Many independent retailers know inventory matters, yet they struggle with cash flow because of poor Inventory Decisions. Fresh from h+h Americas, Gwen Bortner shares why most people don’t actually have an inventory management problem, but rather an inventory decision-making problem. Along with co-host Tonya Kubo, she explains why inventory feels so complicated and how retailers accidentally buy like consumers instead of owners. You’ll learn how the Open-to-Buy framework keeps your cash flowing instead of letting it sit dead on your shelves. This straightforward approach will challenge the way you view your resources, your margins, and your retail strategy.
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Everyone Knows They Have An Inventory Problem. Why Can’t They Fix It?
Introduction: h+h Americas Trade Show
Friends, this is a special treat. It is a special treat because Gwen is fresh off of speaking engagement and appearance at h+h Americas, which is an international conference, I believe. In fact, I’m going to like it when explain it because she explains it better than me because she was there and I was not. What we’re going to be doing is over the next four episodes, we are going to be talking about what independent retailers are struggling with based on hundreds of conversations that Gwen has had, many of which were at h+h Americas. Gwen set the stage for us. Tell us a little bit about h+h Americas, and then we’ll get into our topic, which is about inventory.
h+h is a trade show. It’s a place where people are going to find what they want to buy wholesale to stock at their shop, which is retail. It also includes lots of makers because h+h is focused around the craft industry. Particularly things that are associated with string or thread or yarn, such as fabric, sewing, quilting, knitting, crochet, all of those kinds of crafts. Even though it is truly a trade show, it also has other elements. There were makers there that are focused on doing all of the cons and all of those amazing outfits people wear to the Sci-Fi Con, the gaming con
Also, cosplay.
All of the cosplay stuff and not just in any one particular niche. All of the various cosplay. There was a whole cosplay fashion show as well, which was interesting. Some of the work is done as art. There were some gallery-type things that were there as well that you could wander through, look through and see retrospectives of various creators that have done various amounts of artwork. The general focus is for folks looking to discover new products that they want to bring into their shop. This one, as I said, was focused specifically on what I call string-based craft.
Anything that’s starting with the thread, a string, a yarn. Something that’s string-like and using that. There’s all sorts of trade shows like this. There’s trade shows for the clothing industry and the pet industry. Anybody that’s selling something to somebody else, there’s a trade show for. Although, this episode we’re going to be talking about inventory. I want those of you who are like, “I don’t do retail so I don’t need to know.” We are going to have other topics as well that are going to apply to you because we’re talking about employees and all of this thing. What my experience has been is that when you start understanding somebody else’s industry, it gives you insights into your own even if you don’t think that they apply exactly.
That is true. The reason that it’s important to talk about your experience at h+h. First of all, it is rare to hear from a speaker at a trade show on their observations, versus just like, “Let me regurgitate when I taught.” You’ll hire me because we’re genuinely going to be talking about the various observations you have made at the show and the conversations you’ve had since the show.
Now, I do know because I have been to the website that there were several tracks and you taught business classes on the brick-and-mortar track. You taught a workshop on the brick-and-mortar track for their pre-event and you also taught business classes. Since I’ve been working with you, the most popular workshop that I’ve ever seen you give is the one that we get the most feedback on. Which is your open-to-buy workshop? The opening to buy a workshop is about inventory.
I want you to answer why inventory feels so complicated for retailers. I’m initiated over here. Let’s pretend before I started working with you. If you own a shop, you have to have retail or you have to have inventory. You have to have something to sell, so it feels like inventory should be very simple. Why is it complicated enough that people at various stages of their business would even go to a workshop about it?
The first thing is most independent retailers, regardless of what industry they’re in, are in it because they have a passion for the thing. There is no one that owns a pet store that hates animals. There’s no one that owns a nursery that doesn’t like plants. Part of the reason they’re usually into independent retail, 99.9% of the time is because they love the thing that they’re selling. They’re excited about it. They want to share that excitement and help other people be excited about it and use the thing well and support it. Whatever those pieces are.
