Inventrak Blog

Technology is a force that cannot be ignored in any industry. Equipping your retail business with the proper technology is an absolute must if you hope to make the most out of your inventory, maximize the value of your customer relationships, and optimize your workforce. Truly effective retail technology requires, at minimum, the following three basic components:

-Detailed inventory control that allows you to determine your bestselling items

-Customer tracking that allows the merchant to understand their customers’ purchasing patterns and personal preferences

-An easy-to-use point of sale solution

There are, of course, several other features that numerous retail applications boast, many of which are beneficial and play an important role in your business operations. However, if you are considering purchasing (or already own) a retail management system that does not cover these three basics, you and your business are better off finding another system. 

Inventory, customer relationships, point-of-sale: These are the three legs of the Retail Tripod on which your business rests. They operate in a cyclical manner: Inventory drives customers to the store, a great customer experience will motivate them to buy, and the point of sale is the close, complete with customer registration, item recommendations, etc.  

The actions taken at the POS may alter your customer relationships and inventory. For example, if a registered customer makes a purchase of $5000 in a store whose average sale is, say, $150, this information is stored in your customer database which, after review, may inspire you to designate this customer as a VIP. Or if an item that does not do particularly well suddenly explodes in sales (say for seasonal reasons, or fluctuating trends) then this will be logged as a bestselling item by your inventory management technology.  So the POS serves as a gateway that takes information from your sales transactions and pushes that information to the end-user in a way that allows them to interpret this information in terms of inventory levels, the value of customer relationships, and more.

With the proper retail technology in place, managing your business is as easy as 1-2-3!

We have talked about the Key Performance Indicator on last blog (Retail Metrics-Increase Your Profit). GMROI evaluates your rate of return of your inventory. You definitely want to increase your GMROI. But how? Let us look at Inventory Turnover first.

Inventory Turnover

You must have heard of this term for a lot of times. What is it? How it can help you?

Inventory Turnover is a measure of how many times your inventory turns over in the course of a year.

For example, if you have an average inventory of 100 jackets in a year and you sell 100 jackets every 4 months, your inventory is totally replaced 3 times per year. Therefore, your inventory turnover is 3.

Given the example above, it is obvious that if your inventory turnover increases, assuming your pricing is fixed, you should earn more money from inventory (GMROI increases). However, the truth is that turnover often is increased by reducing selling price, which reduces Gross Margin from Sales.

That is why I want to mention Inventory Turnover before summarizing how to increase your GMROI.   Actually GMROI can also be calculated by : GMROI = Gross Margin % x Inventory Turnover.(If you want to know how to get this formula, I can tell you.)

Now, you can find that you can increase your GMROI by increasing the factors in the formula, for examples:

• Improving Delivery Speed. Now you can reevaluate the importance of your vendor delivery speed. It has impact on your GMROI! A shorter lead time means a lower reorder point, lower average inventory, increased Inventory Turnover and eventually increased GMROI. You should choose the vendors with average lead time as short as possible.
• Careful pricing strategy: using markup or markdown to increase GMROI is much more complicated than picking a vendor. But the good news is, you don't need to be a mathematician, statistician or science giant to make decisions on your pricing. You can use retail IT tool to help forecast your GMROI based on possible pricing plans before you make final decisions.

Here are some Performance Indicators which you can evaluate your business and make improvements. You will find that you can catch these key indicators easily:

Gross Margin Return on Investment(GMROI)

Do you have investment in stocks, bonds, real estate or commercial bank deposits? Do you care how they are doing? Do you know what your payback is? Would you deposit your savings in a bank paying 7% interest when the bank next door pays 8.5%? Probably not.

The very same principles should be applied to your inventory buying decisions-GMROI. Unlike traditional ROI, which measures the rate of return on all your "investments" including building, GMROI looks only at the dollars invested in inventory. This allows you to isolate and analyze the effect of various inventory purchasing options.

GMROI can be calculated: your Gross Margin from Sales divided by Average Cost of Goods Sold.

It is obvious that your goal should always be to increase your GMROI.    

But how? We will discuss on how to increase your GMROI on my next blog.

In the past decades, there is a trend that many retailers (from national chain stores such WalMart to all types of retail businesses) have started to adopt ERP systems to meet their increasing managerial needs.  They are in favor of ERP systems because ERP systems address the issue mentioned above in such ways:

• ERP systems are multifunctional in scope, tracking a range of activities such as financial results, sales and human resources.
• ERP systems are integrated in nature, meaning that when data are entered into one function, information in all related functions is also changed immediately.

Thus, an ERP system not only enables retailers to obtain more value from supply chain by:

• Increasing the speed to bring a business opportunity to market;
• Increasing the speed to meet customers' orders which makes low optimum inventory level possible;
• Increasing the speed to adjust categories and assortments according to demand.

