Platt Perspective on Business and Technology

Balancing turnover rate, inventory capacity, consumer selection and price point – 2

Posted in strategy and planning by Timothy Platt on June 20, 2011

This is my third installment in a series I have been posting in Business Strategy and Operations, (see postings 160 and 161) and a second examining the interaction of inventory turnover rate and in-house inventory capacity, consumer selection and price point. And I start by explicitly focusing on price point.

You have a storefront that may be bricks and mortar or online, and you find yourself considering two stock-keeping units (SKU) in your inventory, as you fine tune what you will offer moving forward.

• Both SKU units at least nominally, and for average wholesale price go for the same price point, and your competition, on average sell them retail at very similar prices too, meaning they would also offer, at least on average for your marketplace, essentially identical markups and profit margins.
• But one of these SKU units, identified here simply as A shows a significantly higher turnover rate for your business than the other one does, which I have labeled B.
• That means when you go to your wholesaler, you purchase a lot more of A to keep your inventory stocked, and you probably add to your A inventory more often as well.
• And that means you have a stronger argument for negotiating a higher sales volume, discounted rate for the wholesale purchase of A on a per-item basis than you would for B. And if your purchases of A are of sufficient scale to be more cost-effective for the wholesaler, they would not necessarily loose out from this either. As a specific case in point, if you can now purchase complete pallet-loads of A, eliminating the wholesaler the need of breaking pallets of that SKU down as they come in from the manufacturer, that would actually save them money. And of course, your increased purchase of A translates into the wholesaler’s increased purchases of A from the original manufacturer too – with possibility for price per unit discounts there too.
• And my take home point coming from all of this, is that for your business, A and B as stockable and salable SKU units are no longer the same, for wholesale price you pay for them or for the markup you can realize for them and perhaps even if you now undercut the competition for sale of A with reduced prices.

If you are only going to continue to stock and sell one of these two items, it will probably be A and even if B does have a smaller, and less active but still very loyal following – unless the people who purchase B are so valuable to your store as customers in general, that it would in effect make sense to offer B to them as what amounts to a loss leader.

The mathematics of this is fascinating – and important as that is where detailed analysis has to take place in determining what inventory retention and reduction decisions you make, and what levels of stock you carry for any given SKU, and when seasonally.

I am going to shift this discussion back to the level of the marketplace again with part four in the series, and with a focus on the global marketplace – a natural purview of online commerce.

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