I can’t tell you how many times I’ve visited a lighting showroom and walked back into the warehouse to find inventory that is several years old. When I ask them when the last time was that those items were sold, many have no idea.
Showrooms that strain under a load of old stock often find themselves in cash conundrums and tend to have efficiency issues (digging through boxes takes time).
It doesn’t have to be that way.
Big Picture ≠ Whole Picture
For most lighting showrooms, looking at their inventory with a big picture lens just won’t cut it. In my experience, it’s very common to see a lighting showroom with what appears to be a healthy level of overall inventory. But when you dig in, you find out that they have only a few weeks, or even days, worth of their biggest sellers in stock, and they’re bloated with items that haven’t sold for years.
If a showroom’s main look at inventory is a sum total, it may HIDE the fact that they are grossly under-stocked on top sellers, while grossly over-stocked with items that aren’t selling at all (and aren’t likely to any time soon).
In our industry, inventory is where the cash lives… or where it goes to die.
Shift in Thinking
The first thing I recommend is to shift the way you think and talk about inventory. If your inventory is just “backup stock ready for possible orders,” it becomes too easy to see just boxes in a warehouse. But inventory is not just a static item like a pencil or stapler.
In our industry, inventory is where the cash lives… or where it goes to die. It’s one of the most important parts of our business, and it has a life of its own. It may seem like a bit of business hyperbole to compare your inventory to a living person, but that’s exactly how I like to think about it.
Treat Your Inventory As An Employee – Is It Doing Its Job?
If you start to treat your inventory more like an employee, it changes the mindset. Your inventory has a job to do. It’s responsible for keeping on top of outgoing orders without allowing for too much “bloat” in the warehouse.
Imagine for a minute that you have assigned that large responsibility to a high-paid team member (and BTW – COGS makes up the largest expense for most lighting showrooms, so your inventory is your HIGHEST paid team member). If your business was cash-poor while drowning in inventory, what would you say to that team member? What would you do?
I think we can all agree that, at the very least, it’s time for a performance review.
Grading Your Inventory
When an employee is struggling, a performance review is often the first step. Done right – with meaningful, specific, and actionable goals – it’s an opportunity to learn what your employee needs from you to succeed, and it can give you a glimpse at any systems that may need to change.
When you start to think of your inventory as another employee, you’ll quickly see that your business also needs a way to rate your inventory that is meaningful, specific, and actionable. How you develop that system is up to you and what works best for your showroom, but let me give you an idea of how we do it:
OUR PROCESS
Over the years, we’ve developed an inventory grading formula. We pull a report each month, and each item in our inventory gets a grade, A to F. Each letter has a specific definition that works for our showroom.
For example, items that we sell very regularly (daily) and that we have 60-90 Days Sales* on hand usually get an A. Items that don’t sell with as much volume, but we are selling with regularity and have around the right level of inventory on hand (usually 30 to 90 Days Sales depending upon volume), get a B.
On the other side of the spectrum, items in inventory that haven’t sold in the last 90 days can’t get a grade above a C. Items with high inventory levels that haven’t sold in over a year get an F.
*Note: If you’re not familiar with or have a way to measure “Days Sales in Inventory” (which many just shorten to “Days Sales”) in your software, this is something I’d recommend researching. The days-sales metric is fairly standard in retail and is an important key to understanding how to make inventory decisions.
That kind of information can help you make better purchasing decisions and understand when it’s time to cut ties with stock that’s wasting your space.
MAKE IT WORK FOR YOU
There isn’t a one-size-fits-all system for all showrooms. Grading A-F works well for us because each category is specific and meaningful to the way we run things. Other businesses prefer to work with only three categories, going from A-C. The most important thing is to not be afraid to take a look at your system and tweak it if it’s not working for you. (Note: it won’t ever be perfect, so don’t let that stop you from doing the grading to get the best analysis you can.)
Grading your inventory will help you get an idea of the overall health of your stock and, more importantly, it takes inventory management to more of the micro-level. That kind of information can help you make better purchasing decisions and understand when it’s time to cut ties with stock that’s wasting your space.
It’s Review Time
An inefficient inventory can cause a lot of unnecessary trouble. Have you ever lost a sale because a customer didn’t want to wait for a popular item to be back in stock? Have your employees ever had a difficult time sifting through the boxes to find the right item for an order? Do you feel a little like your bloated inventory is eating your business alive? These are all signs that your inventory isn’t pulling its weight – and it’s time for an inventory performance review.
An accurate inventory grading system gives great analysis, but that’s just two of the three “A’s” of inventory: ACCURACY, ANALYSIS, and ACTION.
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Is Your Inventory Eating You Alive?
An accurate inventory grading system gives great analysis, but that’s just two of the three “A’s” of inventory: ACCURACY, ANALYSIS, and ACTION.
In the next post, we’ll discuss the importance of an action plan – and how no inventory grading system is complete without one.
