MONEY MATTERS: INVENTORY CONTROL
The Key to Improving Cashflow? Inventory Management.
by Tom Shay
Whether you’re a vendor who sells online or a spa with a retail space, all forms of retailing must confront the challenge of inventory control.
And while internet retailing has changed the way all of retailing works, far too many retailers think that dealing with inventory must be done the same way it has for years. The lone change that has occurred has been the advent of the point of sale (POS) system, which allows a machine to do what the buyer used to do. This only works, though, if the parameters are properly established for the reordering of merchandise and the buyer knows how to read the information the point of sale system provides.
The reality, though, is that the proper and most profitable way of dealing with inventory has been around for decades, but many retailers do not utilize the correct methodology.
Have you ever taken a look at your checking account and found it to have less money than you need to cover bills over the coming month? If so, have
you ever then walked over to the merchandise display in your spa and had this conversation with yourself?
“If I had not ordered as much of these three products, or not brought in this new line, or had let these items run out, that money would be in the checking account.”
Perhaps the conversation went the other way. You think about your trip to the ISPA Conference & Expo last year and the conservative approach you took to ordering. Perhaps there were products you decided to order much less of than you thought you needed because of cash concerns.
All of these are legitimate concerns you can have in your spa. While budgeting and cashflow planning are important components in resolving these worries, a proper inventory control system is the first tool that you should use.
Some retailers use a concept of “stock replenishment” to order. you take the dollar amount of sales in any category, look at the margin (for example, 55 percent), multiply the amount of sales by 55 percent and that’s how much money you spend to replenish what you sold. It’s a great concept, but with one sizable fallacy: stock replenishment makes the incorrect assumption that you need all the inventory sold to be replaced.
The error? no consideration for the four seasons of the year. if you are a spa in Florida, the big tourist and seasonal resident season ends in the early spring and the family tourist season does not start for several months.
You need a method, called “open to buy,” that does consider seasonality. While the open to buy method takes a bit more effort, I anticipate you will
quickly see that this is the correct, best and most accurate method for managing inventory for a spa.
To get started, consider a moisturizer. Are you buying for the sales you anticipate in the next month, or the next six months? Not all vendors
are the same. They have minimum quantities, weights or dollar amounts that need to be considered.
How long does it take for the inventory to arrive? Can you reorder this moisturizer, or will this be a onetime
order for the season? Is this a moisturizer that you stock year-round, or one that you want to phase out after its primary selling season? Some spas want to start a new season by looking at all the options, including new products.
Once these questions are answered, you get a feel for which months you are now ordering. It could be for the next month, one month six months from now, or for the next six months.
Once you’ve estimated how much inventory to order, you’ll make a similar estimate of what your sales will be. This will tell you how much of this moisturizer you are going to need to order to produce these sales over the time span you’ve decided to order for.
Got all this information put together? Let’s take a moment to answer a critical question. Your spa will need to have multiple open to buy categories. how many? I will leave that for you to determine, but I will give some guidelines.
Most divide their retail into departments, lines or categories. Similar products are in each category. I suggest that as you look at your spa, no category should comprise more than ten percent or less than three percent of your overall product sales. Go smaller than this suggestion and you could find yourself with a lot of open to buys. (The record I’ve seen was 287 categories! Think of how much time you would spend at the desk managing all those categories.)
Using our guidelines, your spa should have somewhere between 10 and 34 open to buy categories to manage your inventory. For example, your categories may be cleansers, toners, moisturizers, serums, masks, scrubs, shower gels, soaps and moisturizers.
You’ve created your categories. You know the timeframe you’re ordering for and your sales goals for that timeframe; therefore, you know how much to order. Now, you can begin to put together the open to buy.
There is one last item to be considered: if you are willing to say, “we are sold out for the season.”
Always having enough inventory on hand is a very costly proposition. for example, if a Florida spa knows they sell few serums to summer tourists, they would not likely fully restock, or reorder at all, serums in April.
While customers may then go somewhere else to get their serum, you have to ask yourself: are these sales worth reordering that much merchandise? Other spas are going to be discounting their excess merchandise at the end of a season. it is challenging to try to sell at full margin when someone has already began discounting to get rid of inventory.
Instead, what if you were selling at full margin and then simply ran out? Granted, you would miss some sales, but how many of those sales would be at full margin and how many would be at a discount? When discounting any low-margin items, you can quickly find yourself selling items at below cost. This means you are eating away the margin you earned on the items you did sell at full price.
And if you decide to reorder a dozen bottles of serum and sell one, how much is it costing you to have the remaining eleven bottles sit until sales pick up again next fall? The money spent on those unsold serums could be better allocated elsewhere.
There are a couple of questions that probably still remain. How often should you calculate open to buy? While monthly is the traditional time frame, you may find that this is too overwhelming and want to use bi-monthly or quarterly.
How should you calculate all of this? you can get by with something as simple as a columnar pad, pencil and calculator. If you are comfortable
working on your computer, using Microsoft Excel is ideal. This article is just a primer; there is more detailed information and an “open to buy” calculator at www.profitsplus.org that you can use to get started. if you attended my session on inventory control last year in Phoenix, this is the same calculator that was used in that class.
Consider that 54 percent of businesses that fail do so with a financial statement that shows they are making a profit. Their problem is that they have no cash available to pay bills. By managing your inventory using the open to buy method, you’ll have more cash on hand and less tied up on your shelves.
Tom Shay is a small business inventory expert and certified speaking professional (CSP) based in St. Petersburg, Florida. Tom spoke at the 2018 ISPA Conference & Expo.