22 NOV-DEC 09
The stock market rise in Q2 of this year was due in part to companies slashing every conceivable expense and trimming excess inventory to a bare minimum. In the short run this practice leads to increased profitability even without top line revenue growth. While trimming unneeded expenses and stock is always a prudent business move this pathway to profitability proves short term if avenues to increase cash through sales growth are not developed at some point.
The Retailers Spotlighted in the Case Studies Below Have Accomplished That Goal
Both operations are established businesses that wanted to reach the next level and were willing to go outside of their organizations to do so. They “outsourced” the sales and inventory forecasting function to gain an objective independent perspective of their businesses. The process began as it does in all cases with a simple evaluation called a Financial Performance Review (FPR). The FPR helped pinpoint the major issues facing each of these retailers so that a custom-tailored solution could be employed. The results speak for themselves. Here are their stories.
Case Study #1: Multi-Location Business
This particular operation is a multiple unit store. They have a good reputation in the industry and are reasonably good merchants in general. During a basic review of the merchandising numbers immediate ways to improve cash flow became apparent. Even though the store had fairly reliable information systems the data was not being used effectively and therefore potential benefits were not being realized. The back room was bursting at the seams with out-of-season goods and the majority of any given season’s inventory was front-loaded. Attempts at open-to-buy planning went right out the window as soon as another hot line came along that they hadn’t left money for. Fill-ins and promotional buys could not be financially justified but still occurred anyway.
By initiating a basic bottom-up sales
Inventory Forecasting System
Using data they were already collecting positive results soon became apparent. The short-term results included:
- No longer sitting on old goods
- Not driving sales volume with markdowns
- Balanced inventories between store locations and classifications
- Deliveries timed closer to need
- Closely following a sales and inventory forecast that was not based on last year but rather on the current trend of each classification
- Reduction in the amount of pre-season buying thus leaving money for fill-ins re-orders and promotional buys
The bottom line: Inventory is down over my keyword000000 at retail and markdowns have been reduced by over my keyword00000. The company has more cash available than ever before even given the fact that sales volume is off due mostly to economic factors.
Case Study #2: Single Location Business
This is a single location store in a small town a second generation operation now in the midst of transferring ownership to the next generation. Upon initial interview the obvious problem was lack of sales growth. Every response to my questions was “That’s the way we have always done it.”
This business was also clearly in need of a culture shift: Business practices that seemed to work for Mom and Dad in the 1980s and ‘90s weren’t working out so well for Junior in today’s retail climate. OTB was talked about only prior to major markets and the foundation of the plan was questionable at best. Vendors were given what appeared to be an open checkbook to write initial purchase orders. When that failed to occur the store looked at what they had purchased the previous year and placed orders from there.
Markdowns when taken were done only in January and July. Promotional goods were rarely considered because “Dad got burned once before” the mindset being that they would be buying goods no one else wanted.
We had to work quickly and efficiently.
Or This Store Was Not Going to Make It
The merchandise classification system that was in place needed to be redefined. An inventory was then provided by classification so that we had an accurate starting point. Future orders began being monitored regularly and adjusted based on current selling patterns. Each classification was reviewed monthly to determine overall trends. Using the store’s POS information to spot style size and color opportunities we were able to begin chasing hot sellers as well as identify slow movers so that corrective action could be taken. Open-to-buy dollars are now reserved for re-orders and for opportunistic buys which are now part of this store’s purchasing strategy.
The bottom line: Sales volume is up in double figures margins are healthy turnover is above industry norms and cash flow is strong. The real benefit however is that Mom and Dad who are transferring ownership to their adult child through a buyout agreement no longer worry that their lifelong work won’t be around to fund their retirement or that their “child” won’t have a future of gainful employment (and a good way to support their grandchildren).
Both operations while different in many respects had several things in common that contributed to their ultimate success:
- A willingness to change old habits
- Openness to new ideas
- Receptivity to outside input
- The ability to supply the data needed to properly guide their business
Schedule Your Store’s “Annual Check-Up”
Whether your store does $500000 in annual sales or $25 million it makes good business sense to have an annual check-up especially if there have been significant changes in the business in the past year. Think of it this way: If health reasons kept you from working in your
Store Performance and Success
Store for a period your business probably wouldn’t be as successful. That is the very reason most responsible people have annual physicals. Applying the same logic to your business should result in fewer economic maladies to contend with—and perhaps fewer store closures for the retailing industry overall.
Year-End Reflection
As we wind up what has been a challenging year for most retailers take time to review and reflect on your business in order to see what changes should be implemented in the upcoming year.
Financial Performance Review (FPR)
A Financial Performance Review (FPR) is a quick easy confidential and best of all free way to determine at a macro-level your overall financial well-being. By investing no more than three minutes of time and answering five simple questions you will be able to see where you stand compared to other similar stores what your true upside potential is and possible trouble spots that should be addressed.
Contact Information
Ritchie Sayner is vice president of business development at RMSA Retail Solutions which works with retailers to improve performance. For details on a free FPR contact him at RSayner@rmsa.com or call 816-505-7912.
nsra.org
Article Summary
The article discusses how retailers can achieve increased profitability by trimming unnecessary expenses and inventory as demonstrated by two case studies. Both retailers improved their financial health by outsourcing sales and inventory forecasting functions resulting in better cash flow and sales growth. The article emphasizes the importance of regular financial reviews for sustainable business success.
“A willingness to change old habits and openness to new ideas contributed to their ultimate success.”
Real-World Examples of Successful Retail Strategies
The following examples illustrate how businesses have effectively implemented inventory management and sales forecasting strategies to achieve significant improvements in performance.
- A multi-location clothing retailer in the United States adopted a bottom-up inventory forecasting system. By doing so they reduced their inventory by over my keyword million and cut down markdowns by my keyword00000 despite a challenging economic climate.
- A single-location family-owned store in a small town redefined its merchandise classification and utilized point-of-sale data to monitor trends. This led to a double-digit increase in sales volume and a strong cash flow securing the business’s future as it transitioned to the next generation.
- A European electronics retailer outsourced their sales forecasting and inventory management to an external consultancy. This strategic move helped them balance inventories across their stores reduce excess stock and improve cash availability all while maintaining healthy sales margins.