An ERP system also helps retailers save money by abandoning high cost for maintaining multiple systems since all functions can be done in one system.

If you are struggling with your retail management, why not give ERP systems a try?

 You can see most of your cash has been invested in your inventory. Inventory is your biggest assets which generate almost all your cash, but it also consume large part of your cash. New items, new categories, reorders, there is always something to buy. So if your cash is tight and you wonder where it is gone, look at your inventory.

Thus inventory control is very important from the perspective of cash flow management.

Small retailers need to watch out every dollar invested in the inventory.

Inventory control strategy

Order the minimum necessary to meet existing demand.  

The smart strategy under these circumstances is to order the minimum necessary to meet existing demand. This is a difficult balancing act as no retailer wants to take the chance of being out of hot items and sending customers to another retailer in a competitive market. The point I tried to make here is that small retailers should have ample supply of items that sell daily or frequently, typically the items that get people into the store.  

Offer less high end items

Another strategy in recession is to keep broad and deep selections by offering less high end items and more inexpensive to moderately priced items for budget conscious customers. Additional consideration is in this appearance of the store, as minimal selections can convey a negative impression to customers. Often a well stocked store implies a certain success to customers and encourages a better relationship.

Cash outflow schedule

Another point I want to make about your cash flow management is cash outflow schedule. You should really pay attention to your cash outflow schedule. At any time, you should be assured that you have enough money to pay your vendors and expenses such as wages. If you don't, for example, you have $20,000 payment for your new orders which is due today, but you do not have the money to pay, what will happen? Nothing good will happen.

Thus

• You should always be sure that you have enough money to pay your vendors before the date due.
• For fixed expenses such as rent, wages and utilities, you need make reserves in advance. In such a bad economy environment, if you do not want your store operations in trouble, you should reserve at least one month' expenses.

The good news is that consumer  confidence jumped in April, you need to watch our your cash flow to sustain and wait for the good time coming.  

But wouldn’t it be great if you could make more money with something simple? You hear about “Small Ways to Save the Planet” or “Easy Ways to Burn Extra Calories” but where is the “Simple Ways to Increase Cash Flow?” Your argument may be that it’s not that easy. Says who? One easy way to boost your sales is through a well-known and under-utilized process: Up selling at the register!

In a recent blog post, small business writer Bill Sifflard points out the value of item suggestions at the register level. “If your sales people simply suggest a related follow up product or “plus sell” with every sale,  statistically they will increase their gross sales volume on average by 20%-25%.”

Consider for a moment how simple an action this is for such a large payoff. By suggesting even one additional item to your customers based on their purchase, you are able to increase your sales by up to 25%! Of course your team will have to anticipate rejection, but as Sifflard points out, “If 3 out of 10 [customers] bite, you have an all-star batting average.”

These suggestions are easy: If they buy tennis shoes, suggest socks; if nail polish, nail polish remover, etc. As Sifflard reminds us, asking “Anything Else?” at the end of a transaction hardly counts. Suggest specific items to customers based on their current purchase, popular items, or sale items.

Some POS systems  even come equipped with a Related Item Recommendations feature that suggest items based on items previous customers purchased, products related by item type, or management recommendations. It’s a great cheat!

Don’t underestimate the power of up selling! It could mean a 25% sales increase to your business!

All merchandise has a life cycle which customer demand peaks, and then ebbs. When retailers order new items, they usually purchase as much as they think will be enough, in order to avoid losing sales because of out-of-stock situation. For reorder decisions, they take the same considerations into it.

However, retailers often find they are in a situation that some products are not selling so well and are overstocked. And these inventories become dead when retailers miss their last chance to sell them - they fail to take markdowns on them in time.  

Dead inventory represent a part of your inventory investment. Some stores have as much as 30% of the inventory are dead, that is a lot of cash.  

Retailers should expect some of their inventory will become dead.

However, they can use certain strategies and technology to minimize the loss.  

Creat a budget for markdown 

First of all, retailers should have a budget for markdowns, and to use it to assure that markdowns are being taken on a timely basis. Once customer demand ebbs and you still have the products in stock, you can take extraordinary markdowns to spur sales.

Minimize the possibility of dead inventory 

Secondly, you should minimize the possibility that your inventory becomes dead. Order minimum new items, and then based on your daily/weekly sales reports to make reorder decisions.  The real-time transaction reporting technology ensure that you are able to order minimum amount each time to meet the demand of changing market.

We are not sure how many of our new products will be sold out. Neither are we sure when customer demand for a product will begin to ebb. But we can still do something with this unpredictable world. Prepare for the worst, and work smart with retail technology.