Small Business: Keys to managing inventory

Managing inventory can be one of the most challenging tasks of running a business.

Keeping too much can create a money-losing proposition for a retailer, while keeping too little could mean lost sales.

With the holiday shopping season fast approaching, it's important to get a handle on your inventory needs so you can meet consumer demand without having to cut into profits and make deep discounts later, say experts.

"Forecasting is everything," explains Jon Schreibfeder, president of Effective Inventory Management Inc., a consultancy in Coppell, Texas.

Whether it's the holiday season or just a routine week, without proper forecasting you risk making poor buying decisions.

"Very few businesses aren't in a cash crunch," says Schreibfeder. "They can't afford to buy what will become dead inventory."

To help make accurate inventory forecasts, he says, you should be taking into account such key factors as previous sales of a particular item or items with similar characteristics (i.e. color, style, price); external trends out of your control like inclement weather or new competitors in your market; and discounts, incentives and promotions you may be offering to help move inventory.

Forecast accuracy:Keep good data so you can track previous sales of inventory and monitor forecast accuracy, says Schreibfeder.

"If your forecast accuracy week by week isn't good, then you need to figure out what can we do to derive a better forecast," he notes.

When forecasting, it pays to take a conservative approach in these hard economic times, say experts.

"When you overbuy, you have to promote your way out of it," says Marshal Cohen, chief industry analyst for The NPD Group, a Port Washington market research firm, noting that since the downturn retailers are "managing inventory better than ever before."

They're not being too overzealous even with the holidays, says Cohen, who expects holiday sales to grow 1.5 to 2 percent this season.

"I'm always cautiously optimistic when it comes to inventory," notes Henry Hildreth, fifth-generation owner of Hildreth's Home Goods in Southampton and East Hampton.

Hildreth has scaled back inventory levels since 2008 but says now he's actually had to replenish stock and even increase inventory levels 5 percent to 7 percent for this holiday season. "This year sales are up about 3 percent year over year," says Hildreth. The key is to keep inventory moving, he notes.

One way to do this is to let customers know how much or how little product you have, says Cohen. "As you sell down on a product, make sure the consumer knows that," he notes. "If they see limited supply, they're more likely to buy sooner and spend more."

The same goes with letting them know when a product is going on sale, says Cohen.

Spurring demand: By creating a sense of urgency customers who really want the product and know it's going on sale may buy it sooner to avoid missing out on it, he notes. You can credit them the difference.

Beyond that, be aware of what's sitting in your stockroom, advises Dan Butler, vice president of merchandising and retail operations for the National Retail Federation in Washington.

A lot of small independent retailers put merchandise in the back and get busy and don't realize what's "on the fifth shelf of the stockroom," he notes.

Keep the floor stocked, so you keep inventory moving. Also, pay attention to ship and cancel dates on purchase orders so you're not accepting vendor merchandise after the agreed-upon ship date, says Butler. And make sure damaged goods are removed from the floor and that your store and fitting rooms are clean. "Customers don't like to shop in a messy store," he notes.

Fast fact

According to a recent survey by professional services firm BDO USA, 82 percent of retail CFOs report they either increased (31 percent) or maintained (51 percent) inventory levels for the 2011 holiday season.