PERSPECTIVES

From The Co-Founders

Tips, Tactics & Strategic Insights and Commentary
from The ROI Co-Founders, Pat Johnson and Dick Outcalt
Outcalt & Johnson: Retail Strategists LLC; Retail Turnaround Experts

Vital Formula for Every Retailer

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2 MIN READ |
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by ROI Co-Founders |
November 29, 2021 |
Financial Strength, Inventory Management |

The #1 responsibility of every retailer is to manage and control the inventory. By doing that, you are managing margin, profit, cash flow...also known as success!

Managing inventory demands a merger of art – the selection of merchandise – and science – the quantity of merchandise at any given time.

And here is a formula that makes the science part accessible for every retailer. All you need is a pencil to do this (remember those?) And it can and should be embraced by every retailer!

Christmas is less than four weeks away. The march toward your 12/31 targeted ending inventory level has begun.

This is the moment an “enforcer” steps up. No, this time we’re not referring to sales or customer service or better displays. We are instead referring to your #1 responsibility!

Ahh yes. Inventory at 12/31 is a vital, critical touchstone. It prepares your store for the months ahead. You must have appropriate inventory levels and mix, plus the cash to pay for it!

And here's a quick and easy – and free! – way to know what that target ending inventory number should be. By department. It's all based on your turnover rate for each department. Here's how it works.

For each department:

Convert the turnover rate into months of supply.
For example, 4 turns divided into 12 months in a year equals 3 "months of supply of inventory @retail", what we call "one turn's worth."
Add up "one turn's worth" of sales.
For example, at 4 turns: add up your expected sales volume for the up-coming 3 months: January plus February plus March for that department.

That represents the "one turn's worth" of inventory @retail at 4 turns that you should have on hand on December 31. (And no more than that!)
Do this for each department.
Now you have a targeted inventory level @retail – "one turn's worth" – for December 31 for each department.

Now, total it up.
Compare that target with your inventory on hand @retail right now, plus all on-orders, minus realistic sales.

Close counts, but get an estimate now.

And now, the crucial test:
Are you on track to hit the year-end inventory target?

If not, what adjustments do you need to make? Like much sharper markdowns? Or canceling or delaying orders? Or...??

Nice to have that estimate now, right?

A worthy enforcer (ahem, that would be YOU!) will monitor this process two/three times a week through December.

Customers are available! But time is running out. Tick tock. Tick tock. Do not miss out on this golden opportunity!

As the old adage goes, "If you don't know where you're going, any road will get you there."

Having a targeted ending inventory is the answer for "where are you going?" And you will be much happier when you get there!