Inventory – Breadth or Depth?

With the year coming to an end, I’ve been taking a look at our turn rates and our inventory.  Some parts of our inventory (clothing, media products) have been somewhat lackluster in terms of their turns. Others are running too hot (our general board game inventory probably could be beefed up, though I’m considering ‘splitting’ the category further to give us better insight).   It’s all the usual part of running a business, where you review your turns and sales and decide what to do.

The question that came to mind, more than anything else when dealing with our game inventory is whether we’d be better off increasing our breadth or depth.  It’s one thing to say ‘increase inventory dollars in board games’, and another to decide whether to do so by:

  • buying more unique products (increasing breadth)
  • buying more of our hot-sellers (increasing depth)

Increasing Breadth

When increasing breadth, we are looking to bring in more games than we have now.  This could be a return of older games that have been ‘cut’ due to low turn rates or by bringing in more new games, relaxing our normal restrictions on what we think should (or should not) be brought in to the store.

The advantage of bringing in older games is that many of those games were once good sellers.  While sales might have slowed, the demand was once there and because the games were once bought /are in people’s collections, there might be latent demand for these games (or slow trickling demand).

On the other hand, bringing in newer games allows sleeper hits to make their way into our portfolio.  Some of our better sellers have been games we’d never expect to sell and so, by bringing in more independent / small games, we might hit on more of these.  However, the disadvantage is that we might see a significant increase in games that we need to clearance.

In both cases though, we are able to have more stock and potentially increase the likelihood for customers to find eactly what they are looking for, particularly customers who have a specific idea of what they want.

Increasing Depth

pandemic_new_ed_Increasing depth on the other hand focuses on our ‘bestsellers’.  This is a hedge to ensure we never, ever run out of stock.  With many bestsellers already, we have started carrying 3 weeks worth of sales (i.e. if we expect to sell a copy a week, we’ll keep at least 3 copies on hand).  This is mostly due to the restock period for many games.

However, this doesn’t take into account stock-outs.  Scythe for example is currently out of stock again.  3 weeks of stock would (at our last week worth of sales when we had stock) be around 20 copies.  However, with the game out of stock right now, when we could have restocked it, perhaps we should have restocked at the 3 month level.

Of course, Scythe is rather unique (it is the hotness).  Let’s try Pandemic instead.  We sell around 4 copies of this game every week at least, so our regular stock level (or the stock level we try to keep) is 12 copies.  However, there are weeks when our ‘normal’ estimate is off, and like now, we are out of stock of this game (again!).  Perhaps instead of keeping 3 weeks, we should be at 2 months? That’d mean we’d have to stock 32 copies, but we’d never have to worry about the game running out of stock on a day-to-day basis and as importantly, stock-outs at the manufacturer level wouldn’t affect us either (well, for 3 months at least).

This tactic would give us the ability to continue to cater to our customers, but it does target more ‘new’ customers (i.e. customers looking for the ‘staples’ of our business like Pandemic, Dead of Winter, etc.).  It doesn’t cater to ‘alpha’ gamers who have a specific independent game that they really, really want.

It also has the disadvantage of being really expensive.  Even going from 3 weeks to 4 weeks for say our top 30 bestsellers (and assuming average cost of $30), we’re looking at $2700 ($30 x 30 SKUs x 3 copies a week) increase in capital cost.  If we decided to do 3 months, that’s a $27,000 increase in our inventory!

What Will We Do?

Well, firstly we’re going to pay all our Christmas bills off and ensure we are caught up on any bills.  After that, we’ll review to see how much additional funds we might have to put into play any of the above strategies.  It’s clear we need to increase our inventory value in our board game side and I’m personally leaning to a ‘mixed’ option, with a slightly heavier focus on increasing depth.  If we can shift some funds from our slower-selling categories, we probably will do that too.

