1 Product Basics – Getting Organised
How to guides
Benefits
The two top reasons for business failures are lack of cash and out of control inventories. Controlling your inventory and the processes around this are crucial to the success or failure of your business. This article will help you:
- Control and minimise inventory investment
- Order the right amount of stock
- Find the right tools for your business
Overview
This article is aimed to help those who would like to start taking control their stock processes. It will deliver an overview what you need to start doing from a very practical point of view. Each area discussed will connect to the next to give you a simple but effective process to start getting your stock organised. There are four steps;
1. Organise your stock (Category Management)
Stock is at the heart of any retailer and it is therefore vital to get right. Too much and we are wasting capital and increasing expenses, too little and we are missing sales and disappointing customers. We use Category Management to cut ranges into “bite sized chunks” in order to better manage our inventory. Category Management will help you;- Better measure product performance
- Improve buying and replenishment
- Display product to match customer needs
- Relate retail space to performance
- Improve supplier partnerships
Category management enables retailers to better manage their product range by grouping products into like groups of similar items. We use category management throughout the business to:tart getting your stock organised. There are four steps;
Categories vary depending upon the business you are in, however what is important and common to all businesses, is that your categories should reflect your customer’s needs and wants.
If you are in the café business, your categories may reflect your menu board, e.g., sandwiches, hot food, hot drinks, cold drinks, pastry items, confectionary etc. The way a customer would select their food.
A category management approach builds a framework for your product to sit in. This framework is also called your product mix. The width and depth of your range, the information required to manage your range and your customer’s needs will tend to dictate the number of categories and also the number of levels underneath each category.
A department store may have as many as 6 layers in their category structure. Of course department stores have huge product ranges.
Most small retailers will use 2 to 4 layers.
For more information and examples see the How to Guide: Organise Your Stock -Category Management
2. Know Your Sales History and Start Forecasting
Sales Forecasting is the No. 1 planning tool for your business. When used to plan inventory and staffing can lead to greater profits by:
- Minimising the money tied up inventory and increase stock turn
- Increasing sales and reduce markdowns
- Reducing business expenses (carrying costs, interest)
- Optimising staffing
Successful sales forecasting uses what has happened in the past (sales history), coupled with your knowledge and experience to make a realistic prediction of what will happen in the future. The more you do it the more accurate your forecasts will become.
This information will allow you to invest in the right amount of inventory, the right number of staff, the right amount of overheads to best meet those sales thereby optimising your investment and minimising your outgoings to deliver optimum profits.
Use can forecast the business’s total sales or forecast individual product unit sales. Sales forecasting is the cornerstone of good planning and a profitable business. Businesses that plan future sales are more likely to succeed than those that don’t.
For the complete step by step guide on sales forecasting see 4 Steps to Successful Sales Forecasting
3. Order What You Need (not want)
Too much inventory and your capital investment soars and expenses increase. Too little and you can miss valuable sales and loose customers.
Matching the “right amount” of inventory to your sales will lead to greater profits by;
Minimising inventory investment and increase stock turn
Increase sales and reduce markdowns
Reduce business expenses (carrying costs, interest)
The right amount of inventory is the amount of inventory that best matches your sales going forward. To work out the right amount of inventory simply follow the following formula:
Sales + Closing Stock – Opening Stock = Purchases
The key to using this formula is predicting the closing stock based on your sales forecast. This basic merchandising “open to buy” formula can be the used for all stock planning including SKU or unit planning, or when budgeting purchases in dollars.
To find out more go to the step by step guide – How to Order the “Right” Amount of Stock. This guide will demonstrate the use of the basic “open to buy” formulae. And show how to work out the right purchase quantity for your predicted sales.
4. Measure Stock Performance (Sales & Inventory Analysis)
The Sales & Inventory Analysis brings together all aspects of your product’s performance. The analysis will give you the information to make crucial decision by identifying:
-
Fast and slow moving stock;
- Overstocks and understocks;
- Gross profit performance;
- Good and poor return on investment;
- Potential stock outs; and
- Average sells, margins and costs.
A sales and inventory analysis is the basis of measuring stock performance. It is a “moment in time” analysis and it is therefore recommended that the analysis be done at least monthly or more frequently depending on your buying cycle.
The sales and inventory analysis uses the following information from your point of sales system (all reports should be run ex GST):
Inventory (units & value)
Sales (units & dollars)
Gross profit dollars or gross margin%
The analysis uses inventory, sales and margin to calculate discounts, COGS, average sells, costs, gross profits and sales mixes.
We can add indicators such as stock turn, stock cover, space allocation, stock to sales ratios and GMROI (to name a few). If you have your category management in your system the analysis can be done at any level from Category to SKU.
Once you have sales and inventory numbers set you can start to build some predictive models. For example - Work out your ideal stock holding (based on display space and buying lead times) or add floor space and work out sales per square meters.
For further details see the How to Guide - Measuring Stock Performance
Download a PDF of this guide.
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