“Inventory is money sitting around in another form.” – Rhonda Adams, USA Today
THIS COLUMN IS about money — your money. The average practice has at least 1,000 frames in their inventory. At an average acquisition price of $50, that amounts to $50,000! $50,000 is real money. It’s your money. You’ve probably heard that to earn the return needed on your inventory, it should “turn” (meaning sold and replaced) at least three to four times a year. Do you know how many times your inventory has turned in the past year? It’s an important metric if you hope to make any money on the $50,000 that is sitting in your office.
Here are four things you can do now to improve the ROI on your inventory:
Organize by Brand
An adequate inventory is 800 frames. These should be made up of 20 different brands—40 frames per brand. This is very important. You must commit to a brand. The Ralph Lauren section at your local department store does not consist of one suit, two sports coats and three shirts. You must also commit to a brand to properly merchandise your inventory. The brands should be organized into four categories: licensed/designer label frames, private label frames, value brand frames and sunwear frames. The percentage of each in your mix is based on your target customer.
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Set Only 8 Retail Price Points
You should set your retail pricing consistent with your business brand. Start with setting the price range of your frames based on the target customers. Our brand is “Chevys and Buicks.” This means that our customers are middle to upper middle income. You wouldn’t walk into a Chevrolet dealership and expect to see a Cadillac. An example of pricing for our brand is a low-end product of $129 up to a high end of $399. Select price points in between, say $129, $149, $189, $219, $249, $279, $349 and $399. Each time you consider a frame, you ask yourself, at which price can I sell this frame? Then you want to try to purchase the frame with the largest margin you can negotiate. Most offices start the other way around, how much am I paying and what is that times three?
Limit the Number of Vendors
Limit the number of frame companies to six. This gives you an advantage when negotiating acquisition cost. If you are working with a vendor and plan to buy three or four brands and at least 40 frames in each, you will find a very cooperative rep. A big advantage is working with people who value your business. If you buy 10 frames from one of 12 or more manufacturers, no one will value your business. It’s just not that much to any one vendor.
Manage a Static Inventory
Once an initial order is received, do not sell frames off of the display. Instead, when one is sold, order the frame from the manufacturer. This way, the best-selling frames never leave the showroom. You can sell the same frame multiple times a week and not have to wait six to eight weeks for the rep to return so you can place a stock order. Your cash flow and payments will smooth out and you won’t have large inventory invoices to pay every six to eight weeks.
Remember, the whole point of having an inventory is to turn it into money.