Boucher: What Are Turns? What Do they Cost?
Norman Boucher is president of LCN Outdoors, a leading supplier to the RV park and campground sector. The following guest column appears in the November issue of Woodall's Campground Management.
Think of turns as your groceries. You go and buy your weekly groceries milk, eggs, fruits, vegetables, meats and the like. By mid-week they have started to spoil and the produce is tossed out, much like taking a markdown in your store. We shop once a week because it is the easier and less time consuming. Sometimes, we do not even check sales flyers or specials or forget to clip those coupons. Are we in such a hurry that we can leave this money on the counter?
Inventory turn is a retail benchmark that measures how often inventory cycles in a given period, generally measured per year. The key to success is to turn inventory into cash to buy more inventory and turn that into cash as well. Carrying unneeded inventory can derail profits, it ties up cash for day-to-day operations, takes up floor space and then becomes obsolete and must be marked down.
Inventory turnover is calculated by taking your cost of goods sold and dividing by the balance of your inventory at cost. Example: sales at cost of $10,000 per year with an average inventory cost of $2,500 the turn of inventory is 4 times.
It is a fact that almost every retailer’s inventory is their largest asset. Inventory may make up 75% and is also a prime generator of revenue. It is not enough to know sales volume or inventory levels; you must look at sales in correlation to investment of inventory.
Turning inventory over is critical to success. A higher inventory turnover ratio means that you have less cash tied up in inventory to support a given level of sales. A true merchandising goal is to reduce your days’ supply to match lead times without losing sales.
Control your inventory (never buy more than you can realistically sell in a 4-week period of time). It is easy to buy 100 of any item to save on a purchase price, but more difficult to find 100 customers to buy that exact item in a short period of time.
Keep markdown items at the back of your store.
How to calculate inventory carrying cost: Add up your annual inventory costs: Storage-$75, Handling-$25, Obsolescence-$30, Administrative- $65, Pilferage-$30 and Damage-$25 for a total of $250 annually.
Divide the inventory carrying costs by the average inventory value: $250 divided by $2,500 equals 10%.
Now add your costs: Capital-2%, Insurance-1%, Taxes-3% for a total of 6%.
Add your inventory carrying cost of 10% plus your business costs of 6% and this gives you your inventory carrying rate of 16%.
As you can see, with a 16% carrying cost, how much could you make investing in a traditional manner or what is the cost of not having a day-to-day fund as needed?
What is inventory performance measurement and why is this becoming more important during these economic times? It has become more important to properly reduce inventory during the proper time frame rather than increasing your store size. Imagine your grocery store not having chips and salsa prior to that big game or race.
With smaller stores, one may think to measure inventory via dollars earned per square foot of store per category.
Someone in your company must learn to measure inventory. Without this type of analyzed measurement, your turnover rate per category cannot be gauged properly.
How much inventory per category? During what time of year should a category level be changed to better stock your store and help manage turns and inventory performance per square foot of store?
We all know prior to Memorial Day and for Memorial Day weekend, we should have RV supplies in inventory for those campers that truly do not prepare their units or camp regularly.
Depending on your location, do you need more fishing supplies rather than swimming products and suntan lotions? Toys are always needed and can take over floor space after Memorial Day, helping to increase your turn ratio and increase your dollars per square foot sold along with your cash flow.