September 6, 2018
Lean Retailing: A Better Way to Manage Inventory — and Increase Profits
Of the many leaps forward in manufacturing over the last century, some were technologically driven and others were what’s known as “process driven,” which means a new way of thinking led to a new way of doing. Regarding those process-driven changes, the concept of “lean manufacturing” is now so pervasive that most professionals have at least heard the term, regardless of the industry they work in, along with other associated concepts such as Six Sigma and that method’s Black Belt Certification program.
In martial arts mythology, the tiger is often contrasted with the dragon. Both are powerful, but the tiger is ill-tempered and quick to act, whereas the dragon is wise and thoughtful. You may not have a black belt, but that doesn’t mean you can’t take the dragon’s thoughtful and observant approach to your inventory and ordering.
Lean — Not Just for Makers of Things
The term “lean manufacturing” was coined in a 1980s research paper examining Toyota’s production system and other Japanese manufacturing techniques that were being quickly adopted by the worldwide automotive industry. While some variations in approach do exist, the main goal of all lean systems is two-fold: eliminate waste and/or variation, and create production that is driven by actual demand.
Implementing a lean system on a manufacturing floor is complicated and can take time. It’s also a process that is never complete, rather it is one that is constantly refined and improved, adapting itself to changes in demand.
The lean processes concept isn’t germane only to manufacturing. For example, a key benefit of lean concepts in manufacturing is reducing inventories, a struggle that all retailers have in common. While retail inventories generally consist of finished products that could at least be sold at liquidation prices if necessary, oftentimes manufacturing inventory consists of components — even proprietary components –that cannot be resold and are completely idle capital if left to sit. As such, a lot of effort goes into minimizing them — and that’s something every FFL can focus on.
Just in Time
“Just in time” (JIT) inventory is a lean concept that began to take hold in the 1980s, the concept deriving from manufacturing engineers’ observation of supermarkets. Customers in a grocery store generally purchase only what they need and no more, being confident of future supply, and they make those purchases according to their real-time demands. The supermarkets respond in kind, ordering fresh meats and produce and dry goods to stock shelves that have reached a certain point of depletion. They cannot hold fresh inventory for very long, so ordering is disciplined and based on some combination of long-honed intuition and predictive data-driven algorithms.
One method of achieving JIT inventory is known as the “Kanban” scheduling system. Kanban also takes its cues from Toyota’s production line management and seeks to limit excess inventory building up at any point during the manufacturing process. It was actually Toyota that conducted the supermarket studies.
Starting to see how this idea of lean can benefit your FFL store? Then here are three ways you can immediately take advantage of JIT and Kanban thinking:
- Stop scheduled ordering — You may be in a habit of sitting down every Friday to place orders or reviewing your inventory on Sundays. These types of scheduled tasks can seem efficient, but you should not let your time drive your orders.
Order on time. Instead of ordering a set, regular intervals, utilize the data you have (more on that in a moment) to alert you when to order, and order only what is necessary.
- Mirror inventories — Most retailers in the firearms industry purchase their inventory through a distributor. Over the past several years, firearms distributors have rapidly computerized their inventory systems so that their retailer customers can see that inventory in real time; some can even view the distributor’s personal order pipeline and/or directly mirror distribution inventory in real-time on e-commerce portals. In addition, today nearly every retailer has some kind of point-of-sale (POS) system that electronically logs transactions. These tools make a JIT or the Kanban system for the retailer easier than ever to integrate.
If you’re wondering how this can work for you, consider this: While you, of course, need product on your sales floor, most customers looking to purchase a specific model firearm actually don’t expect to get it that day. This is especially true with states and local jurisdictions that have waiting periods to purchase. So, instead of taking an inventory risk and stocking for too many purchase possibilities, arm your staff with tablets and let them simply show your customers the inventory at the distributor. They can then order on the spot.
- Data is big — Just as with manufacturing, robust POS systems exist that can automate ordering based on preset criteria. If your store is using software without that functionality, very likely the sales data is exportable into some format that will allow you to study the data.
Utilizing this data in a lean way allows you to stop guessing at what your customers may want in the upcoming season because now you’re letting them tell you what they want in the only way that doesn’t lie: with their actual purchases. You can then design an ordering system, driven by that data, that will “pull” appropriate inventory from the distributor (even if that pulling is accomplished with a phone call you make after looking at a spreadsheet). In this manner, you will quickly find your on-hand inventories being reduced and sales increasing.
Two notes about this kind of data-driven ordering: First, whether you rely on software for this kind of inventory management or perform some of the analysis manually, you will need to set low-stock thresholds that automatically trigger orders. Second, you will need to monitor turn time by SKU to tell you how much to order when those low-inventory thresholds are triggered.
Behind the retailer, manufacturers have a genuine desire to create demand-based systems that leave them properly scaled and without an excess of inventory, as do the distributors in between the two. But, those systems upstream in the product supply chain can function appropriately only when the demand data given to them from the retailers is accurate. In other words, you, the firearms retailer, are the frontline in understanding and addressing demand. Therefore, not only does a just-in-time or lean purchasing system help the retailer, largescale adoption of these techniques can and will lead to a more efficient, agile and profitable industry as a whole.
About the Author
Josh Fiorini has a wealth of experience in manufacturing, business management and finance both within and without the firearms industry. He was the CEO of PTR Industries, Inc., for seven years and spent the first decade of his career in finance holding positions as an equity analyst and portfolio manager before starting his own hedge fund which led him to the firearms industry. This experience, along with a deep background in manufacturing, banking and private equity, has made him a sought after contributor on numerous boards, discussion groups, media outlets, corporations and community organizations. Currently, Fiorini invests his time with non-profit initiatives and acts as a contributor and management consultant to various firms in the firearms industry. His activities have been reported in such publications as The Wall Street Journal, The New York Times and USA Today.