Inventory management can be accomplished with a range of methods, from simple tick sheets to computerized tracking and demand forecasting systems. The easiest technique is to look at your inventory to see which items have been best sellers and which have not sold as quickly. If your inventory only contains a few items, this method works well. Once your inventory grows to dozens or hundreds of stock keeping units (SKUs) it will be necessary to implement a simple count using a clipboard, a pencil and tick marks. When your inventory expands beyond the level where items can be counted easily, one widely used solution is to rotate counts by department. For example, count men’s shoes this week, count women’s shoes next week, etc. Another way to manage inventory at this level is by tagging each item. When an item sells, pull the tag and place it in a secure spot. At the end of the week, look at each of the tags of the SKUs sold, and adjust your inventory records accordingly.
When your inventory management problem outgrows manual methods, consider using either one of the free or cheap software inventory management programs available online, or the inventory management functions of accounting software packages. Another alternative is to use one of the smart phone applications available for inventory management. These applications typically read bar codes and update a simple database. If your inventory has a large number of SKUs, a dedicated bar code reader will be a worthwhile investment. These read barcodes much faster than phones, which use the camera to image the barcode and then parse it. If you are using RFID, you will need a dedicated device to read them efficiently.
A key concept for retailers is the idea of Gross Margin Return on Investment (GMROI). GMROI is gross margin multiplied by inventory turnover. If you buy a product for $2 and sell it for $4, your gross margin is 50% (cost/revenue). If you buy the product 4 times per year, your inventory turnover is 4. So, the GMROI for this product is (.50 x 4, or 2). GMROI says that for every $1 you invest in this product, you will get $2 return on your investment. Using a spreadsheet and the past year’s invoices from your vendors, you can compute GMROI. Prorate the overlapping months (a product you order every five months has a turnover of 2.4 times). Once you have identified the margin non-contributors, either discontinue them or mark them down and promote them out of your inventory. This will convert unproductive inventory into cash, which may be reinvested into profitable lines.
Alternately, remember that you have two control levers to affect GMROI, margin and turnover. You can increase margins by raising prices, or you can feature them in order to try to increase the rate at which they turn. Another way to increase turns is to decrease the number you have on hand to a bare minimum. This will need to be offset against any discounts you get from bulk order quantities. The trick to managing inventory is, of course, having only the minimum amount on hand you need to avoid stockouts. Managing this is one thing that software can help you with, but it will still be an imperfect solution for most retailers, and stockouts will continue to occur, but less often.
Understanding your inventory levels is worth paying close attention to as you bring your quantities in line and understand the contribution that each item or group makes. Here, Pareto’s Law (80% of profit comes from 20% of the inventory) will help you after you’ve identified the 20% of your inventory stock that warrants your closest attention.
As you evaluate your inventory based on GMROI, keep in mind that like all simple tools there are limitations. It automatically favors high turnover items, but there are some high-margin, low-turnover items that customers expect their retailers to carry. Building a business based solely on high-turnover items puts many retailers in direct price competition. It may be preferable to consider a mix of high-turn and high-margin items as you adjust your inventory to maximize cash utilization and profit.
