Monday, August 27, 2012

Q&A: Data and Inventory Makeup

Kyle Tracy asks:

You've posted often about the performance of your business broken down categorically (or sometimes by the bucket). When does this data change the makeup/merchandising of the store?

I use a common retail method called "Open to Buy" in which you budget your cost of goods so inventory remains stable. Inventory is a zero sum game, so everything new requires something old to be phased out.

Most larger open to buy users track their goods by department. So if I sold a board game for $50, I would have $25 available to buy another board game, assuming a 50% margin. I don't do that. I have a big enough budget to buy just about anything I want at any time, but I let the money slosh between departments organically.  I don't know if that's a good thing or a bad thing, but it's what I do.

Then I do most of my work on the back end with performance metrics.So board games can have all the moneys if they're performing very well, or they'll get very little if they're in a lull. They'll just be organically culled on the back end rather than being starved for resources on the front end. This seems to work well for me and avoids the problem of limiting a department, possibly one that's booming, because it has too much stuff already.

Again, this requires a big enough budget to pull this off, and I often struggle with purchasing deficits, a concept that most small retailers can't grasp because they haven't taken the small step towards open to buy. So right now I have a budget deficit of $2,642 and I'm about to order another $3,000 of stuff today, including the new Warhammer 40K starter sets. If my store were smaller, if it weren't my Summer season, if the economy was starting to lag, if I was in a losing money position and making payroll this week were iffy, if I didn't have money in savings to cover this if things went  horribly wrong, I would be in a lot of trouble with these numbers. But, you know, that's typical business risks and eventually my budget will balance and it should equal cash in the bank.

Open to buy example from the first year in my first store. I go over more open to buy in this presentation.

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