Case Studies: Inventory Spending
Tracking Inventory & Industry Trends are Key to Profitability
Ellen Cummings, a seller of antique quilts on a busy main street, had never reviewed her inventory to see what was and wasn’t selling. She had no idea how long her inventory was sitting unsold, and she continued to add inventory without understanding if it was necessary.
Cummings needed to analyze her inventory and sales trends so she could make smarter purchases and understand how the amount of time quilts spent in inventory affected her margin. She discovered that the amount of time it took for inventory to turn was very important. In fact, her analysis revealed that if a quilt sold within six months of purchasing it, she could realize a net margin of 75%, but the margin decreased drastically for every additional six months the quilt remained in inventory. After two years in inventory, the level of discounting became an extreme penalty.
Cummings improved her process for selecting quilts to hold in inventory, updating her knowledge of trends in popularity among antique quilts. This enabled her to reduce her cash spending and also minimized the possibility of buying and holding inventory that would end up costing her money.
Track inventory to help you adapt to shifting trends in your industry.
Tracking Sales by SKU Leads to Better Purchasing Decisions
Val Madden, owner of Madden’s Made — a semi-custom art framer — had expanded to sell general store items to complement his main product offering. In an effort to attract younger consumers, he had shifted his traditional focus on decorative home products by adding a very large selection of products that were more functional and practical. He lacked understanding of which SKUs were most profitable, and the store had more SKUs in inventory than he could track.
The number of SKUs had become an accounting nightmare for Madden. With so many SKUs, creating and analyzing the weekly sales reports became an untenable task. An outside firm conducted an analysis comparing the revenue brought in by each SKU over the last 12 months, revealing that only 40% of the SKUs were responsible for 85% of sales.
The results of the analysis motivated Madden to eliminate the lowest-selling 20% of SKUs and to rethink and refine his product mix.
Track inventory and sales by SKU and buy inventory based on the results.
Tracking Inventory Helps Owner Make Timely Marketing Decisions
Marjan Lee, creator and producer of Puppy Time Puppy Toys, had been using the same packaging for three years when she decided it was time to refresh the brand through a new package design. Lee needed to figure out the best timing for ordering the new packaging and launching the new product.
In order to decide the best time to launch the new packaging while minimizing waste, Lee needed to understand her usage of the current packaging. She compared the average units of toys sold per month (600), with what she had on hand (2,400). If purchases continued at the same rate, Lee still had four months of old packaging that she needed to use. She learned that the lead time for the new package to be produced and delivered to her would be one month.
With an understanding of her inventory and lead time needed for new packaging, Lee was able to calculate that she would need to order her new packaging in three months.
Marketing decisions to change packaging can also affect your cash spending on materials inventory. Track unfinished and finished products.
Owner Reduces Unexpected Expenses with an Inventory Tracking System
Alex Munoz had owned his thriving family plumbing business Munoz & Daughters for 22 years. When his daughter Amelia joined the business, he asked her to look for opportunities to make improvements. She noticed that they often lacked necessary inventory, and set out to understand why.
Alex had never set up a system for tracking his inventory. As a result, his employees often didn't have the supplies they needed to complete repairs or installations while on job sites. Purchasing last-minute supplies was costly, and the additional expense plus the time spent driving to and from their supplier would eat away at their net profit.
Amelia created an inventory tracking system that revealed where they were falling short of meeting the demand for certain supplies, and showed them the time lag between when he ordered supplies and when they were delivered to his shop. With a new understanding of monthly inventory turnover and the lead time needed to replenish key supplies, Munoz was able to order the supplies he needed to have on hand in advance, and avoid costly last-minute supply purchases.
Tracking inventory is essential for making timely supply purchases and reducing unexpected costs.
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Businesses described in the case study are illustrative and do not represent real individuals or situations.
For Informational/Educational Purposes Only: The author’s views may differ from other employees and departments of JPMorgan Chase & Co. Views and strategies described may not be appropriate for everyone, and are not intended as specific advice/recommendation for any individual. You should carefully consider your needs and objectives before making any decisions, and consult the appropriate professional(s). Outlooks and past performance are not guarantees of future results.