Purchase Advice vs. Auto Inventory Replenishment
By Lee Rychel
Since the beginning of time, merchants have struggled with knowing how to keep best-sellers in stock while minimizing the amount of slow-movers on the floor. These issues are directly related and are often addressed with a Min/Max model. This model (also called Par Stock) is used by retailers in an effort to constantly maintain the healthy levels of inventory they think they need.
The main challenge with the Min/Max approach is that it’s often more subjective than objective. It’s nearly impossible to accurately track the rate of sale for hundreds of items manually. We get too excited about an item that sold quickly, overbuy as a result, and then end up over-stocked once that item loses popularity
As a traveling consultant who has worked with more than 150 retailers, I’ve seen dozens of iterations of spreadsheets and software aimed at helping buyers control hundreds of inventory items. Each instance was a massive undertaking and still fraught with a healthy dose of subjectivity. Additionally, these systems only tracked the top performers- but what about the 80% of the inventory that is NOT performing? How long do you keep those dogs around before making the decision to move them off the floor? Moving them out of stock means freeing up money for new intros, but we typically wait too long to make that call.
One of the greatest developments in building out the PROFITsystems retail management system was the development of the Purchase Advice Report. This tool works together with our software’s Calculate Ranking routine to give the buyer a truly accurate look at what’s really happening within their inventory. The work the software does to give a sound recommendation far surpasses the information provided by a spreadsheet. The calculations factor in a number of things that are important when making a recommendation, including:
- Rate of Sale (trends)
- How many items were sold during each of the last six months, weighting the most recent period more heavily
- Biannual trend comparisons
- Last six months vs. last 12 months, with the ability to identify new items that take off immediately
- Information on down-trending items
- Lead Time (how long it takes for items to come in)
- By using the invoice date and the receiving date, and averaging the last six receivings, you have a very accurate picture of the amount of time it actually takes for items to come in
- Item profitability
- Using the GMROI for each item, you can determine if an item is profitable and worth stocking
- Item Popularity
- The Calculate Ranking routine scores your inventory and displays all your information on one report so you can readily see if which items are best-sellers
- Location Information
- Determine whether an item is on the floor, damaged or nailed down using this report
- Stock Levels
- Use the Purchase Advice Report to track how many days an item is in or out of stock, and paint a more accurate picture of its true rate of sale
- The Purchase Advice Report looks at all inventory, taking into account reserved from stock, on-order items, and open PO (purchase order) quantities, including available inbound stock and reserved items on those open POs
- Recommended Order Quantity
- This is the core of the Purchase Advice Report algorithm result. Based on all of the variables noted above the system makes a recommendation to buy or not to buy.
- Overbought Stock
- The Purchase Advice Report not only gives buying recommendations, but it also displays items with negative buy recommendations, which typically mean you’re overstocked.
- Creating the PO
- Running the report can also create the PO for the buyer to review, avoiding manually entering those items onto a stock PO.
Ever wonder how some businesses grow and stay healthy while other similar businesses struggle? Let’s take a look at how implementing these tools would impact two very typical stores.
- A $2M business with 2.5 turns of inventory at a 45% Gross Margin (GM) will typically have $440,000 of inventory on hand.
- A $2M business with 4 turns of inventory at a 45% GM will typically have $275,000 of inventory on hand.
For the $2M business, we can free up over $165,000 of cash for every year we are able to sustain 4 turns.
- A $8M business with 2.5 turns of inventory at a 45% GM will typically have $1,760,000 of inventory
- A $8M business with 4 turns of inventory at a 45% GM will typically have $1,100,000 of inventory on hand.
For the $8M business, we can free up over $660,000 of cash for every year are able to sustain 4 turns.
These results will occur with no increase in advertising, and at the same level of sales- and it gets better. Reducing those dogs and keeping the winners in stock has another benefit: old inventory typically costs 30% of COGS to manage, move, wrestle, repair and fuss with before it’s sold.
In our first example above, let’s take 30% cost against half of that inventory, that’s likely not performing ($220,000). This means there is potentially another $66,000 leaking out of your checkbook every year. These costs and lost cash flow don’t show up on the P&L, however they do truly exist by simply buying smarter, the benefits are incredible.
For members of our performance groups, reviewing the Purchase Advice Report regularly is as important as knowing how much cash they have in the bank. Clients who live by the Purchase Advice Report have inventory levels that make sense, as well as a much higher level of best-sellers in stock than retailers who are trying to do this by hand. Their GMROI is higher and their cash flow is much stronger, and many of our clients see major increases in turns and profitability. By only increasing the amount of turns in the average furniture store, many will see a dramatic impact on the financial health of their business.