Managing Inventory

Hello again! Hope you had a nice Thanksgiving and are enjoying your weekend. Things were a little slow at Open Produce on Black Friday, as you might expect, but people seem to be hungry again today. We have lots of new stuff in the store, including Odwalla juice and Vegemite; drop in and see us sometime!

Here’s another long post about the business. Today I thought I would write a bit about inventory, a subject which is so fascinating to me that I could rant about it for pages. Instead I will put a little link here, so you only have to read this if football and leftovers aren’t enough to put you to sleep.

Handling the store’s day-to-day logistical issues is pretty tricky, but to succeed as a business we also need to manage a huge long term logistical issue, inventory. Inventory is theoretically an asset, but in many ways it’s our biggest liability, too.

We can’t pay our rent in apples. Once we turn dollars into apples, we have to sell some apples to get dollars again. If apples were all we sold and it took more than a month to make back the rent in apples, we’d be out on the street with a bunch of apples pretty soon.

We have a lot of dollars tied up in inventory. To stay in business, we need to sell a certain amount of that inventory every 30 days. If we don’t, we need more cash, and it’d better not be in apple form when we need it. Really, we’ve tried depositing apples in our checking account, but they don’t fit in the little envelopes. So that’s the challenge, balancing inventory and cash.

The obvious reasons inventory builds up are unpredictable demand and long distributor lead times on orders. But more subtly, we have to sell a variety of products to run an appealing store. Greater variety both attracts more customers and makes items much more attractive to buy.

We sometimes have to buy ten different things before we can sell any of them. People are going to want pasta for their pasta sauce, for example. We also need to carry more than one type of pasta sauce. Context matters a lot. We may end up buying ten items in cases of ten before we sell one item. We’ll sell it all eventually, but we’re still out the cost of one hundred items up front, hence inventory.

Also there need to be a certain number of something on the shelf to sell. One jar of delicious jam doesn’t sell. Nobody will buy it. Five jars of the same jam, placed next to six other kinds of jam, sell great. I don’t understand this at all, but it’s an empirical fact. I think it’s some sort of guilt complex, like where nobody wants the last spring roll from an appetizer plate. Me, I think the one jar of jam looks weak and vulnerable, like the gazelle with a limp at the back of the herd. But I digress.

Inventory from smaller distributors we pay for by cash or check on delivery, but a lot of inventory we buy on net 7 or net 30 days credit terms, which means we must pay for it within 30 days of buying it. This is great if we sell “enough” in 30 days to cover its cost, and is a major part of how we build up new dry goods inventory. The catch is that if sales decline over a period, as they might for some weeks of December, we could be left footing a pretty large bill for inventory on top of other expenses. We can’t pay that one with apples, either.

So we just have to get exactly enough of a wide variety of stuff. Easy, right? There are a couple more snags.

Most distributors have a minimum order size for delivery to cover their costs. That means we have to want enough stuff from the same distributor to get something we really need from them. Lead times are anywhere from one day to weeks. When we don’t need enough stuff to meet a minimum, we have to guess and order more of something to make an order deadline. That’s partly why we’re the only produce store in Hyde Park that sells individually wrapped fortune cookies. (The other reason is because we think that’s awesome.)

Even if we manage to reorder something on time, distributors frequently short us items they’re low on (they deliver them to other customers who want them because we’re small potatoes). There are a couple strategies for dealing with this. We can order five kinds of an item and hope to receive one, or we can order the same thing from an alternative distributor, or we can be out of something.

When all is said and done, it’s pretty amazing the store is as well stocked as it is. But that occasionally comes at the cost of some extra inventory.

Produce is a completely different type of inventory challenge. It doesn’t really build up and threaten to crush us like dry goods. Quite the opposite, actually, it goes bad so quickly we can barely stock it. We may throw as much as half a case of some things away. If we buy from CIPM (the Produce Market), we get big cases that we end up throwing half away. If we buy wholesale from Hyde Park Produce, they’ll split cases with us, which works much better for some things but is sometimes more expensive. Also things come in and out of season all the time, and wholesale prices change daily; it can be challenging to make sure we’re not selling things at a loss!

So with dry goods, we need to get a good variety and then closely match our supply to volume so we don’t tie up too much cash. We also need to be very careful about net 30 credit, using it to grow but avoiding getting crunched due to seasonal volume changes. And with produce, actually, we need more of it and better variety, particularly fresh greens—but this will require better refrigeration and will have to wait until the new year.

We’re still figuring out how to do all this, but we are getting good at it. We’ve just got to keep it up through next year.