Eyes on Cash Flow & Managing Inventory - Tips from one successful ECP and Väri
In optical, as well as most retail sales, we typically find that 80% of sales come from 20% of inventory. This is commonly called “the eighty/twenty rule”. But more often than not, Independent ECP’s practice what I call the “Binge and Purge” inventory system.
We all experience the constant flow of optical frame reps and can feel inundated on a daily basis. It’s their job to introduce new product and exchange if possible, the slow sellers. It is the retailers’ job to understand the store’s frame capacity, to work to keep that steady and to replace the sellers as they sell.
This is a relatively easy process, but it’s also easy to fall for and be romanced by way too many of those beautiful new styles and inevitably, they can end up filling your boards to overcapacity. This is the “binge” where we end up with a 90-day supply with a 30-day bill attached. These frames must be turned (sold) to be profitable, so for the next 90 days we try to clear the board…the “Purge”.
An even more frustrating thing is that the best sellers (20%) are sold first, fast easiest. If you are lucky and sell the rest over the next few months, the board starts looking empty, so when a new group of reps show up, we do the same “Binge” and start the cycle all over again. This is how we get into trouble. Cash flow is strapped and we get behind in payments.
We all understand that our retail stores make money by turning inventory quickly. If every frame that you buy turns quickly, you make your profit. Here is the catch. The 80 / 20 rule means that out of 100 frames purchased, only 20 of those will be the ones that sell first. But because you are now loaded down with inventory, you are most likely not going to reorder those 20 best sellers because you are going to look at the remaining 80 on your board and think to yourself, I’ll reorder when I sell the rest of these.” Unfortunately, it is an uphill battle to sell those frames.
In reality, you should reorder the 20 best-selling frames IMMEDIATELY or order those frames on an Rx. The same frame can theoretically be sold multiple times in a day. Otherwise, you are going to have to wait until your eyewear rep comes back into your store to exchange out the 80 pieces that have not sold. Meanwhile, you STILL have to pay the bill for those 80 frames that are sitting on your board like little coffins. This means that your cost is 4 times more per frame sale until you’ve sold all of them.
When you do the math and multiply this scenario by multiple reps and collections, this quickly becomes a financial disaster that will always put you behind the curve in paying your bills on time.
So, the solution is easy. When you sell your best sellers, that top 20%, don’t wait, reorder immediately and turn those frames repeatedly. It is so simple. Just keep reordering the frames that sell. If you sell one frame a week, replace one frame, if you sell 10, replace 10. Just don’t allow your reps to come in and sell you 20 frames when you only have room for 10.
If you want to make room for some new inventory or styles, you need to “bank” your future frame choices. To do this, keep a log and every time you sell a frame that was a hard sell – put that into the “bank”. That means that the next time the rep comes to see you, you’ll have room to buy and not just exchange! Every one wins. Remember that this 80/20 rule is just a guideline, 70/30, or 60/40 would even be better because you want to always increase the ratio of your best sellers. And, as an added bonus, this will help you to even out your cash flow.
So from one ECP to another, here’s my best advice:
- Don’t order more frames than you initially need and reorder only the best sellers, or RX them. Order specifically for the sale so that frame can get sold again and again and again.
- Remember to keep your best sellers on the board at all times and you might find the opportunity to sell the same frame multiple times in the same day.
- Not turning your inventory costs you… a lot.
- You need great inventory turns – if you are not getting 4 -5 turns out of a collection, it could be time to let it go.
So, to sum it up, when managing your inventory, don’t let the dogs carry the burden. A “woofer” of a frame should not return to your inventory, even if someone buys it. Save the spot and use that spot on the board to add another best seller and make room for a new collection that really turns heads and your profit margins.
And, check out Väri when you have a chance – we don’t have a dog in the line! In fact, the only dog we keep around here is Buddy!