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MANAGING INVENTORY AND MERCHANDISE
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Inventory is the stock in your store which you hope to sell for a profit to your customers.
It is important to have the right level of inventory in your store, if you have too much
inventory then your money is not working as hard as it should and inventory starts depreciating
as soon as you open cartons and put them on the shelf. On the other hand if you have too little
inventory you will fall short of your customer demands and you will lose business. Having the
right level of inventory stems from knowing the needs and habits of your customers, grouping
your store inventory into departments will help you in managing the level of inventory needed
and in figuring out your customer habits.
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Grouping the merchandise
Grouping the merchandise in a store is very important for the
success of a retail business for the following reasons:
- Lets customers find items easily
- Allows you to manage your merchandise
more effectively
- Allows better tracking of sales at a
department or classification level
- You learn about your customers habits
A typical grouping structure might look something like that shown below:
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| When you do groupings of the merchandise in your store
it is important to consider your customer needs first and the best form of classification
that can best serve your customers and make their shopping experience more enjoyable and
convenient. You will need to study their habits very carefully and make changes to the
grouping based on your new findings.
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Four Key Inventory Ratios
1) Turnover.
Turnover is a measure of how fast you are moving items through the door to the customers,
the more items you move the higher your turn over ratio will be therefore the heather your
business will be and the better you cash flow. A high turnover ratio will also mean that
you have less money invested in inventory at any one time and therefore lowers your risks.
Your turnover ratio will be directly affected by which product strategy you choose:
- High price, high margin (high turnover
ratio)
- Low price, low margin (low turnover
ratio)
You can operate your business on any of these two strategies or may be based on a mix of these
two strategies, however keep in mind that you need to cover your overheads and profits at the end of the day.
Turnover = Net Sales / Average Inventory
= 350,000 /75,000
= 4.67
A good turnover ratio will be 3 and above.
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2) Stock-to-Sales Ratio.
This a second way to measure how your inventory level is doing against the volume of sales.
Stock to Sales Ratio = Inventory at start of month at selling price / Total sales for the month
For example, if during the month of March your sales were $ 100,000 and the inventory at the beginning of
March was $ 300,000 in selling price, the Stock-to-Sales-Ratio would be:
300,000 / 100,000 = 3/1
This means it would take 3 months to sell the entire inventory you have at hand, on average the inventory
would set for 3 month on the shelf.
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3) Gross Margin Return on Inventory Investments (GMROII)
This ratio is a measure of your return on every dollar you spend on inventory.
When buying inventory you are actually investing money and you have to make sure that you are getting
a good return on your investment.
GMROII = Gross Margins / Average inventory at Cost
Gross margin is defined as the amount of money somebody pays for the product minus the amount of money the product costs.
For example if the cost of your inventory is $150,000 and your gross margins are $ 450,000, then GMROII ratio would be:-
450,000 / 150,000 = 3
This number means you are getting 3 dollars for every 1 dollar you spend on the inventory.
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| 4) Sales per Square Foot
This ratio is a measure of the utilization efficiency of the selling area of the retail store and this will enable you to compare yourself to other
stores and see how efficient your use of the selling area is. Selling area does not include the restrooms, windows, stock room and area behind the
counter, it is only the actual selling area.
Sales per Square Foot = Net Annual Sales / Selling Area in square feet
A good store should have at least $200 per square foot or above, any less you are either using too much space or do not have enough sales.
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| Merchandise Markdowns
If you are running a retail store you will sometimes be faced with inventory sitting on your shelf for too long,
this could be due to a number of reasons:
- Ordered to much of particular item.
- Overpaid vendors for items which made
your items overpriced.
- Misjudge the needs of you customers.
- Items are out season.
- Poor display items.
- Damaged items.
- Competition is forcing you to take
markdowns.
In order to help move this unwanted inventory through the door you need to have marked down items, but remember when marking
down item to ask your self, how did I end up in this situation and how can I overcome it the future.
There are two types of mark downs:
- Permanent, reduce the value of an item
permanently.
- Promotional, reduce the value for a
specific period of time, for example, weekend sales.
When doing promotional markdowns it is good to follow a seasonal pattern so that your customers can predict these markdowns.
Having a seasonal pattern will build credibility with your customers, because it is very annoying for a customer to find out an item he bought
for full price yesterday is on sale for half price today. Avoid gimmicky sales and the up-and-downs of prices as it puts most customers off.
When you do markdowns, it is a good idea to move items to a special rack or an area near the back of the store, otherwise you will be
contaminating your regular selection, customers interested in a discount will be happy to walk to the back.
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