Retail Strategy: Determining the Ideal Amount of Inventory

Lighting Showrooms Inventory Management

Determining the ideal amount of inventory is one of retailers’ biggest challenges.

Lighting distributors that have a lot of remodeling customers find carrying heavy stock on certain items to be a necessary part of doing business today. Keeping the most popular items on hand is a no brainer, but what about those items a retailer finds at market that don’t have a proven track record?  All it takes is a few cases of buyers’ remorse to tie up your working capital. If you have to discount that merchandise in order to sell it, there goes your profit margin.

According to a white paper prepared by Ann Grackin for ChainLink Research, there is no one-size-fits-all solution — the “right” inventory levels depends on your store’s goals, the nature of your business, your market, and the product line.

Store owners who run into inventory challenges might not be taking into consideration all of the factors involved. Grackin points out that transportation methods, warehouse and administrative management, dramatic fluctuations in fuel costs, rising or falling wages in different regions, and changes in market conditions can influence inventory strategy. If a lighting distributor’s goal is to keep adding new products to the mix to help the store look fresh, those frequent purchases can break the budget if consumers aren’t purchasing them as expected.

In the ChainLink Research white paper Conquering the Inventory Dilemma, Gordon Westwater, President and CEO of the sports solution company IPICO, points to credit tightening as another influential factor. “Credit has become tight across the spectrum. At one point you had a lot of manufacturers who were very gracious with credit because there was a lot of worldwide capacity. Many of those manufacturers don’t exist anymore. And all companies are being squeezed with limited cash and not as much credit out there. So now you have to manage your own business more carefully because you are not getting those terms,” he explains.

And then there is the problem of back orders and not enough transparency when it comes to the communication between manufacturer and retailer. For many distributors, the solution comes down to selecting a software system that allows them to have more timely access to vital data. 

For some retailers, investing in an Enterprise Resource Planning (ERP) system – business process management software that uses a system of integrated applications to automate back office functions – has been helpful. While it can’t immediately correct buying mistakes, having greater inventory visibility allows store owners to evaluate sales by category to make better purchasing decisions going forward.

Having solid analytics is key. According to the white paper’s research, the ability to plan, set inventory levels, identify trends and be able to respond, re-plan, and analyze is essential. Retailers who implement more analytical approaches to their inventory management process experience a step up in business performance.

There also needs to be coordination within the showroom to make sure its operational processes – including tactical decisions about purchasing inventory – continue to align with its corporate goals. By paying close attention to inventory turns and levels, retailers can increase their profitability and ultimately achieve greater success regardless of the economic climate.

Read more of enLightenment magazines Showroom Tips and Tricks

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