A retailer’s inventory is their own lab of balancing supply and demand. On the one hand, you want to have enough inventory available for customers who want it. On the other hand, you don’t want so much inventory that you’re stuck with extra stuff you can’t sell. But even if you run out of inventory, you have the option to place a backorder, provided your competitor down the road doesn’t have the item on hand. It’s like walking a tightrope between expenditures and profits. So, how do you know if you have excess inventory, or even better, how can you prevent having excess in the future?
If you have a product on your shelves or in your storeroom that’s gathered a layer of visible dust, that means nobody has even touched it in a few weeks. If it hasn’t been touched, there’s little to no interest in the item. Don’t restock it. The same holds true for items on your shelves with expiration dates that have already passed.
It’s been on the shelf for more than a year
Perhaps your cleaning crew takes care of the dust. In that case, a good guideline is a year. If the product has been on the shelf for more than a year, chances are you’ve overstocked and you paid for excess inventory. This is especially true of seasonal items.
The storeroom is getting crowded
Unless you’re anticipating a rush of sales, (like around Black Friday) your storeroom should not be overly crowded. After a few seasons of retail, you should have a general idea of what your customers like or don’t like. If your storeroom is getting crowded, you either need to clean it out because you’re storing too many seasonal products, or you need to order less inventory. Sometimes it’s both. Space is of premium value in retail. Don’t waste it on items that aren’t selling.
You wonder if you should discount it or keep it for the next season
This is where the tightrope gets extra tricky. If you discount the excess inventory, you stand to lose some of your profit margin. If you keep it for the next season, you stand to display outdated products. When you find yourself having to make these decisions too often, you’ve probably stocked excess inventory. Why store old items when you could be stocking newer, more in-demand merchandise?
How to prevent excess inventory
Now that you know whether or not you’ve overstocked, you need a plan to prevent it from happening again. Using data from the inventory management feature on your Bindo iPad POS, calculate the Days Inventory Outstanding (DIO) and the Sales Per Square Foot (SPSF). Ideally, the DIO will be a low number and the SPSF will be high. The best way to know how you fare in your industry is to compare your numbers to other retailers with similar merchandise. In other words, a grocer shouldn’t compare their DIO with that of a home improvement store.
To calculate the DIO and the SPSF, use the following equations:
DIO = (Average inventory/cost of goods sold) × 365
SPSF = Annual sales ÷ square footage of the store
These equations will give you an idea of how you’re doing with inventory management and will allow you to compare with other similar retailers.
A good POS will also help with your inventory management by telling you when you’re low on certain items and suggesting how many to order. To learn more Bindo’s inventory management system, start your free trial today!
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