By the Numbers: Your Inventory is Your Asset — Not Your Liability

IF YOU THINK ABOUT the various assets your business has, tangible ones such as bank balances, plant and fittings or intangible ones such as databases or key agreements, there is one that always requires the most management and the biggest investment — and that is inventory. It’s the lifeblood of your business, without which there would be no money coming in.

It’s interesting the attitude many jewelers have to their largest asset. There is often little or no accountability expected from it yet this level of disinterest would seldom be tolerated in other investments — and at the end of the day your inventory is an investment.

Would you accept a return on government bonds of 2 percent if you knew other people were being paid 4 percent for theirs? Would you be pleased with a company that paid you a dividend of 5 percent on your stocks when every other stockholder received 8 percent?

Of course not. You’d be quick to complain and if the institution concerned did nothing you would be straight on to the regulatory authorities complaining at the injustice.

Yet where is the justice in doing this with your inventory?

This sort of behavior seems to be accepted by store owners yet they are, in fact, the culprits guilty of short changing their own returns.

Let’s take a look at the typical stock turn achieved by store owners in the US:

If it looks a little like the read out on an ECG then I’ll continue that theme! It would be fair to say that between January and November the rate of stockturn sits on average, around 0.6 to 0.7 stockturns per year. The dark line represents the rolling 12 month figure and, it would be fair to say, the graph is flatlining. The lighter colored line represents the monthly figure and largely parallels the 12-month result with the exception of December when the heartbeat kicks in and the patient is expected to keep breathing for another year!

This is not the readout of a healthy patient yet seems to be seen as acceptable by many. The interesting thing is that many successful retailers are achieving stockturns equal to the December figure all year round and will often achieve stockturns of 3 to 5 times, on an annualized basis for December alone, without sacrificing sales due to an inventory that is too lean.

You can’t become healthy by adopting the unhealthy habits of other people and the same is true of your inventory.

As you well know, the return on your investment is not just about stockturn. The margin achieved is a significant factor also – after all, there is more than one way to skin a cat and a lower stockturn may be reflected in higher margins, right?

Well let’s take a look:

Here we have the typical margin achieved by the average US jeweler store. May has seen an upswing, and it will be interesting to see if this figure is sustainable long term. But generally this number has bounced along between 49 percent and 51 percent margin historically – averaging out at 50 percent or keystone.

So your typical store based on 0.7 stockturns and 100 percent mark up (keystone) is achieving a return (GMROI) of $70 (0.7 x 100) gross profit for every $100 invested in inventory.

Now this might sound good compared to bank interest rates but why accept a return of $70 on your investment when someone else is achieving $150 for no extra effort or risk?

The fact is you shouldn’t. You’re leaving money on the table and your oversupply of inventory (or undersupply of sales) is only helping your vendors, not you.

So what do the successful stores do different?

They expect more from their inventory. You get what you expect and if a $70 return is considered fine then how can you do better? The $150 return stores demand more and take action to make sure it happens. They measure what they are achieving in each area.

They cull aged inventory. They don’t allow it to sit around gathering dust just in case someone wants it. They use a variety of means to stay on top of inventory that is no longer useful.

They re-order fast sellers. They put the odds in their favor by milking the good product that provides them 70-80 percent of their sales. When you’re doing this effectively you quickly find the other 80 percent that is growing old is no longer important to making the sale and they become less hung up about parting with it.

They stack the odds in their favor when buying new product. They don’t buy product on a whim but study what is selling elsewhere and choose the good sellers that others are showing them.

They have the exit plan for each item in place. As with many things, you make the money when you buy and not when you sell. They know when they buy what action they will take with the item if it doesn’t sell. They hope for the best and plan for the worst. Never is this better illustrated than stores that take a gamble on an item retailing for $20,000, $30,000 or $50,000. Pushing the top end of your market is a good strategy but purchasing this type of product without a fall-back option is a dangerous game. Can it be exchanged? What price can it sell for if reduced, and does that amount still recover cost price? These questions need to be answered with every purchase.

You’re the doctor and your inventory is the patient. Don’t be accused of malpractice!