How to Make Smart Inventory Buys

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<p>During this NAMM U session, Alan Friedman of Friedman, Kannenberg and Co. revealed the keys to successful inventory management.<br /> <br /> <span style="line-height: 1.6em;">According to Friedman, inventory management begins with knowing what products to buy and how many to buy. He armed retailers with a simple and easy formula to do this.&nbsp;</span><span style="line-height: 1.6em;">&ldquo;Every music retailer has too much inventory,&rdquo; he said.</span><br /> <br /> <span style="line-height: 1.6em;">According to Friedman, </span><strong style="line-height: 1.6em;">retailers only need to ask themselves four questions when buying product.</strong><span style="line-height: 1.6em;"> He encouraged them to make these questions a permanent part of their buying process.</span><br /> <br /> <strong style="line-height: 1.6em;">1. Can I sell this product?</strong><br /> <span style="line-height: 1.6em;">If it&rsquo;s something your customers want, move to question 2.</span><br /> <br /> <strong style="line-height: 1.6em;">2. Will I make a profit?</strong><br /> <span style="line-height: 1.6em;">If the answer is yes, move to question 3.</span><br /> <br /> <strong style="line-height: 1.6em;">3. How quickly can I sell it?</strong><br /> <span style="line-height: 1.6em;">If you can sell it in 30 days or less, buy tons.</span><br /> <br /> <strong style="line-height: 1.6em;">4. How quickly do I have to pay for it?</strong><br /> <span style="line-height: 1.6em;">You should be able to sell most of the product before you pay the vendor, so you don&rsquo;t have cash flow shortages.</span><br /> <br /> <span style="line-height: 1.6em;">Friedman walked the audience through questions three and four with specific examples. He noted that you&rsquo;re invested in your inventory </span><em style="line-height: 1.6em;">when you pay for it</em><span style="line-height: 1.6em;">, not when you get the product&mdash;stressing the importance of vendor payment terms and ideally getting 60&ndash;90 days from your supplier. &ldquo;The objective is to sell product, at the highest gross profit, in the least amount of time, and never pay for it,&rdquo; he said.</span><br /> <br /> <span style="line-height: 1.6em;">He added that if you start to focus on these four things, your inventory levels will start coming down because you&rsquo;ll be moving product faster, your cash flow will improve, and your business will grow stronger and become more successful.</span><br /> <br /> <span style="line-height: 1.6em;">&ldquo;The music industry&rsquo;s margins are shrinking, and it doesn&rsquo;t matter at what margin you&rsquo;re making your business work&mdash;it&rsquo;s about the amount of gross profit dollars you make,&rdquo; Friedman said.</span><br /> <br /> <span style="line-height: 1.6em;">He then gave his rule of thumb for buying inventory and advised putting it to use immediately: </span><strong style="line-height: 1.6em;">Buy the product only if you know you can sell it in &lsquo;X&rsquo; days or less, where &lsquo;X&rsquo; is equal to 360 days times your gross profit percent.</strong><span style="line-height: 1.6em;"> (Note: 360 is a round number and easier to use than 365 days.)</span><br /> <br /> <span style="line-height: 1.6em;">So, using the following example of 25 percent gross profit:</span><br /> <br /> <span style="line-height: 1.6em;">Step 1. Calculate your gross profit percent: 25 percent.</span><br /> <br /> <span style="line-height: 1.6em;">Step 2. Calculate the number days to sell the product: 360 days x 0.25 = 90 days.</span><br /> <br /> <span style="line-height: 1.6em;">Step 3. Now make the buying decision: If you can move it in 90 days or less, buy it. Make sure the quantities you buy fall within the range of this formula. Otherwise, don&rsquo;t buy more than you can move in 90 days or less.</span><br /> <br /> <span style="line-height: 1.6em;">&ldquo;You would never build a house without a blueprint,&rdquo; he said. &ldquo;The best stores are the ones who monitor their inventory levels, do physical counts of their inventory, and are buying what they need and selling within a short period of time. If you buy in small bites, you can pay your vendors, and always go back to buy more.&rdquo;</span><br /> <br /> <span style="line-height: 1.6em;">Don&rsquo;t beat yourself up when you make a bad buying decision, but continue to ask yourself the four questions and use the rule of thumb. Practice makes perfect.</span></p>