While inventory management may seem straightforward, many businesses struggle to optimize it. During the scaling of our bar chain, we implemented a series of inventory management strategies that transformed our business into a "money-generating machine." Here are the key decisions that drove our success.
Our solutions revolve around product type, assortment, ordering procedures, and payment terms. For clarity, here are some key parameters of our business:
Key Parameters A chain of beer bars focused on draft and bottled beer; An average of 80 SKUs of bottled beer and 15 SKUs of draft beer per location; An average product unit turnover of three days (including draft beer in kegs); Supplier payment terms ranging from 7 to 21 days; Orders placed before 2 PM typically arrive the next day (excluding weekends); One keg of draft beer yields 50-75 glasses of beer depending on the keg size.
The Results Inventory Optimization All our locations operate with minimal inventory, essentially eliminating the need for significant storage space. An ABC analysis of sales at any given bar reveals that, given our product assortment and turnover rate, display space is generally sufficient for our inventory needs.
Instead of increasing the quantity of top-selling items, we focus on expanding the variety within those categories. For example, instead of stocking 36 bottles of one type of lager, we offer six different lagers, with six bottles of each. This approach is applied across all product categories, distributing SKUs proportionally based on the ABC analysis. The required number of SKUs is determined by overall demand and demand within each product category.
Therefore, we address potential stockouts not by increasing warehouse stock, but by diversifying the selection on our shelves and menus. The number of SKUs can be adjusted seasonally to reflect fluctuations in demand. In our case, 80 SKUs of bottled beer and 15 SKUs of draft beer are sufficient to operate smoothly for a week without excessive inventory.
Order Optimization Frequent ordering is another crucial element. We prioritize ordering more often (up to twice a week per supplier) over maintaining large stockpiles. Our supplier relationships are structured so that even with frequent orders, we meet the minimum order value for each supplier.
The exception to this is during holidays when suppliers may halt deliveries. In these instances, we increase our inventory just enough to cover the holiday period. However, these situations typically occur no more than twice a year.
Optimizing the Receiving Process Analyzing the two main product types (bottle and draft) reveals a significant difference in receiving efficiency:
Receiving a single keg of draft beer yields 50-75 glasses, or at least 50 servings (excluding spillage). Receiving a single bottle of beer yields one serving.
To achieve the same number of servings as a single keg, we would need to receive 50 individual bottles. Therefore, our product assortment prioritizes draft beer sales over bottled beer. This results in a higher volume of keg orders compared to bottled beer, streamlining the receiving process.
Increased Financial Efficiency: Creating a "Money-Generating Machine" The most compelling outcome of our strategy is the financial efficiency we achieved. With an average product turnover of three days and supplier payment terms of 7-21 days, our inventory was effectively financed by our suppliers. By the time payment was due, the product had already been sold, allowing us to pay for goods with the revenue generated from those same goods.
The 7-Eleven Model: Managing Over 78,000 Stores Worldwide Our experience optimizing a bar chain might seem inapplicable to larger businesses. Surprisingly, the world's largest convenience store chain, 7-Eleven, operates on similar principles.
Item-by-Item Management Pioneered by 7-Eleven, item-by-item management focuses on analyzing sales data for each individual product, with an emphasis on high-frequency items. This dynamic approach, coupled with rapid responses to shifts in demand, allows them to replace, on average, up to 70% of a store's assortment annually. As consumer preferences evolve, product lifecycles shorten, sometimes lasting only two weeks.
Small-Batch Distribution Another key element of the 7-Eleven model is small-batch distribution with high-frequency replenishment. Many stores operate with minimal storage space beyond their shelves, relying on daily deliveries to maintain inventory levels.