Death by Inventory

Death by Inventory

by Sid Raisch

Inventory is the bane of a retailer’s existence.
I bet you’re wondering what the word bane means now that it has been connected directly to you.
(The source or cause of misfortune, unhappiness, frustration, or anxiety, usually used hyperbolically. – The Free Dictionary)

Inventory is a Necessary Evil
Gaining a clear perspective on inventory is the first step to taming the monster. Inventory is inherently evil in that without tightly defined and rigorous management and manipulation it always becomes a problem.

Inventory must be curated, purchased, valued, edited, displayed, signed, priced, maintained, moved, paid for, financed, marked down, and well, we could probably apply a dozen or so other action verbs.

The Unexamined Life of Inventory
Socrates said that the unexamined life is not worth living. The same could be said of merchandise. The failure to measure inventory performance with internal and external benchmarking is like flying an airplane in a fog without the knowledge of how to read the instruments. In those conditions with inventory you will likely eventually financially crash the  entire business.  Managing inventory is not for the faint of heart, at least until you are doing it very well.

Standardized Performance Measurement
Unbelievable as it may be, you will find that there are many ways to measure inventory performance in a simple Internet search. Many of the methods and formula are attached to credible organizations. It is arguable that if you are consistent it doesn’t matter, however, when put against net profitability some methods are clearly superior to others.

Merchan+ Ma+h
Financial Consultant Steve Bailey and I have collaborated to produce a booklet of financial terms. Send an email to [email protected] to get a PDF copy returned to you. I’m going to infringe on Steve’s space some in this article, but not on what he does for you. My aim is to illustrate that we must get a grip on measuring inventory performance in order to better understand how to control it so it doesn’t control us.

Inventory Creates Margin
The sale of merchandise produces gross margin, the difference between the landed price and selling price. In our primary education system curriculum, this is called “gross profit”, which I agree that it is – gross – as in YUCK! While the margin should contain net profit often this is not the case, therefore I recommend that your company vocabulary is not permitted to include the term “gross profit”.  By definition, the margin earned in the sale of products and services must pay all of the expenses of running the business, including wages & wage benefits, operating expenses, and profit.

There is No Margin Until Inventory Turns
Many are incorrectly pontificating, or debating, that you can and should lower the price of goods to lower price resistance barriers to turn more inventory. They are simply wrong. Others are feeling that their high margins are all they need to focus upon to drive profitability, and they are also wrong.

In the micro-economics of specialty retail making up revenue on volume rarely if ever actually occurs, and if it does the net result is almost always a net loss. You’ll almost never sell enough more of a lowered price item to make up the margin difference. To the contrary, increasing pricing will often yield greater margin dollars and if presented well can increase unit volume and margin volume. But we can’t be cavalier about raising prices, or lazy about adding perceived value. There is a point of going too far and that is when the price exceeds the perceived value of the customer, but most owners and employees in the garden business have a bigger problem at the other end of the spectrum, believing their inventory has the value required to pay for itself plus earn the margin required for a decent profit yield. If you can’t believe your inventory is worth the price you need please stop buying it in the first place.

Velocity of Turns
The concept of velocity is well covered in the very smart little book titled “What the CEO Wants You to Know” by Ram Charan. It would do the CEO of your enterprise well to read this book and then share it with his or her entire team. Velocity is the number of inventory turns achieved. The sum of the total inventory turns of all products is a key indicator of retail health. In all retail a velocity of 5-7 turns is typically a healthy financial environment. Garden centers typically turn inventory 3-4 times, a woefully inadequate velocity to spin enough cash to pay all the bills and have a decent amount left for a profit.

Inventory is a (Rapidly) Depreciating Asset
While inventory is technically a balance sheet asset, it is a depreciating asset. The half-life of inventory is just a few weeks beyond the period in which it should have been converted to margin, or sold. Add to this the cost of maintaining inventory and even a good retailer is eaten alive with labor expenses associated directly to inventory.

Inventory has a Shelf Life
We typically think of perishable items having a “shelf life” of the period until they spoil, or in modern terms, until the Expiration Date arrives. The truth is that non-perishables also have a shelf life. The Merchant’s Mantra is; “Never buy what you can’t sell before you have to pay for it.”  Inventory that sits on the shelf or bench too long costs more than it can earn in margin. If we think of an expiration date on inventory and treat it as if it were all heads of lettuce, we’d be less likely to carry so much of it.

Inventory Shrink
While people who deal with inventory may benefit from having their heads examined by psychologists, they will do just fine by getting their inventory velocity up and their inventory shrink under control.

