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The complete guide to your retail inventory strategy

Today’s world of retail is becoming ever more demanding. With the number of items on sale in e-shops increasing and profit margins decreasing simultaneously, retail owners find it ever more challenging to make a living.

inventory strategy

This guide will show you ways to increase your retail business’s performance by creating and maintaining a comprehensive inventory strategy. Why Inventory? Because it has the most significant potential to make a substantial difference in sales, profits, customer satisfaction, and cash flow at the same time.

By following our step-by-step manual, you can turn your business from a “near-zero” to a profit-making machine and free a lot of money you currently hold in goods. Use your free cash for advertising and growth and expand to other regions to increase your customer base.

1. Step – understand your portfolio 

For a successful inventory strategy, you need to understand the value of your items on sale. The more SKUs you have in stock, the more complicated it gets to keep track of every item alone. This becomes impossible to comprehend from a certain point, especially if you have more than one point of sales. 

Start by putting your products into categories. Business professionals call this ABC analysis, but that’s not what you need to remember. Just put all of your items in one list and sort them by sales. 

Remember that you need to treat each SKUs as an item alone. So a T-shirt in 3 colors and five sizes is, as a matter of fact, 15 SKUs. If you have these in more than one point of sale, that those numbers double again. You need to work with each SKU alone and lookup sales of that particular item alone while making your list.

Why is product segmentation important? It gives you a clear insight into what items in your inventory are pure gold of your business and which need to be delisted on the other hand. Sell only the stuff that makes you money and let nobody tell you otherwise.

Once you are finished sorting your products, make two lines on your list. After reaching 80% of your total sales and the second after getting the point of no or minimal sales. This will divide your inventory into three categories, and the following table will tell you what to do with each one:

NameMake UpTake UpExplained
Winners80% of salestop 10% items of your inventoryThese products drive your sales. Concentrate on keeping these available at all times.
Chasers19% of sales80% of your inventoryThis stuff makes your store big and popular. Keep these available, but don’t be harsh on yourself if you run out every now and then
Losers1% of sales10% of your inventoryWhat is this rubbish? You have to get rid of this immediately. 

2. Step – create a sales forecast

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Sales forecasting or demand planning is the process that turns a local hero business into a global retail giant. It is the one thing that large retail companies do exceptionally well and what small and medium-sized businesses hardly ever consider. 

Turning your business into a predictable money-making machine will unlock your full sales potential and put you in the driver seat. With sales forecasting, you can become an entirely data-driven company and clear your hand of silly everyday chaos. 

One thing, though. Sales forecasting is complicated. Very very complicated. But hey, if it were easy, everybody would be doing it. So don’t let yourself be scared off by its complexity. Remember that there is no limit to how much you can invest in forecasting. The closer you get to the theoretical 100% accuracy, the larger the IT department you need. But if you are only starting, several basic calculations can still make a huge difference.

But by all means, you do need some piece of software for this one. Sales forecasting has to take into account a lot of factors. The key ones are sales volume and seasonality.  But many others come into play as well, like the weather, for instance. Also, the items on sale are connected and affect each other. Increase sales of one item and see the other drop. To think of all of these factors at once above your whole portfolio is just pure madness. Get yourself a sales forecasting software and get comfortable. 

So why is sales forecasting important for your Inventory strategy? Well, to easily put it. If you know how much you will sell, you know how much you need to keep in stock to satisfy all demand. Sales forecasting gives you the ability to keep your inventory not too big and not too small at the same time—just the perfect, minimal size to keep goods available (especially Winners – see above).

3. Step – Make purchase orders based on data

This is the part of your strategy where you really start making those profits and freeing that cash for your business. A typical stock of a typical small or medium-sized retail company is double the size than it would need to be, and still, owners find it hard to keep goods available.

But once you create your inventory strategy based on your forecast, you will end up buying just the goods you need to satisfy the demand. Making the correct purchase order decision based on your intuition is possible for a short amount of time and a small number of items or SKUs. Being smart about purchase orders above your entire inventory is just impossible. 

So do yourself a favor and stop guessing when it comes to ordering supplies. Build your order lists based on hard data and watch your business grow sky-high.

4. step – Choose the right items for sales promotion 

If you run a retail business, you are fully aware of the power of discounts. Put something in sales and watch your sales numbers rise in front of your eyes. But you should be smart about it too. Always keep your inventory data at the back of your head when you plan discounts.

Because there are at least two things you need to consider. First, don’t discount items which sell well. First, put items on sale, which are in your inventory trash category (or Losers, how we call them above). You do want to get rid of these anyway; they might as well run out. The sooner, the better, as a matter of fact.

When you put other items in promotion, remember that your demand will increase, and you need more of the discounted items in stock. So don’t forget to provide any information about discounts for your forecasting software. Let the software adapt to your price change and prepare yourself for any Black Friday event in advance

5. Repeat inventory strategy every day 

The last (but not least) step to your new inventory strategy is repetition. Make inventory management, sales planning, and planned purchase orders apart of your everyday bread. Inventory management cannot be set once and then let go. It needs to be reevaluated, recalculated, and adjusted every day you come to work.

The more step-by-step mentality to the inventory strategy you adhere, the more rewarding it will be over time. Remember, this stuff is complicated, but it is your moon shot to the retail elite if you do it right. 

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