Inventory : the Guessing Game

Stocking inventory for Starlit is always an interesting guessing game.  Sure, we have past data and industry knowledge of what might sell – certain designers and certain publishers do very well.  In addition of course there’s BGG and ‘buzz’ on specific games that help us get an idea of how much demand there might be for a game.  However, it’s all educated guesses at best and sometimes you guess wrong and there are real costs involved.

Let’s Do Some Maths

Let’s have some fun with maths.  Say, on average 50 games come out a month (are solicited to us).  Of those 50 games, a certain percentage will not sell in the store.  Let’s say 80% of the games will sell a copy, 20% are low demand.  So, of those 50 games, 40 games will sell, another 10 won’t at full price.

If we brought in every single game, ignoring our knowledge of the business, and assume an average cost of $20 per game; total inventory outlay would be $1000.  40 of those games sell, which means we are looking at $200 of ‘dead’ inventory which will not sell at a profit.  Let’s further say that half of those games (10%) will sell at cost and the other 10% won’t sell ever.  So, you will have sold $900 of the inventory that you bring in at any one time, with $100 of dead inventory.   Now, on the $800 at our regular profit margins, we would generate $400 in gross profit. Actually, much less since there are shipping costs, interchange, labour costs – so we’ll call it $300.  Now, with $100 of ‘dead’ stock, you have instead $200 of profit and $100 of stock that won’t ever move in your warehouse.

Let’s say instead that you bring in 40 games, and assume that your actual guessing ups your sale rate to 90%. So, you sell 36 games for a profit of $360. Your dead stock in this case is actually $40, so your profit is $230 ($90 additional COGs). By bringing in less stock, even though you have ‘missed’ out on the other 4 games that could have sold; you’ve made more.

More Complications

Another thing to note is that dead stock has a cost.  It takes up space in your storage, has to be counted and cleaned once in a while and eventually has to be discarded.  Add to the initial out-lay of funds to purchase the stock and the opportunity cost of dead stock and keeping lower stock is better than not (to a certain extent).  After a few years, those 5 or 6 games start piling up.

So if you are ever wondering why we don’t hold all the games that are coming out, well, here you go.  A simple, simple explanation.

Board Game Release Cycle

Or perhaps I should say sales / inventory cycle for board games.  This is roughly an idea about the board game release cycle (and other game products not including CCGs cycle for the most part) in terms of our inventory and sales.

 

Sales Overview Inventory Focus Inventory Budget Cashflow
January Flowover of Grandmother money means sales stays high Restock month from December. Items that missed December release or ran out of stock often arrive now, some of which are good sellers Great  – lots of money from Boxing Day Sales
February Sales doldrums. Everyone is receiving their credit card bills Keep stock tight, reduce stock levels time. Try to get rid of extra stock Great – so long as you keep a tight hold, you should have extra funds
March Sales picking up a bit, tax refunds coming in Continue trimming ‘extra’ stock.  More Essen releases often arrive around now. Good – might have to reduce available funds a bit to bring in more Essen products.
April Tax refunds for most everyone has come in now  Anniversary Sales generally drives revenue Trim stock further via Anniversary Sale, pick up Essen releases and interesting new items but low level inventory increase. Great – all Anniversary Sale items hopefully increased budget
May Sales lower as purchases ‘pulled’ from this month to April. Not much movement, bring in new items to keep stock fresh but don’t expect many hits. Some reprints of ‘hit’ items start arriving now too. Good generally – again, purchasing for ‘reprint’ hits now.
June Summer doldrums. Lower sales, few  interesting products released generally. Treading water. Just waiting. Good – on downcurve as we restock products and bring in okay sellers.
July Summer doldrums. Lower sales, few  interesting products released generally. Treading water. Just waiting. Good – on downcurve as we restock products and bring in okay sellers.
August Summer doldrums. Lower sales, lots of buzz from GenCon releases though Pre-order time.  Keep track of the buzz, add lots of pre-orders  based off buzz in GenCon. Good – no outlay just yet as only pre-orders.
September GenCon releases begin to hit shelves, sales are ramping up in Fall. Stock starts arriving, shelves start filling up really, really fast. Okay – money is starting to flow out to new stock that is arriving in torrents now, as new stock from GenCon starts arriving
October Lots of hit games start arriving, people are back purchasing. Stock starts arriving, shelves start filling up really, really fast. Okay to Bad – Inventory is piling up in large doses.
November Lots of purchasing.  Early bird XMas shoppers, GenCon hits and Winter game buying is happening now in droves. Add extra stock for XMas, make sure there’s enough for increase in sales. Bad – pre-purchasing extra stock pushes cashflow down before sales starts streaming in.
December XMas is here. 40 – 50% increase in ‘normal’ monthly revenue. Add extra stock in early parts of December, start cutting back and getting ready for sale. Bad to Ok – funds start flowing in, and towards the end of the month we start reducing the amount of stock so cashflow starts getting good

