Move Your Inventory by Choosing the Winners and Losing the Others
In my opinion, the No. 1 problem most music retailers face is inventory. They have too many things that aren’t moving and not enough of the things that are. This can be fixed by avoiding a few key pitfalls and identifying the winners and losers in your store.
Before I go any further, let me say that if you are serious about being in the music business, you’ve got to have a quality point of sale system. You can do everything I’m going to share without a POS, but the amount of time you’d spend compiling data would easily pay for a POS.
Let's look at a few stats to determine our inventory position. These include GMROI, average inventory and inventory turns.
• GMROI is an inventory profitability evaluation ratio that analyzes a store's ability to turn inventory into cash above the inventory's cost. This is calculated by dividing the gross margin by the average inventory cost. A ratio higher than 1 means the firm is selling the merchandise for more than what it cost the store to acquire it. The opposite is true for a ratio below 1.
• Average inventory is your average inventory on hand for any given period. It's best to measure this monthly. Average inventory can be calculated by adding your beginning inventory and ending inventory and dividing that by 2.
• Inventory turnover is a ratio showing how many times a store's inventory is sold and replaced over a period, usually one year. This can be calculated by dividing your cost of goods sold by your average inventory.
Knowing these terms, you can run an inventory analysis report, which should have the following columns:
Many retailers will immediately look at the gross profit percentage and think this business is doing well. But even though this example shows a healthy gross profit, I would surmise that this business is actually enduring extreme cash flow pressures and is probably on it’s way out if it doesn’t get them under control. The GMROI and inventory turns reveal this.
The GMROI shows that the business only received 65 cents in return for every dollar it invested in inventory over the last year—a net cash outflow of 35 cents. The inventory turns show the business has more than one year worth of inventory on hand (an inventory turn of 1 equals one year’s worth of inventory, an inventory turn of 2 equals six months of inventory, etc). In terms of total dollars, this company could go for more than a year without ordering any product!
To fix these issues, we need to do some combination of the following: increase sales and turns of the inventory that's on hand, and reduce overall inventory.
To find the inventory that's doing well (the winners), we need to use our POS to determine the top 20 SKUs per department based on units sold and also the top 20 units based on dollars sold. To find the losers, we need to run a report to find the worst-performing inventory—the product that hasn’t turned during the last year.
Once we have this information, we must first put a system in place that ensures we never run out of our best inventory. No matter what, we always need to have those SKUs in stock. For the losers, we can try remerchandising them in a better location, provide product training for our salespeople (adding a spiff is a great way to increase staff participation in moving slow inventory) and, finally, put the product on sale or clearance.
Putting these concepts into effect could drastically change the financial picture for this store. If we can reduce the overall inventory while maintaining sales, see how it changes our GMROI and inventory turns:
Now, for every dollar invested in inventory over the course of the year, the business receives $1.54 in positive cash flow, a vast, and sustainable, improvement. Plus, the company's now turning its inventory twice per year—meaning it only has about six months of inventory on hand, which is a much healthier position.
Digging out of this hole will likely take a while. But setting a goal, devising a plan and acting upon it is a must if you want to be healthy, happy and successful in retail.