The Art And Science Of Good Inventory Investment
By Jules Steinberg -- TWICE, 5/13/2002
Who can deny that there is nothing more important in a retailer's business toolbox than the capital (cash or credit) he has invested in goods for resale to the public?
It is surprising, therefore, that, comparatively speaking, so little attention is paid to this phase of the business until the merchant runs out of top-selling merchandise, or the accounts payable section of the balance sheet exceeds the working capital minus the inventory.
Surely, this can't be part of a campaign by suppliers to keep merchants in the dark when it comes to calculating just how much is enough of an investment in inventory. Then again, it could be that number crunching is too dull an activity to engage in when the trade is full of a record number of new product innovations. Still, more dealers have gone out of business because they purchased too much inventory than because they paid too much for it.
It all begins with the day a supplier's rep arrives at the store or the hotel room with the latest in new product offerings from his firm. Whether it is something the competition has been selling, or an item truly new, there is no way a retailer's profit performance, or the number of units the public will buy, can be guaranteed.
And that is as it should be! Any guarantee of the number of units the public will purchase takes the necessity for imagination and creative thinking out of the retail business. And it is precisely those abilities that make the difference between successes and failures in this business.
At best, it is still guesswork, but the CEOs of profitable dealerships base their decisions on the size of their markets. They know the saturation level of the same or similar products, as well as the average life of those items. Dividing the number of new units the market will probably buy by the number of outlets selling the same item in the area gives an alert observer an idea of the minimum sales the store might expect.
Also, for safety's sake, the dealership's working capital position cannot be ignored. Taking that, together with terms of sale from the wholesale supplier, and estimates of the amount a customer is prepared to pay, paves the way for calculating how the retailer will be paid before his accounts payable come due.
If this appears to be time consuming, consider that the future of the retail organization is at stake. The process of physically delivering merchandise to the consumer is something the supplier can do as well as any retailer. It's in the area of anticipating the public's demand that retailers can teach their suppliers a lesson or two.
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