How Item-Level Inventory Pays Off

By
Mark Lotstein, President, Retail Optimization Group LLC

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Every retailer should be doing item-level inventory. Whether you have one store or 100, there is no excuse for not doing item-level inventory. There are only a few things that are guaranteed to make you more profitable and increase your cash flow, and this is one of them.

Here are three things that item-level inventory will do for your business:

  1. Minimize Shrink. If you are not doing item-level inventory, then you could without a doubt lower your shrink. What­ever percentage you believe it is today, you are wrong. There is no way to have accurate shrink numbers without item-level inventory. To explore the cost benefit, do the math on what you would increase your profitability by if you lowered shrink by 1% or 2%.
  2. Identify Dead Product. We have worked with hundreds of stores over the past few years, and in every case, at least 10% of the stores’ items do not sell. If the average store has $50,000 (at cost) of merchandise, and you were to get rid of 10% to 20% of dead and slow-moving items, what would that equate to in dollars?
  3. Minimize Overstock. Based on all the clients we have worked with, we can almost guarantee that you have overstock of many products, such as cigarettes that used to sell at a faster pace, candy that was hot a year ago, and drinks that move faster in the summer but that you still stock at the same level in the winter. If you are like most stores, you get deliveries at least once a week. So why have more than a 10-day supply of any item? Think about the bottom-line effect of reducing carrying costs by 5%.

This is what item-level inventory does for your business, and the return on investment you will see from it:

  1. Reduces shrink by 1% to 2%, with the average store having $40,000 of prod­uct in house. That equates to an extra $400 to $800 monthly.
  2. Removes dead and slow-moving product from the store by 10%. That’s an extra $4,000.
  3. Minimizes overstock 10%. Add $4,000 to your bottom line.

How to Do It

Even a single-store owner can do item-level inventory. Here is a simplified ver­sion of what we recommend to clients.

  1. Make sure your scanning and back-office software are the most up-to-date versions. It is important to have the newest features and access to the software company support desk to help you do the initial inventory setup and processing.
  2. You must have a high-quality pricebook in the software (includ­ing only items you really carry, good descriptions and cost-of-goods infor­mation). Remember the old computer adage “garbage in, garbage out”: If you have a poor pricebook, you will never have a quality inventory, but you will have a number of other issues.
  3. Hire a third-party inventory company. You do not have the time to do an item-level inventory properly, and you can’t have your employees do it. We work with a number of high-quality companies in different parts of the country, so feel free to call or email me and I will be happy to provide you with some options in your area.
  4. Make sure the inventory com­pany can interface with your back-office software and that they have worked with the software before. Also make sure that the software company does not charge you a fee to work with an outside inventory company.
  5. It will take you at least three inventory counts to have quality num­bers and real shrink information. So if you are planning on eventually doing item-level inventory quarterly, that’s fine; but make sure you do it for at least three months in a row to get you off on the right foot.

Remember that in our industry and today’s world, no matter how much you trust your employees, your vendors and your own knowledge, you need hard information. Item-level inventory can give you real control over your business and help you maximize your profits. 

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