How do you determine how much inventory to invest in to support your assortment? After you have rolled up sales and margin plans, you are ready to plan inventory. It’s important to determine how much inventory to carry in stores and in the warehouse to support your financial goals.
Let me qualify by saying I am not referring to the detailed supply chain process. I will be sharing a high-level view of “How do I plan inventory levels to support my overall assortment and financial goals?”
8 Simple Steps to Determine Inventory Levels:
1. Estimate the volume of style changes
- Styles you are continuing, replacing and/or adding (suggest “one out, one in” to create controlled levels of style counts)
- Which categories you are buying into
2. Determine Assortment
3. Determine Pricing
4. Identify where the product will be distributed
- Brick and mortar
5. Forecast sales by style
6. Determine Presentation
- Product replenishment frequency
- Minimum quantities (how much do you want on hand)
7. Establish how many weeks of sales of supply (WOS) to carry
- Add presentation minimum + WOS
8. Roll up total inventory need
- By total, style and channel
5 Do’s and Don’ts when Managing Your Inventory:
- Know your history
Not all product will turn at the same rate. It will depend upon product type, seasonality, fitting styles, etc. Recapping your historical turnover and GMROI results, by company, category and style, is a first step in setting goals. Companies often use these measures to quantify how productive their inventory is. Let’s look at a couple ways to measure productivity of your inventory:
- Turnover = Cost of Goods Sold/Average Inventory
This tells how fast you are selling your overall inventory.
If your overall company sales are $100M, margin rate 40%, and Avg Cost inventory $20M, then:
$100M Retail Sales -$40M Gross Margin $ = $60M Cost of Goods Sold (COGS)
$60M COGS/ Avg Cost Inventory $20M = 3X Turnover
- GMROI = Gross Margin $/ Avg Cost Inventory
See a visual recap of the following chart with the examples of Turnover and GMROI above. Keeping sales, margin and cost the same, note how turnover and GMROI are positively impacted when reducing overall inventory.
- Start with sales potential
Inventory should support your sales plan. Determine where to invest, reduce or limit your inventory. It is always a balancing act to have “just the right amount of inventory at the right time”. Know your current inventory position. Ensure you set store and warehouse quantities. You will likely want to err on investing in basics, core sizes, “known” styles and seasonal – when in season. Watch and manage your inventory closely on seasonal – when out of season, outlier sizes and discontinued/clearance. If a product is discontinued or clearance, be sure to be progressive with markdowns. We are not talking fine wine here – it will not improve with age. And it could be taking up a big chunk of your overall inventory investment. Take the markdown, sell it, and move on to funding more productive parts of your assortment.
- Know your KPI’s
Track inventory productivity AND be sure to report and monitor on a regular basis. It is important to know how healthy your inventory is and be able to react to sales trends immediately.
- Determine which items are “never outs”
These items are high customer priority. It’s likely there are some products your customers expect you to always have in stock. Work closely with your supplier(s) on ensuring shipping consistency. We all have the retailers we go to, where we know we can find a great basic white t-shirt or kid’s khaki shorts. Personal story – how can a local department be out of stock in a khaki short, boys’ size 12 or 14, right before spring break?! When a retailer disappoints and is not in stock in these expected styles, it sometimes can be a relationship-breaker with your customer. And it becomes difficult to win them back.
- Look (literally) at your clearance inventory
A good practice is to physically look, yes literally, at your clearance inventory. It sometimes appears different than just looking at data on your reports. What did not sell? You will likely see obvious views into what you overbought or undersold. Often you are left with outlier sizes, certain colors, flavors, or materials. Seeing the overstock sets you up for future improvement.
- Forget to recap prior results
There is lots to learn from what worked and did not. Know where sales and inventory were aligned in past seasons and where you were out of stock. This is critical to build in lost sales potential, to avoid repeat out of stock experiences. Tracking in stocks AND overstocks over time will help you identify opportunities for the future.
- Buy inventory to simply fill your store presentation or warehouse
This could quickly create an overstock situation! We all know real estate does not always match sales potential. Maybe traffic patterns have changed, competition has moved in, or you are doing a remodel of a current store. Be sure to buy inventory to sales potential – not space! If there is extra space available, be creative in how to merchandise this space.
- Buy into every sale
Being 100% in stock in all products is not feasible. There is no way you will be 100% in stock in every size, for every customer for every product! It’s ok! For clarification, some categories you will need 100% in stock. Examples: gas, bread, milk, basic white t-shirt, khaki shorts, etc. But you need to be sure your customer understands. If the top 20% of your styles do 80% of your business, focus on in stocks on those! But, be sure your customer has options. One option is to hold outlier sizes in your warehouse with the ability to drop ship to your customer. Or have a couple of stores carry more depth of outlier sizes and colors and drop ship from those stores. Providing options to support your customer is very important.
- Forget to communicate to your customer
If product is set and sell, let them know “limited time available”. Find a way to communicate to your customers if the product is available for limited time. Or available ‘while supplies last’. This is a great way to create a sense of urgency and give you flexibility on how deep you want to go in your inventory buys.
- Use last year receipts as a baseline for this year’s plan
Often, retailers will look at last year buys to determine how much to buy for next season. You may have carryover inventory to consider. You may have overstocked your stores and warehouse last year or you could have had a key promotion last you that you are not repeating. Or included set quantities in last year’s buys, that you don’t have to repeat. You may have adjusted number of stores that product is carried in. Use sales as your starting point, along with current inventory levels, before creating buy quantities.
The Five Do’s and Don’ts of managing your inventory are some simple reminders to help you and your teams more effectively manage your retail inventory. You will see great impact to your bottom line by reducing inventory carrying costs, improving your in stocks, decreasing markdowns and improving overall customer satisfaction.
Download the eBook. Learn the Do’s and Don’ts to ensure your retail inventory strategy aligns to your assortment and how to create a retail assortment presentation that’s appealing to customers