A Better Way to Buy Inventory

One of the toughest decisions retailers are constantly called upon to make is how much inventory to buy.

Not that they don't have a great deal of advice. Trade associations and consultants talk about the effects of inventory on the balance sheet of the business. Suppliers point out the operating statement advantages of never permitting a customer to walk because one is out of stock. Bankers and other creditors talk fondly of maximizing inventory turns.

If any one of these advisers were consistently correct, operating a retail establishment would be so simple that you wouldn't have enough fingers and toes to count the competitors. But it is in inventory management that we separate the men from the boys — or women from the girls — in this business.

No matter how big or small the operation might be, there's a question that every entrepreneur must answer before signing that purchase order. Namely, how many of this stock keeping unit (SKU) will I sell at a profit before my supplier's next truck rolls around to my door?

With the exception of those inventory pieces purchased merely for stepping the customers up to more profitable models, this is the deciding factor in inventory buying. And I truly wish that I had an answer other than "gut feeling" to that one. Perhaps, though, the following can assist in determining that stock turnover rate.

If, for example, a merchant estimates that he will sell a dozen pieces of an SKU within the week or so it might take for his supplier to deliver a re-order, a two-week supply, or 24 pieces should keep this segment of the business running profitably. Of course, one must take into account the effects of quantity discount pricing. Will larger quantity buys reduce our per unit cost of goods sold, enabling us to lower our retail selling price and thereby increasing the number of such sales? And perhaps more important, will the total gross profit from those increased sales still make the venture worthwhile?

As we indicated earlier, there are, unfortunately, no pat answers to such questions. The closest we can come to one is to first decide on the number of sales lost because of price. These, added to the original calculation of sales actually made, should result in a new figure of stock turnover rate.

There are other things a retailer can also do to assure more accurate inventory buying, such as taking into account changes in the demographics of his market. Will the shift in the number of families in the area affect total demand for the product? How will changes in the item's design influence the open-to-buy of his customers, and what, if anything, will be the affect of competitors handling the same line?

Still, no matter how much attention one pays to potential demand for a product, in the final analysis it is still a gamble for the dealer. The best he can do is minimize the risk. This is the role that daily sales analysis plays in the merchant's merchandising plans. Sales recorded accurately by model number, together with an exit survey of prospects who failed to make a purchase are the best tools for assuring a good return on an inventory investment.