| What’s the value of your inventory on | | | | seasonal items, a quick sales plan can be developed |
| hand?” This is one of the first questions that I | | | | by taking the prior years sales for the same period |
| ask a prospective client during our initial conversation. | | | | and applying the sales trend factor. For larger |
| And they can almost always give me a | | | | retailers, more elaborate demand forecasting |
| straight-forward answer. | | | | software applications are frequently utilized. The point |
| Then I ask, “How many weeks of supply is | | | | of this discussion is not to review various forecasting |
| that?” | | | | methods, but to emphasize the importance of a well |
| Silence. | | | | thought out sales plan arrived at through careful |
| For many small retailers I speak with, thinking of | | | | analysis of past sales volume and patterns, and |
| inventory in terms weeks of supply is a new | | | | current trends. |
| concept. They can easily talk about inventory in | | | | To become a truly powerful inventory management |
| terms of quantity, units, cases or casepacks, as well | | | | tool, forward weeks of supply should be calculated |
| as how much inventory they need to build an | | | | continually by category or item. For categories of |
| effective display. They may have heard of terms like | | | | fashion merchandise, for instance, where specific |
| ‘inventory turnover’ or | | | | items are constantly changing as assortments, |
| ‘open-to-buy’ without fully understanding | | | | forward weeks of supply should be calculated by |
| what they mean. They understand return on | | | | category. For staple replenishment items, forward |
| investment, but in managing the day to day | | | | weeks of supply should be calculated by item. And |
| urgencies of their business they are much more | | | | just as on hand inventories should be thought of in |
| focused on sales, believing that maximizing sales will | | | | terms of forward weeks of supply, purchase |
| lead to positive cash flow. | | | | quantities should also be evaluated for the number of |
| This perspective on cash flow is ironic because | | | | additional weeks of supply that they represent. Every |
| almost every small retailer I speak with who | | | | purchase order should be accompanied by the |
| can’t answer my weeks of supply question also | | | | following question; “How many weeks am I |
| experiences recurring cash flow problems. Let me | | | | buying?” |
| explain why. | | | | Finally, after I’ve taken a moment to explain the |
| Thinking about inventory in terms of time is the | | | | concept of weeks of supply to a prospective client, |
| essential starting point in effectively managing | | | | they invariably ask what the weeks of supply should |
| inventory. Stated in simple terms, the goal of | | | | be for their business. And just like they started the |
| effective inventory management is to have on hand | | | | conversation by not knowing what their weeks of |
| at any given time only enough inventory to support | | | | supply was, I end it by not being able to tell them |
| planned sales until the next delivery arrives, plus a | | | | what their weeks of supply should be. Every retailer |
| safety stock to cover any short term sales spike | | | | has a different optimal weeks of supply, due to their |
| and the possibility of a late vendor delivery. This | | | | unique mix of product offerings, which have unique |
| quantity can be stated at any point in time as | | | | selling characteristics, customer expectations, and |
| forward weeks of supply; that is, the number of | | | | supply chains. And for most retailers, especially those |
| weeks of planned sales going forward that the | | | | whose product offerings are highly seasonal, the |
| current inventory represents. When thinking in terms | | | | optimal weeks of supply may vary significantly |
| of weeks of supply, the focus is on maximizing the | | | | throughout the year. |
| return on the inventory investment by linking | | | | The point is not necessarily to identify what the |
| inventory levels directly to planned sales. | | | | optimal weeks of supply is, but to continually |
| However, many small retailers instinctively focus on | | | | challenge the current forward weeks of supply to |
| how much they might be able to sell if they had the | | | | identify opportunities for eliminating unnecessary |
| stock on hand, rather than the amount of cash they | | | | inventory and to free up cash for other urgent |
| are committing to inventory. Their focus is on having | | | | needs. As every retailer understands, there’s no |
| the stock to be able to capture the ‘last | | | | such thing as standing still; if you’re not going |
| sale’. The problem with trying to capture that | | | | forward, you can be almost certain that you’re |
| ‘last sale’, however, is that it’s not | | | | going backwards. |
| possible to know exactly which sale is the ‘last | | | | Small retailers who think of their inventory in terms |
| sale’, resulting in inflated inventory levels. And | | | | of weeks of supply almost always experience fewer |
| unless they can quantify the number of weeks of | | | | markdowns and fewer build-ups of dead inventory, |
| supply they have on hand, and the number of | | | | faster inventory turnover, and healthier cash flows. |
| additional weeks of supply they are purchasing, they | | | | With healthier cash flows and a keen eye on weeks |
| have no way of projecting when they can expect to | | | | of supply, a small retailer will always have the ability |
| sell that inventory and convert it into cash. | | | | to be a true merchant, to make that advantageous |
| Clearly, a critical component of forward weeks of | | | | purchase, chase a key item, or capitalize on the |
| supply is planned sales. For small retailers of | | | | latest emerging trend. And those are the true keys |
| non-seasonal items, these sales plans can be arrived | | | | to generating consistent sales increase and |
| at quickly by taking the current weekly rate of sale | | | | profitability. |
| and applying a factor for the current sales trend. For | | | | |