Why Buying as a Consumer Fails as a Retailer
What that means is they also probably, before they had their business, were a good consumer of those things. They bought lots of plants. They bought lots of things for their pet. They bought lots of fabric. They’ve done all of these things. The problem is buying as a consumer and buying as a retailer are two completely different things. Initially, almost all people start out doing it as if it’s the same thing. At some point, they realize, “Only because I like it doesn’t mean that my customers will like it, or just because I don’t like it doesn’t mean that my customers will like it.”
Inventory as a Cash Flow Issue
All of a sudden, they realize that inventory isn’t just, I buy something and I sell something or because I like it, they’re going to buy it. There has to be a strategic plan around it. For many, what they’ve realized is they have bought a lot of stuff that is not selling. That’s money wasted. The way I describe it is when you buy something wholesale. What you’re basically doing is putting a dollar on the shelf and asking someone else to come in and pay $2 for that dollar. If you’ve got inventory sitting and not selling. That’s just money that’s just sitting there.
It’s not becoming more money. It’s not money in your pocket. It’s not paying for your employees. It’s not paying the rent. It’s not doing any of those things. Typically, inventory is a huge dollar amount of what the overall business investment is. Most of the initial business investment is around inventory. If that inventory isn’t creating money in some way, it becomes problematic. It usually takes a bit, but not too far. It’s usually somewhere about year 1 to 3. Somewhere in there. It starts to become painful, and that’s when retailers start saying, “I obviously don’t understand what I need to be doing for inventory.” Now what they’re looking for is a system. Not a gut instinctive of, “That’s cute. I’m going to buy that.”
Buying as a consumer and buying as a retailer are two completely different things. You can't stock your shelves based on personal taste. Share on XI’ve been involved in your business long enough to know and you have told me several times that a lot of the issues with most retailers have way too much inventory. A lot of times, it comes from challenges with decision-making. I don’t know a ton of retailers, but I know a few. In my experience, I think they buy based on what they’ve sold in the past. They’re reordering what’s sold. They build relationships with their vendors, so they trust their vendors. If their vendor says, “Your competitor down the way is stocking this,” then they feel like they have to stock it or, “Your competitor down the way refuses to stock this.” Therefore, they feel like they have to stock back because then that’s a differentiating factor.
Especially in the craft industry. They buy what they personally like. If they don’t like a yarn, they don’t like how a yarn performs, then they’re not going to stock it. Whereas in some businesses, I’m thinking like jewelry or even to your point of a pet store. Only because they won’t feed it to their animal, doesn’t it mean that they don’t know that other animal owners don’t want to feed that and what feels like a sure thing.
There are certain things that I think that there’s a lot of retail owners who feel a security around having a ton of inventory. Even though you say it’s not money. To them, it feels like a savings account that they can cash in any time. I’m telling you what my impression of people is and I’m not saying it’s right. I do think there’s a percentage of people who think like, “As long as my shelves are stocked, I can get a cash injection anytime I want because all I have to do is put it on sale.”
That is true. They can put it on sale, which is one of those things that is like, “Tonya, if I give you a $1, will you give me $0.80 for it? What’s your answer, Tonya?
Yes, Gwen. I would love to take your $1 for $0.80.
That’s what happens when we start putting it on sale. It’s like, yes but no. This is where a lot of times folks struggle. They don’t understand what math is. That’s why the whole concept of open to buy, which is a way to manage making decisions. You have to make hard choices that you can’t just do everything that you want, because it gives some constraint.
It gives constraints based on what’s happening in your business as opposed to what you think should happen to your business based on what happened last month or what happened last year or any of those things. Which is a crystal ball. It may not be like a completely clouded crystal ball. You may have some data around that, but when anyone says, “I’m based on projections.” It was like, “How well did your budget do in April of 2020?”
Things do happen that we don’t have control over. It is all of the things that you said. More than anything, it’s about learning how to make decisions that are based on data and not just gut. Not that I don’t want to make some decisions on gut because I do want you to make some decisions on gut. It’s a combination of both instead of it being like, “That’s pretty. I think I’ll buy that.”
Why is that important? If it’s pretty, then won’t my customers think it’s pretty? Don’t like to be attractive?
