your reorder points. If your POS supports it, set an automatic reorder reminder when this point is reached.
You had 25 t-shirts on hand on Sep. 30. On Oct. 1, you ordered 50 t-shirts in one size, assorted colors, for a total of 75 shirts on hand at the beginning of the month.
7. Manage Your Aging Stock, Especially Seasonal Stock
Old or stale inventory can quickly eat into your profits by preventing you from bringing new stock in – not to mention increasing your carrying costs. Managing it properly will help you avoid these pitfalls and ultimately increase your profits.
Sell-through and weeks of supply are useful calculations for managing aging stock. Use them to ensure you aren’t tying up dollars in old or stale inventory, or getting stuck with out-of-date merchandise:
Determine sell-through to see how far you are through a category or item.
Determine weeks on hand to see how much inventory you have left.
Compare sell-through to weeks on hand.
If sell-through is low and weeks on hand is high, consider a more aggressive strategy to move this inventory faster.
If both sell-through is low and weeks on hand are low, you should determine whether insufficient stock levels (i.e. varieties of size, color) is the cause.
Discounting inventory is never a retailer’s first choice. To push slow-moving stock, consider the following strategies:
Change up the merchandising: move it to a more prominent location, add new visuals, and group with fast-moving products.
Discount by first re-pricing, often referred to as white-ticketing; if this fails, move on to markdowns (redticketing).
Host or participate in pop-up and special events.
Items over one year old are typically considered dead. If they cannot be sold, consider donating them to charity for a tax receipt.