A better system for managing inventory
Digging into the data revealed gaps that are tying up cash and resulting in lost opportunity
Welcome. I’m Katherine Raz. I own a shop in Tacoma, Washington called The Fernseed and this is my newsletter about running an independent retail business in the age of Amazon, Covid, etc. If you’re a shop owner, or you sell products to small retail businesses, or you’re just curious what this whole business is about, you’re in the right place. (And if this email was forwarded to you, you can sign up to receive it yourself right here. It’s free!)
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I started taking a deep dive into retail metrics recently because I'm trying to manage our inventory more effectively. While I'm far from finished with the process, I thought I would outline some of the metrics I've started tracking and the nascent systems I've developed to manage the flow of products in and out of the shop. I'm fascinated by how this process, even in its beginning stages, has revealed bottlenecks in our process. I'm convinced that solving these surprisingly basic issues will free up much needed cash that is currently tied up in inventory while also generating new revenue from untapped or underutilized sources.
Let's start with something super basic: inventory on hand. If you are running a retail business, you must know this metric. How much inventory are you sitting on, and what is its total wholesale (cost-based) value?
It's not always easy to track! For half a year our inventory was being over reported in Shopify because of a data tracking redundancy that occurred because of an app we use called Bundles. Bundles solves a very basic problem we have, which is how to "bundle" individual products together in a single SKU. (This is handy if you sell gift boxes, for example.) The issue we had (which Bundles has now fixed) was that every SKU in a bundled product was being counted twice: once as its individual SKU, once as a bundled product in the system. This meant that my inventory was reporting as $130k when it was actually closer to $89k. I had to make a big end-of-year cost of goods adjustment which I'm sure will be a nightmare when the IRS audits me.
Whatever you have to do to get your inventory amounts accurate, do it, even if it's tedious. This number has to be as accurate as possible. Everything hinges on it.
Once I had accurate inventory numbers, I realized that we were sitting on about as much inventory (cost-based) as we were making in monthly sales. Not great!
Part of the reason we have so much inventory is because we stocked up to avoid selling out of key products when COVID was exacerbating supply chain issues. But I made some buying mistakes there, too. We dramatically overstocked on some things unnecessarily.
My goal now is to liquidate as much of the overstocked merchandise as quickly as possible. To do that, we have to identify what merchandise should be reduced to sale and clearance prices.
Sale price: The item is discounted but not below cost (we still make money, but not a great margin)
Clearance price: The item is discounted below the price we paid, so we lose money on this item (but still free up cash)
We have a neighborhood sidewalk sale coming up, so we have a lucky opportunity to liquidate a lot of stuff quickly if we take advantage. Otherwise I would be a bit more cautious about flooding the shop with sale and clearance items. In order to avoid looking like a garage sale, we strike a balance between offering a sale section and re-pricing sale items with the same price tag we use on regular price items. We also use plain brown kraft stickers for sale prices, which is a bit more classy than red or neon sale stickers.
Once we've cleared out as much of our sale and clearance items as possible, I outlined a new inventory tracking system that I hope will help us better manage the flow of inventory in and out of the shop.
Every item is categorized by where it fits in our inventory flow. There are 5 categories:
Flagship products
Basics
Maker items
Sale and clearance
New items
Every new product we add gets added to the New Item category while we assess how it's selling. If it sells really well, it gets added to Flagship product line. Flagship products are products that generate the most revenue for the shop and are prioritized in merchandising, re-ordering, marketing, and staff product education. These are typically products with an A rating (if you're using an inventory grading system such as Stocky).
If a new product sells decently (B rating), we'll either add it to the Basics or Maker category. Basics are products that don't generate a remarkable amount of revenue, but that shoppers expect to find at a plant and flower shop, like flower food or vinyl saucers. Maker items are handmade products that typically have a higher price point and so don't sell as quickly, but are part of our shop mission to support artists and designers. (Some handmade items achieve Flagship status for us, which is awesome.)
If a new item doesn't sell well, we'll add it to the sale category and eventually clearance it.
This all sounds great in theory, right? But how do we make a practice of managing it?
To start with, I outlined goals.
Ensure Flagship products are always in stock and merchandised well at both shops.
Maintain ideal ratios of Flagship, Maker, Basic, and new products so those categories are not tying up too much cash. (TBD on what those ratios are.)
Liquidate sale and clearance items so they sell somewhere between the 6-12 month mark. Don't hold on to anything for more than 6 months, ideally, but never longer than a year!
One of the challenges I have now is how much of an active hand I have to have in things. We have an inventory team responsible for processing and ordering products, but given the fact that even *I* don't know how to most effectively manage our inventory for ideal ratios and cash flow, I can't expect them to just... figure it out. To that end, I've recaptured some of those duties for myself and am now regularly meeting with one other team member once a week to work on inventory with goals metrics—and not just tasks—in mind. We're taking a goals-based approach, and it's already working.
This past week, for example, I noticed that many of the plants in our Flagship category (read: best selling plants) were not in stock at our Proctor location just as we're about to have this neighborhood sidewalk sale. So I ordered them! If we were taking a task-based approach we may have decided we didn't need to order plants for Proctor (the task being: make a weekly plant order) because we have enough to make the shop look full. With the goals-based approach (keep best sellers in stock), I know most of the plants in inventory aren't our best sellers, so I'm re-stocking accordingly.
In order to fit all our current products into one of the categories, I'm going through everything in inventory and assigning it a status using tags in Shopify. It seems like a huge undertaking, but I know the products so well this task will likely take me a few hours of data entry.
Going forward, we've outlined concrete inventory tasks to address weekly and monthly, as well as metrics which will tell us how we're doing.
Here they are, distilled.
Weekly
Order plants, focusing first on Flagship, then adding anything associated with a bundled product, special order, or new and rare items we can support with marketing
Mark down any plants that have been sitting 4+ weeks
Check inventory on Flagship hard goods and Basics and re-order if needed
Organize transfer of products from South Tacoma (warehouse) to Proctor, ensuring Flagship items are in stock and Maker/Basics are well represented
Enter outstanding purchase orders into the system
Monthly
Assess performance of New Items with 3+ months of data and decide how they'll be categorized going forward
Check on status of any outstanding purchase orders that have not yet been received
Figure out which new Flagship, Basic, and Maker items should be added to the website
Metrics
Total stock on hand cost price (both locations)
New inventory/purchases this month
Cost of goods sold
Turnover rate
Stock to sale ratio
Gross margin as reported in bookkeeping AND in Shopify
Ratio of products in each category: Flagship, Maker, Basic, New, Sale & Clearance
Gross sales (both locations, online)
Discounts
Average order value (both locations, online)
I have additional very granular sales metrics that I track each month, but these are the primary metrics associated with inventory management.
As I mentioned, this is a new process, so I'll be eager to report back on results once we have a few months of putting it into practice.
I'm very curious what you think is missing from this picture, or what questions you have about how I came up with or am implementing this process. I’m happy to share specifics on how we pull reports from Shopify, which can be tricky!
Meanwhile I’d love to know: what are some of your biggest inventory challenges and how are you tackling them?