Red Line Inventory

One of the simplest forms of inventory management is called “Red Line Inventory.” This is an old version of what became known as Model Stock. In theory, it is so simple that no one could possibly mess it up. In all my years of management, with only two exceptions, I have never come across anyone who could not comprehend and use the Red Line or Model Stock inventory systems.

The idea of Red Line Inventory is that you draw a red line around the walls of your stock room. Cases of merchandise are stacked up along the walls. When the stock falls below the red line, it is time to reorder. When the new stock arrives, the old stock is moved, the new stock is placed at the bottom of the stack, and the older stock is piled on top of it. Once the correct reorder point is found, this system is virtually fool-proof.

In Model Stock it is basically the same. Instead of drawing a red line on a stock room wall, the store will start with an estimate of how many of each product is needed to begin an order cycle. In time, the store will be able to calculate how many of each product they need to keep in stock. The goal is to keep one and a half times the stock that would normally be sold in an order cycle. So, if the store sells twelve cans of green beans in an order period, then the store would keep eighteen cans in stock. Each time an order is placed, whatever it takes to fill that stock back up to the one and a half times level is ordered. If the store normally sells twelve cans of green beans in an order cycle, the person placing the order will look to see how many remain. If six cans of green beans remain, then the order will be for twelve cans.  When the new stock comes in, the old stock will be placed in front and/or on top of the new stock. This keeps the stock rotated. Sometimes it isn’t possible to keep exactly the proper amount on hand. In some cases, the store knows it only needs to keep eighteen in stock, but the product must be ordered by the case of 24. The store needs to decide at what point it should reorder this case. The trick is not to run out, but not to tie up too much in inventory and not to let merchandise stale out.

Take a look around your store. Is your inventory under control or is your inventory controlling you?

Disclaimer
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.
Please Visit McClendon Enterprises

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.

Disclaimer
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.
Please Visit McClendon Enterprises