Inventory Management – Top to Bottom

Speaking with Claus over e-mail, he had a question in inventory management.  Basically, how do you manage inventory? There are quite a few tools that you can use, and I’ve covered them in bits, bobs, drabs and other pieces before in this blog.

So, here’s how to break it down:

– Total $ amount is based off turn rate for desired revenue level

For B&M you can shoot for a turn rate of 4, online I’d say it’s between 5 to 6.  A lot of that though depends on how often you get stock – if you only restock once every month, you have to keep a higher level of stock overall than if you restocked every 2 to 3 days.  Also, if you are growing a new section (e.g. like we did for RPGs) your turn rates for that section will suck in the initial period but slowly get better once you (a) hit a minimum stock amount and (b) customers get used to you having that kind of product.  Then you can start trimming we find.

– Open to Buy methodology keeps track of your inventory dollars spent on a high level basis

Think of Open to Buy as a high level methodology – keeping an eye on total $ spent; not specific products.  So, it’s a good way to keep an eye on how much money you are putting into the business in terms of inventory and ensuring you  have money to buy new stock though I’d point out that you also need at least $5  – 10k for overages during crazy release season like now.

You can even push open-to-buy down to category level sections.  Deciding how much of a % you want your RPGs, Miniatures, etc to be part of your revenue / product quantities.

– Minimum Stock Levels keeps track of stock for individual products

On a specific product level, we generally pre-order 1 copy and add more depending on the publisher and theme.  So we know for example FFG products we can sell 2 to 3 each for most of their products, so we start at a 2 or 3 qty level.  Then we adjust according to theme – e.g. if it’s a popular IP; we add more, if it’s less popular or boring sounding, we drop by 1 or 2.

We also adjust based off buzz and pre-orders.  Our rough guide is we get twice the number of pre-orders brought in.  So if we have 3 pre-orders, we ask for 6.  Generally, we sell another 1 or 2 copies in the week of release.

The minimum stock level we use is basically sales for 1 1/2 weeks rounded up.  For popular products (e.g. Settlers of Catan) we add a +2.  It’s 1 1/2 weeks since we restock once a week; so technically we should be at or close to 0 when our restock comes in.  For really popular products, we might get 2 weeks worth of restock.  So if we sell 3 copies of Settlers a week, we’d normally stock 6 copies in-house (3 + 1.5 + 2) at any one time.  For a product that sells once every 3 months (i.e. turn rate of 4); we’d still stock 1 copy.  Those with turn rates lower than 4; we’d selectively cull depending on game and whether it’s an expansion, new game or classic or minimum requirement (e.g. monopoly).

– Stock levels are then further adjusted based on product level turn rates

Once a product passes a certain timeframe (generally for us about 3 months); we start reviewing it for sales.  Anything that hasn’t sold in that timeframe starts getting shifted into the ‘sale’ pile for further trimming to free up our inventory (see Open to Buy again).

