If you are a long-time reader of MFA, or have attended Meridian seminars or workshops, you may already know your store product inventory should never exceed 1.5 times your supplier frequency. For most stores on a weekly supplier delivery schedule, it means total store inventory should not be more than 11 days worth of sales.
Many managers, CFOs and owners that actually take the time to do this quick calculation, however, find their inventory is way more than it should be. For instance, a store selling $2,175 of inside goods per day, or about $65,000 per month, should have no more than $23,925 in inventory. But what happens when that inventory is say, $38,000? How is it possible to reduce inventory without losing customers? Here are two effective strategies:
1. Identify specific slow or non-moving products. Once you know exactly what they are, identify why they aren’t moving. Products typically become slow movers from one of three common causes:
- lack of customer demand,
- poor merchandising, or
- they are priced too high.
Let’s start with solutions to each.
If there is no longer customer demand for the product, try to get your vendor to take it back. Particularly whenever accepting any new product a vendor wants you to promote, make that vendor include a take-back option in your contract. For slow-movers, if you didn’t get a buy-back clause in the contract and the vendor refuses to take the product back, get rid of it in a sale. Price to get rid of it. Have a sidewalk type sale. And finally, make sure you don’t mistakenly reorder this product once it finally does sell!
If you think customer demand is still pretty good for a slow-moving product, it may be you have a merchandising problem. Can the customer easily find this product? Try moving the product to a very visible location or in close proximity to a companion product.
The only way to know if pricing is the problem is to comparison-shop your competitors. Bear in mind, however, that the overall character of your store impacts your ability to price. If your location attracts very price-sensitive shoppers, perhaps by offering the cheapest gas in town, those shoppers won’t buy any over-priced product. You may have to be under all your competitors to move product. On the other hand, if your location attracts a higher-end, less price-sensitive shopper, you can afford to price above competitors and that product will still move.
2. Reduce SKUs by 20%. It’s been proven that retailers who reduce the number of SKUs by 20% experience a significant increase in bottom-line profit. Notice that this statistic is based on SKUs not products. SKUs reflect not only the product, but its packaging size.
If you take a hard look at the variety of package sizes you carry for certain products, you may find you can achieve your 20% reduction simply by carrying less size options! Do you really need chips in the small bag, the 99-cent grabber, the regular size and the super family size? If you analyze sales by package size, you’ll discover which size(s) you can get rid of without losing sales.
If you use scanning, this task will be very easy. But even without scanning and the most basic manual system, you can still get this accomplished. Ask store managers and clerks to identify what doesn’t move well, or package sizes they think could be eliminated. You can then go to your vendor purchasing records to check velocity for those items. Some vendors can and are willing to help you with this process, giving you their internal velocity report for your purchases.
Beware of vendors, however, wanting to help you too much in this process. They have profit and sales targets that may not be congruent with your customer demands. For instance, you may decide you want to eliminate two out of four package sizes of chips, but your vendor is pushing hard to promote the one size you are eliminating. Make your decisions based upon customer buying habits, not vendor pressure.
Package size SKU reduction can get tricky. You may have a size that is selling well, but the larger or smaller size would be a suitable equivalent where elimination of that size would not impact sales. On the other hand, you may eliminate a size and find customers won’t buy the remaining sizes. It takes some experimentation to get it right.
Another advantage to 20% SKU reduction, be it from product elimination or package size reduction, is the tremendous savings it brings in overhead cost reduction. When you reduce your SKUs by 20%, you are essentially eliminating 20% of your staff’s payables workload, supplier order verification processes, inventory counts and controls, etc. So in addition to having better turns in your remaining products producing more gross profits, you get a double whammy by saving on operating costs as well. What could a 20% reduction in your payables and inventory processes save you?
With fuel margins tight, it’s essential that you make your inventory into profit. Remember that every $100,000 of inventory you have costs your company approximately $10,000 each year just to maintain. Get serious about getting inventory right. And right means 1.5 times supplier delivery frequency.