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David Brown

Inventory – How much is Enough?

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One of the most common questions we get from jewelry-store owners is about the inventory level they should carry in their store. How much is enough? How much is too much?
It’s a critical question as the typical jewelry-store owner carries more inventory than any other asset … it can be the single biggest drain on cash flow and can be one of the top contributing factors to a business failing.

As the graph shows, the improved financial situation in recent years has shown an increase in the average level of inventory held – seasonal variations are obvious to see with December being an understandable peak, but with inventory levels in March 2014 now running at $1.079 million, up from $960,000 12 months ago it raises the question, are jewelers now overstocked given the recent decline in sales?

So how much is enough? The ideal level, in our opinion, is the amount of inventory required to meet your current anticipated sales. What timeframe this represents will depend on how quickly you can reorder product; obviously the quicker you can restock the less product you need to carry.

Ultimately, inventory should be viewed from the customer’s perspective: How many choices does the customer need to see in order to make a buying decision?

One of the best tools we know of for planning your inventory is an open-to-buy system. This is the ideal planning tool for buying as it takes into consideration how much inventory you have now, how much you will be selling and what you will need to spend to replenish back to the appropriate levels.

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In its simplest form, an OTB system takes into consideration your expected sales and factors in your gross margin percentage and markdowns. This will provide you with how much inventory will be moved during the selected period. The system will then subtract this from your beginning inventory and will compare the expected ending inventory with your planned ending inventory. If your expected ending inventory is less than planned, then the difference is the amount of purchase dollars available to buy more inventory. On the other hand, if your OTB is negative (expected inventory greater than plan) then there are no dollars available to buy more product. In fact, action may have to be taken to move more inventory (markdowns, vendor returns, etc.)

Managing an open-to-buy system can be tricky as it is a constantly moving target, and for a store with limited trading history it can be difficult to determine anticipated sales.

So what is the ideal inventory level? As we said earlier, some product lines can be restocked quicker and hence less product is required but as a rough rule of thumb we suggest 1.5-2 stockturns per year on average as being the ideal. You need room to grow but don’t need to be in a situation where your product lines are becoming a millstone around your neck. This may be only a 1.0 stockturn for higher priced diamond product but be 3 times for cheaper silver lines.

This means that if you plan to have sales of $50,000 (retail dollars) in a period then I would require between $75,000-$100,000 (retail dollars) of inventory on-hand at the beginning of the period. Seasonal adjustments are obviously required for December and other busy periods.

Once you start using an OTB system you can get much more detailed in your inventory management by using the OTB at the category or department level. This way the OTB not only tells you whether you have enough stock but also if you have the right mix.

Getting your inventory levels right is one of the most important decisions you can make for your store. If you need help with setting up an open-to-buy system for your business, seek the help of an experienced training company or consultant.

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