We’re all familiar with the old cliché. But in their stores, retailers tend to focus on the “trees” and not see the forest. What I mean here is that we look generally at the items rather than the departments.
Why is this wrong? Well, “wrong” may be a bit strong, but where merchandisers have problems is not with the individual items, but with the quantities of merchandise carried in each department. Today, merchandising a store is very different from years gone by. Today, everything you carry is a “fashion” item. By fashion, I mean changing. Everything is changing – and the changes are coming faster all the time. The items you want in your store are the newest items, the best items. So your buying strategy must be different than it was in years gone by.
Your customers are coming to your shop looking for a “type” of product. They may desire a specific brand or item, but normally they are looking for a type of merchandise and come to see what you have. If you can satisfy their needs, you have helped the customer and you have helped yourself. The customer has now finished his/her search and you have made a sale. If handled properly that sale can be the introduction to other sales at that time or later. Your customer would rather do any number of things rather than go from shop to shop trying to satisfy their buying needs. By having the proper selection of the “types” of merchandise they are seeking, you will solve their problem and help your cash flow.
Cash flow is the life blood of any retail operation and can quickly dry up even if sales are strong. Obviously, if your bills (merchandise and overhead) are greater than your sales, you will have cash flow problems. Overhead must be paid to keep the doors open. The overhead expenses are generally fixed, so they don’t offer much in the way of surprises. The problems come with merchandise invoices that are excessive.
Balance is very important in merchandising. It is said that retailers do 80% of their business with 20% of their inventory. While that may be a little extreme, it means that most inventories are out of balance with sales and a great deal of merchandise dollars are unproductive. This situation is usually the result of merchandising by item rather than department. When you plan and buy by department you can keep your inventory balanced to sales and turning at productive rates. The advantage of retailing over other investments is the opportunity to turn your dollars more frequently. If you don’t take advantage of that opportunity, you are truly missing the boat. The more you turn, the more you make. Every time you sell an item, you take in the merchandise cost, contribute to overhead and profit. Ideally, you will do that with each item, but if items do not sell, there is no income to pay the merchandise invoice, there is no contribution to overhead and there is certainly no profit. Markdowns do not solve the turnover problem. When merchandise is sold at a discount the merchandise cost may be recovered, but there is no contribution to overhead or profits. Consequently, there will be a cash shortage. This is why it is more important to see the forest (departments) than the items (trees) in your buying plans.
The proper way to achieve balance in your inventory is through open-to-buy planning. Open-to-buy is a process that will guide you to determine and purchase the right quantities of merchandise in each of your departments to keep your inventory at the correct level to support the sales you anticipate at the turn rates you desire. If you use proper open-to-buy procedures, you will find your inventory leaner, better balanced, your buying more on target, your turnover improved, your markdowns reduced and your cash flow increased. You will see lots of benefits from open-to-buy planning.
The process begins with defining your departments and then forecasting a sales plan in each department for each of the next 12 months. A look at turn rates is important at this point, since sales and turn are the two things that drive your shop. The whole point behind open-to-buy is to help you improve your turnover so you can make more money. Whatever your present turn rates are, that is just a starting point and with open-to-buy you will be striving to constantly improve your turn. Turnover is calculated by dividing your annual sales (in a department) by the average amount of inventory you keep on hand in that department (in retail dollars). Whatever your present turn is, your goal is to improve it – not by leaps and bounds, but gradually and consistently.
With sales and turn you can calculate ideal beginning inventories – that amount of merchandise that you need to have on hand on the first of the month to support the sales you expect at your desired turn rates – for each month 12 months ahead. This can be done by dividing the turn rate into 12 (months) and multiplying that figure by the expected sales for that month.
With sales and beginning inventory figures, the open-to-buy calculations can be performed. Starting with your current inventory (in retail dollars) subtract your projected sales for the coming month. This will leave an “inventory balance”. By subtracting this inventory balance from the ideal beginning inventory for the next month, your open-to-buy amount for the first month will be established. When you go from a weak selling month to a strong selling month, expect a large open-to-buy figure. When you go from a strong selling month to a weak selling month, expect a zero or negative open-to-buy amount. The most important thing you can do is to go into your slow selling months with the right amount of inventory. This eliminates merchandise carryover, excess invoices and markdowns. By taking any negative open-to-buy away from preceding positive open-to-buy amounts, you may approach strong selling months with slightly less than optimum merchandise (which shouldn’t affect your sales), but more importantly you will be avoiding the excess payables and markdowns which traditionally follow a strong sales period – and consume all profits generated by the stronger sales.
To be a profitable retailer, you must miss a few sales. You cannot be all things to all people or you will have too much inventory and eat up your profits with markdowns. When you plan for your various months, you must look at the demand in each department coupled with desired turnover and then buy the best items available to meet your department dollar plan. This will actually force you to become a better item selector. So looking at the forest first will sharpen your view of the trees.