Managing Personal Bias in Buying
Possibly. So long as the people who are walking in the shop also feel the same way about things that you do. For instance, I love lime green. Lime green is one of my favorite colors. I do well in it. I happen to look good in lime green. I know it’s not a favorite for everybody. Would I buy lime green? I probably would, but I would buy lime green with the expectation that it probably won’t sell and I’ll end up buying it for myself. Which is a different thought than, “This is such a great colored lime green. Everybody’s going to want it just because I like it.”
When you buy inventory, you're putting a dollar on the shelf and asking someone to pay two. If it doesn't sell, your cash is just dead. Share on XBy the same token, I’m not a big fan of blue, but I happen to know people like blue. Blue is a popular color. Blue would be one that I would typically not buy but I know I need to buy. Back to, I’m understanding who my customer is and what they’re buying habits are. That’s part of this piece of understanding who are your customers, who’s coming in the door because honestly, there’s only one you.
You can’t buy just for you. You got to think broader about who that is. When you’re first starting out, it’s hard to know who that is. When you first start out, there is a little bit of spaghetti throwing that goes initially. You usually have some direction, but there’s usually a little bit of spaghetti. Part of it is to start watching it and seeing what goes with it. Over time, that’s what you’re wanting to look at. As you said, people think, “This is valuable. It’s on the shelf.” The problem is, is your cash flowing through the process? only because it’s on the shelf, doesn’t mean it’s valuable. It only becomes valuable when someone takes it off the shelf and takes it home.
To your earlier point, inventory is a cash flow issue because a dollar sitting on the shelf is a dollar that can’t be spent on payroll, can’t be spent to fix the ceiling leak, can’t be spent to take out an ad in next week’s newspaper. It’s a dollar tied up until somebody says, “That thing is so amazing. Let me give you $2 for it.”
Exactly. That’s why choosing and limiting the amount of inventory is useful. One of the things that happens with folks is they believe in and part of it is the retailer and entrepreneurial mindset. People think, “Everyone thinks like I do,” which is never true. It does not matter how you think. They’re good at making choices. They’re like, “Out of lots of choices, I see all of these things and I know what I want to choose.” Most people aren’t good at that.
One of the things that I will talk about with retailers when I’m working with them, particularly when we’re working about inventory is, what is your core product and what are the things that supplement the core product. When someone says, “I want to bring in this thing.” It’s like, “That’s almost exactly like your core product.” “Why are you bringing that in?” “I want people to have choices.” You don’t. Most people do not want choices. They want to know what the thing is to choose.
Going back to pet stores and food. If you go to one of the big super big box stores, which is not what we’re talking about. There are literally aisles and aisles of choices for cats, dogs, and all of the things. I don’t want those choices at all. That is super frustrating for me, even though I can make choices. What’s frustrating is that I have to go through all the aisles because they move things around to find the one back of dog food that I want because I’m not checking out thirteen different types of dog food.
I’m only going to look for a different dog food when this dog food is no longer working for my dog for whatever reason. She’s no longer a puppy. She’s now an adult. She’s no longer an adult. She’s now a senior. Her stomach’s upset. This dog food doesn’t work. We find that she’s allergic to chicken. No more chicken. Whatever the thing is. I’m only going to make a different choice when I need to make a different choice.
The Myth of More Choices
One of the things about Inventory is we think more choices are better for our client or our customer and it’s not. Most of us want to have a choice, but two is a choice. Three is the maximum most people can handle to choose from. If you’re talking about independent retail, they’re going to bring in dog food. Maybe one other brand. Possibly a third, but if they start bringing in 4 or 5 or 6 or 7 different brands, it’s going to be hard for them to sell that dog food because it’s too many choices.
I’ve never been a big pet store shopper until we rescued a kitten that was sick. I live by an independent pet store. I went in there because I was like, “I’ve never had a kitten this young. What should I do?” The person spent 5-10 minutes asking me a few questions and said, “You could probably go with one of these two brands. You could probably go with one of these two brands given the information you’ve told me and the age of the kitten.”
it was followed up by, “This is what I feed my cat. This is what the owner feeds their cat. We can tell you a lot about them.” I was like, “Okay. Sold.” Very easy because I didn’t know anything. They brought me some samples from the back, which I thought was very kind. It was unexpected. We went out and now I buy that brand all the time. Since I work with you, I have noticed there are a signage everywhere that is like, “We feed and we sell this brand.”
