Recently the owner of a chain of ten shoe stores in Chicago approached us at a trade show and told us a story worth repeating. He said that his accountant had closed the books on the prior year and announced the great news: sales had reached a record high.

“Great,” the retailer said, “now I can take that two week vacation in the Caribbean my wife and I keep talking about.”
“With what money?” his accountant asked matter-of-factly.
“I thought you said sales were higher than they’ve ever been,” he said.
“They were.”
“So where’s the money?”
“It’s sitting in inventory,” said the accountant.

Having record breaking sales is not enough, as our retailer learned. Lots of sales without proper inventory control just means that your profits are sitting in merchandise and not cash, where we would like them to be. In fact, the paradox of retail is that the more successful you are, the harder it gets to maintain control. For those items that fly off the shelves, many retailers do not have the time (or the tools!) to analyze sales and restock. Since the items are gone in many cases without a trace, no one really notices the lost opportunity. Many retailers have no idea how many sales they are losing because they have not restocked items in high-demand.

The goal of an expert supply system is to find a balance between having enough inventory so that no sales are lost because a customer cannot find the item she wants in stock but not having so much inventory that it ties up capital and we have to liquidate it at a slim margin. The relevant unit of control is the item, that is, at a bare minimum, a combination of style, size and color. It is not enough to optimize inventory levels for a given style such as the Marilyn (a woman’s dress sandal)--inventory must be optimized for the black size 6½ Marilyn, the silver size 10 Marilyn and every other item in that style.