Setting Inventory Levels and Controls

The old days of hanging a sign over the door, filling the cases, and waiting for the cash register to ring are gone. The game has changed and there are new ways of doing business. Companies that adapt to the changes will succeed.

Aladdin Gold Creations offers the following article—the first of a five-part series—to energize you and your staff to successfully sell gold jewelry. Our reasons for this undertaking are purely selfish. If you succeed in selling more gold jewelry, then we also will succeed.

The series will address inventory levels and controls, enthusiasm, employee training, in-store marketing and promotion, and visual aids. We begin with inventory levels and controls.

There’s a fine line between having too much inventory and not enough. Because we’re in a fashion business, the consumer needs to be made aware of changing styles. The successful retailer creates a need in the mind of the consumer. He achieves this with constant updating of fashion trends and inventory. If you wait for consumers to ask for styles they’ve seen advertised, it’s too late—they’ve already purchased the items elsewhere. They’re likely to go to the retailer that advertises specific product. And consider this: With high gas prices, consumers won’t keep going back to retailers who don’t have the inventory on hand.

If you’re concerned about overstocking gold inventory, be aware that most manufacturers and wholesalers have a stock- balancing program to help the retailer alleviate slow-selling items. If yours doesn’t, it’s time to look for one that does.

Most consumers aren’t aware of the high price of gold, so the argument that gold jewelry is too expensive for the public is nonsense. Besides, it’s a precious metal for a reason. The cost-of-the-product factor should be a positive, not a negative. Making consumers aware that they’re buying something precious that will hold its value over time should be a key sales tool for the retailer.

The notion of selling them “something else” doesn’t hold up, either. The only customer who might be switched is one who’s buying a gift and doesn’t care what it is as long as it’s in his price range. That does not describe most customers. If you want to buy a Ford Taurus, would you accept a switch to a Ford pickup truck? That’s what the retailer who attempts this is trying to do. A better idea is to analyze your best-selling price points and stock more inventory in those categories. Maximizing inventory turnover is the key to a healthy business.

The right mix also is important. All retailers sell pendants and need gold chain on which to hang them. Pendant sales occur all year, not just at Christmas. Yet some retailers stock heavily in the fall and expect it carry them for the coming year.

Buying inventory on a regular basis is smart on a number of levels. You not only cost average and hedge the gold market but also have better control of your inventory by maximizing turnover. As an example of cost averaging, consider an 18-inch box chain weighing 2.2 grams in 14k. If you bought this chain Feb. 1, 2007, at the gold market price of $660.25 per ounce, your cost was $43.45. The same chain purchased May 1, 2007, at $673.60, cost $44.33. If purchased Oct. 1, 2007, at $742.50 your cost was $48.51. Buying the item three times at different market prices (for an average of $45.43) versus buying three at the fall market price of $48.51 would have saved you 6.8 percent. More important, you would have turned the item over three times.

Another factor that’s often overlooked is gross margin. Gold jewelry in most cases has better margins than other types, especially diamonds. While the average ticket price is lower than other categories, you won’t have to sell as much because of the higher margins. If you’re selling a gold item at $500 with a 2.5 markup and discount the piece 20 percent, you’re still making double your cost ($200 × 2.5 = $500; $500 – 20 percent = $400). How many item categories in your store can claim that distinction?

Does Wal-Mart wait until it’s out of an item before deciding whether to reorder it? No. That’s why it’s the world’s largest retailer. Replacing inventory is crucial to turnover. Recall the story of the retailer who refused to buy the same item twice because he sold it to one customer and didn’t want to offend her by selling it to her girlfriends. That retailer is no longer in business.

Cost averaging also helps alleviate margin pressures. You can maintain current cost information and adjust retail prices accordingly. If you don’t adjust prices with a rising gold market, you can easily pay more at the wholesale level than you’re getting at the retail level. Any profits derived from that sale are lost when buying new inventory.

The failure to adapt to tomorrow’s business model exerts unnecessary pressure on margins and turnover. If you stock inventory only once a year, you’re missing the swiftly changing fashion and metals markets. If you had stocked heavy gold bracelets in the past, the likelihood they are still in stock is high. The only thing you can do with them is discount the items to move them out of inventory, thus lowering your profit margin. If you had ordered four times a year, you probably wouldn’t have them. The gold market rise would have dictated that you buy lighter and more fashionable bracelets.

Buying more often helps you manage payables—there’s less pressure to pay your bills on time. Smaller invoices are more manageable than large ones. The advantages of getting and maintaining a good credit rating are numerous. The most obvious is the discount for payment within terms that most manufacturers offer. By managing your payables to take advantage of discounts, you not only accrue them but also build goodwill with your vendors. You also will rely less on outside sources such as banks for financing inventory. Wouldn’t you rather put the cost of borrowing into the business or, better yet, your pocket?

Next month: how to generate enthusiasm for selling gold jewelry.