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Jewelers with Good Turn need to buy less inventory


#1

Jewelers with Good Turn need to buy less inventory

I’ve been writing for years about financial numbers in a jewelry
store. Today I received an email from Roy Williams who runs the
"Wizard Academy", a marketing and advertising resource for jewelers
as well as a few other retail segments of our economy. He also writes
for InStore Magazine.

If you sign up for his Monday Morning Memos you’ll get a slab of
everything. Today’s was about turn and Roy explains it very well.

You can sign up for his weekly memos by going to this website:

http://www.mondaymorningmemo.com

1/3rd from the top, right is “Subscribe Here”. Its free. You should
add it to your arsenal. Here is what he wrote today.

David Geller

Turn, Turn, Turn

The Mark of a Remarkable Business

Business midgets focus on profit margin, “I can sell these for
double my cost!” But business giants focus on turn, “How many more
would I sell if I lowered my price?”

Retailers call it “inventory turn.” Restaurateurs call it “table
turn.” Either way, it’s a measurement of how efficiently a business
uses its assets.

Inventory turn tells the retailer how many times he sold and
replaced his inventory over a period of time. Table turn tells the
restaurateur how many times he emptied and filled his restaurant
during a single mealtime.

Turn is Sales divided by Inventory.

Bob and Samantha are competitors. Bob makes a 100 percent markup on
everything he sells. Samantha adds only a 50 percent markup. Which
of them has the better business?

Your instincts tell you Bob makes more money but actually, it’s
Samantha.

Bob carries an average inventory of 6 million dollars and sells each
of his items an average of once a year at twice the price he paid for
it: 12 million dollars in sales with an annual gross profit of 6
million dollars. Bob “turned” his inventory once.

Samantha carries an average inventory of just 1 million dollars. She
sells and replaces each item an average of 12 times a year, adding
only a 50 percent markup each time. Samantha does 18 million dollars
in sales and her annual gross profit is 6 million dollars, exactly
the same as Bob’s.

But Samantha turned her inventory 12 times.

Both retailers made 6 million dollars but Bob is slowly going broke.
Samantha is quickly becoming rich and powerful.

Bob invests 6 million to make a gross profit of 6 million a year.
This means Bob has to make a 6 million dollar investment every time
he wants to open a new store. And Bob’s inventory is getting
out-of-date because he has to sit on it for a whole year before he
can replace it. This problem compounds itself each year.

Samantha invests just 1 million dollars to make 6 million. She can
open a new store with just a million dollars invested in inventory.
But wait, it gets better.

Bob bought only 6 million dollars worth of product last year.
Samantha bought 12 million. And Samantha is opening new stores. Lots
of them. This is what makes Samantha powerful. Soon the suppliers
will be charging Samantha lower prices than they charge Bob because
Samantha is a much better customer. And the suppliers will give her
90 days to pay but Bob must continue paying immediately.

Do you realize what just happened? Not only can Samantha open a new
store with an investment of just 1 million dollars in inventory, she
can sell that inventory for 1.5 million dollars each month for 3
months - putting a total of 4.5 million into her bank account -
before she has to pay the first million dollars for the first month’s
inventory. This leaves 3.5 million dollars sitting in Samantha’s bank
account, allowing her to inventory 3 new stores, each of which will
be able to fund 3 additional stores in just 90 days.

Samantha has opened 12 stores in just 6 months. If she keeps it up,
she’ll have 432 stores at the end of the year. And Samantha started
with just 1 million dollars in inventory while Bob started with 6
million.

Bob likes to boast that he offers “6 times the selection,” but the
public knows Bob charges $100 for the same item Samantha sells for
just $75.

Care to make a guess how this is going to turn out?

The moral of the story is this: you can’t get a high inventory turn
without offering the public what they really want. In my opinion,
the person who selects a company’s inventory is the most important
person in that company. I could be wrong.

But I don’t think so.

Roy H. Williams

Wizard Academy is a nontraditional business school. To understand
what we mean by nontraditional, just Google “inventory turn” and
compare the dozens of definitions you’ll find to the one we’ve
offered above.

