Reduce Your Inventory — But Not at the Expense of Sales

I’M SURE I don’t have to tell you how important inventory is to the sales that occur in your business. After all, if you don’t have it you can’t sell it. The fact remains, however, that success for your store will depend on having the right inventory — and this is more critical than having the right amount.

A quick analysis of your existing inventory will likely reveal a couple of things. Firstly, a very small number of items are generating a very large share of the sales. These units will typically represent less than 10 percent of the items in a U.S. jewelry store but be contributing over 75 percent of the sales. For those of you familiar with the 80/20 rule this is taking it to extremes!

This ratio of 10 percent is low by international standards. Although a minority of the inventory will always account for a majority of the sales, you would normally expect to see 20 percent or more of the items contributing this level of revenue. So if the typical U.S. jeweler can achieve this with only 10 percent of their items, are they getting better efficiency from their inventory?

Sadly, no. U.S. jewelers achieve some of the worst stockturns in the world. The reality is they are not being efficient and are missing out on sales. Based on these sorts of numbers, if two jewelers had the same amount of inventory but one had 20 percent of their inventory as good fast sellers and the other had only 10 percent, then the first jeweler is offering twice as good a selection — and is on their way to achieving twice the amount in sales.

The above graph shows the level of inventory being held by the average jewelry store in the U.S. As the figures show, inventory levels have dropped to a level of around $712,000. It is possible to see the pattern of how inventory has been controlled by sales since July 2008, before the recession. The more buoyant period of July-November 2008 saw inventory levels staying under control as revenue was strong and many jewelers were able to trade their way out of excess inventory. Inventory levels climbed during the Christmas period as can be expected, however for much of 2009 inventory levels sat generally between $740,000-$800,000, much higher than 2008, despite poor sales. This is because the typical jeweler manages their inventory by not replacing items that sell. If sales aren’t happening then stock levels remain high. The problem is the majority of sales are good items and if the jeweler takes the attitude of not replacing these items then he is reducing his selection of good selling pieces that are available. He is allowing the customer to choose what inventory should be reduced instead of making that decision himself.

It is important that the right inventory disappears. Since December 2009 we have seen a strong drop in inventory levels. This has been a result of the pickup in business with many retailers trading their way out of excess stock. Again, however, as the customer normally buys the better pieces we are seeing inventory levels dropping because jewelers are selling their best pieces and not replacing them rather than managing a planned reduction in old items.

Between July of 2009 and March of 2010 the average level of inventory dropped from $780,000 to $712,000. Unfortunately during this time the amount of fast selling and new inventory available to show customers also dropped from 28 percent to 26 percent. This means in July last year $218,400 (28 percent of $780,000) of potentially good-selling pieces were available. In March there is only $185,120 (26 percent of $712,000). Inventories have declined, as they have needed to, but not in the right way. Most stores have weakened their selections of high-performing items by an average of 15 percent —the percentage drop from $218,400 to $185,120. This is not a positive.

So what can be done?

1. Above all else, reorder fast sellers. It is tempting to keep money in the bank but that is a short-term answer to a long-term problem. You need those hard working lines to keep regenerating profit. The only way to improve performance long term is from more sales. The secret to more sales is having more of the right product. And the right products are those that your customers are telling you they like – and it’s their wallets that are doing the talking
2. Set a plan to eliminate the aged inventory. There are a number of methods to doing this that we can advise you on.
3. Control your buying. Don’t commit to finding new unproven items when the pieces that have sold well have not been ordered back in. The numbers don’t lie.