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Inventory Woes

In my opinion, the number one problem facing most music retailers today is inventory.  They have too much of the things that aren’t moving and not enough of the things that are.  In this brief article, I’ll try to explain how I look at inventory, some key pitfalls to avoid, and how to identify the winners and losers in your inventory.

First thing, if you are serious about being in the music business, you’ve GOT to have a quality POS (a point of sale, not the other POS - you probably have too much of that - which is why you’re reading this article!).  You can do everything I’m going to share with you without a POS, but the amount of time you’d spend compiling data would EASILY pay for a POS! I recommend Tri Technical System’s AIMsi. In fact, I have no idea why you’d use anything else - almost everything I’m going to show you is just a click away in AIMsi...

We are going to look at a few stats to determine our inventory position: GMROI, Average Inventory, and Inventory Turns.

GMROI: An inventory profitability evaluation ratio that analyzes a store's ability to turn inventory into cash above the cost of the inventory.
  • It is calculated by dividing the gross margin by the average inventory cost.
  • A ratio higher than 1 means the firm is selling the merchandise for more than what it costs the store to acquire it. The opposite is true for a ratio below 1.

Average Inventory: You're average inventory on hand for any given period.  Measured monthly is the best.
  • Calculation: Beginning Inventory + Ending Inventory / 2 = Average Inventory

Inventory Turnover:   A ratio showing how many times a store's inventory is sold and replaced over a period (usually one year)
  • Inventory Turns = COGS / Average Inventory

Knowing these terms, run or create an Inventory Analysis report, it should have the following columns:

Most retailers will immediately look at the Gross Profit % and think this business is doing well.  But while they have a healthy gross profit, I would surmise that this business is actually enduring extreme cash flow pressures, and is probably on it’s way out of business if it doesn’t get it under control!

The metrics that reveal this are GMROI and Inventory Turns.

The GMROI shows that for every dollar they’ve invested in inventory over the last year, they only received $.65 cents in return - a net cash OUTFLOW of $.35 cents!

The Inventory Turns shows they have over ONE YEAR’S worth of inventory on hand right now (Inventory Turn of 1.0 = 1 year’s worth of inventory, Inventory Turn of 2 = 6 months of inventory, etc).  In terms of total dollars, they could go for over a year without ordering ANY product!

To fix these issues, they need to do some combination of the following:
  • Increase sales/turns of the inventory they already have on hand
  • Reduce overall inventory

To find the inventory that is producing well for them (the winners), they need to use their POS to determine the Top 20 SKUS per department based on units sold, and also what the Top 20 are based on dollars sold.

To find the losers, they need to run a report to find the WORST performing inventory - the inventory that hasn’t turned over the least year.

Once we have this information, we first must put a system in place that insures we NEVER run out of our best inventory.  No matter what, we ALWAYS have those SKUS in stock.

For the losers - we can try re-merchandising them to a better location, providing product training for our staff so they are more comfortable selling it (adding a SPIFF to this is a great way to increase staff participation on moving this inventory), and finally, putting it on sale or clearance.

Putting this concepts into effect can drastically change the financial picture for this store.  If we can reduce the overall inventory while maintaining sales, see how it changes our GMROI and Inventory Turns:

You now see that for every dollar invested in inventory over the course of the year, they receive $1.54 in positive cash flow - a vast (and sustainable) improvement.  Plus, they are now turning their inventory twice per year - meaning they only have about 6 months of inventory on hand, which is a much healthier position.

While digging out of this hole will likely take a while, setting a goal and devising a plan and acting on it is a must if you wish to be healthy, happy and successful in retail.

Remember, if you need my help, I'm only an email away.


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