We’ll see you when you get here. - RHW


#2

Hello David,

I've been writing for years about financial numbers in a jewelry
store. Today I received an email from Roy Williams who runs the
"Wizard Academy", a marketing and advertising resource for
jewelers as well as a few other retail segments of our economy. 

I also get the Monday Morning Memo. This one made me think of your
recent piece as well.

There is something about “turns” that I am not so sure about. If you
sell a lot of units of the same thing, say gold chains, and can get a
much better price for them if you buy in bulk, like a years worth,
doesn’t it make sense to load up and get them cheaper? A years worth
of chains, say it is 100 units, if you buy them all at once and sell
them in one year, is that still one “turn”? But you sold the same
thing 100 times. Obviously you only want to do this with things that
are reliable sellers that you get a discount greater than a year’s
interest rate.

Trying to get it here. Thanks for your wisdom.
Stephen Walker


#3

Hi Stephen

Its not how many units you sold, its how many times you sold and
re-ordered the units.

100 chains sitting in stock, buy in January and sell in December,
EACH chain sold one time. That’s a turn of “1”.

But buy 100 chains in January and sell them all by June 1st, reorder
another 100 and sell them by December, you sold all of them twice in
a year-turn of 2.

And the thing about “buying in bulk”. Goes with what Roy spoke
about. If you sell 100 chains a year and each chain costs $100 EACH,
you’ll have to PAY $10,000 all at once. Lets say this
(hypothetically) is you’re ONLY business and the only thing you sell.
Lets say you keystone the chains. If you sell 100 a YEAR, you sell
about 9 a month.

So sales each month is 9x$200 = $1800 in sales. Profit is half =
$900.

But you have to spend $10,000 to sell $1800 a month. If you had 30
day terms, you’d be late paying each month. In fact if you sent the
supplier 100% of your sales each month to pay them off, it would take
5.5 months of sending the supplier ALL of your sales. Then and only
then, in month 6 could you pay rent and salaries.

If you would buy ONLY 9 chains on the 1st of the month, you’d spend
$900 (equal to your cost of goods) and by the start of week 3 you’d
pay for all of the chains and you get to keep 100% of the month in
weeks 3 and 4. Then just reorder the last week, overnight delivery
and start again. Cash flow is now positive after 2 weeks rather than
5.5 months.

By the way, Roy Williams got it wrong. Turn is not the way he
posted. Its one years worth of the cost of what you sold divided by
the average inventory on hand for that same year.

The example of what I gave is why jewelers get into trouble. They
spend almost all of sales paying for inventory that has not sold,
leaving no money for payables and expenses, who are calling you on
the phone.

Worse yet are bench jewelers. They work their butts late at night
and take about 60% of their good bench profits and plow it into
inventory that takes 2-3 years to sell. Would you take half of store
sales and loan it to Uncle Marvin, who promised to pay you in 6
months but actually pays you 2 years later? Don’t think so.

If you’re going to be a charity, at least send it to ME!

:slight_smile:

David
JewelerProfit


#4

It seems to me that a “good price” in our industry is very dependent
on the market price of precious metals. As volatile as the price is,
you’d have to have pretty good prescience to know that your good
price would hold throughout the year.

Wouldn’t it be better to buy in smaller lots and price your goods
accordingly? It seems to me it would be similar to dollar cost
averaging in investments, but I may be wrong in my assumption. I am
sure though that you’d be able to keep your retail price/wholesale
price ratio in closer synch thereby ensuring more stability,
something I think would be more difficult with materials bought in
bulk for sale over a longer term such as a year.

Am I hitting anywhere near the target here? I don’t consider myself
schooled in business, so I’m open to learning here.

Mike DeBurgh, GJG
Henderson, NV


#5

Hi David i been following this thread, and was wondering if, this
method /theory also fits the studio jeweler/designer, with a
production line, and no retail sales, but BtoB only. I am assuming
the closest would be a Bench jewelers way, but even that if the
bench jeweler has a retail spot open to public vs just BtoB?

Hratch