How to Win the Inventory Game: Stock Vs. Heavy Inventory

Some lighting retailers rely on Just in Time while others carry heavy inventory – choosing a method depends on your customers.

The recent Recession forced many retailers to more closely examine who their customers are and how they buy. Even in the not-too-distant-to-be-forgotten boom years when stock turned over quickly, inventory was still a primary concern – but in a different way. Distributors needed to have a ready supply of the most popular items to keep up with demand and rival the home centers’ deep pockets.

Lighting retailers such as Chris Unthank of Valley Light Gallery in Scottsdale, Arizona, and David Director of Connecticut Lighting Centers in the Northeast have always carried plentiful inventory in nearby stand-alone warehouses – even when doing so during the Recession meant sacrifices in other areas such as reducing marketing budgets or postponing renovations.

When new construction and even resales stagnated, people’s buying habits changed.

Instead of selling their homes, consumers opted to stay put and remodel. “Those customers want to come in, find what they’re looking for, and walk out with it,” Peggy Goldwasser, a sales associate with Valley Light Gallery, told enLIGHTenment magazine. And just like retailers, manufacturers have experienced inventory shortages and cash flow problems. “Our concern when ordering is: who has it and who can ship. People don’t want to wait a month for something – and in some cases it can be a three-month wait or more,” she added.

Having deep inventory is one of the reasons why the architectural community in New England relies on Connecticut Lighting Centers when a supplier falls through on a time-sensitive project.

Allen Ray of Allen Ray Associates in Texas – a renowned specialist in distribution channel management and streamlined efficiencies – reminds retailers to factor in the “cost of carry” for their inventory when setting pricing. “People who are appealing to [the remodeling] market will automatically carry more inventory,” he advised. “The price should go up approximately two percent for sitting on the shelf. If distributors don’t put in a cost of carry [into their pricing], they will make less money in the long haul.”

Not all showrooms have the same clientele, of course. Many stores that cater to high-end interior designers and custom builders find that this demographics’ customer does not want what everyone else has or is readily available. For this type of business, subscribing to the “Just in Time” inventory model may work best.

There are pitfalls to this method, such as shortages at the factory level and long wait times. “If showrooms depend on Just in Time, they are at the mercy of someone shipping it to them,” Ray stated. “They also run the risk of not pricing it correctly. For Just in Time, they will incur freight, which has to be included in the cost.” He added that since the price of freight is collected on the front end, it probably won’t be listed on the invoice when the shipment comes in. That means chances are high for a distributor forgetting to factor in that cost. In order to remain profitable, remember to add in the cost of getting that product in and set the mark up based on that price.

Regardless of the inventory method you choose, there are basic tenets to keep in mind. Establish a system for reliably counting inventory regularly and an efficient means of locating each stock item. The typical 80/20 rule also applies to inventory: approximately 80% of your sales will come from 20% of your inventory. Experts estimate that the next sales tier is comprised of 30% of items bringing in 10% of sales, and so on.

Create a historical log that gives an approximation of the lead time that each manufacturer literally takes to deliver – which may be different from what was said when placing the purchase order.  This will aid the distributor in giving a realistic timeline to customers at the time that they are evaluating several choices in the store. Continual shipping delays not only frays the relationship between retailer and factory, but also negatively affects the customer’s perception of both the retailer and the manufacturer.

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