The amount of inventory that your business has invested in directly affects your profit and your cash flow. Inventory management, for any company that sells products, is crucial to the success of your business. Retail inventory management in the salon/spa industry is a sadly misunderstood area of our business. We are often distracted by shiny object syndrome! A new product or promotion looks so great we want to put it on our shelves, without due consideration for what we already have there!
Too much or not enough inventory?
If you are holding too much inventory on your shelves, you run the risk of obsolescence and getting stuck with inventory that you can’t sell. I can’t tell you the number of times I have walked into a salon/spa and seen product on the shelf that was discontinued the prior year!
If you hold too little inventory, then you are risking being out of stock and loss of customer good will. Either problem will end up costing your business money! How do you best manage your inventory investment in order to maximize your profits and your cash flow, and at the same time, minimize your expenses?
Each category needs to be dealt with in an appropriate manner:
This is the kind of inventory that has been sitting on your shelves for an extended period of time. In our industry, where the retail focus is on consumable products, six months is too long for a product to sit! For the dead inventory that doesn’t sell, deem it “unsellable” and check with the distributor to see if they will take it back. You may have to strike a deal to try a new product they are pushing, but that is OK.
If that doesn’t work, donate it to charity. At least, you’ll get a tax write-off. Instead of holding dead inventory on your shelves, mark it down for quick sale. Look to the fashion industry to see how they handle out of date items. They sell at full mark-up when the new season arrives and discount to sell-off when the next season arrives. Anything left after a certain length of time ends up with a liquidator.
It isn’t dead, but it is moving very slowly. Perhaps it is that product that only a very small percentage of which your customers are asking. That said, slow moving inventory ties up your cash in idle inventory. It creates a negative impact on profitability and cash flow.
If you use an SKU system, you can isolate each individual product and calculate that product’s turnover. If you set a target inventory turnover for products that your company sells and the item you have isolated falls under that target. You can mark it as slow-moving and take action to get it off your shelf or out of your warehouse. You can then use some of the techniques you use for getting rid of dead inventory. If it is a specialty item, consider ordering it on a “special” order basis.
This is your cash cow. This is the inventory that sells, adds to your profit and your cash flow. Track what you think is productive inventory and make sure it is productive. If it isn’t, move it to the slow-moving or dead inventory categories. Use the inventory turnover ratio to calculate how your productive inventory is doing. You may even want to do this by product line.
Be aware that the inventory turnover ratio is dependent on the industry you are in. In the beauty industry the average is about 6 times per year. Usually, the higher the number, the better you are doing.
Unless you manage your inventory investment wisely, your healthy business can turn sour quickly.
Don’t let this happen! There is an unspoken 80/20 rule in business for different situations. In the case of inventory, you usually get about 80 percent of your sales from 20 percent of your inventory. Categorize what you have on your shelf; keep your performing products well-stocked and your slower movers in smaller increments. Better to sell 100 pieces of fast moving product than having 100 different products that don’t sell!
As noted earlier, minimizing inventory holdings reduces overhead costs and, hence, improves the profitability performance of the enterprise.