The Art of Inventory Optimization, Part 2: Stock Levels

“We’re out of stock.” Four words every customer hates to hear. And if customers hate to hear them, retailers downright loathe saying them. It means a lost sale and a disappointed customer, or (as your profit report will tell you) money lost now and money lost later. 

Especially these days, when consumers have a myriad of apps and services that make the competition more accessible than ever, it’s important to calibrate and be strategic about what you stock. Shopventory has worked with tens of thousands of merchants over the years and we’ve put together a few tips from seasoned retail experts.

Set Goals

What items do you want to sell? How many units do you want/need to sell? If all you do is tinker aimlessly, it becomes a recipe for confusion and “confused” is definitely not a good adjective to describe a business.

While margin often beats volume when defining strategy it's a fine balancing act to manage. Total gross margin dollars is the best target to focus on. You can make a lot of margin and sell only one item. You can make very little margin and sell thousands. The sweet spot is in the middle between these two extremes and you can experiment with pricing to reach the optimal point. 

A good rule of thumb is to have one master question in mind: “How can we add the most to the bottom line?”. Pricing strategy is a big one and we touched on that in part one of this series, but fewer stock-outs (running out of stock on a product your store carries) translates to more sales and happier customers.

Divide and Conquer

Having a segregated “back stock” of inventory gives you a much easier way to conduct inventory reconciliations and manage incoming inventory. Back-of-house vs. front-of-house gives you a lot more control when merchandising. There’s a reason companies pay billions of dollars per year for storage space. It also provides a layer of accountability when transferring inventory from storage to your active location. 

Warehousing isn’t just for the big boys either. A solid inventory management software like Shopventory can let you create your warehouse/back stock as a separate location and manage that inventory separately. This way, the purchase ordering and receiving can be done with more focus, and analysis for sales and transfers to the active sales floor has less clutter in the reporting.

Find the Danger Zone

If you sell 1 unit per day, and it takes your vendor 5 days to deliver, then there’s never a reason your on-hand quantity should ever be below 5. That’s the “danger zone”. It’s a danger because inevitably, you’ll have a customer walk into your store ready to hand you money, but you can’t accept it because the item they want to buy is out of stock. That money walks out your door and may never come back.

Stay out of the danger zone by doing some basic calculations. Pull up a sales report and divide it out. How many units are sold per day and how long does it take your vendors to deliver? It’s not a hard formula, but it makes a world of difference in eliminating stock outs. Once you have it, create an alert that lets you know you’re near the danger zone and it’s time to reorder. 

In Shopventory, we built an Alerting system that sends you an email and also notifies you as soon as you log in when something is running low. A good alert should go off before you’re in the danger zone to give you plenty of time. When requesting shipment from a vendor, it’s always a good idea to allow for at least 2 days of delays and not count weekend days. This will help account for holidays or any possible delays that inevitably occur during the shipping process. Inventory may arrive sooner than expected, but the Divide and Conquer strategy laid out above helps ensure you’re ready to handle it.

Know when to stack the deck and when to clean house

When it comes to inventory that just isn’t selling, there is a two-pronged effect. Not only are those items not making the business money, they’re taking up the shelf space of the items that can. 

Detailed reports on “dead” inventory are critical to getting timing right, which is why Shopventory was built with a customizable dead inventory report that renders decision-ready insights in seconds. But if you don’t have software to do it for you, be careful about sacrificing an assistant manager to try and comb through spreadsheets to cobble one together.

Reliable sellers have earned their spots, but slow movers that need to be reduced to move merit a second look. Good stock levels aren’t just about knowing what products to carry, but also what products not to carry. We touched on this principle in detail in part one of the series as well. But it bears repeating from a stock level perspective. 

People are more likely to buy things if there are lots of them. Ask any supermarket manager: The fewer apples there are on the display table, the harder it becomes to sell apples. When getting rid of clearance inventory, recognize that you may have to make the discounts steeper as you run out. 

Likewise, if you have a hot seller in stock, don’t be content to let customers find it in its niche. Put it at the forefront, and put a lot of it there. The more abundant your display appears, the more natural it feels to consumers to toss it in their cart.

Conclusion

It’s easier said than done, but the overall premise is simple: Stock the items that make money. Don’t stock product that doesn’t. Let the competition chase their tails with gut instincts and hunches. Use hard data to run circles around them. 

The hard part for most businesses is getting the data they need. This is why we built Shopventory. Seriously, Shopventory started because a fashion boutique in San Diego needed a better way to manage inventory and the owner happened to be married to a software engineer who would later become our co-founder. This is also why we priced it so that small businesses can actually access the tools the major retailers use.

To help you optimize your stock level management, we are offering a 30-day free trial of Shopventory. In fact, Shopventory is backed with a 30-day money back guarantee. That means you get a total of 60 days risk-free!

You can start a trial now with no credit card required! Tens of thousands of merchants trust Shopventory to optimize and manage over a billion dollars worth of inventory all over the world. Come see why!

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