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Monday, February 27, 2012

Inventory Control

Today we will talk about Inventory Control. For a retail establishment, inventory is a key to success. The old saying is "You can't sell out of an empty wagon." Another way to say that is "You can't sell it if you don't have it."  That is more true today in the age of instant gratification than it was back in the days of the general store and the Sears catalog

First, a quick story.

The Inventory
Jerry Clower (Clower, 1980), a Southern comedian, tells a story of a husband and wife who owned a mercantile. Through the years, they had managed to put together enough money to send their son to Mississippi State University to pursue an accounting degree. The son managed to graduate with honors and returned home to help run the family business.

The first Saturday the son was back the father walked to the store and noticed a sign on the front door that said “Closed for Inventory.” The father walked inside and asked the son what was the meaning of this. The son replied, “We have to close so we can get an accurate inventory so we can figure our profit.” The father explained. “Son, years ago your mother and I saved our butter and egg money so we could buy a bolt of cloth. We sold cloth off that bolt and used the money to buy more merchandise for the store. If you go to the back room, way up high on a shelf in the back corner you will find what is left of that bolt of cloth with a little bit of cloth left on it. All the rest is profit. Now get the store open.”

 The father never studied anthropology, accounting, autoethnographics, or any other business concept. But he knew that his customers needed for him to be open and he knew that he could not make a profit if the store was not open. These are business basics. What the son needed to learn was that unless the basics are taken care of all the theory in the world is useless and no profit will be made.

Now, you must ask yourself, "Was the son wrong or was the father wrong?" The answer is that both of them were right. It is important to keep the store open when people need it the most, but it is also important to get an accurate inventory. Sometimes stores have to perform a "Hot Inventory". That is, they must inventory during normal business hours and hope for the best. This is not the most accurate inventory, but is sometimes the most practical.

A good rule of thumb is to keep one and one half times what you would normally sell in an order cycle. For example; if the store normally receives their orders every week, they need to keep one and one-half weeks’ worth of inventory. If the store receives a shipment every two weeks, the store needs to keep three weeks’ worth of inventory.  The store should shoot for no more or no less than this number, but that is difficult to do.

Each item on the shelf has to pay its rent. If the item is not selling, the store is losing money on that item. In most cases the store is paying property tax on its inventory. In addition to that, the money that is tied up in inventory that is not selling could be used to purchase inventory that will sell. So, if the store is not selling completely through the inventory it has on an item at least once a month, then the store needs to take a closer look at that item. Can the store reduce the quantity of that item it keeps in stock? If so, they should do so. Should the item be completely culled from the line up? The manager, or other employee whose job it is to set inventory levels, needs to assess each item and decide if they should reduce the quantity of the item carried or if they should remove it from the store's model stock all together. On the other hand, if a store runs out of particular items early in the order cycle each time, then the level of stock for that item should be increased.

Each item in a store's inventory eats a part of the cash available for store operations. Therefore, each item has to provide a good return on investment (ROI), which we will talk about soon.

The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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