The ongoing challenge for every independent specialty retailer is the constant need to increase sales, control expenses and improve profitability. Because of these key business factors it is more important than ever for today’s retailer to effectively manage their largest investment: inventory.
Maximizing the return on inventory investment is the key to profitability in retailing. Profitability is achieved by optimizing stock turn rates by merchandise classification to assure that the inventory dollars are moved from slower turning under-performing classes to existing or new classes which represent profitable sales opportunities. Merchandise, which is ordered months before delivery must be timed to meet sales demand and optimize cash flow. Without an effective merchandise plan in place, managing these factors is hit or miss.
Tom Fasshauer, President of Art’s for Him in Honesdale Pennsylvania provides a great analogy:
“Like a baseball player who doesn’t know his batting average or earned run average we were operating without knowing our gross margin, turn rate and open to buy. Merchant Plus!® gives me those numbers instantly, without a lot of hassle. When it comes to inventory management, if you can’t track the numbers, you can’t manage them.”
When a retailer is able to optimize their inventory total inventory levels and markdowns are reduced while cash flow, margins and sales are increased. The result of proper inventory planning is a store wide increase in profitability. The best measurement of inventory profitability is the annual Stock Turn Rate. Increasing Stock Turn Rrates leads to a smaller investment in inventory with lower carrying costs, better cash flow and improved opportunity costs/investments. As inventory is reduced, gross margins increase as a result of lower, controlled markdowns. With a well planned initial inventory commitment, the retailer is in a position to take advantage of off-priced, in season opportunities to increase the initial markon. Most importantly, sales levels are retained in under performing classes while inventory dollars are better invested to take advantage of better sales opportunities. No question, a better balanced inventory results in increased sales – not just from reducing lost sales, but by being in position to react to changing trends and maintaining fresh and exciting merchandise selections.
This simple example illustrates how significantly balanced inventories affect profitability.
|
Sales |
Gross Margin % |
Stock Turn Rate |
Annual Savings |
Total Savings |
|
|
Store A |
$1,000,000 |
45% |
1.0 |
||
|
Year 1 |
$1,100,000 |
47% |
1.25 |
$94,500 |
$94,500 |
|
Year 2 |
$1,200,000 |
50% |
1.5 |
$118,250 |
$212,750 |
|
Year 3 |
$1,300,000 |
53% |
2.0 |
$164,940 |
$283,190 |
In this example improving the turn rate has a significant result. This store could increase its bottom line by 25% in three years with a disciplined but reasonable merchandising goal that was planned for and monitored. It really is as easy as planning an improvement in turn rates using a merchandising budget and following your own plan’s budgetary restraints.
John Stern at Straus in Fargo, North Dakota implemented Smyth Retail’s Merchant Plus!® System to help him better manage inventory and attests to significant results:
“Our turn rate has improved by 25%, and margins are up 3% since we started on the new system. The system absolutely will pay for itself and then some. It is easy enough to use so that even I have figured most of it out! Lots of very valuable information is easily accessible. “
Yes, planning takes time and discipline. A merchant wears more hats in one day than most people wear in their lives. With an effective planning tool, this time is minimal and certainly a priority for all independent retailers.
The only effective retail software system goes beyond tracking inventory to provide information and management tools designed to allow for efficient and effective merchandise planning. To learn more about the Merchant Plus!® Merchandising system, please call us today – 866-SMYTH RT (769-8478).
