To adapt to the changes in today’s retail landscape, it is important to back your business decisions with data. Knowing the right inventory performance metrics to evaluate and what they mean will allow you to make educated business decisions to improve your store’s inventory performance.
Make sure you’re evaluating these 3 important inventory performance metrics:
Look at your Sell-Through – This is the percentage of sales to the inventory investment available for sale. The formula measures how much or what percentage of your total available inventory was sold during a given period. For instance, if you had two items for which you had received 10 pieces of both and had sold 6 pieces of both, the sell-through percent on both items would the same at 60%. But if one of these items had been in your store for 12 months and the other item in the store for 1 month, the second item is much more profitable for your business than the first, even though the sell-through is the same.
Evaluate the Return On Investment (ROI) of Your Inventory – For every dollar you invest in a product, how many are you getting in return. ROI analyzes inventory levels, sales, and profitability by comparing the investment in inventory required to generate those gross margin dollars. A high ROI indicates that you have the right amount of inventory, at the right time, for the right price. A low ROI may indicate that you are missing out on sales opportunities and leaving money on the table in the form of old inventory or excess markdowns.
Understand the Gross Profit Margin (GP) of classes/SKUs/vendors – GP measures the percentage of your total sales dollars that are profit dollars. The GP percentage is relative to the cost of the item as well as the selling price. A higher GP percentage indicates that you are selling your product as close to the original retail price as possible. A lower GP percentage may indicate excessive markdowns for products driving down profitability.
Without the data, it is difficult to accurately know your success. The more insight you have, the better equipped you are to make informed decisions so that you can be a profitable retailer.
Do you want to increase cash flow?
Your cash flow and profitability depend on inventory productivity (i.e., does it sell or not and how fast). If you can improve this value, you can improve the profitability of your store. So, what can you do to improve your inventory productivity?
Analyze product performance
As a general rule, you can improve your cash flow by 1% for every 1 week of improvement you achieve in inventory turns. Turns are the rate at which inventory is sold within a certain time frame. This is an important indicator of how efficiently a product is moving through a sales cycle. You can use turns to discover what products sell most quickly and make you the most money (note: products selling at a faster rate usually sell at full price and higher margins). On the flip side, slow inventory turnover is an indicator of lost opportunity.
Here’s how to improve your inventory turn rate:
Analyze your turn data at the class, brand, and product levels to identify inventory performance
Mark down stale products to sell them quickly and make room for better-performing products
Invest your cash into high productivity classes, brands, and products
Making these decisions will improve your inventory productivity to increase cash flow. What would it look like if your business could increase overall inventory turn by shaving off just one week off inventory age? Find your potential cash flow increase:
Total number of sales X .01 (1% improvement from 1-week turn increase) = cash flow increase
That’s a powerful number! RICS system provides turns, return on investment, and gross margin rate of investment on our sales reports so you don’t have to mess with calculating it yourself.
No more guesswork, no more hunches.
Get control of your inventory to increase cash flow. Need more help? Click below to register for our upcoming webinar or check out our guide, Cash Flow: How To Use Inventory Management to Make More Now.
[vc_row][vc_column][minti_testimonial author=”Mark Denkler” company=”Vince Canning Shoes and Tootsies Shoes”]“Information is money. If you have information, then you can use it to improve your business and increase profit.”[/minti_testimonial][vc_column_text]Data is a key ingredient for the success of your business. But, it doesn’t mean anything until you can analyze it and understand what it’s telling you. If your technology can’t help compile, store, analyze, and report on your data, this can be detrimental toward growing your business.
Mark and LaRonda Denkler from Vince Canning Shoes and Tootsies Shoes experienced this before switching to RICS. It wasn’t until a vendor came to them, excited about how well their brand was doing, that Mark realized they lacked true insight on product performance. They had thought that specific brand wasn’t selling well until the vendor told them otherwise.
Background on Vince Canning Shoes and Tootsies Shoes
Located in Delray Beach, FL, Vince Canning Shoes opened in 1952. Their business has been passed down three generations. Mark Denkler and his wife, LaRonda, bought the store from his uncle and have now been working in the footwear industry for over 20 years! Vince Canning Shoes became a partner with RICS in 2003.
The Denklers chose to switch to RICS after their current system went out of business. “Time was the main focus- we needed an efficient solution to get business done,” says Mark.
When they bought Tootsies Shoes, across the street from Vince Canning Shoes, the store didn’t have a retail management system in place. They choose to implement RICS because, without it, they lacked insight into how their products were performing.
Why RICS Software?
Before using RICS, Mark explains “you don’t know what’s selling; you have your daily recaps and look at the inventory wall.” Without inventory data, they didn’t have enough information to know how the business was really doing.
After implementing RICS, they accessed important metrics like turns, gross profit margin, ROI, etc. This insight showed them inventory trends right away.
Mark from Vince Canning Shoes and Tootsies Shoes recognizes RICS has greatly improved their business by stating how it, “allows us to do our buying better. We had no idea we were missing sales. Now, we know we have the information to make a sale.”
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The Importance of Inventory Management
56. That is the number of shoes in my closet. Yep, 56 pairs of heels, boots, sandals, and wedges. This number does not include athletic shoes, flip flops, and the random pair of ice skates on the top shelf. I know, I know.
I am a shoe girl – I have always been a shoe girl. I have all of my shoes organized by color and type so I can quickly find whatever I need and I am always evaluating the shoes I have on hand. I do a physical check to see which ones are worn and need retired and which ones are out of style for the current season. This also allows me to understand what I have and what I “need” when I am out shopping – nothing is worse than having two pairs of very similar, open-toed, black lace booties when I could have gone for the pink, patent leather stilettos!
My system works for me, but I am only managing 56 pairs of shoes and I don’t make or lose money based on what is in my closet. I cannot even begin to imagine what it would be like to be a retailer managing more inventory than that.
But many of you out there can. You manage hundreds and thousands of SKUs that come in and out of your store on a regular basis. You have to manage the inventory coming in from suppliers, what may be transferred to another store or sold online, and what goes out of your store in sales. You need to work hard to manage your inventory so you can make money to maintain and grow your business.
On average, almost 25% of your inventory costs could be eliminated or reduced by rethinking your inventory management strategy. That means more money to invest in high performing inventory and more money to the bottom line. RICS’ exclusive e-book can give you many useful tips and strategies to help you:
Increase your turn rate and move products steadily through the purchase cycle
Use and analyze past seasonal orders to determine how to price product
Save time and generate automatic purchase orders
Create space for profitable products by liquidating non-moving stock
Click here to access our e-book and learn more about managing your inventory more efficiently.
In the meantime, I have shoes to to assess!
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