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Knowledge of your inventory can make or break your business.
This is one of the most feared questions when making the sale: “Do we have that in stock?” As retailers, I am reasonably sure you have had to walk or reschedule a much-needed sale at one time or another because we thought we had something only to find out it wasn’t there when we needed it most. Hopefully, you’ve found a system to mitigate this issue. If you’re still working through it, allow me to offer some ideas that might get you on your way to a healthy understanding of your inventory.
What’s in the barn?
Knowing what you have available to sell is paramount. Your customer expectation for product availability was made when you sold products and services. To find out post-sale that your product isn’t actually available leaves you in a compromised position. Now you must come up with a reasonable explanation. This situation happens all too frequently and, for the most part, it can be completely avoided.
Count it, then count it again
Counting your inventory is the first step to knowing what you have in stock. If you haven’t done so, now is the time to physically count your stock. Make sure you have a way to audit the results—especially for smaller items like kits, harnesses or adaptors.
How long will your stock last?
To calculate how long your stock will last, you must know your rate of sale for each item. There are a few ways to accomplish this task. The first is look at the past year of sales for each item and divide it by 52 weeks. This method is simple, but won’t account for seasonality. Should you desire to get a bit more accurate, do the same by quarter or by month. If you are using a point-of-sale software that tracks what you sell, this task should be fairly simple. Regardless of your method, once completed you will have a calculated rate of sale that can be used for deciding how much of each product you keep in the barn. Next, let’s review ways to set proper inventory levels to keep important stock on the shelf.
Setting levels
Knowing how many weeks of inventory to keep on hand can be a challenge. Knowing your rate of sale is an important step. You also need to have a good understanding of your supply-chain. You will have to account for lead-time, order quantity discounts as well as freight-cost reductions usually acquired from larger orders. Another important factor is availability. You should account for temporary product shortages. To deal with product shortage, you should assign an alternate product that could temporarily replace one that may be out of stock. This will help you manage your inventory levels going forward and put you in a better position to have what your customer needs when they need it. The number of weeks on hand is a calculation you will need to determine based on your business needs. Your purchasing power should also be considered.
Creating and managing your open to buy
The open to buy is a number set by you based on your ability to purchase inventory over a defined period. You can calculate it within your comfort zone by reviewing the rate of sales over a period and determining a dollar value of inventory required to achieve it. This doesn’t account for fluctuations and growth, but it provides an initial guideline. Next you should review your available cash and credit line to make sure you can afford to place the orders. Remember, just because you have favorable terms doesn’t mean you should order more. Each month a bill will be due and you need to ensure you have the revenue to pay it. You should also look at seasonality to account for higher and lower sales months, to keep you from having too much or little. Another consideration is separating it by category. Once the total is identified, you should review each category and set a number for each. Once completed, manage your inventory. Do regular counts. These are sometimes referred to as cycle counts. Assign someone to spot check troublesome categories to make sure you’re staying on top of your numbers.
Aging inventory
Looking for an easy way to increase your open to buy? Review your aging inventory. If it’s collecting dust, it’s probably costing you money. Have a sale, move it to eBay (brand permitting), or write it off. This will provide more spendable cash to support your inventory goals. And it cleans up the stockroom, as well.
Smooth sailing ahead
Regardless of how you complete the task, knowing your inventory and managing it better will lead to an improved experience for you, your business and your customer.
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