I severely overstocked my business. What should I do?
This article first appeared on December 8th, 2011.
I made the mistake of severely overstocking my sports equipment business. What should I do?
This existing stock that you have not been able to shift is utilizing valuable shelf space and tying up working capital, and needs to be cleared to maximise the shop's profit performance.
There is a range of options available for selling old or unpopular stock, including the obvious one of reducing prices.
The stock could also be used for weekly specials, giveaways where appropriate or advertised prominently (either in your shop window or website home page) with the aim of enticing customers into the store. It could even be treated as a loss leader to entice the sale of other profitable stock items.
Finally, consider eBay or other online avenues and also talk to your suppliers and reps as to whether they may be willing to swap stock items.
Your main question is how to get stock orders right in the future. Here, it is crucial to gain a good understanding of your customer, your demographic and your industry.
There are several approaches that can be taken to build this knowledge base aside from observing customer purchases in your store and talking to customers.
Utilise the knowledge of the sales representatives and suppliers who sell you the stock.
They sell stock to retailers on a daily basis and should have an accurate feel for consumer preferences in the sports equipment industry at any given time.
Actively visit other stores to find out what is on their shelves, and ask questions as if you were a customer.
Consider general trends in customer preferences and tastes and the demographics of the area where your store is located - on the latter you can obtain information about income levels, age demographics, etc. from the Bureau of Statistics website.
Finally, utilize other information sources; for example websites, annual reports and marketing campaigns of large sports retailers (e.g. Rebel Sports). This will improve your knowledge of industry trends, product trends and strategic movements of competitors.
It is also vital to monitor stock and conduct periodic reviews of stock on hand to help determine future order quantities.
Ideally, stock will be ordered on a “just in time” basis. That is, it arrives just soon enough to fulfil all sales requirements but not before it is required. That way, it won’t be taking up valuable storage, shelf space and working capital.
In the sports equipment industry, demand for products will fluctuate seasonally; therefore it may take 12 months or more to get a thorough understanding of ongoing stock requirements.
Also, new sports equipment is being released each season and customers generally want the latest models- you will need to be aware of this and may need to adjust prices as the stock ages, in order to clear existing stock and make way for new upgrades.
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The demand for some products may be more consistent.
For these, the ideal order quantity is dependent upon freight and delivery costs, bulk discounts, the cost of storing your stock and the volume of sales as well as working capital limitations. Being aware of the delivery time is also crucial.
To assist in reviewing and monitoring stock, consider the stock management and point of sales systems being used.
Do they allow you to efficiently monitor stock on hand and historical patterns of stock sales?
Having good systems will be valuable in helping you monitor customer demand patterns over time, and this will help determine how much and what stock needs to be ordered.
Another possibility for consideration with future orders is consignment stock. Ask your suppliers whether they offer consignment stock arrangements, and consider whether those arrangements could benefit your store.
It may be possible to hold stock in your store and send it back to the supplier or swap it for other products if it does not sell. Payment for the stock may not be required until the stock is sold, which would also help with cash flow.
Finally, financial ratios and benchmarking can be useful in assessing your business’s performance.
This will give you an indication of how your business is performing in key areas; in this context, whether stock is sitting on your shelves for too long.
To work out the number of days inventory is held, use average stock on hand/Cost of goods sold, multiplied by time period.
For example, if you had $60,000 of stock on hand at the start of the year and $70,000 on hand at the end, and your cost of goods sold for the year was $300,000, the ratio would be as follows: $65,000/$300,000 x 365 = 79 days.
Reducing this number means stock is moving faster and working capital can be used for other purposes.
To put this another way, stock turnover ratio is Cost of Goods/Average Stock. In the above example, this is 4.6- stock is moving in and out 4.6 times a year.
Benchmarks are useful in two broad ways: firstly for comparative purposes, because they provide a guide of best practice.
Secondly, they can be used to improve profitability and business performance - with these stock ratios, aim to decrease stock days and increase times moved per year.
Note that there are plenty of information providers who sell benchmark information and industry information.
To get you started here are some free resources:
Co-authored with Travis Eldridge