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In a literal sense, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the business investment and must be well-managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled, they are unreliable, inefficient and costly.
At the same time, excess inventory can lead to costly markdowns, storage issues, obsolescence, product expiration, inflated shrinkage and spoilage of perishable items. And this unsteady balance between inventory and service levels will only continue to grow in complexity as the number of SKUs, supply sources, seasonal collections, promotions and product characteristics continue to skyrocket every year.
One of the most important aspects of inventory control is to have the items in stock at the moment they are needed. This includes going into the market to buy the goods early enough to ensure delivery at the proper time. Thus, buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination.
For retailers, planning ahead is very crucial. Since they offer new items for sale months before the actual calendar date for the beginning of the new season, it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last-minute panic purchases. The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season. For example, many retailers view March 21 as the end of the spring season, June 21 as the end of summer and Dec. 21 as the end of winter.
Retailers in Denial About $93-Billion Out-of-Stock Problem
"Out-of-stocks seems to be one of the biggest issues facing retailers today," said Frank Riso, marketing and operations executive at Motorola. "I've heard horror stories of retailers who've reached up to 8 percent out-of-stock during the holiday period -- especially on popular items."
In fact, according to the 2008 Store Systems Study produced by RIS News and research partner IHL Group, the loss of sales to competitors due to out-of-stocks measures a staggering $93 billion.
According to the study, entitled "Seizing the In-Store Opportunity," of the three major verticals polled in the survey, Specialty Soft Goods retailers take the hardest hit, with out-of-stocks amounting to the equivalent of 7.1 percent of store sales, or a weighted cost of $5.82 for each transaction. For Department Stores, the loss of customer revenue amounts to $5.15 for every transaction, or the equivalent of 4.2 percent of same-store sales. Food/Grocery pays the least for per-item out-of-stocks in the survey, only losing $0.92 for every transaction. But, the study points out, when you take into consideration that the average supermarket makes less than a penny profit per item, the loss to out-of-stocks still accounts for up to 1.5 percent of annual sales.
"If a retailer completely fixes the problem, it could increase same-store sales by 3.7 percent by converting out-of-stocks into transactions," the study revealed. "Put another way, the average retailer loses the equivalent of $3.19 for every transaction it makes either through lost sales of specific items or by creating a situation where shoppers purchase nothing in the store even though they came in to buy."
Furthermore, according to statistics from Information Resources, Inc. (IRI), 70 percent of customers will buy a substitute item the first time they encounter an out-of-stock situation. By the second encounter, there is a 50/50 chance that the customer will go someplace else. A third out-of-stock situation drives 70 percent of customers out the door. This is a clear sign that today's time-starved shoppers have little tolerance for merchants that are, even occasionally, out of stock on the products they want.
Successful Inventory Management From the Pros
According to the U.S. Small Business Administration (SBA), successful inventory management involves balancing the costs of inventory with the benefits of inventory. Many small-business owners fail to appreciate fully the true costs of carrying inventory, which include not only the direct costs of storage, insurance and taxes, but also the cost of money tied up in inventory.
This fine line between keeping too much inventory and not enough is not the manager's only concern. According to the SBA, others include:
• Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin;
• Increasing inventory turnover -- but not sacrificing the service level;
• Keeping stock low -- but not sacrificing service or performance;
• Obtaining lower prices by making volume purchases -- but not ending up with slow-moving inventory; and
• Having an adequate inventory on hand -- but not getting caught with obsolete items.
For Laura Havlek, owner of Sonoma, Calif.'s Sign of the Bear, successful inventory management at her 3,000-square-foot kitchenware store involves keeping a watchful eye on what's selling and what's not selling -- by item, department and vendor.
"We run reports for top sellers and no sellers, we adjust our inventory levels by department, item and vendor to reflect changing turn, and with every item, we'll assess potential turn versus price point -- both on the initial buy and as they sell through or don't. We check our back stock against floor stock thoroughly, to make sure everything is abundantly displayed on the sales floor," Havlek revealed.
She also believes there's absolutely no substitute for doing homework. "That means line-by-line stock checks that all inventory is represented on the sales floor (not in the backroom), that sections are well-displayed and well-signed, that hot sellers are reordered for the holidays, that customers have been well-served ... it's all the bits and pieces that are so much a part of what builds daily success, or poses a hurdle when it's not well done."
In addition to meticulous stock-checking, Havlek has maintained a well-oiled ship by offering customers one fair price, every day. That involves looking before she orders to see whether she can offer a compelling item at a compelling price and still remain profitable.
"We'll shave margins when it's sensible, especially where vendors have worked out freight programs to allow us to do so, but if we can't offer an item at a retail price point that is compelling to consumers and profitable for us, we should be selling something else. A fair price for everyone is how we preserve the service and the quality of what we sell."
Keep it Lean … but not too Lean
The current economic climate is creating a whole new set of challenges for U.S. retailers as consumers cut back, trade down or delay purchases. Fearing that 2008 may be the most challenging period since the 1991 recession, many retailers have slimmed offerings, cut inventory, closed stores and sliced payroll.
Sign of the Bear has responded by leaning out what is not selling as well as formerly, but stocking up on the items that are selling better than ever. "I think one of the real pitfalls, self-fulfilling prophecies, of difficult economic times, is looking as if you're too lean ... it's depressing and uncompelling to walk into a store that looks as if it's going out of business; so, ironically, one of the best things I think retailers can offer this fall is enthusiasm and abundance," Havlek said.
