How to Make Smart Inventory Buys
During this NAMM U session, Alan Friedman of Friedman, Kannenberg and Co. revealed the keys to successful inventory management.
According to Friedman, inventory management begins with knowing what products to buy and how many to buy. He armed retailers with a simple and easy formula to do this. “Every music retailer has too much inventory,” he said.
According to Friedman, retailers only need to ask themselves four questions when buying product. He encouraged them to make these questions a permanent part of their buying process.
1. Can I sell this product?
If it’s something your customers want, move to question 2.
2. Will I make a profit?
If the answer is yes, move to question 3.
3. How quickly can I sell it?
If you can sell it in 30 days or less, buy tons.
4. How quickly do I have to pay for it?
You should be able to sell most of the product before you pay the vendor, so you don’t have cash flow shortages.
Friedman walked the audience through questions three and four with specific examples. He noted that you’re invested in your inventory when you pay for it, not when you get the product—stressing the importance of vendor payment terms and ideally getting 60–90 days from your supplier. “The objective is to sell product, at the highest gross profit, in the least amount of time, and never pay for it,” he said.
He added that if you start to focus on these four things, your inventory levels will start coming down because you’ll be moving product faster, your cash flow will improve, and your business will grow stronger and become more successful.
“The music industry’s margins are shrinking, and it doesn’t matter at what margin you’re making your business work—it’s about the amount of gross profit dollars you make,” Friedman said.
He then gave his rule of thumb for buying inventory and advised putting it to use immediately: Buy the product only if you know you can sell it in ‘X’ days or less, where ‘X’ is equal to 360 days times your gross profit percent. (Note: 360 is a round number and easier to use than 365 days.)
So, using the following example of 25 percent gross profit:
Step 1. Calculate your gross profit percent: 25 percent.
Step 2. Calculate the number days to sell the product: 360 days x 0.25 = 90 days.
Step 3. Now make the buying decision: If you can move it in 90 days or less, buy it. Make sure the quantities you buy fall within the range of this formula. Otherwise, don’t buy more than you can move in 90 days or less.
“You would never build a house without a blueprint,” he said. “The best stores are the ones who monitor their inventory levels, do physical counts of their inventory, and are buying what they need and selling within a short period of time. If you buy in small bites, you can pay your vendors, and always go back to buy more.”
Don’t beat yourself up when you make a bad buying decision, but continue to ask yourself the four questions and use the rule of thumb. Practice makes perfect.