Why is it that some business owners look at their Stock as though it is “money in the bank”? Why might this thinking be wrong and what can be done to fix it?
What is the right amount of stock? A challenge for every business owner.
How can a clothing reseller meet the needs of every prospective customer if she doesn’t have every size, colour and style of every product in her range at every retail site that she runs? Hard. What happens at the planned (or sudden) end to a season when all that is left are the unpopular styles in the outlying sizes and colours?
Yes, you say, that’s what twice-yearly sales are for. An attempt to recover some of the cost of over stocking by discounting… before scrapping the rest. But discounting risks potentially damaging the brand.
Wine manufacturers get caught in a dilemma when their current vintage doesn’t completely sell. The next vintage is happily growing in the sun and soon needs to be picked. Do they discount their current vintage? What about the unsold pallets from the previous vintage? And the one before that?
Do they dump stock through on-line sale merchants and risk damaging their brand? It is a common strategy. Check out how bad it got for Treasury Wine Estates.
Brand suffers when you discount.
Over the years we have come across some horrible stock problems. The profit and loss account can still show profitable trading, and that’s good. But a careful look at the balance sheet reveals massive stock levels. Coincidentally, the bank manager has just said ‘no’ to the most recent overdraft extension.
In many of these situations, unsold stock got pushed to the back of the warehouse. Out of sight, out of mind. Other slow-moving stock remained just that. Until it got slower and slower and ultimately stopped too. No more room at the back.
New stock is still needed to meet demand. No-one really notices what is going on. The business still seems to be out-of-stock of regular lines and suppliers are putting the business on credit-hold. And yet the warehouse is full?
All this time, the stock remains recorded at full value. Which is why the Profit and Loss Account looked just fine. But the key is a quick comparison of the stock recorded in the balance sheet against the levels of sales. Stock turnover against any benchmark is way too slow. Of course, as some lines never sell while popular lines sell many times over, the problem may be even worse than it seems.
Businesses need a stock strategy. Rules about age and turnover.
This is another ‘black-art’ skill for the owner. And good record-keeping and stock statistics become a handy tool. The skill comes from the ability to predict the amount of sales for every stock line for the forthcoming time period.
The owner needs to consider; the amount to be maintained in stock, the need to close out a line at the end of a season, the lead times for supply and resupply, reorder quantities and the prediction of which lines are likely to be most popular.
And every business owner gets that prediction wrong to some extent. Some stock lines will not behave as predicted. Nobody’s perfect.
The trick is to manage the bad trend and managing it early. If something is not selling, adjust your thinking. Change the minimum order quantities, cancel standing orders and don’t make the problem worse. Next, deal with the problem. What do you need to do to move this obstinate stock? Is it merchandising? Is it marketing? Does it warrant a discount? Could you be clever and package it together with a full priced line? Could it be sold under a different brand?
Check what the leaders in your (or similar) industries do to manage their stock levels and wastage. You might be surprised at the clever and resourceful techniques adopted. One thing is sure… if they are good at keeping stock levels low, then someone is driving this hard.
And stock is not gradually burning up cash.
Business Specialist Partner