The fundamentals of ordering inventory for retail
By Janet Cummings
When you are in retail, ordering the right amount of inventory can be the difference between making a profit and going under.
The fundamentals of ordering inventory
In retail, ordering the proper inventory can be the difference between making a profit and going under. If you carry too much inventory, you risk tying up too much capital that may be needed in other areas of your business. For example, sinking funds into the costs of unsold goods and the necessary storage to hold them for long periods can impact your advertising budget. Conversely, you risk losing customer credibility if you do not keep enough inventory. They will seek out a competitor with what they need when needed. Losing customers and the sales associated with the lack of available products can harm current and future business. Ordering and investing in the right products at the correct times is the best way to ensure your inventory works for you.
I have worked in retail for over thirty years. While a lot has changed, a lot has stayed the same. I am sharing what I have learned about how understanding merchandising, price, and ordering inventory can drive sales, reduce costs, and help your retail business, whether in brick-and-mortar, online, or both.
Before you order, know your numbers
Before ordering, you should always know your current inventory; otherwise, you risk inflating your inventory. For example, you may be sitting on 20 units and have ordered 20 units, but you may have only sold five units. Sitting on inventory takes up your spending dollars and warehouse or merchandising space. And for products with an expiration date, you increase your liability of losing money on unrealized sales.
Before you order, know your customer
To successfully order products, it helps to know your customers’ buying habits. What have they bought in the past? What do they like looking at now? Are they $100 customers or $1,000 customers? Are the $100 customers impulsive? Do the $1,000 customers take their time to decide? By understanding your customer’s buying habits, you can make more informed decisions about what inventory you need to carry.
How often should you order inventory?
Knowing when to order products is a science, not an art. You cannot rely on your feelings or your gut. Hard data and tracking are necessary. You need to accurately estimate how much your customers are likely to purchase and when your customers are likely to make a purchase. On top of that, the logistics surrounding the timing and size of an order are crucial. How much lead time do you need to anticipate between order placement and receiving the order? Will you have the space to store the product when it arrives? Is the storage of these specific products a good use of that space? Would a different product be more valuable to allocate these resources to? These are all questions that must be considered alongside properly sizing your order.
How much inventory should you order?
You want to order what is selling and try to be ahead of the game so you are not selling out of something. The best way to assess needed quantities is to look at your historical data. And when in doubt, order a little over rather than under. Remember, if your customers cannot get what they need from you, they will go to your competitor. The long-term cost of having slightly too much inventory is less detrimental to your business than not having enough.
What happens when you order too much inventory?
If you order too much inventory, you must find ways to move it without losing all your profit margin. One way to do this is to run a small sale and make a big sign! Yes, this sounds pedestrian, but it works. Signs are great for drawing attention, even if you are not running a sale.
While there are risks to sitting on inventory for too long, if you have the warehouse space and good liquidity, it’s OK to sit on some overstock for a short time, especially if you know that a busy season is around the corner. And sometimes, the company that you ordered it from can take it back.
What happens when you order too little inventory?
When you do not order enough inventory, your customers will be irritated that you are out of the product they came in to buy. You will lose potential sales of the product they came looking for and other products they may have purchased while shopping for the out-of-stock product.
When ordering inventory, always have a plan
Never place an order without a plan. You need to know how you will price products, how you will merchandise products, and how they will impact your margins and sales.
If it’s not something that you can see your customers buying, you should not order it.
Ensure you have a strategy in place for whether or not an order makes sense for your retail environment. For example, if you order TV sets for a downtown store, you probably will not sell many because people will not carry a TV five blocks. If you cannot offer a solution to potential customer hurdles, like delivery in this instance, it might not be a good fit for your situation.
Even if you are online, that does not mean that you have a global customer base (though it might). So it’s essential to know your location. This is another way of knowing your customers. If you know where they live, you can make informed decisions about what they need. For example, if your customers live in Hawaii, you probably do not need to sell snow shovels.
So, how much inventory should you order?
As I mentioned above, carrying inventory is a science. Too much inventory and you can lose valuable cash flow; too little inventory and you can lose your customers to competitors. The best way to determine inventory is to use historical data that details past sales and inventory reports.
When it comes to inventory, never stop innovating
Technology has come a long way. It makes conducting inventory, managing logistics, and ordering the right quantities for your customers easier. When it comes to ordering, you need to improve and innovate constantly. If you are doing inventory the way you have always done it, you are probably leaving a lot of opportunities for saving money or making a profit on the table.