Employ a Detailed Approach to Merchandise Analysis

Keep in mind that depending on your business and product offering, certain products may have higher than average costs (oversize items, heavier items, ship-alones, etc.).

Too often, merchants will make a commitment to purchase excess inventory, perhaps due to lower costs or minimum quantities, with the intent to carry the item forward.

Besides the risk of the item not performing, if you apply a carrying cost, it’ll show the profit impact due to warehouse costs, storage space or perhaps interest on borrowed money.

With interest rates currently hovering in the high single digits, applying, say, an 8 percent cost-of-money factor for carrying the inventory can shed a different light on the decision to buy excess inventory up front.

Having considered all these factors, we come to contribution. You’ve now determined that this item — contributed to gross margin and after nonmerchandise variable operating expenses are applied — still will contribute to overhead. Many companies stop here. But once again, in managing a profitable business you want to ensure you’re still profitable after all costs are applied.

The final costs to apply are fixed (overhead) costs. Generally, these expenses are in the 8 percent to 12 percent of sales range.

So, applying a fixed percentage to all items provides a bottom-line view of what your season looked like or will look like in planning mode.

‘Exactly Right Later’
On the surface, this approach may appear to be contradictory to the one I outlined in my July column (see “Stay On Top of the Metrics,” pg. 47, July 2007 issue).

That approach is the “almost right now,” as opposed to the more specific “exactly right later” approach described in this article, which provides a nonthreatening view of profitability. Factor in this post-season detailed analysis of item profitability, and you’ll have guaranteed improved bottom-line results.