Running a lean inventory business

One of the biggest drains on capital and cash in a retail business is inventory.  Now, inventory comes in two parts for us – general gaming stock & accessories and packing materials.  With our gaming stock, we manage it as best we can on a Just-in-Time basis; while packing materials we actually purchase in bulk and stock.   The reasoning for each stocking method is based on the frequency of restocks, the cost of shipping, the amount of capital tied-up and any bulk-purchasing discounts we might receive from our suppliers in each case.

We carry a relatively lean inventory for most items; attempting to stock 1 1/2 weeks worth of inventory for each time at any one time.  Of course, due to the nature of retail, there’s no telling which items will sell in any given week; so we actually stock 1 1/2 weeks worth of the expected average quantity sold.  As an example, we generally keep 7 copies of Settlers of Catan in-stock and 5 of each of the Ticket to Ride & Ticket to Ride Europe.    In any given week though, we might only sell 2 copies of Settlers, 4 of Ticket to Ride and 0 of Ticket to Ride Europe.

With board game stock; we have 3 main distributors that we use and a number of other minor distributors.  For the main distributors, we generally place an order with them once a week throughout the year, picking it up on Thursdays.   However, during Christmas; we increase the frequency of pick-ups to twice a week to deal with the increased volume of sales.

This saves us a huge amount of committed capital – by doubling the number of pick-ups we do; we effectively increase our stock by 1.5-2 times.  Why not 2 exactly? That’s due to the in-transit times of our shipments to us.    For 2 of our main distributors; we are a 2 day ship – which means an order shipped on a Tuesday arrives on a Thursday.  Knowing this, we need to plan for a 5 day gap (Wed – Monday) where no new stock would arrive from these distributors.

While our distributors have generally been extremely good at shipping out orders placed on the same day; there is unfortunately an occasional hiccup and that’s when relying on a lean inventory system becomes a huge problem; especially when we do pick-ups only once (or twice) a week.  If we place the order, expecting them to ship the same day and they miss by one day; we end up waiting an entire extra week (or half-week during Christmas) for our stock.

If it’s a week, and we have only 1 1/2 week worth of inventory in-stock; that means we are actually ‘missing’ sales for up to a week.  E.g. I place an order for 5 copies of Settlers of Catan on Tuesday, having sold them the week before.  I now have 2 copies left.  By Thursday, when I expect my restock, I might have 0 copies left.  However, if my distributor  or UPS misses their shipment to us by a day; we must now wait till next Thursday to receive our stock – missing out on the sale of another 7 copies.

On the other hand, if I stocked for 2 1/2 weeks worth of inventory, I’d effectively increase my capital investment in stock by 66%.  Which, if you’re talking about $100,000 in inventory is $66,000.