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David Brown: Retirement Planning, Beginning With the End In Mind, Part Three

Part 3 of 4: David Brown teaches you to optimize your inventory.




BY NOW YOU SHOULD have completed a GAP analysis (see INSTORE, February 2008, page 79) that will meet your future wealth and retirement requirements and have calculated your gross profit GAP and sales GAP.

So let’s move ahead:

Step 4: The Inventory Gap

In this step, we are finally ready to answer the big question: “How much inventory do I need to achieve my sales budget?” This figure is also known as the optimum inventory level (OIL).

A good way to think of OIL is: Enough inventory to give your customers the best possible choice, to give you the best possible return on your investment and to allow for sustainable growth.

The objective here is to help you understand and calculate your own OIL. This is a fairly complex but highly important process, so we’ll break into small steps.

The first is to take into account your business circumstances, such as:

  • Is your business growing, static or declining?
  • Are you intending to include new product ranges in your buying plan to boost certain areas of your business?
  • Are you planning to drop certain product lines that no longer fit your business model or market position?

Categories which may show a below average gross margin return on investment (GMROI) but deliver a high return on effort. (We’ll come back to this last bit later.)

Once you’ve taken these factors into account, you are now ready to calculate your OIL. But do so understanding that GMROI is not an exact science but rather a rule of thumb. Also, remember that it is difficult to sell what you don’t stock. In other words, investment precedes dividend. You don’t get interest from your bank until you deposit some money and so it is with retailing.

Arguably, it is possible to achieve a GMROI ratio ßof 2.0 – meaning $200 of gross profit per annum from every $100 invested in inventory. This should be the basis for calculating your OIL if you are striving for best practice.

However, because most stores achieve well below this, a more realistic rule of thumb for a growing retail business is that every $1.00 of well chosen, well managed inventory will produce between $2.50 and $3.00 of retail sales per annum (excluding repairs, custom designs and special orders).

That means if your inventory level is $100,000, you should be achieving between $250,000 and $300,000 of retail sales.

Looked at another way, using our example of GAP sales of $1,062,265, the OIL would be between $354,088 ($1,062,265 ÷ 3 = $354,088) and $424,906 ($1,062,265 ÷ 2.5 = $424,906).
$1,062,265 3 $354,088
$1,062,265 2.5 $424,906

GAP SALES BUDGET – 1,062,265

GAP SALES BUDGET – 1,062,265

IMPORTANT: Score less than this, and you are underperforming, which means you either need to address the lack of sales compared to the inventory you are carrying or you need to address the excess inventory. Our preference is that you consider both before deciding on a strategy because often the inventory is not the real problem — the lack of sales is.

Action Steps

  1. Note any changes to your business circumstances as outlined.
  2. Calculate your OIL as explained.
  3. Calculate your inventory GAP by comparing your OIL with your current inventory level.
  4. Based on your inventory GAP, determine if your strategy moving forward will be to increase sales, reduce inventory or both.

Next month, we will explain GMROI and how to calculate your OIL for each product category.

David Brown is the president of Edge Retail Academy, a leading jewelry business consulting and data aggregation firm that provides expert business improvement plans to help with all facets of your business, including improved financials, healthier inventory, sales growth, increased staff performance, recruiting and retirement/succession planning, all custom-tailored to your store’s needs. They offer Edge Pulse to better understand critical sales and inventory data, to improve business profitability, benchmark your store against 1,200-plus other Edge Users, and ensure you stay on top of market trends with their $3 billion-plus of industry sales data. Contact (877) 569.8657, ext. 001, or



When There’s No Succession Plan, Call Wilkerson

Bob Wesley, owner of Robert C. Wesley Jewelers in Scottsdale, Ariz., was a third-generation jeweler. When it was time to enjoy life on the other side of the counter, he weighed his options. His lease was nearing renewal time and with no succession plan, he decided it was time to call Wilkerson. There was plenty of inventory to sell and at first, says Wesley, he thought he might try to manage a sale himself. But he’s glad he didn’t. “There’s no way I could have done this as well as Wilkerson,” he says. Wilkerson took responsibility for the entire event, with every detail — from advertising to accounting — done, dusted and managed by the Wilkerson team. “It’s the complete package,” he says of the Wilkerson method of helping jewelers to easily go on to the next phase of their lives. “There’s no way any retailer can duplicate what they’ve done.”

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