These days, independent jewelers cannot afford any excess inventory. Storage costs, insurance, pilferage, damage, obsolescence, taxes and interest on loans add up to 30 percent annually to the cost of the goods you carry. Because those costs continue to rise, tight inventory control is still one of the best investments you can make - especially during the buying season.
Inventory problems often require prompt corrective action. If inventory levels are too low and market demand increases, sales and profits may be lost. If inventory levels are too high and demand declines, you must liquidate some of the excess goods, often at sharply reduced prices, which naturally affects profits.
In order to control inventory levels in your business, yet still meeting market requirements and demands, it’s important to invest in inventory wisely. Otherwise, you will find yourself tying up excess capital, something we can all use a bit more of these days.
The key to successful inventory management is adherence to strict controls. You must have an uncanny ability to anticipate customer demand so that sufficient stock is on hand to accommodate sales volume while avoiding shortages. The best way to do this is to understand inventory turns and create an accurate sales forecast.
Inventory turnover is the measure of how often, at the current rate of sales, you sell your entire inventory in one year. (To calculate inventory turnover, divide total annual sales by your average monthly inventory at retail; or, annual cost of goods sold divided by average inventory at cost.)
To get an idea of your store’s optimum turnover rate, track it over a period of time. Is your merchandise turning faster or slower than it was this time last year? Another way to assess your turnover rate is to compare it to that of other jewelry stores. The median turnover rate in the jewelry industry is 1.3.
How do you know how much inventory you’ll need for one selling period? The best way is to project your sales. To do that, analyze last year’s results, recent receipts, trends in your community (as well as the entire industry) and your total merchandising plan. Due to holidays and other factors, projected sales will vary month to month throughout the year.
Here’s a way to visualize the process. Assume you project a total sales volume of $900,000 for next year. What inventory level should you maintain to keep in line with your sales and inventory targets? Suppose you set 2.0 turns as your goal for the year. Dividing 52 by 2.0, you find you should sell out your inventory approximately every 26 weeks. That equals one turn. Further, assume you expect sales to be $350,000 for the first 26 weeks of the year. That means you should have $350,000 worth of inventory at retail on hand at the first of January. If you hold inventory in proportion to your projected sales for the weeks of supply, you will have a greater share of fresh merchandise.
In addition, timing the inflow of merchandise as closely as possible to the start of the selling season will, in most cases, be more profitable than taking goods far in advance, even if vendors grant dating or other price concessions. The other costs of carrying inventory will almost always wipe out whatever savings you realize by taking goods early.
Of course, no business can be run successfully by formulas alone, though they are clearly helpful guidelines. Applying those formulas, while stirring in your own judgment, helps you detect problems early and control those critical inventory levels.
Bob Epstein is CEO of Silverman Consultants, LLC. Offering a legacy in sales strategies for jewelers since 1945, Silverman Consultants provides guidance to store owners seeking to turn around a business, sell off unwanted inventory, or liquidate an entire store. With offices located in Charleston, South Carolina; New York, New York; and Saskatoon, Canada; the company helps jewelry store owners and chains formulate strategies designed to maximize revenue in times of transition, whether due to retirement, store closing, or simply when needing a boost in sales. For more information visit www.silvermanconsultants.com or call Bob direct at 800-347-1500.