When not to go with your gut: forget instinct. Careful scheduling and record keeping are the hallmarks of effective inventory management - inventory management techniques

Nation's Business, Dec, 1993 by Meg Whittemore

Richard Siegel's shoe stores in New York and Massachusetts sell children's snow boots in August. Preseason sales like these help him pick his customers' brains and determine what will or won't sell in the season ahead. "It is a way to set up your inventory so that downstream you know whether you have to make corrections in colors or size long before you get into the heart of the season," Siegel says.

As president of Dunkirk Shoes, based in Olean, N.Y., Siegel manages 15 stores that sell moderately priced women's, men's, and children's shoes and accessories. Having grown up in a retail family, Siegel has seen the good and the bad of inventory management. He remembers that his father's shoe store "had lots of white-elephant shoes in the basement" that never sold. He remembers going to shoe shows and watching small shoe retailers "leaving a trail of paper orders with the vendors, shooting from the hip and buying duplicate styles."

For too many independent, small-store retailers, inventory management is a function of instinct. Actually, however, it is careful scheduling and record keeping that keep a store afloat.

"Eighty percent of these gut operators who say they know what their customers want and make their buys accordingly are always in trouble because their cash flow is stuffed away in boxes of unsold merchandise in the back room of the store," says Joseph Siegel (no relation to Richard), vice president of merchandising for the National Retail Federation, a retail trade group based in New York City. A former retailer who used to own 14 women's clothing stores in northern New Jersey, Siegel now advises small retailers on effective merchandising and inventory management.

"There are only two things in life that improve with age, and inventory isn't one of them," Joseph Siegel says. "Inventory is the largest single asset in a retail company. It is the cash flow of the business." A store's inventory, he says, represents a retailer's merchandising philosophy, buying decisions, and

customer satisfaction. Inventory, according to Siegel, is the center of the retail wheel.

How do you reverse a pattern of overbuying? Start by understanding that every product has a different shelf life and that allowing inventory to age beyond its prime selling cycle without markdowns is the first step toward inventory mismanagement.

"If there is one word to describe proper inventory management, it is discipline," says Martha Morgan, president and founder of Metropolitan Apparel Group, Inc., an upscale women's specialty store in Wilmington, Del.

Morgan relies on markdowns to move merchandise that has outlived its season in her 1,000-square-foot store. She buys for six seasons each year: spring, summer, early fall, fall, holiday, and cruise. "I learned that more is not always better," she says. "I structure the inventory to sales projections and use a timing calendar."

The calendar devised for her by Joseph Siegel, who led a seminar she attended, pinpoints when merchandise should arrive in the store, when it should be presented to the customer, when reorders should stop, and when markdowns should begin. "This is like a cookbook," she says. "It is something to follow."

Morgan says she might extend the schedule by a week in either direction, but she says that in general the formula works well.

"I can see a 5 to 10 percent increase in our gross margins since using this method," Morgan says. Her gross profit margin, the difference between net sales and cost of goods, is typically 48 percent, while the industry average is 43 percent.

Before adopting her current approach to inventory management, Morgan, who opened her store 14 years ago, was "well-stocked within our merchandise category, just like other retailers of that time," she says. "I was not afraid to order 144 pieces of a style in a multitude of colors because I knew we could sell them."

By the late 1980s, Morgan's approach to managing her inventory changed, prompted by increased competition, shrinking gross margins, and sluggish merchandise turnover.

She explains how she learned to restructure the inventory and develop seasonal merchandising plans. Morgan now buys small collections of clothing: 24 pieces in five different styles.

"We expect to sell 85 percent of that at regular price, which means we have less markdown," she says.

Markdowns, of course, are an important part of inventory management, and they can be instrumental in planning future sales. Joseph Siegel of the retail federation suggests keeping a record of the number of blouses, sweaters, shoes, etc., that are marked down each season.

"If you marked down a lot of blouses last January, that means you had too many to begin with," he says. Take that information and apply it to your buying plans for next January, Siegel advises.

Morgan would agree. "Too much inventory means higher markdowns, which increases your cost of goods sold and reduces your profit," she says. "Too little inventory reduces your sales capacity."

Her strategy appears to work, Morgan's inventory turns over 4.5 times a year, while the industry average is 1.9 times annually.