Inventory is one of if not the most cash-intensive facets of our business. Managing that inventory is no small task. So how do we know what the right inventory is for our store on a consistent basis? Let us start by visualizing our business as a well-engineered race car. The physical store is the body of the vehicle, the engine is the sales team, the tires are our support staff, and last but certainly not least we can compare our inventory to being the “fuel” that makes everything go.
Race cars require clean, fresh, high-quality fuel to see maximum performance. If we use too low a grade of fuel, we may even damage the engine beyond repair. On top of that we need the right amount of fuel to take us far enough to reach our goals. If we falter on any aspect of our “fuel management strategy,” our store will not see its full potential when it comes to generating revenue and profits.
So, let’s look at the first aspect of race car “fuel” strategy. In NASCAR, crew chiefs never start a race without a well-defined fuel strategy. As the race evolves, they must quickly adapt to the situation at hand because they know that not enough fuel won’t allow you to finish the race and too much fuel will have you run slower than the other cars. Managing an optimal fuel strategy is an ever-evolving situation that can partially be planned but also must be altered constantly. How much inventory do we practically need to achieve our goal? Too little inventory and we may very well end up with a shortage of key inventory items. This will result in lost sales, drive customers to our competition and may even have us struggling to replenish if the goods have long lead times to inventory. Too much inventory and we run the risk of tying up our cash resources, which may have us struggling to pay our day-to-day bills. On top of this, an overinventoried store will have some, if not much, of the inventory age and become less profitable over time due to expiration dates, popular trends and wear and tear, along with introduction of new products.
A Point of Sale System will help you keep track of sales and inventory. Photo Credit: ATA
For those of you reading this who currently use a Retail Point of Sale System (POS), congratulations, you have a key component that will help you optimize your inventory strategy in the easiest way possible. Data is key here, so if you have been running your business through your POS for multiple years, you have the numbers to help you accurately predict how much inventory you need right now to succeed! Even if you do not have a POS, you can still make very strong estimations of what your future inventory needs are just by looking at your sales tax reports for prior months/years. So, for example…
Based on either your POS report or your sales tax report:
- August 2020 your store made a total of $24,000 in sales.
- August 2021 your store made a total of $28,000 in sales.
- August 2022 your store made a total of $30,000 in sales.
For August 2023, you feel you will continue this trend AND you feel the market will also be up over last year, so you estimate you should make $34,000 in total sales.
By using historical data, we can make strong predictions of future performance. Once we have agreed on our sales goal for any given period, we can then use this figure to estimate the total, on-hand inventory we will need to support this sales goal.
For most stores, an average on-hand inventory position of 3x to 5x their sales goal will give them the needed levels of inventory to support the sales team while also not having too much inventory to go stagnant. Per our example this would translate into roughly $100,000 to $170,000 (at retail) worth of on-hand inventory on average. Just like a 500-mile race, our sales volume evolves over time so that in some months we might only need $80,000 of inventory on hand, whereas during our busiest season we might need $200,000. The key here is to use data to help us make the most accurate estimation possible.
Based on what we have talked about so far, we have learned how to calculate how much fuel we need to finish the race, but finishing alone won’t promise us first place. As the infamous Ricky Bobby of Talladega Nights was known to say, “If you ain’t first, you’re last.” And no one wants to finish as the “first loser,” as Dale Earnhardt Sr. said. So how do we make sure we have the right octane of fuel for our store? This again is where sales data from our POS becomes our hero. If we look at historical sales history by category, we can break down the $30,000 in sales we saw in August 2022 (from our prior example) and determine how that breaks down by category. Let’s break down our August 2022 sales…
Bows: $20,000 (66% of sales)
Arrows: $6,000 (20% of sales)
General Accessories: $4,000 (14% of sales)
Total Sales: $30,000
If we feel that these sales levels translate into a healthy profit profile for our store, then we should target our inventory spending to match these figures as closely as practically possible. This would look something like this…
Bow Inventory: $66,000 - $112,000
Arrow Inventory: $20,000 - $34,000
General Accessories: $14,000 - $24,000
Average Inventory: $100,000 - $170,000
By optimizing our inventory strategy to match our sales history, we will make sure we are running the right “fuel mixture” to keep our sales “engine” running at its planned best.
Try diversifying your products. Photo Credit: ATA
So now we have our current fuel strategy set for our 500-mile race, but what if we want to try for a 600-mile race? This would be akin to asking our store to produce more profits. If our inventory is already doing what it can to cover 500 miles, then we need a bigger gas tank! Often, one of the best ways to accomplish this is through inventory diversification. This might mean adding a new manufacturer to our assortment that will bring in new customers, or a totally new department of goods that engages with a whole new group of potential customers. Even better, our new inventory might not just bring in new customers but also bring them in during a time of year that is normally slow! This is where an already top-performing inventory strategy will produce the profits to reinvest into the inventory and help us expand without the need for an injection of outside cash. What we add to our inventory can be just about anything that is felt to add a genuine asset to our already optimized strategy, but it must be done with discipline. How much do we want to grow our sales potential? If our goal is 20%, then by extension this will mean we will need to add approximately 20% more inventory. The key here is that our inventory expansion adds to our potential and not just steals from our already existing inventory. It truly must be novel and expansive to help improve our business.
One last facet we must explore is the size of our gas tank for our race car. At some point, the tank will just be too big. Eventually we will need a bigger car! As a good thumbnail, any store should have an inventory investment (at wholesale cost) with a bare minimum of $100 per square foot of retail showroom space. Anything less and customers will feel there is too little selection or, worse yet, think the business is heading out of business. To use our race car analogy, if we cannot afford to invest in $100 of inventory per square foot or more, we need a smaller car. This is when it is key to find ways to reduce the apparent emptiness of our showroom by condensing displays, making bow racks look fuller through creative displays, or using any other means to make the showroom appear as full as possible. On the flip side, we can start to sense our fuel tank is getting too big when our inventory investment at cost starts to exceed $300 per square foot of retail space. Once we grow past this number, it is a sure sign we could use a larger store, as any extra inventory would just be going into backstock, which is likely excess inventory that we don’t need.
In summary, inventory optimization is the key effort we must take to keep a store running at its best, the fastest, and to go the distance to achieve success. Knowing when to change your inventory strategy will have you not just finishing but finishing in first place!
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