How to Manage Retail Inventory

Retail Inventory Management

Managing Inventory in Retailing - Retail Truths by Chip Averwater

Truth #101:  Inventory is marketing too.

An academic once observed (profoundly, apparently), “Inventory is the price a business pays for lack of information.” In other words, if we knew exactly what we were going to sell and when, we would stock only those products and only at the precise times they were needed. Shelves wouldn’t be needed as they’d be empty.

Perhaps that’s true in a manufacturing or warehouse business, but it doesn’t work in retail inventory management.

The breadth and depth of a store’s inventory makes a strong marketing statement to retail customers. Their impression of it on one visit determines whether they’ll return later for a different need. In addition some customers won’t make a purchase until they’ve seen their options—and they shop where they believe those options are available.

Success in retail depends on having inventory. Inventory capital should be invested wisely—but wisely doesn’t mean minimizing inventory.

A store is not a store without inventory.

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Truth #102: We can’t sell what we don’t have.

The basic function of retail inventory management is anticipating what products customers will want and making them conveniently available when customers are ready to buy. If we miss at this, nothing else can make up—we’re simply out of the game.

Since we can’t precisely predict how many of which items will sell and when, we make our best guesses (aided hopefully by historical data and trends). When we guess low, we miss sales; when we guess high, we waste investment that could have been put into other merchandise that would sell.

Inventory Management - Retail Truths Cover

Truth #104: No inventory is ever enough.

Normal people dream about tropical islands and sexy partners. Retailers dream about the stores we could build, the selections we could offer, the customers we could satisfy, the sales we could achieve—if only we could afford more inventory. Like the rabbit at the greyhound track, the investment we “need” is always just beyond our reach.

Unfortunately, as we tell our sadly underprivileged kids, we have to learn to live within our means. That means choosing carefully (and painfully) the items that offer our companies the best return and the best fit with our marketing strategy.

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Truth #105: Love your products, but only for their sales.

We should get to know our products well, use them whenever we can, recognize and appreciate their benefits, believe in them, and talk them up. But we should love them only as merchandise.

Many of us were attracted to our areas of retail by the products. Sometimes they were part of a hobby that has long fascinated us or a field we’ve accumulated expertise in. Knowledge and experience create affinity.

But our personal attractions should not influence our retail inventory managemeny. We’re stocking a store, not a trophy case or museum.

Best is seldom best seller. Our customers’ uses are often not the same as ours, and customers are rarely as infatuated with the product as we are.

Retail Inventory Management, Retail Truths

Truth #107: “Maximize turnover” is foolish advice.

Many consultants chant the mantra of “maximize turnover,” apparently unaware of how silly such a recommendation is.

If we want to increase our turnover, we can simply eliminate the 50 percent of our inventory with the lowest turnover. If we want it even higher, we can do it again. We can make our turnover almost anything we want it to be. What’s left of our sales might no longer support our business, but our ratios will be the envy of the industry.

Turnover is not the goal—profit is. We should invest every dollar we have reasonable access to in the inventory that will offer us the best (net) profit. What that does to our turnover ratio is irrelevant.

(This doesn’t mean turnover ratios are totally useless in retail inventory management—only that they’re grossly misused and a major distraction. Low turnover sometimes indicates dead stock, and high turnover sometimes indicates too little stock. (However, most retailers suffer from a blend of the two that renders their overall turnover ratios meaningless.))

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Truth #108: Inventory expands to fill all space.

There’s never enough space for the merchandise we want to keep. Whatever we have, there’s always more we could sell if only we had a place to put it.

When a hole appears on a sales floor or shelf, it fills quickly, although rarely with the correct items. Attractive displays turn into stacks and piles. Spacious aisles become narrow paths, shelves and bins are loaded far beyond capacity, categories blur and overlap, and few products get the displays they deserve.

When new merchandise arrives, finding a place for it is a battle. Docks turn into permanent storage, and offices, hallways, bathrooms, and elevators become fair game.

Retail Inventory Management, from Retail Truths

Truth #109: Enough space isn’t the solution, and sometimes is the problem.

Our first reaction to a crowded store is that we need more room. Such logic recalls Dizzy Dean’s suggestion of moving first base back five feet to avoid close calls. We’d just fill the new area with a bigger jumble of merchandise and enlarge the mess. (Space limitations are the only inventory controls some of us have.)

An abundance of space indulges our tendencies to disorganization. We accumulate merchandise we don’t need, become comfortable in our dead stock, and can’t find products we might otherwise sell.

What we need isn’t more space, but purchase planning, inventory management, and discipline. Ideally we should analyze which products provide the best net profit, allocate our space accordingly, quickly move out the dead and less desirable pieces, and stick like Prussian soldiers to the battle plan.

Efficient retail inventory management is seldom fun but always rewarding.

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