New small business rule: Sacrifice inventory, save the store

— -- When John Goldman strolled through his Rhode Island jewelry stores, he used to see every piece on sale as an asset. The pricey silver necklaces gleaming in display cases until they sold as special gifts — all were assets. So were the $19 earrings that thrifty shoppers snapped up quickly.

Now Goldman knows that some of his glittering stock can sink his business, an independent chain called Green River Silver Co. whose rapid growth stalled after the financial crisis of 2008. As sales ebbed, Goldman hired consultant Ted Hurlbut, who told him his heavier necklaces were dangerous liabilities. That stock was weighing down profits while it sat unsold.

"Ted suggested that we literally liquidate it,'' said Goldman, who got cash from silver dealerships that melted down his less attractive heavy jewelry.

Goldman is one of the small business owners forced by the recession to focus on the exacting discipline of inventory management, the art of fine-tuning the mix of stock on hand to maximize profits. Even in good times, slow-moving inventory like Goldman's necklaces ties up capital. It can also carry other costs, such as warehousing. Now, in the current climate of tight credit and weak consumer demand, excess inventory can threaten the survival of both tiny companies and huge ones.

Small businesses, however, are often less adept at inventory management than large corporations, said Hurlbut, a small business consultant based in Foxboro, Mass.

Independent shop owners have other strengths, like passion for their products and great rapport with customers, he said.

"They didn't get into the business because they wanted to sit around and analyze data sets,'' Hurlbut said. But he likes to get his clients hooked on the somewhat geeky study of inventory data. "Geeky can be the difference between making money and not making money."

Before the economic downturn, many businesses could overlook inventory data because sales increases made up for inefficiencies in operations, he said. Goldman, who launched Green River in 1990, had long relied on good instincts as a buyer. He roamed through Mexico, Bali, and India looking for the best silver jewelry at the lowest price. Initially, he sold at craft fairs. By 2004, he had three stores and a small online operation.

"We just grew with the economy,'' Goldman said.

But by 2009, Green River was facing its first year without positive growth and was slashing costs. Short on cash, Goldman replaced stock more slowly. He was uneasy about the mix of items left in his shops. But he fully realized the danger after Hurlbut analyzed the inventory numbers. The stock was skewed toward expensive jewelry that sold slowly, if at all.

Green River's slide into an unfavorable inventory balance was typical of small retail outlets after the 2008 crash, said Hurlbut. Many shop owners lived off their existing inventory, and budget-conscious customers bought up the least expensive items. Left behind were expensive products, or things consumers just didn't want even at huge discounts. Now retailers need to unload those burdens, and restock with products customers are most likely to want, Hurlbut said.

But predicting customer desires is still tricky. Even as consumer confidence recovers somewhat, demand can fluctuate wildly. These conditions are challenging even for large corporations, said Abe Eshkenazi, CEO of APICS The Association for Operations Management, which offers training and certification in supply chain management, inventory control and related skills.

Major companies are now making it "a strategic imperative'' to closely link production with consumer demand by improving coordination along the supply chain, from manufacturing to distribution and retail sales, Eshkenazi said. This can avoid excess inventories at any point in the chain. But the leaner operations of suppliers can create shortages for small purchasers, such as independent retailers. Those businesses need to stay closely in touch with their suppliers, he said.

"They have to be sure things will be available,'' Eshkenazi said.

On the other hand, Hurlbut said, retailers should resist if suppliers urge them to buy prescribed assortments of goods that will force them to hold unsold inventory. "The key is to know what you want and be clear in asking for it,'' he said.

Goldman said his vendors have made accommodations, such as selling on terms that allow him to pay in 30 days. He has also changed his buying patterns.

Hurlbut showed Goldman how to interpret the data from his sales-tracking software. Green River's "sweet spot'' was an average sale of about $35. But after 2009, that figure drifted to about $38, and sales suffered. Now, Goldman buys an array of items at a range of prices to aim the average purchase at the "sweet spot.''

"We're in a much better place right now," he said. "The mix is better and it's reflected in sales.''

Copyright 2011