Is More Inventory the Answer?

Is More Inventory the Answer?

If you want to make more sales, you need more product, right? Not always, says the Edge Retail Academy’s David Brown.

This month I want to focus on inventory again but this time in relation to the holiday season. Given the increase in sales that happens at this time of year it’s an understandable reaction for most stores to increase the amount of product they have on offer. After all, sales are about stockturn and if you don’t have it you can’t sell it, right?

Let’s have a look at that inventory graph again, this time updated to include October’s inventory holdings.

As the chart shows, over the last five years we have seen a pattern of increasing inventory during the period of October and November followed by a dip in December and January as last-minute December gift-buying cleans out inventory for most jewelers. Makes sense, at least on the surface. If you want to make more sales, you will need more product, right?

But is that necessarily true? Think about the purchasing decisions of most buyers. Generally speaking, a customer will need to see a minimum selection of choices before they will decide to buy. Let’s use Tag Heuer watches as an example. Customer A walks in and is seeking a men’s Tag Heuer watch suitable for dress wear. He has decided that he wishes to spend up to $3,000. How many Tag Heuer watches does he need to see to meet his criteria, to feel he is able to make a selection? Let’s assume six (the number doesn’t matter per se as you’ll soon see). The customer buys a watch. Two days later another customer comes in with the same criteria. Again, how many watches does he need to see? Again, let’s assume six is sufficient for him to feel he has seen a selection.

Now imagine you are aiming to sell four Tag Heuer men’s watches over the Christmas period that meet that selection criteria. Normal stockturn math, based on a selection of six watches needing to be viewed, may suggest 24 watches would need to be stocked that month (4 sales x 6 to choose from each time). However is that the case? In reality, no. If you replenish the product that sells you should be able to generate four sales from having just six watches available for each customer to view.

Now this example is extremely simplistic and I don’t suggest you take these figures literally. The point I am trying to make is that it is a natural reaction to increase your stockholding when December arrives, and there are circumstances when this is definitely necessary (particularly around product lines that can’t be replenished quickly). However, you don’t need to carry an entire month’s worth of sales for the full month. By viewing each customer as a separate sale and asking, “Do I have sufficient selection to meet each customer’s needs AS THEY PURCHASE,” a subtle shift in mindset results. You aren’t generating four Tag Heuer watch sales, you are generating one Tag Heuer watch sale four separate times.

Rather than needing say $36,000 (for argument’s sake) of Tag Heuer watches in store, in line with the above example, you need only sufficient inventory to generate $36,000 in cost of sales. There is a difference. Replenishing good sellers quickly will allow you to achieve this objective without having to invest large amounts of cash in extra product that may not sell. It also gives you the advantage of using fast sellers to achieve your objective — if you reorder fast sellers you may be able to achieve this cost of sales figure with less than $36,000 of inventory.

By all means review your selection with the key holiday weeks approaching. You will need to increase certain areas to meet sales targets but by indentifying your sales in a particular department as being one sale repeated several times rather than a number of sales at once, you may find yourself approaching the area of stockturn and inventory levels from a slightly more enlightened viewpoint.

David Brown is president of the Edge Retail Academy, an organization devoted to the ongoing measurement and growth of jewelry store performance and profitability. For further information about the Academy’s management mentoring and industry benchmarking reports contact inquiries@edgeretailacademy.com or Phone toll free (877) 5698657