There’s another brand they carry that is more expensive. Every now and then, that one will go on sale. I might pick it up and they’ll say, “If we’re ever out of this brand, that’s a great substitute.” They never talked to me about the third brand. I couldn’t tell you if that third brand is understocked or not. I couldn’t tell you. If the shelf is ever empty. I know the shelf is empty often with the brand that I buy. I couldn’t tell you anything about that third brand. They never talk about it. It’s always like brand A and B.
That’s an example where that third brand is probably a waste of inventory dollars.
My guess is it’s either a waste of inventor dollars or a highly specialized market and they only buy what they move. I would know if that brand went on sale, because I shop, or as you said, it’s a waste of space. Something that you have said in the past that is important to bring up is inventory management advice. Now, I’m going to be honest, Gwen. It’s going to sound a little rude to our readers, but you know me well enough to know that I mean it in kindness. I have looked at your slides. I know the topics that you teach.
Everyone Knows They Have An Inventory Problem. Why Can’t They Fix It? Share on XI have always been shocked at how popular and literally mind-blowing the open-to-buy workshop is to attendees. I feel like there’s a lot of people out there talking about inventory and inventory management. I don’t feel like this is a new topic, quite honestly. I don’t feel like it’s a rocket science sort of thing. You don’t even have to carry the one when you’re doing the math part of it. Genuinely, I’ve read the letters. I remember a few years ago. A woman sends like a handwritten letter from her child based on the workshop. This is how much it moves people. Which makes me think that, though, there is a lot of information out there, it must be missing the mark.
There’s two things. One is that most of the information out there is based on big retail.
Big retail chains like Walmart or Tractor Supply?
Yes, and Macy’s, Nordstrom’s, and the big-box stores. All of those things. It’s because that’s where most of the consultants and most of the people who are focused on that live. There are literally millions and millions of dollars that are going into those inventory environments. Tens of millions or hundreds of millions of dollars that are going in. Extrapolating that to an independent retailer who has one or maybe two, and possibly three shops in a region. It doesn’t apply. The first thing is the information that they’re getting is based on not valuable information because Tractor Supply has a completely different buying model than you as an individual has. That’s the first thing.
You called our friend, Nick Peterson. It’s accurate but it’s not useful, or both are not useful.
Yes, and it’s not useful to this environment. The other reason that I know that I get so many responses is because I talk about it in a way that people understand. I don’t talk about it like accountants talk about it. I also explain why it matters that you pay attention to this. A lot of people just think, “I have to have inventory because I’m selling something. I have inventory so I sell it,” like, it’s a matter of fact of a business, like, “I have it and I don’t have to think about it because it’s the nature of doing business.” That’s not true. You do need to think about it. It’s the core to your business and treating it like a default.
It means you’re probably losing a ton of money in a place that is probably one of your biggest money sinkholes within your overall business. It doesn’t show up. Part of the problem also, is inventory doesn’t show up on the income statement, on the profit and loss statement. Inventory sits in the balance sheet, where a lot of people don’t look. Most people get focused on how much they sell and what they’re expenses are.
The big expenses typically are rent and people. Those are your two biggest expenses typically when you’re running a retail business. A big amount of cash is going to inventory, which doesn’t show up on the P&L. If you’re not looking at the balance sheet and understanding what that means and what’s happening with all of the things. That becomes problematic. That’s why most cash flow issues for retail businesses. A large percentage of it is their inventory management. Not their expense management.
What does that mean?
It’s back to, they’ve got too much money sitting on the shelves, versus what they can afford to have sitting on the shelves based on what their actual sales are. There’s a whole formula, which is part of what I teach in the class. One of the things that I point out in class all the time is, the information is fairly simple but it’s not easy.
