Inventory & Margin
con•trol n. to verify or regulate by systematic comparison.
74. The #1 Inventory Rule. Narrow and deep, keep it fresh and keep it turning. The definition of a great inventory is one that turns. For example:
Let's say we have a business that does $4,000,000/yr @ 25% margin. That would mean that our cost of goods sold [CGS] is 75% of sales, or $3,000,000. Now, if our inventory was $1,500,000 that would mean our inventory turns/yr is 2 times [$3M/$1.5M]. Now, if we were working on 4 turns/yr it would mean our inventory would only have to be $750,000 [$3M/4]. That would leave $750,000 to do whatever you wanted to [invest in stores, etc.]. The more turns the better.
- 75. Dating [when the invoice is due]. Dating is also essential to building an efficient inventory. If you have a 45 day supply and have 60 days dating you have 15 days to use the cash from the difference of when the product is completely sold and when you have to pay for it. This creates positive cash flow.
76. Margin. When considering margin you must always take into account inventory turns. One without the other leaves you with an incomplete picture.
If you were to invest $10,000 in two different businesses [A&B], and if A were to promise you a 40% return, while B promised you a 15% return, which would you choose? You shouldn't choose yet because you don't have enough information. If I was to tell you that the 40% return from business A is over a 4 month period, and the 15% return from business B is over a 1 month period, you could now make a more reasonable evaluation of the merits of each investment.
Over a 1 year period business A will make you $12,000 [$4,000 x 3] while business B will make you $18,000 [$1,500 x 12]. The choice is easy. Business B makes you 50% more. So, never talk margin without turn, that's margin efficiency.
- 77. Margin Efficiency. Margin x Turns = Margin Efficiency. Always consider margin efficiency when pricing an item. Each item has its own margin efficiency. Do not get caught up in having to work at a certain margin, it is meaningless.
- 78. Every item has its magic price.
79. Inventory turns. In an industry that has an average of 40% margin, there will be a change of 1 inventory turn for every 5% change in margin. For example:
If your margin is 40% and you enjoy 4 turns per year [ME=160], you will find that your turns will go to 6 per year if your margin drops to 30% [ME=180]. This would prove a better return. Furthermore, if your margin dropped to 20%, your turns would increase to 8 [ME=160], this would not be better than the return at 30% with 6 turns [ME=180]. Your inventory is expensive, make the most of it, keep it working, keep it turning!
80. Customer Retrieval, Associated Sales, & Goodwill. When talking about margin you must not only consider turns, but customer retrieval, associated sales, and goodwill as well. The lower your margin - the greater the customer retrieval. The better your value, the more likely your customer is to buy other items. The greater the value - the more likely the word will spread. Repeat business and word of mouth advertising are essential to a retailer's success. For example:
If you are in Disney World you may buy a T-shirt for $30, but you are not going to go back there and buy more unless you have to. It is not a good value. You may go to a store and buy a particular item that you really want, but if it is not a value, how likely are you to buy something else. Whereas, in a store that has a great deal going - you are more likely to buy more, come back again, and most importantly, tell everyone about it. Here’s a guide to measure the possible impact of different pricing:
