Sunday, May 1, 2022

Inventory Sizing

This is a wonky inventory article you should probably skip, unless you're curious how I'm restocking inventory. It's one of those things I'm writing to get processes straight in my own head, more than to instruct others.

I doubled my inventory (and then some) over the last two years. The goal was to both stock up for potential outages and attempt to meet increased demand, which seemed limitless. I had hopes of establishing a baseline for a new normal. I really just wanted normal sales with double the inventory. This worked and our sales were stratospheric in 2021, and up 28% in 2022. This is typical in the trade, I think. The ratios I use for my stable inventory are different now, and that's what I wanted to write about. What did I do then, what do I do now.

Why am I stocking lower? A few reason: 

  • I'm less concerned about outages. Product is certainly late, but it's now a few weeks late rather than a few months. Stock outages, like COVID, have moved to the endemic phase. It's just there all the time. Deal with it.
  • I've learned the limits of demand. I stocked way up on everything as a means of somewhat blind, yet historically informed inventory growth, and have organically drawn inventory down as product sold. My inventory, when I could get it, was functionally limitless in 2021. I got a really good glimpse of demand. That glimpse was invaluable, even if it was a snapshot in time.
  • Dead Stock. I want to emphasize that this method was successful in that it didn't result in huge gluts of dead inventory. 2020 was the year of dead stock, with months of the store being closed, but 2021 was my most efficient year in history. We did not start 2021 with dead 2020 stock. That was gone.
  • Budget. We're no longer swinging for the fence, attempting to survive by pulling the inventory lever as hard as possible. I have enough money in the bank to pay off my EIDL loan, but I'm still using it as a backstop. The goal is to pay that debt next year, and I can't do that by spending the rest of that money. We're back to a sustainable inventory budget.

The ratio! Right, that. The ratio I used to expand inventory rapidly was to divide my annual sales by my turn rate, which was six. The image below is from Top Loader sales. If I were to bump up my inventory for the apocalypse, or simply the need for rapid inventory expansion, I would divide my annual sales of 191 by 6, and set my restock to 32. Now, carrying 32 top loaders is probably not enough for top loaders, which are in short supply, but you get the idea. 

32 top loaders, a somewhat arbitrary number, should satisfy demand for about six weeks. Sometimes this ratio, with other products, satisfied demand for months. This is a very liberal ratio. It worked well with stock in flux, but it left a lot of slack in the system overall. That was fine then. I would only change this restocking ratio as items sold, so slow selling items weren't changed, and eventually the inventory stabilized at around double the previous amount. I was getting worried there for a minute, let me tell you. Will this ever end? If I had an extra $100K or so, perhaps I would stick with the original ratio.

I also clearanced items at a very liberal six months of low activity. Inventory is about opportunity cost. If you have all the money in the world, as in all the inventory I could possibly want to buy, there is no opportunity cost. Clearance sales are then about space and a clear sales channel, rather than recovering inventory dollars. My store is completely full, so space is now an issue.

The new ratio was implemented to "right size" inventory to normal levels. I decided on a 30 day supply. I check every item after a sale and tweak it. That's right, every sale in the store is evaluated. Some might find this tedious, I just consider it part of the job. This 30 day supply is a much smaller number than annual sales divided by turns. It also has the advantage of being in line with distributor terms. 

The goal, not for the first time, is to sell this stuff before the bill is due. The top loader example would have me stock only 23 top loaders at any given time. That's 28% less stock, which might not seem like a huge difference, but this draw down helped "right size" the inventory without resulting in outages. It is also helping me get my budget back on track. 

Exceptions: There are times I know this is going a bit lean, especially with slower selling items. An RPG book might have sold 18 copies in the last year but only 2 copy in the last month. Do you stock 3 copies like the expansion example (18x6) or 2 copies (2 sales in the last month)? If it's D&D and you don't want to ever be out of a title, perhaps 3. If that item is not part of a strategy, perhaps 2. I like to identify leaders in each segment and treat them more liberally than everyone else: D&D, 40K, Magic, and ugh, core Asmodee.

Disclaimer: This is what I do and not what I'm recommending. Inventory is part art and part science, but even the science reeks of art. There are always exceptions with inventory, subjective decisions related to your expectations of future sales and future availability. There are inventory coherency issues to consider. There are times you're actively stocking up or slimming down a line. My formulas are not something you could plug into a spreadsheet, they're a baseline understanding. You wouldn't hand this to a young buyer and say, do this. There's a ton of institutional knowledge behind it, and quite a lot of handwavium.


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