When my clients come to me with inventory management issues, the problem usually boils down to one of two things: out-of-stocks and overstocks. At first glance, the two issues appear unrelated out-of-stocks resulting from unexpectedly high sales, and overstocks from unexpectedly low sales but they are really the flip side of the same problem. Both result from inadequate planning and sales forecasting.
All too often, before they’ve reached out to me for assistance, their response has been to add an additional layer of inventory to eliminate the out-of-stock problem, only to make the overstock problems worse.
Once we begin to work together, and the discussion comes around to their sales forecasting process, one of the first things that often emerges is that they have not been actually forecasting sales at all. Their focus instead has been solely on how much to buy. That’s putting the cart before the horse, however. And that’s usually at the heart of the problem.
Let’s approach it with some basic retail math, if simplified a bit, for any given month:
Beginning inventory + Merchandise Receipts – Forecasted Sales = Ending Inventory
When an independent retailer focuses on how much to buy, they usually start by looking at how much they’ve bought in the past. But we can rework the retail math to show that they need to start with a sales forecast and an inventory plan:
Ending Inventory + Forecasted Sales – Beginning Inventory = Merchandise Receipts
If we know how much inventory we want to end the month with, and how much we expect to sell during the month, and then subtract how much inventory we’re going to start the month with, we can calculate how much we need to bring in during the month.
In other words, everything starts with a good solid sales forecast. From there, we can plan how much inventory we’ll need to have to support that plan. Only then can we determine accurately how much inventory we’ll need to buy.
A good sales forecast has the following attributes:
- It takes into account relevant sales and inventory histories, to identify extraordinary sales and inventory levels and any other unusual patterns.
- It drills down to the department, category and sub-category level, as appropriate, to identify opportunities and trends, as well as the potential impacts of increased competition, emerging technology, changes in promotional patterns and new product introductions.
- It rolls up from the subcategory, category and department levels to a total forecasted sales increase that can be tested against the realistic expectations of what can be actually achieved.
- It plans in both units and sales dollars, so that the plan is well balanced between unit sales and the average selling price of each unit sold.It is dynamic, so that it can be continually updated and adjusted as each month passes and additional information is developed.
- It identifies the most likely level of sales for any given moth, not the level that might be possible if things broke just right. As a result, it has a bias toward a flat sales forecast for any given department, category or subcategory, unless there is specific reason to forecast an increase or decrease.
Effective inventory management begins with a carefully developed sales forecast. Only then can inventory levels be planned, and merchandise receipts scheduled throughout the season. This is the key to eliminating both out-of-stocks and over-stocks.
Copyright (c) 2012 Ted Hurlbut
Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise and proven retail know-how, Get his FREE report “The 16 Essential Elements of a WINNING Independent Retail Strategy” Visit: HurlbutaAsociates.com