Approaching the point of a mature business brings decisions of policy that are best not left to chance. Various factors are involved in deciding how much stock to hold. Along with a gut feel these should lead to a policy decision so that the purchase of inventory for an online company doesn't end up like the tail wagging the dog, overshadowing the profit business model. We will take the example of retailing chess sets and other chess products in analysing the factors in coming to the right decision.
The Range
If a large range of chess products are held, such as with Chess Baron in the US and UK, how much of each line should be held? Clearly if an eCommerce company such as this had 20 different lines, the solution is simple, and the ratio of stock value to total retail sales looks pleasing to any bank manager, perhaps around 10%. In the above example, the retailer runs with a fairly large inventory compared to many in the industry, almost 200 lines in total. To hold even ten of each line means a stock total of 2000 units, which with a purchase price of $50 on average, means that the cost of stock is very significant. With a typical turnover of this kind of store perhaps reaching over $120K, the ratio of stock value to retail sales approaches 100%. The inventory also represents an asset for the company, and so the asset will be taxed as if cash - almost definitely meaning a loss or break even for the first two years as the stock is ramped up - unless something can be done to reduce the inventory level, which looks mandatory at this ratio level. Stores such as ChessBaron hold somewhere in the region of $60K in stock, but giants of the industry such as WholesaleChess would hold an inventory value of $200K. The largest chess retailer - ChessUSA also has a store in New York and holds a minimum of $300K in stock at any one time.
Where it comes from
If the chess goods come from a domestic source, the stock holding can be reduced whilst keeping in touch with stock levels at the supplier. Buying from wholesalers who have gone through the pain of buying from China or India, etc., suggests that the higher price may be worthwhile in some cases. When this is not available, the model of purchasing from less developed countries means that stock cannot follow any slick JIT model, nor bought from the suppliers as orders arrive, except in high unit price chess sets which are often built to order. This clearly influences the stock level decision - purchasing chess sets from India just isn't as fast or flexible as buying from a domestic wholesaler.
Intelligent Stocking
Clearly some items sell better than others. With our example, having a wide range is part of the store's marketing strategy. ChessBaron holds so mnay lines that generally anyone that wants to buy chess sets can buy from them, they'll find something that is appropriate. Holding just a few of the slower selling chess sets and marking them out of stock when sold instead of rushing to get them in to the order about to ship from India (for example) means that the stock level is better controlled. The converse obviously applies to the faster selling lines. Some lines ARE purchased from domestic sources, - these could be drop shipped instead of held as stock if that facility exists. Smaller margin, true, but no cash tied up in expensive stock. Making sure the manufacturer follows through with replacements for faulty chess pieces, which would otherwise render the entire chess set useless will reduce the need for ordering some sets, whilst simultaneously making the manufacturer feel the pain of blemishes and lax quality control.
Comfort Level
When the business starts, there is some need for juggling stock to fill orders as replacements or free upgrades, or just suggested alternatives. There is little cash and orders for chess sets from India are inflexible and slow. This means constantly being on the phone to the customer - 'Sorry sir, we've run out of the Carved Napolean Chess set (well, we only had one, and it was sold three weeks ago), but can I recommend the Chamfered base staunton chess set, which you could have for the same price...?'- sorting out endless problems because of stock levels that are too low. Having the chess sets in stock, being able to lift one of twenty off the shelf and being able to fill the order easily means time allowed for further selling or just sanity of life. So some inventory level is required when it comes to running an active business, even if slick consultants may urge a minimal stock level ordering small shipments from India with double wrapping and double stress.
Balancing these factors leads to the conclusion that significant chess stock is required, whilst minimising inventory levels by intelligent stocking and supplier orders. It's the nature of the game - there is a good markup in the retailing of chess sets, but the downside is the expense of the stock held and the level of inventory required.
