As a general rule, according to Business News Daily, 80% of your profits come from 20% of your stock. With much of your business investment tied up in inventory, it makes sense to make sure you’re making the best use of your money by managing your inventory well.
Start by determining what merchandise makes up the 20% in your shop. There is a quaint retailing term that calls things you should never be out of your bread and butter items. Customers come in expecting you to have this merchandise. Prioritize your order writing for these lines, and work with your suppliers to predict how much you need on hand each month of the year.
It may be true that your bread and butter items are not your most profitable ones due to high freight costs or low markup. Can sourcing a new vendor, or negotiating a discount, help with this? On the flip side, can you promote the items with the highest margin to make them top sellers?
Another one of my favorite retailing terms is LIFO/FIFO. The abbreviation LIFO means last in, first out. LIFO’s wicked twin brother is FIFO: first in, first out. With FIFO, you’ve succumbed to the temptation to put the newest, most exciting merchandise out while the old stock sits in the stockroom getting older. In order to rotate your inventory efficiently, you need to make sure that your oldest inventory is always put on display first. If you are no longer putting price tags on merchandise (which is how we hide a date code on our goods), you’ll need a stockroom system that mandates storing new arrivals behind older stock of the same item.
The Business News Daily article doesn’t cover this, but there is probably also a 20/80 rule – more officially known as the Pareto principle, which states that for many outcomes, roughly 80% of consequences come from 20% of causes – about bringing in new merchandise. If you have regular repeat customers, perhaps you should try to maintain their interest by having 20% of your stock be new each time they stop in.
Pareto, an Italian economist who lived in the early 20th century, clearly never owned a shop. Prioritizing the 20% of the most in profitable items while bringing in 20% in new goods all the time would be exhausting. But the fact is that is that paying attention to your most profitable lines as well as always having something new – or at least moved into a new display – are both essential to a store’s financial success.
