If you stopped buying today, how long would your current inventory last you? This is a variation of the old question, if you stopped working how long would your money last, but in this case we’re honing in on the amount of surplus product most store owners are carrying.
Why do this exercise? Because, as we repeatedly tell our clients and anyone else who listens, most stores have a surplus of product sitting around that simply doesn’t perform.
Let’s look at the stock turn of the typical US store. On average most stores carry around 1 stock turn of product per year, that is they have enough inventory to sell everything once during the 12 months relative to their sales figure. A store with $1M in sales and using keystone as their mark up will have exactly $500,000 of inventory.
Let’s break that down further however. Of that $500K of inventory around $50,000 represents fast selling product that averages around 4-10 stock turns per annum. This is the productive stock that contributes the majority of the sales figures for the business.
That leaves $450,000 of inventory that is turning over at a rate of 0.50 or less. Most of this product is taking around 2 years or longer on average before it walks out the door.
So let me ask you this - would you be willing to invest $450,000 in an investment which only has a 20% chance of recovering its cost or making money, and would be unlikely to return you this money in the first 12 months? If your broker said this to you you’d think he was crazy, yet when it comes to controlling inventory many store owners will retain product which is clearly going nowhere for an indefinite period of time.
It’s not an uncommon problem with investments generally. Reluctant to admit they’ve got it wrong, many stock pickers hang on to losing investments hoping that things will come right and believing that if they hang in there long enough the investment will turn positive for them.
That may even work sometimes with the stock market where a rising tide can lift even the leakiest of boats, however jewelry is different. If 200 people have viewed your item and aren’t interested in buying it, how many more do you need to confirm it isn’t going to be a good seller? How long do you want to wait before realizing a return on your investment?
All investments must have an evaluation period, a point in time where you assess if the investment has been worthwhile and you should continue with it or make the decision its time to jump ship.
Your inventory is no different. You must regularly assess it to see whether or not it is worth the cost of retention. The first period in which this should be done is the 2 month mark. For lower priced items this is the first litmus test of performance. If it hasn’t sold then do you discuss it with staff, relocate its position or consider amending its price? Beyond this is the 6 month period. For much of your product it’s D-Day. If it hasn’t moved by now the chances of it performing are slim. You should certainly be reconsidering your pricing strategy at this stage, there is little point in persisting with a higher margin when the demand isn’t there.
Working on your report by vendor at this stage is a good idea. If you can determine which product has become old on an item by item basis you may be able to discuss this with the representative when they next come in. They may be able to suggest a solution or look to exchange the product if you are sourcing new items with them.
Re-evaluate your inventory investment on a regular basis. Don’t just leave it to chance – a planned process of controlling aging inventory will improve cash flow and ultimately your business sales.