And that’s how we manage inventory.  Kind of messy, but it works for us so far.

The lie of the infinite shelf space

It’s that time of year again, when stock from GenCon & Spiel starts arriving in droves and we end up wondering where we are going to keep all these games till Christmas. Right now, we’ve got a ton of games just sitting on the floor waiting to be sold; stocked up for the holiday season because we know we won’t get anymore.

It’s not just shelf-space of course, it’s also inventory capital that gets limited. We scramble to find sufficient capital to stock up for Christmas, knowing that we’ll sell through most of these in a few months and probably reduce our stock significantly afterwards.

And that’s the lie of omission right there. Not every game will hit the shelf..

Oh, everyone knows this on one level or another. However, it’s not something that’s ever said to publishers, and it’s certainly not something B&M Stores trumpet. After all, one of their major arguments is that they provide a space for customers to physically see and sometimes demo games. However, if a game doesn’t hit the shelf (i.e. is never bought); it will never be demo’ed. And B&M stores are much more limited than online stores in their ability to purchase and stock a wide variety of games.

Why? It’s actually quite simple.

Firstly, most online stores end up specialising (CCGs, Board Games, Miniatures); allowing them to go in-depth into one category. We are mostly a board games store; with a slowly expanding RPG & Miniatures section. On any given day, we have over 2,000+ board games in-stock.

Secondly, our shelf space is cheaper. Our online shelf space (a product page) is negligible in cost; while the physical space is physically cheaper to rent. So we don’t have to optimise revenue per foot as tightly as a B&M.

Thirdly, we have a wider audience base. We often end-up with the customers who no longer can find the games they want from their local B&M store. Those with exotic or disparate taste. So we can afford to take chances on less well known games, bringing in 1 or 2 copies on the off-chance that they’d sell.

Inventory Management

Let’s talk about one huge area of the business that, if managed poorly could put any game store out of business – Inventory Management.

The goal of inventory management is to ensure you have the inventory you need to sell to your customers, without over-stocking.  In a perfect world, a customer will always see the exact item they want in-stock; while every other item they aren’t going to buy is out of stock.  Of course, a series of bare shelves that have nothing but 1 item doesn’t offer a whole lot of confidence on the state of the shop either.   And of course not every customer knows what they want until they see it – so part of the goal of inventory management is to have enough stock for casual browsers too.

One of the methods recommended for managing your inventory is what they call an ‘open to buy‘ system.  It basically is a budget that tracks your inventory dollars based on what you have sold previously and what your goals are for inventory.  However, while it can track individual product items, it generally is better used at a higher level (e.g. full categories like board games, rpgs, etc).

Instead, what we use is a minimum stock quantity method , keeping a specific level of product in-stock at any one time. When that level is reached, we re-order to bring us back to our maximum quantity levels.  The advantage of such a system is that theoretically, we will never run out of stock for our bestsellers since we’ll always have sufficient quantity of them.

A major disadvantage – we’re keeping track of stock (even if most of this is automated) on a granular level.  If an item goes from a slow-seller that we want to keep 1 copy in-stock at any one time to a medium seller (where we might want to keep 2 copies in); we have to manually update the information.

The system also doesn’t automatically account for slowing demand.  Most games slow in demand over a period of time; and it’s something we have to manually adjust for.

The other disadvantage is that we often face ‘inventory creep’.  With the minimum stock level method, as we continue to add new inventory on an on-going basis to the store, old inventory has to be manually ‘removed’ from circulation.  If we don’t manually adjust this on a regular basis and for example the next ‘hot’ item is Descent : Journeys into the Dark 2nd Edition which is a more expensive game, we can expect to see our inventory numbers creep up.

Right now, as we grow we just manually review these numbers in the balance sheet and hope to adjust every few months; though we’ve begun looking at a more vigorous and consistent method to ensure we aren’t putting all the profits the company generates into new stock!

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.