She continued, "In lean times, it's worth remembering that so many businesses were solidly profitable doing 80, 90 or 95 percent of their peak-year business, and as long as we evolve in tandem with our income stream, we stay profitable. Of course, increases in gross sales bring a sense of satisfaction and joy. But increases in net revenue are the real, and much less visible, ultimate yardstick. If sales are down 5 percent but so are expenses, business is in balance. Lean economic times are about balance and focusing on what is working, and evolving toward it … We all maintain enthusiasm and solid profitability by watching and managing every facet of daily business, from staffing to inventory, to keep pace with big-picture trends."
At Evansville, Ind.-based kitchenware shop Kitchen Affairs, owners Shelly and Mike Sackett cope with the current economic climate by keeping it simple and sticking with the basics as much as possible.
"In lean times, people will eat more at home, and will entertain at home more than taking guests to an expensive restaurant, so basics and a few nice serving pieces are in demand," Mike Sackett revealed.
They also offer up straightforward advice for struggling retailers -- Sell! Sell! Sell! "The real secret to controlling what comes in the back door is to make sure it all goes out the front door. Sometimes, businesses forget that most important fact," Sackett explained.
Another important fact retailers should not overlook, according to the Sacketts: Don't fall in love with your merchandise. "It's easy to buy what you like, and the more you like it, the more likely you are to buy too much of it. Rely on sales history, both by vendor and by product category/department. Even something as simple as wooden or bamboo utensils can become severely overstocked, especially if you just keep adding SKUs and/or colors, and never dropping the dying ones."
He added, "Sometimes, like everyone else, we just say the heck with it and order something we think will turn quickly and fits our product mix. Part of the secret of 'fringe' merchandise is to get on it and get off it while it's still in demand, but after the novelty of the product has worn off."
Systems That Work
Besides focusing their efforts on moving the merchandise out the door, the Sacketts also utilize on-hand reports almost every time they place an order for replenishing merchandise. For new lines, they look at existing inventories and projected sales by department, since they don't have a history with a new vendor.
On the tech side, the Sacketts rely on Microsoft's RMS (a successor system to a product called QuickSell) to help manage their inventory. "We like the company we bought the software from (Advanced Retail Management Systems), in part because they are working with our Gourmet Catalog Buying Group. The system doesn't offer everything we'd like, but it's affordable for a small one-store operation," he said.
KC Lapiana, owner of Wexford, Pa.-based In The Kitchen also relies on a POS system from Microsoft that is multi-user for more than one store. She chose Microsoft based on the recommendation of a former IT person as well as her experience with expanding to two stores.
"POS systems are imperative in our business due to piece count in excess of 5,000 SKUs. How else could you mange it?" Lapiana asked. She revealed that only a few people are allowed to get their hands into the inventory system. "It is delicate and must be managed on a daily basis. Mistakes come full circle if entered incorrectly."
In the Kitchen avoids mistakes by running restock and inventory management reports every day for restock purposes, as well as finding problems daily. The store also uses a scanner that is utilized for specific category or vendor inventories.
In the end, of course, it all comes down to Havlek's simple theory: Find what works and don't run out. "This remains our most compelling tip. Outages cost us all money. The correlate comes from a grocery store friend who said, 'evict non-paying tenants' -- cleaning house of what is not selling gives us room to display better what we are selling, and shelf space and money to keep things fresh."
Embrace Technology With Mobile Computers
So how does a retailer avoid losses and minimize out-of-stocks? According to the experts we spoke with, there are numerous ways to take better control of your inventory and decrease costs associated with its mismanagement.
First and foremost, you must embrace technology and do away with those cumbersome manual spreadsheets. Technological advances in wireless, handheld mobile computers are changing the landscape of retail -- providing retailers with more and better ways to service customers, improve their shopping experience, and streamline back-office functions. Not only are today's handheld models extremely powerful multi-task devices complete with color monitors and the ability to handle an ever-increasing array of store functions, they are also far lighter, faster, have better battery life, and run on open platforms that are easily integrated with other retail applications.
"What's really encouraging about the latest products is the cost," explained Riso. "The memory and the operation of the mobile computers have gone up and the prices have come way down. When I first started using mobile devices in supermarkets back in the 1970s, they were costing $2,000-$3,000. They didn't do a third of the stuff you can now do for less than $1,000. It's great because retailers of all sizes are now able to compete more effectively with larger retailers who have been using this type of technology for years."
What to Look For
According to Riso, when choosing a mobile device, retailers should look for a software partner that has implemented systems in the small-to-medium-sized business arena. "A majority of the inventory management providers will have references or the types of customers they've dealt with in the past. That can certainly be helpful," he began.
Another important factor in your selection of a mobile device: It should be user-friendly. "Anybody who can dial a telephone can probably use a mobile computer. If you're familiar with any kind of desktop or laptop computer, it's not a problem at all to use. For the most part, the units have a trigger that you pull, it scans the barcode, you enter several numbers -- maybe it's quantity or a price -- then you read the data that comes back up on the screen. It may be intimidating when you think about it upfront, but I've been involved with putting technology in stores for over 25 years, and it's always amazing to watch people 'get it,'" he concluded.
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