I’d love for you to give us a simple one-sentence explanation of what open to buy solved. While you think of that, because I know that’s hard. I want to say that that is the thing that I have seen people appreciate most. You are somebody who says, “It is simple.” You look at those slides and you work out the mathematical formula and I’m sure there are people who sit there going, “I must be an idiot that I’ve never realized this before.”
One of the things that people will say is that, you validate the fact that they haven’t realized it before right by telling them. You’d go, “If you’ve worked with consultants, who’ve worked with Macy’s. They’re not going to tell you this because Macy’s has a different problem than you do.” If they’ve worked with any large chain retailer, the site-by-site location doesn’t have as much control over inventory. They’re not going to talk to you about these things.
More inventory doesn't create more sales. More sales demand more inventory. Don't fall into the trap of overstocking for security. Share on XAlso, you may make it accessible because you let them know like, “This isn’t something you can fix overnight.” I saw an email exchange at one point where you were like, “You’re probably going to make like a 4% adjustment per year.” It may have been per quarter but it’s like, “You’re not going to go from 0% to 40% in a month. It’s going to be incremental quarter by quarter, year by year adjustment as you work to sell down where you’re overstocked and figure out what the fast movers are.Tell the problem that is open to buy solves and take it from there.
The Open-to-Buy Decision Framework
It’s making sure that you are not investing more in inventory than your business will support than what you’re selling. I say business will support because it is based on how much you’re selling. It’s not how much it takes to fill the space.
It is pretty when the space is full, Gwen.
One of the first things that I deal with almost every client that it comes across is, “We’re doing well. We want to get a bigger space.” I want to look at how consistently they’re turning their inventory. What that means is, the inventory is landing on the shelf and getting sold. We look at it as a total number. Not specific pin by pin, but a total value. We have money that sits on the shelf that’s inventory value. How often is that total value being sold to customers walking out the door gone? Hopefully, to never be seen again.
What’s the goal? Is there a goal number for that?
It is for independent retail. The minimum healthy business is what we call two turns. We’re replacing the full value of our inventory twice a year.
That’s not as often as I would have thought. I would have thought you were going to say every month.
Where we say what’s ready to expand is when we get to about 3.5 to 4 turns, because what’s happening then is that you’re probably paying more in shipping than you should. You should have it more available because you’re having to restock too fast. Now, what will happen is, the purple pin is super popular, so you may replace it six times in a year. A weird remote hardly ever sells, so it may only sell once every eighteen months.
We’re averaging it altogether. We’re not looking at item by item. We’re looking at it as a whole. That’s part of the simple math. As I said, it’s fairly simple. It’s arithmetic. It’s not overly complicated. Most people don’t like the number that they come up with because what they realize is that they usually have a lot more inventory than their business supports. It’s like, “If I have more inventory, I’ll sell more.” No. That is not the way that it works. Back to three choices of cat food. All you ever heard them talk about are two. More inventory doesn’t create more sales. More sales will demand more inventory. Most people that are in the business think more inventory will create more sales. It doesn’t work that way at all.
That tells me why more inventory doesn’t fix a sales problem, because that is something that I’ve heard. I had a very short run in retail. I’m not built for retail. If I ever want to buy a retail business, remind me, Gwen. I said I’m not built for retail. Back to school is what did me. I was like, “If I can’t manage back to school, I definitely can’t survive Black Friday.” One of the things is, if you don’t have it to sell.
They’ll buy it someplace else and you may never get them back. That was always a thing I heard in terms of why you need to have 16 of everything versus 16 of 2 things and 3 of everything else. You’re saying more inventory doesn’t fix a sales problem because having more doesn’t guarantee you’ll sell it. Where selling more inventory is more of a guarantee.
What that is, it’s not about having more inventory. It’s about having the right inventory. Back to having sixteen choices. It doesn’t give you a better chance of selling it. Having two or three within a category is more likely to sell it.
We talked about why inventory feels complicated. Part of it is, people are getting a lot of advice for the wrong type of business. Even if it’s for the same business model, it’s the wrong type of retail business. The importance of making strategic data driven decisions and separating yourself as a consumer from yourself as a business owner. I thought that was a good point. We talked about why inventory is a cash flow issue because dollars that are invested on the shelf can’t be used for other things. You gave us some great insight on open to buy as a decision-making framework. It’s solving that one problem that solves a whole bunch of problems.
