Inventories are brought to a peak just before sales come to a peak. When sales actually do reach their highest point, the leveling-off of inventories begins. Replenishment of stocks is then on a restrained and selective basis.
Prompt leveling-off of inventory minimizes the risk of being left with large stocks when demand has dwindled, as it inevitably does late in a selling season.
Example: Assume that November produces peak sales in a Coat Department. Stocks reach their highest point by November 1, with a wide assortment of styles and prices. By December 1, demand is still strong, but beginning to level off. The inventory is smaller than in November, with fewer styles -principally reorders of those that have shown strength. By January 1, looking forward to rapidly dwindling demand, the inventory is approaching clearance levels in size and assortment.
Management's dollar figure for inventory at the beginning of a given month may be arrived at by applying an appropriate stock-sale; ratio to the planned sales for that month.
The stock-sales ratio is obtained by dividing sales for a month by the retail value of the inventory at the beginning of that month. The ratio varies from month to month and from one department or classification to another.
This figure that management uses for any department is based on past experience, the experience of other stores, and its own goals for the store or department.
Buyer planning is done in units, however - the number of units you expect to need in each classification and price line to support the month's planned sales.
Only after the unit figures have been worked out does the buyer convert estimates to dollars.
If your dollar total does not jibe with the tentative figure the management has set down, speak up for what you believe you need before the budget is made final. Marshall your facts and present them. For example, you may have a classification that has been quite unimportant for years and is suddenly moving into the center of fashion.
In your month-to-month planning, be careful to plan each classification's and each price line's timing separately. The peaks and the cut-off points can be different for each one.
For example, if you buy for a broad range of prices, the customers who patronize your top price lines may have reached and passed their peak shopping period for a season before those in the lower price lines are even well started.
Planning for Branches
If you are buying for one or more branch stores, plan each one's sales and inventories separately.
Be especially watchful of differences in individual branches as to emphasis to be placed on various price lines and classifications, and on differences in the timing of sales peaks and valleys.
Your branch department managers and branch store managers may have worthwhile suggestions that will round out whatever facts you glean from the past year's sales and stock records.
In planning inventory, avoid lumping all selling units together, even if you are dealing with only one or two small branches. Each branch has its own special character.
Common faults to avoid in branch inventory planning include:
- understating branch sales potential
- providing the branch with too skimpy an assortment to inspire customer confidence in a particular classification or price line.
If you have so little confidence in a classification or price line that you can risk only a tiny stock at a branch, you may be better advised to eliminate that classification or price line at that location. Assemble the facts (previous sales, reports of unfilled customer requests, other pertinent data) and check with branch executives and your merchandise manager.
Providing the branch with only a token stock is not likely to produce sales. Branch inventory is planned for the sake of sales. Poor stock, poor sales.
Planning Purchases
Once the sales and stock figures for each month have been established, the planning of purchases becomes a matter of simple arithmetic. Wherever dollar figures are used, all are at retail.
Purchases at Cost
Up to this point, all the dollar figures in the merchandise budget are at retail. Some managements also show planned purchase figures at cost value.
Entering cost values on the merchandise budget tends to imply to buyers that there is a rigidly fixed relationship between cost and retail - that they must inevitably spend $6,000, let us say, for goods to retail at $10,000. Most managements prefer to have their buyers use judgment as well as arithmetic in their purchasing, and to spend $5,700, or $6,100, or whatever is necessary to obtain $10,000 in good, salable merchandise.
The procedure for reducing a retail purchase figure to a cost value is simple. Management specifies on the plan the initial mark on percentage it expects the buyer to achieve.
Simply multiply the retail value of planned purchases by the reciprocal of the initial mark on percentage to obtain the allowable cost value. (The reciprocal is 100% minus the initial mark on percentage.)
Units versus Dollars
When you have built your budget up, step by step, and then converted your estimated units to dollars, your sales and inventory figures may or may not coincide with management's own plan.
If you are required to make adjustments in your dollar plan, your safest procedure is to go back once more to your unit planning and see where you can best make the changes.
For example, suppose you have to cut your inventories back to 5 percent below what you planned. There will be some classifications or price lines that simply cannot be cut back at all; others may be able to function with a 10 percent cut; some marginal groupings may even be dropped without real loss of sales or good will.
Going back over your unit figures again is not as quick as making a uniform across-the-board change in the dollar amounts, but it is the only sound way to make whatever adjustments must be made.
Reaping the Benefits
Operating within a well planned merchandise budget usually means operating profitably. Your inventory will be selected and timed in the light of expected customer demand, and you will be functioning on the smallest, fastest-turning inventory that is practical for your department. Moreover, those executives of your store who are responsible for promoting, financing, and staffing your department will have realistic advance notice of your needs and programs, and can plan ahead to do their share to help you achieve your goals.
