Inventory Management and Safety Stock (Tradecraft)

With my inventory management presentation at ACD Games Day in May, I've started deeper research into the topic. If you do something for a number of years, you might be pretty good at it, but you don't necessarily have the context to go beyond, and it certainly doesn't mean you can teach it.

I'm reading the informative and thankfully somewhat fun book, Inventory Management Explained, by David Piasecki. Honestly, the bulk of what there is to know about inventory management doesn't apply to every business. About 20-30% seems to apply to any given situation, since inventory management also covers manufacturing, but can include a lot of practices we don't see in the game trade. On the plus side, as game store owners, we have it really good, with things like "lot sizes" (how much you have to buy of one product at once, or buying for a volume discount) and lead times being as ideal as they could be. The distributors get to deal with that stuff.

According to Piasecki, there are seven categories of inventory, with the important ones for game stores being your current demand inventory, safety stock, anticipation inventory, and hedge inventory. "Your stock,"is current demand inventory, stuff you buy for right now. Safety stock, is the most interesting category and the one you probably spend time on the most, after general stocking of your "current demand" items. Anticipation inventory is stuff you buy in anticipation of a season or event, like stocking up on Magic or buying in for the holidays. Hedge inventory refers to taking advantage of price fluctuations, such as distributor sales or perhaps stocking up  before a known price increase, like the annual Games Workshop increase.

Why does this matter? Because ordering is where you make your money, and if you're not making money, you can often trace it back to bad ordering. If you trace it back, you'll need some tools to categorize and figure out where your problem lies.

Out of money in November? Check your anticipatory inventory, as you may have ordered holiday stock too early. My current anticipatory inventory problem relates to CCGs, as in ordering too much Born of the Gods that exceeded my 30 day terms window. The bills are due, and finances are tight because I've got too much inventory. These problems work themselves out eventually, we tell ourselves, but in the mean time, your business is suffering and profitability is effected. You can go for years, decades, like this, selling like a sales god, but wondering why you never make a dime.

You could see where hedge inventory could get you into trouble, and in a trade that doesn't offer a lot of deals, getting stuff at a discount sounds even more appealing. I have one vendor I avoid on the phone because of a combination of high pressure sales tactics and volume discounts. I've got cases of unsold product, hedge inventory, that tells me this is one of my trouble points.

Safety stock is a buffer against variations in demand, but also variations in supply. I've got four deep of Settlers of Catan because of variations in demand and four deep of Arkham Horror because of variation in supply. Safety stock is stuff I never want to be out of, rather than forecasted current demand inventory. Even the newest store has some safety stock, as the saying, "an inch deep and a mile wide" has some exceptions. If you play it safe, current demand inventory and safety stock compromise the bulk of your decision making.

Here's an example of analyzing our two types of safety stock.  You have four Arkham Horrors on the shelf year round as hedging Safety Stock, due to stock outages. You also have four Settlers of Catan as Safety Stock, but primarily because of demand variation. Those four Settlers get a free pass, because you can't account for demand variation, but those four Arkham Horror are costing you money, because you're hedging against supply difficulties.

Identifying Arkham Horror this way allows you to make some calculations and decisions. First, assuming Arkham is a Safety item, we would normally want to stock two copies. Since I'm forced to stock four, due to outages, that's two copies too many. Having to stock them year round due to supply chain problems has an opportunity cost, that of 3 turns a year of other games I can't carry (my board game average, as AH turns more like 8). In gross sales, I lose $360 a year because FFG can't guarantee supply. We'll ignore the lower Fantasy Flight Games margins and look just at retail prices. That 8 turn board game really only performs like a 2 turn board game because of the lost opportunity costs. It goes from a top game to a below average game because it exists at the expense of other inventory.

Breaking inventory down into its constituent categories allows us to analyze in more detail, focus on behavioral changes, and find solutions to our stocking problems. Problems with current demand inventory might be related to not properly tracking with an "open to buy" worksheet, or it might be poor forecasting, since tracking is only half the battle. You might have the wrong safety stock, or you might be putting too much ego into what you've decided you can't ever live without. Our new POS system will track how much of an item we had in stock historically, so you know you were overstocked at a particular time.

Looking at the graphic for Settlers of Catan, our lowest point shown was on February 13th, when we went down to two copies. If we could show our lowest point ever was two copies, we could reduce quantities from four to three. Big deal? Well, that one copy, like the Arkham Horror example, can be multiplied by our turn rate, which is three for board games. So that's $126 in lost sales a year because we have four instead of three selected. That's just one game. One of the challenges in the book, one I haven't taken on yet, is identifying exactly what stock is safety stock to come up with some more strategies.