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RALEIGH, NC -- I have written before about the benefits of reducing inventory and not confusing customers with too many choices. But after working with owners and managers across the country who are challenged by ever-expanding inventory, it is time to talk money.

Buying is a difficult skill to master and a subjective one to teach. Inventory is the country cousin of retail management: you know it is there, often with an embarrassingly large presence; no one quite knows what to do about it and you hope no one will notice before it quietly goes away.

COG is a big deal

The cost of acquiring inventory (cost of goods, or COG) is huge when compared to other large costs of retail such as advertising or labor. Some managers watch relatively small costs like travel or training very closely, yet they condone by default purchasing thousands of dollars of excess inventory. Some agonize over a few hours' overtime for a meeting, then allow buyers to head to a trade show without a budget.

In a retail garden center, inventory is usually by far the biggest use of funds, often double or triple the labor bill and 20 times the phone bill.

In a garden center with $1 million in sales, cost of goods will be at least $450,000, way bigger than labor. But it usually gets a lot less attention and management time.

Inventory competes for cash just like everything else, including bonus programs and capital for growth. Companies with too much cash tied up in products on shelves and benches will have to make frustrating choices between funding operations like labor hours and expanding or modernizing.

Usually in these situations, operational needs win (eventually, you have to make payroll), so companies that always have too much inventory slowly lag in modernization, hampered by a lack of cash flow and decent credit. Excess inventory also restricts a manager's ability to be flexible and to make a quick purchase when a deal or an opportunity comes along.

Learn to manage buying trips

When buyers go to a trade show, talk to a rep or pick up the phone, they are about to make a short-term, highly significant investment decision for the company. Buying $30,000 of fountains is every bit as significant as ordering $30,000 of blacktop for the parking lot and probably more significant than hiring a new employee at $30,000 (the honest truth is that the new hire is easier to let go than unsold pottery or aging trees). Surely a $50,000 purchase of perennials should get the same preparation and research as a $50,000 investment in a new covered walkway.

This is particularly important with the hundreds of new items or SKUs facing a buyer every year. No buyer should sign a purchase order for new or different products without asking; "What if it rains, snows or the competition sells them cheaper?" "What is my fall-back position? "What is the exit strategy?" "What is my optimum gross margin yield and what losses can we tolerate before Plan B kicks in?" "Where will it go and who will champion it?"

What to buy?

It is a bit facetious to answer this question with the obvious answer "buy what sells." But it seems that some buyers forget that cardinal rule.

For instance, you can see perennial tables where a top seller, like coneflower, has equal representation as other plants that have only specialty appeal, like Eriogonum. Not only does this tie up valuable cash, but it also confuses customers and deters impulse purchases.

Buyers who carry four brands of potting soil because a few customers (or employees) are vocal about their favorites are playing it safe -- but safe doesn't maximize performance. In the past, finding best-sellers meant a tedious analysis of winners and losers. But with point-of-sale feedback, retailers have almost instant results on what is selling and what isn't.

A good rule of thumb for allocating the buying budget is 85:10:5 (wow, that is some strong lawn food!).

* Out of the buying budget, allow 80 percent to 85 percent for never-outs, predictable sellers (even if you are bored with them), rising stars or expanding categories and your own specialty/unique lines that differentiate you.

* Allow 10 percent to 15 percent for higher-risk new lines, reorders of something that may (or may not) have another season in it and creditable recommendations from your peers and suppliers.

* Allow only 5 percent to 10 percent for what I call play money. This is the kind of product that will sell out in a week or sit there forever. Be disciplined. Only allow an amount in this section of the budget that you can afford to lose. High stakes, but you will find the product's potential without hurting business.

Invest in what you know will sell

Remember that up to 80 percent of sales volume comes from 20 percent of your lines or SKUs.

Be bold, take a risk and spend heavily on predictable winners for quick-investment returns. Be disciplined with competing lines, especially where duplication will only divide existing sales, not increase them. Be cautious with the very new, the fads and the fashionable. Tell buyers and salespeople who want you to increase inventory that it is OK to be out and that special orders can be a great customer service.

Pre-show checklist

Ask these questions before heading to the shows and markets:
1. Do we carry anything similar? Will the new item increase or decrease sales of the existing one?
2. How does the new item differ (design, style, impact, value, etc.)?
3. What are the pros and cons of the new item? Who will it appeal to?
4. What are the conditions, minimums, terms, reorders and delivery details?
5. What is our relationship with this vendor? Are we getting a deal? Do we trust their word?
6. What would we sell it for? What margin dollars can we make on the space?
7. Does it give us a new merchandising or marketing opportunity?
8. Is it a fit with our image and market?
9. Will it replace or enhance something we carry now?
10. What is the exit strategy for the existing items this will replace?
11. Does this item require new fixtures, fittings, facilities, training, etc.?
12. Will the vendor help us sell this product?
13. What evidence do we have of this product's success elsewhere?
14. Where will it go and how will we introduce it?
15. What is the worse-case loss it can create?

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© 2007 Branch-Smith Publishing