Developing an Inventory Plan
By Abe Sherman
This article assumes you have already determined your company’s total inventory budget and have a well- developed Inventory Hierarchy. The next steps in the planning process will be to allocate that budget by department, category (or subcategory) and price point.
Each department of your store contributes to sales and gross profit in different amounts and each, therefore, should have its own budget. Contained within a department are categories and sometimes sub-categories. Also, price points perform differently from one category to the next; therefore, your plan will call for different allocations by price. Finally, margin will vary from price point to price point as well as one category to the next so the plan must take into account each of these variables.
There are basically two options for creating your budget; you can create a budget by using turnover (or turn) or GMROI (Gross Margin Return on Inventory). When using turnover, your budget will consider the Cost of Goods Sold (COGS) over the previous 12 months. When using a GMROI goal, your budget will consider Gross Profit, also over the previous 12 months. Due to the fact that gross profit percentages differ widely from category to category and from price-point to price-point, I am a strong believer in creating your budgets using GMROI, since your gross profit is going to dictate your investment.
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