Mastering Inventory Management: Strategies for Profitability and Growth

Written by Katelyn Madsen

Effective inventory management is crucial for any retail business aiming to maximize profitability and ensure smooth operations. Cathy Donovan Wagner, a seasoned retail expert and President of Retail Mavens, offered strategic insights during an AGM webinar. With a proven track record of helping thousands of independent retailers boost sales and improve cash flow, Wagner provided practical strategies to help our members do the same using inventory management. Her advice equips retailers with practical strategies to boost profits by aligning their inventory with customer needs.

 

The Real Goal: More Cash, Not Just More Sales

The ultimate objective for any business should be to maximize the cash left at the end of the year, rather than merely focusing on sales figures. While strong sales are important, it’s the cash flow that truly determines a business’s financial health. 

According to Wagner, one of the most significant factors affecting cash flow is inventory management. By carefully monitoring and controlling inventory, businesses can avoid the common pitfalls that drain resources and hinder profitability. Wagner notes that even a small tweak in managing inventory can have a significant impact on a business’s bottom line.

 

Strategy 1: Prioritize Your Best Sellers

One of the most effective strategies for managing inventory is to focus on your best-selling items. These are the products that consistently drive sales and generate the most revenue. However, many retailers make the mistake of allowing their stock of best sellers to run low, which can lead to missed sales opportunities.

“When you have a small quantity of an item, it doesn’t create a big enough display to make an impact,”  Wagner explains. A well-stocked display of popular items not only catches the customer’s eye but also increases the likelihood of a sale. If your staff members confidently know that an item is in stock, they will be more likely to suggest it, further increasing that likelihood. Therefore, it’s crucial to ensure that your best sellers are always in stock.

To implement this strategy, Wagner recommends creating a “Never Out Of” list for 2024. This list should include your top-selling items, along with the minimum quantity you need on hand before reordering. By consistently monitoring and replenishing these products, you can avoid stockouts and capitalize on the momentum of what’s already working in your store.

 

How to Build Your “Never Out Of” List:

1. Identify Your Best Sellers: Start by running reports from your point-of-sale system to see which items have generated the most revenue and which have sold in the highest quantities over the past year.
2. Set Minimum Inventory Levels: For each best-selling item, determine the minimum quantity you need to keep in stock. This figure should be based on how many units you typically sell in a month.
3. Monitor and Reorder Regularly: Track your inventory levels every two weeks. Assign a reliable team member to physically count the items and update the inventory report to ensure total accuracy, as online systems can sometimes be askew. This will help you to reorder before stocks run too low.
4. Consider Seasonality: Adjust your minimum inventory levels during peak sales periods, such as the holiday season, to ensure you meet increased demand.

This method has proven effective for many of Wagner’s clients, with some seeing up to 133% growth in sales by simply focusing on maintaining strong stock levels of their best sellers.

 

 

Strategy 2: Implement an Open-to-Buy Plan

Another critical aspect of inventory management is having a well-defined open-to-buy plan. This plan helps you budget for inventory purchases based on projected sales, ensuring that you invest in the right products at the right time, without overspending. 

The basic calculation for an open-to-buy is:

          What you are going to sell

          + What you need to have

          – What you already have

          = Planned OTB

                – On-Order & Reserves & Special Orders

                       = Actual Open to Buy for Month

 

“The number one tip is to plan your inventory,” says Wagner. Without a plan, businesses often end up overstocking or understocking, both of which can hurt profitability. Overstocking ties up cash in unsold products, while understocking can lead to lost sales and dissatisfied customers.

 

Conclusion: Ride the Momentum of What’s Working

By focusing on your best sellers and adhering to a well-planned open-to-buy strategy, you can significantly improve your inventory management and overall profitability. Remember, each dollar spent by a customer is a vote for what they want you to carry. Ensuring that your best sellers are always available and that your inventory purchases are data-driven will help you end the year with more cash on hand.

As Cathy Donovan Wagner puts it, “You have to ride the momentum of what’s working—your best sellers.” By following these strategies, you can master inventory management and set up your business for long-term success.

 

This article was based on the AGM webinar, “Managing Inventory for 2024” featuring Cathy Donovan Wagner. To watch the full webinar and gain more industry insight, visit the AGM’s YouTube Channel. Only members can view.

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