I'm at a sentence in my business plan that says:
"Company will hold ..... (this can be either dollar amount or number of units) of inventory at all times to ensure proper supply."
I would stay away from having a certain number of units or value of inventory at all times. That is not a very good inventory management practice.
In the summer you would want more items on hand then in the winter.
Instead say what the average annaul value of inventory you plan on keeping.
How should I come up with this number? I don't need a break down by sizes or men/women. Just a general number that will satisfy my daily sales.
I want to be able to drive that number from something instead of just coming up w/ a number from thin air.
I think it should be based on the projected sales. E.g. I project 1,000 munits sold per quarter. So I should always keep X% of this on hand.
Any ideas?
Ok, first you need to determine your projected annual sales in dollars (at cost) otherwise known as Cost of Goods Sold (COGS).
Using the the 1000 units per qtr figure you gave at $20 dollars a shirt and assuming a %30 profit margin, the total annualized COGS would be $56,000
Now that you have your COGS, you need to project your target Inventory Turn.
At 30% margin a good overall turn would be 5. The lower your profit margin the higher your inventory turn should be and vice versa.
Now to get your Target Annual inventory you need to divide your projected sales ($56,000) by your Project inventory turn (5) and you get $11,200.
Now you probably won't achieve an Inventory Turn level right off the bat so you may want to understate the turn to 4. Which would cuase your inventory target to increase to $14,000. Average to the annual average inventory targets and you get an average annual inventory target of $12,600.
