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Inventory – Do You Have It Right Yet?

Prior to Meridian’s spring Focus on Finance event, we invited one of our long-time, loyal attendees to be the recipient of a free store analysis with the caveat that the results would be presented at the next Focus on Finance in a breakout session. The client eagerly agreed.

We left it up to the client to decide which store she wanted analyzed and she selected a store that had been a high performer a few years back, but recently was in steady decline despite all efforts. Management had spent a lot of money on a major facelift and upgrade, new food offerings, etc. and yet even after all the spiffing up, the unit continued to decline.

The analysis results turned out to be fascinating. The basis for the analysis was a demographic study that immediately exposed obvious wrong assumptions about customer buying preferences. You see, the company had embarked on a co-branded hamburger offering as the cornerstone to its remodel. But do you know what the demographics study said? Wrong choice! It revealed those customers weren’t hamburger eaters! They were, in fact, hot dog lovers! Such a simple error, but the costs were astounding. When the data was revealed, the CFO realized in retrospect that as soon as they put in the hamburgers is when the store started to lose customer count!

Not all inventory choices are as simple as hamburgers versus hotdogs, but one of the keys to retail success is to offer only what your customers want to buy. Determining what exactly that is can seem like a daunting task, until you engage in a low-cost demographics study. Our personal choice, and the firm that conducted the analysis and presented the findings at Focus on Finance was IMST (800-231-4678).

Thanks to computer wizardry, demographic information can now be extracted from any area or series of areas. Demographics are no longer zip code confined. For instance, if your store draws from a certain strip of highway, and you want your study area to run 10 miles up your major highway and to include all households within one mile from the highway, that can be done. Two unconnected circular areas of draw – no problem! Using state of the art technology, IMST will draw whatever areas you want in your study, and poof, you have statistics!

What demographics studies reveal is exactly what your customers have been buying. Although a study won’t tell you about hot new products, it will provide you with tried and true staples for your customers. With your study results, you will have not only a list of the area’s major demographic groups and their qualities, but more importantly, you will be provided with detailed lists of these people’s buying preferences!

Doesn’t it make sense to only buy and stock what your customers will buy? Think of the savings in inventory turn reduction and slow moving stock. And don’t think this is an expensive service. It’s not! One month’s shrinkage in the average store is likely more than the cost of a store’s study!

Companies that embrace this knowledge, designing stores and offerings for each site based on specific customer preferences, have a huge edge over national and regional cookie-cutter operations. Think about it. You simply can’t stock a store in Weatherford, Texas with the same exact products as Tampa, Florida or Bangor, Maine and expect to maximize sales in all three locations. At least one, if not all, will suffer. Even within a single town, you may find major customer preference differences that must be accommodated within your individual stores if you want above-average sales and profits at each location.

Once you have the right products in place (which you’ll know by monitoring your sales), then your only remaining challenge is to stock just the right amount of those products your customers want. Luckily, we have a proven, tried and true formula for stocking rates. The formula is 1.5 times your supplier’s delivery frequency. For instance, if you have a grocery supplier that delivers once per week, your maximum inventory should never be more than 1.5 times 7 days (weekly delivery). This translates to 10-11 days of inventory supply, or about 36 –38 turns per year. If your supplier delivers twice per week, this cuts your stocking rate down to no more than 6 days of product or 60 turns. You should be striving for these kinds of numbers on all products. (This formula works for non-retail goods as well.)

To summarize, every retailer can gain added profit by using use this three-point plan of action:

1) Order a market study on each site you own;

2) Using the study results, modify your offerings so you only carry what the study says customers will buy regularly;

3) Stock no more than 1.5 times your supplier delivery time for that product.

If you do these three steps, you will be on the road to maximizing profit at each and every location! Want to see the data in action? We’ll be offering this same educational session at our October Focus on Finance!

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