BrainTrust Query: Six Tips to Drive Inventory Turnover
Through a special arrangement, presented here for discussion is a summary of a current article from the Hurlbut & Associates blog.
An inventory that’s turning quickly typically is lean and focused with exceptional assortments, a continuous flow of new merchandise and compelling presentations. All of that leads to customers who visit often, buy with an acute sense of urgency, and pay full retail.
Here are six ways to drive your inventory turnover:
Buy more frequently. When you buy less frequently — by front-loading your deliveries into the beginning of a season, for example — you extend the time between when the merchandise arrives and when you expect to sell it. The merchandise, and the store it’s in, tends to get stale as a result. If your best customers are in every four weeks or so, and you have merchandise an average of three months before you sell it, that’s at least two times those customers will see it before they purchase it, if they purchase it at all. Each time they come in and don’t buy it, the perceived value in their minds goes down.
Buy in smaller quantities. When you buy larger quantities of an item, customers instinctively sense that they don’t have to make an immediate decision when they see something they like. When they see less depth, they instinctively understand that they need to act quickly. Further, when you buy smaller quantities of an item, you’re left with dollars to bring in something new right behind it. That way, every time a customer visits, there are new things for them to consider.
Buy the best. In the world of good, better, and best, buy the best and leave the rest to somebody else. In a marketplace of me-too merchandise, seek out the exceptional.
Let presentations breathe. When everything is given its proper place on the stage, the stars can shine and all of the supporting actors can do their job. When that happens, customers can easily differentiate each item, find what they are looking for and discover that unexpected treasure. When presentations breathe, sales increase and the inventory turns much faster.
Cull out the sludge. Sludge is the merchandise that just sits there, on the bottom, doing nothing. In some cases the sludge can be pretty toxic, poisoning and de-valuing any other merchandise in its vicinity.
Don’t discount. Discounting cheapens the perceived value of everything in your store, whether on sale or not. It encourages shoppers to wait for the next sale, rather than buy today. In slowing your turn, it ages your inventory, leaving ever-larger swathes of inventory to clear at clearance time. And, because it takes ever-greater discounts to get the same response from customers, it takes ever-greater discounts for the retailer to get the same high.
Discussion Questions
Discussion Questions: What are some best practices for improving inventory turnover? Which suggestions would you add to those mentioned in the article?
The above tips are great overviews of how to improve inventory turn, but when managing a chain with hundreds or thousands of locations, it is also getting inventory right by location. That means giving some authority to the local management team to over/under weight as appropriate. The collective buy might be great, but is it in the right selling location?
One point I’d add is the question, what is the plan for transition to the next season or model? Do you pull it off the shelf and liquidate elsewhere? If you don’t discount and DO cull the sludge, what do you do with end-of-life product? Either plan to sell it out or move it.
It’s not always realistic to expect stores to follow all of Ted’s rules, but a lot of his guidance makes sense — especially buying more often and culling out the sludge. On the other hand, it’s often appropriate to discount (and to focus on “good” and “better”) if that makes sense for your store’s brand positioning. In fact, discounting can drive turnover if it’s done in a planned fashion.
I would also add that “buying in smaller quantities” makes sense for some stores, but not for retailers interested in key item intensification. Sometimes telling customers what you believe in — by buying it with depth and conviction — can drive sales, margin and turnover if you have also edited your overall assortments to weed out the “fluff.”
I would also add the need to cycle count and or inventory more frequently. Why? So as to not assume all is well. Sometimes we may need more merchandise and yet other times we may determine that some of the product is selling in one part of the country and not doing well elsewhere. Transferring the product can also lead to more full retail sales if we have better sales data and can verify by cycle counts. There is no such thing as too much data when it comes to managing the inventory.
What a retailer buys is an art, but how they buy is a science. There are formulas for buying that balance investment with holding and handling costs. Buying more frequently and in small quantity can be the same thing, but also can be wrong for food retailing. One retailer tried smaller quantity only to see warehouse handling costs increase and space utilization decrease. The far superior approach is to calculate the ideal purchase quantity considering all costs. Then buy when needed, not by fixed review. Too many buyers schedule to buy vendors by day of the week. This increases inventory by 30% on average and thus lowers turns.
Buying in smaller quantities and doing so more frequently are great techniques to increase inventory turn. However, they may come with higher COGS. One reason many companies buy in quantity is for the quantity discounts that come with the larger purchases. True, in some case you can negotiate discounts based on annual or even seasonal quantity purchases, but frequent deliveries may drive up costs reducing some of the savings.
On the notion of buying less (and Steve’s point is quite accurate — that comes at a cost — the loss of volume or tiered pricing advantages), I had a colleague who worked for a large mass merchandiser who shared the following with me:
A manufacturer of plastic clothes hangers was struggling to close out their year strong and were in desperate need of a big order. They approached the mass merchandiser and offered an extremely low price for a few rail car loads of hangers. However, the caveat was that the retailer had to accept the entire shipment at one time.
The Buyer/Cat Manager responsible for that category did some math and realized that at the huge savings on the “buy” — the retailer could make huge profit on the “sell.” So, the deal was struck.
What the Buyer/Cat Mgr had neglected to include was the cost of storing the product. A lack of warehouse space available to store the product until it could be sold forced the retailer to rent additional space JUST FOR HANGERS. Additionally, owing to how infrequently it is purchased (it is not salty snacks or beverages), the movement on them was not terrific.
Ultimately, not only did the “savings” get burned up in the carrying costs, but the retailer wound up having to discount them far below costs just to move them out and recoup anything on the buy.
Surely, an example of poor inventory management!
Some of the suggestions in the article aren’t appropriate for all retail formats. “Buy the best” and “Don’t discount” are nice positions to brag about, however, they don’t get the stock moving in mass merchandise/discounter environments.
In terms of “calling out the sludge,” an initial deep discount is typically the best bet. Remember, your first discount is usually your best discount. Swallow your pride and get the stock moving.
For higher-end product, I agree that discounting drives shoppers to seek those discounted items first, and it cheapens the full-price lines. Even in a supermarket, I do not recommend reducing perishable products. It only takes away sales from your fresh products.
I’d add a significant one: Advertise in smart ways that drive retail velocity. Because, in reality, demand is the biggest factor in driving inventory turn.
You will need to be careful. Far too many agencies would want to deliver only brand advertising to you. This is interesting work — but it’s only valuable over a 5-year window.
Smart, product oriented advertising campaigns can build your brand while also driving very immediate product demand.