Shrink comes in many forms and is always expected and should be budgeted. Shrink of 1-2% may be usual and expected, but is always something to try to keep in check and improve upon. When shrink is rises to 3% or more there is a real need to tighten up inventory management to reduce the drain.

Shrink from internal theft is one of the most dangerous sources of financial distress and can destroy the financial health of a business to the point of no return. Stolen items and cash are rarely recovered if they are detected and the thief prosecuted. The best deterrent to theft, and cure for it is prosecution. A client once told me that a grandfather of a young employee who was caught stealing came into their store years later and told the owner that he wished he had encouraged them to press charges rather than asking them to drop the charges because that first discovered theft was the beginning of a lifelong pattern of theft and deception.

Yes, you do have a problem with shoplifting shrink, especially if you think you do not. Shoplifting must be taken seriously with deterrent and preventive measures including cameras, mirrors and anti-theft procedures and devices. This is an effort that pays for itself, without question.

The largest and most dangerous area of shrink is excessive discounts used to draw traffic and to eliminate over-buying.

Meet Your Inventory Creep
There is an inventory creep alive and well in your store. I know this because I see his handy work with merchandise spilling out of displays and into aisles, making it difficult to walk through your store.

“We have met the enemy and he is us.” I recommend that you keep a pair of crutches handy in your backroom and occasionally have your buyers and managers walk through your store on them to wake them up to the presence of the elusive creep.

Curated, Edited Inventory
It’ been a popular concept post the Great Recession for retailers to go boutique and present a carefully curated, edited selection of products. This clarifies value to the consumer and if done very well focuses inventory toward the higher turnover, high margin items. Simple is always better but never easy. It is also becoming less and less of a sustainable model because of the effect of that big company based in Seattle that is selling everything to everybody.

The Long, Long Tail of Inventory
Inventory has a practical use as a marketing tool to attract customers to a one-stop-shop where they’ll surely find exactly what they are looking for, or aren’t looking for, but they know you’ll have it. In the attempt to add items to increase and expand in-season and off-season sales many garden centers have created complexity and clutter, not to mention dead inventory, that is impossible for their customers to absorb and near impossible to maintain. The wider the inventory assortment the greater quantity of store traffic is required to support it.

OPI – Other People’s Inventory
An expansive category killer product selection means you’ll have everything for everybody who would ever want it, and that you’ll bleed a slow death of thousands of cuts one item at a time. It’s time to seriously consider leveraging OPI – Other People’s Inventory, by partnering with suppliers who will ship to your store, or drop ship to the consumer upon their purchase.

Getting Found – Cutting Through Clutter with Search
This is where the Internet is shifting retail. You’re used to reaching out with advertising to find customers who want to buy what you want to sell. Now consumers seek to find what they want online, and you must show up in their sights or you and your inventory are dead to them.

Today over 80% of consumers begin their shopping adventure online. They search and research online to arm themselves with the information and knowledge to make a great buying decision the first time.

Internet marketplaces such as Amazon, Jet, Hayneedle, eBay, Craig’s List and others are providing consumers endless selection and endless depth of inventory that no brick & mortar store can compete with. Today over 55% of consumers who intend to make a purchase begin their trek over there at The majority of those consumers never leave that domain, and those who do have already armed themselves with information to help them buy more price intelligently. We and our customers don’t leave these domains, and also don’t leave our homes nearly as often as we all used to. This means that we must work even harder to earn their presence in our stores, and are more likely to end up on the “have-to” list of things to do, rather than a “get-to” place to go shop.

Free Your People
You’ll never have enough staff, until they sell enough of your stuff. When your people are spending disproportionate time acquiring and maintaining inventory in comparison to time invested to help customers buy it, things are out of whack. Freedom from excess inventory allows your people to be in front of customers, helping them buy

Your friend,


Sid is a consulting Service Provider to The Garden Center Group and also serves as President/CEO of Bower & Branch. He is a board member of AmericanHort and Come Alive Outside. Sid has been inventing and reinventing the way things “don’t get done” into “get it done” strategies that increase profit-ability, market-ability, oper-ability, and owner-ability of garden centers, landscape operations and a few wise suppliers of plants and products. It’s not 38 years of the same thing, it’s thirty-eight increasingly effective years dedicated to improving and re-inventing the inter-dependent horticulture supply chain. He’s constantly challenging “that’s how we do it”, “we tried that”, and a dozen or so other excuses. Sid knows how to get people to get things done by overcoming underlying attitudes, fears and lacking resources.

When you read Sid’s articles or hear Sid talk “put your ears on” and listen up, and get ready to think and implement changes that will take you and your company to new heights and new places. Contact Sid at 937-302-0423 or email to [email protected]



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