So how much inventory is enough? What is the ultimate mix of product you should carry in order to maximize the sales your business can make? Getting this right is a balancing act for most stores and can absorb a huge amount of your business investment and time.
The ideal level, in my opinion, is the amount of inventory required to meet your current anticipated sales. What time frame this represents will depend on how quickly you can reorder product back in; obviously the quicker you can restock, the less product you need to carry.
Inventory is something of a balancing act - too much and you fail to earn a satisfactory return on your investment - too little and customers leave feeling your selection is not sufficient. Ultimately, inventory should be viewed from the customer’s perspective. How many choices does the customer need to see in order to make a buying decision?
One of the best tools we know of for planning your inventory is an Open To Buy system (OTB). This is the ideal planning tool for buying as it takes into consideration how much inventory you have now, how much you will be selling and what you will need to spend to replenish back to the appropriate levels.
In its simplest form, an OTB system takes into consideration your expected sales and factors in your Gross Margin % and markdowns. This will provide you with how much inventory will be moved during the selected period. The system will then subtract this from your beginning inventory and will compare the expected ending inventory with your planned ending inventory.
If your expected ending inventory is less than the plan, then the difference is the amount of purchase dollars available to buy more inventory. On the other hand, if your OTB is negative (expected inventory greater than plan) then there are no dollars available to buy more product. In fact, action may have to be taken to move more inventory (markdowns, vendor returns, etc.)
Managing an open to buy system can be tricky as it is a constantly moving challenge, and for a store with limited trading history it can be difficult to determine anticipated sales.
So, what is the ideal inventory level? As we said earlier some product lines can be restocked quicker and hence less product is required, but as a rough rule of thumb we suggest 1.5 - 2 stock turns per year on average as being the ideal. You need room to grow, but don’t need to be in a situation where your product lines are becoming a millstone around your neck. This may be only 1 stockturn for higher priced diamond product but be 3 times for cheaper silver lines - again the product line will dictate the criteria for this.
This means that if you plan to have sales of $50K (retail$) in a 3 month period, and are aiming for a stockturn of 2, then you will require between $75-$100K (retail$) of inventory on-hand at the beginning of the period. Seasonal adjustments are obviously required for December and other busy periods.
Once you start using an OTB system you can get much more specific in your inventory management by using the OTB at the category or department level. This way the OTB not only tells you whether you have enough inventory, but also if you have the right mix.
Getting your inventory levels right is one of the most important decisions you can make for your store. If you need help with setting up an Open to Buy system for your business our experienced staff are available to help.