Let me say this about open to buy because it truly defines open to buy. It’s a term that big retail uses all the time. What it basically says is, “I have this many dollars that I am allowed to spend on inventory.”
Your customers don't want endless choices. They want you to make the choice easy for them. Limit options to increase your sales. Share on XIt’s your inventory budget.
It’s technically yours but I don’t like a budget because the budget is always saying, “You should be able to spend this much.” This is actually the money I have to spend. Not the money that I should have to spend.
I want to make sure I’m getting this right. Open to buy is an account. Maybe it’s on a spreadsheet or on its own business account, but it’s an account with money in it. The amount of money in that account is the amount of money you have available to spend on inventory.
To replace inventory that has already sold.
You’re not increasing the amount of dollars on the shelf.
Exactly. If you are, we have a way to do that to allow you to spend a little bit more so that you’re growing your inventory at an appropriate pace, or shrinking your inventory at an appropriate pace. Although we sold a dollar’s worth of inventory, we’re not going to replace it with the dollar. We’re going to replace it with $0.90 of inventory because we need to make our inventory a little bit smaller over time. What most people will say is, “Put everything on sale.” That creates a completely different cash flow problem. That math takes a little bit longer to explain to the time that we have for.
Closing Thoughts: Summarizing Key Takeaways and Final Strategies
To tie us up with a little bow, can you succinctly answer the question of the episode which is, if everybody knows they have an inventory problem. Why can’t they fix it by themselves?
It’s because most of them do not have good information on what they need to do for their business. They don’t have a tool that is simple enough that they can maintain it over time. Back to, they’re using tactics and techniques and sometimes tools that are applied to retail but to big retail, which doesn’t apply here.
They’re doing the Black Friday sale because Best Buy does the Black Friday sale. I don’t support Black Friday sales for independent retail. If you do, it’s very limited. There’s a lot of things that don’t make sense for independent retail that are seen all the time when you’re looking at big retail. We’re assuming that because it works for them, it should work for us and it doesn’t. That’s why a lot of independent retail fails because they’re applying a big retail model to their small retail business.
This is the part of the episode where I tell people where to go next. I’m just going to be blunt and honest. I got nothing for you here. If you have questions on this topic, if you’re an independent retailer in any market. Whether it’s a craft industry, pet stores, or anything else that we have mentioned, but are truly independent. Not part of a larger chain. You’re just going to have to talk to Gwen for those questions because I can’t help you.
The best way to talk to Gwen is to get on her calendar. Go to www.tonyakubo.com/Clarity. That will be booking a Clarity call that seems appropriate to the topic at hand. If you want some clarity on what we’ve discussed, Gwen would be the best person to give that to you. If this episode has been helpful to you, I personally would be happy if you would share it with somebody, subscribe and leave us a review because reviews are what get the show shown to more people. Again, there’s a lot of, I wouldn’t say necessarily bad advice. As we said before, valid but not useful advice for independent retailers. The next part of our series is going to be talking about payroll and why it feels so expensive.
Mentioned in This Episode
About Your Hosts
Gwen Bortner has spent four decades advising executives and entrepreneurs in 45+ industries. She helps women succeed in business without sacrificing happiness by identifying their true desires and aligning their business functions. She spots overlooked bottlenecks and crafts efficient plans toward sustainable success that center your values and priorities. Known for her unique approach to problem-solving and accountability through the G.E.A.R.S. framework, Gwen empowers clients to achieve their definition of success without sacrificing what matters most.
Tonya Kubo is a marketing strategist and community builder who helps entrepreneurs build thriving online communities. As co-host of The Business You Really Want and Chief Marketing and Operations Officer (CMOO) at Everyday Effectiveness, she keeps conversations on track and ensures complex business concepts are accessible to everyone. A master facilitator with 18+ years of experience in online community building, Tonya takes a people-first approach to marketing and centers the human experience in all she does.
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