Retail stock is like a houseguest. Some guests are great; they bring a gift, don’t take up too much space, are tidy, and don’t overstay their welcome.
Then there is the other type of guest; the freeloader.
They mooch, take the mi casa su casa thing WAY too far, and overstay their welcome to the point where by rights they should be paying rent.
Similarly, good stock provides a reasonable margin, doesn’t take up valuable storage unnecessarily, and moves quickly enough that there is no need to reduce the price or write it off.
Freeloader stock provides a poor margin, sits in storage and takes up space that could be better used for other items. It often becomes obsolete or needs to be heavily discounted or written off.
Unfortunately, the category stock falls into is not always clear. There will always be certain items that, while demonstrating some freeloader characteristics, justify their position in other ways. For example, low margin stock that flies off the shelves, or essential stock that must be carried to meet customer expectations (think hammers at a hardware store).
The trick is in identifying the true freeloader stock and realising how much it can cost your business.
The hidden costs of Freeloader Stock
The problem is that there are many ways business owners and managers justify freeloader stock. A commonly seen excuse is “But it was a bargain to buy it in bulk”. Everyone loves a discount, but if you’ve just paid for 12 months’ worth of a product you now have:
- the cost of storing it for that length of time;
- potential lost interest on the cash you used, or alternatively be paying interest if you used credit;
- staffing costs to manage, stocktake and organise the stock;
- and unless you were very sure of your sales projections you may also be running the risk of being lumped with something that doesn’t sell as well as you thought, might become obsolete before you shift it all, and may need to be heavily discounted or written off.
When you do the sums these carrying costs can have a significant impact on your actual margin, and may actually cost you more than you make.
Another common excuse is “But Joe Regular always comments on how good it is that I stock X”.
The question to ask here is, does Jo Regular actually buy X? Does anyone else buy X? Often business owners or managers can get too close to the feedback they receive from regulars about the range they stock. It is important to look at stock impartially and identify those items that may be better as a special order item or discontinued altogether.
“But I HAVE to stock product X!”
If it is important (or perceived to be important) to have an item on hand, can you use price to manipulate the impact? E.g. Can you make it cheaper and special order, or can you keep in stock but increase its price to make it pay rent?
If you’re concerned about customer backlash you could also talk to key customers and ask them, “Would it impact you to wait for it to be ordered?”. Involving your customers this way can also make them feel more valued.
Stock is like cash
Let’s not forget that stock is essentially CASH sitting on your shelves, and how it is managed can significantly impact your cash flow. This also means you can analyse it like cash flow.
Cash flow analysis that specifically looks at stock can help you to identify items that may be freeloaders, and determine the real cost of your stock. Scenario analysis can then be used to work out the potential impact of changes to stocking arrangements before you implement them.
A few questions to look at include:
- Can you put a dollar figure on how much is on the shelf and in the warehouse?
- How much is your stock costing you by sitting on the shelf?
- Are you hoarding?
- How much obsolete stock are you carrying?
- What is actually profitable (not necessarily what sells the most)?
- Would special order be more appropriate for some items?
One tiny change may not make a large difference but the cumulative effect of many small changes can be much more than the sum of parts.
Here’s an example
Consider a small retail business with a turnover of around $1M. Stock at hand is approximately $300,000, which equates to roughly four months’ worth of goods. Undertaking cash flow and scenario analysis can identify many small impacts and potential improvements including:
- products that could be discontinued;
- products that could be stocked at a much lower volume;
- profitable product lines that could be increased;
- identify how much warehouse space could be saved by these new stocking levels;
- review the impact of changes to ordering practices.
And the list goes on and on.
If, by undertaking cash flow and scenario analysis in relation to their stock they are able to reduce their stock at hand figure even by a third… Well, what could your business do with an extra $100,000?
So ask yourself – what does your stock actually cost you?
How do you manage your freeloader stock? Share your thoughts!