Business SMART

Turns

 

By: Dennis A. Conforto
Chairman & CEO of A-Z Media Group, Inc.


For the month of December we will be covering the major items that drive profits. At the top of the list of profit drivers is inventory turn. If you look at the companies who turn their inventory the fastest you will see they tend to be the largest.

A Look at Other Industries
Take, for example, Dell Computers on the manufacturing side. Dell uses just-in-time inventory; as a result, they turned their inventory so fast they could finance their own growth. And grow they did – into the largest PC manufacturer in the world with sales of nearly $50 billion worldwide. There were plenty of manufacturers who were bigger than them when they started, but no one worked the supply chain process like Michael Dell.

On the retail side there was no one like Sam Walton; who started out with a bunch of Ben Franklin stores. He wanted to do two things: turn his inventory faster to drive his cost of doing business down and have the lowest prices. Ben Franklin, for whom Walton was managing some variety stores, said no. Sam Walton turned around and founded Wal-Mart. Wal-Mart is now the largest company on Earth. Basing their business on turns, Wal-Mart now has sales approaching 1/3 of $1 trillion, with almost 2 million employees worldwide.

The interesting thing about these two companies is that in their success, they are liked and disliked in equal measure. The consumers reward them with more and more business each year. Their competitors dislike them because they just don’t know how to compete with them. And to compete with them you have to out turn them just like they did to their competitors many years ago.

A Look at the Scrapbooking Industry
In the scrapbook industry the average retail turn rate is about 2.2 turns per year. No matter how you cut it, at that turn rate, an average scrapbooking retailer can only stay in business 4 years before they just flat run out of capital to run their business. A retailer can have a great store, great employees, and awesome customers, and they can even be growing, but there comes a time when that turn rate catches up to the retailer and wipes them out.

The sad thing is that many scrapbooking retailers are shocked. They don’t understand why it seems that they are improving as businesspersons each year but the business is harder to come by and losses are mounting.

Within the next 18 months about 1,000 independent retailers will fail because they don’t understand how inventory turn rate effects their bottom and top lines. It used to be that every time a retailer failed another one would take its place, but that will not be the case this time. This time about 300 stores will replace the 1,000 that will be lost. And that’s a shame, because it does not have to be this way.

Turning one’s inventory is not the fun side of retailing and manufacturing, it is, nonetheless, the essence of a profitable business. There are 5 reasons why a business that turns their inventory faster is just a healthier and better business at the end of the day.

1. They know what is selling and they keep it in stock, this boasts sales in an ever-upward spiral trend.
2. They know what is not selling and they get rid of it fast; this keeps most of the inventory fresh and new, which the consumer loves.
3. Those that know what is selling and keep it in stock and know what is not selling get rid of poor performers quickly and know who their consumer really is. As a result, their inventory selection is limited to the best vendors and the best products. They do not try to be everything to everyone because they know that when they do that they will become no one to everyone.
4. Those who turn inventory fast have positive cash flow and real operating profits to show for all their hard work.
5. Those who turn their inventory fast have lower operating cost and can therefore compete with anyone large or small in their market area.

In summary, higher inventory turns mean higher sales, higher margins, higher cash flow, higher profits, lower operating cost and a more loyal consumer. Just ask Dell and Wal-Mart… and that is what SMART business is all about.