Develop a Finely Tune Inventory Control System
Salon owners know keeping
tabs on inventory
requires a huge balancing
act. Your inventory,
or the stock of your retail
and backbar products, must be
sufficient to meet the needs of your
customers and staff without running
out or tying up too much of your
budget. You need to keep hot sellers
stocked, and you need a plan to
keep slow sellers moving. You need
to order on time, and at the right
times. You need to track your stock,
audit your numbers and keep your
display shelves attractive.
"It's a lot of work-I feel for anyone who has to do it," says Meghanne Haran, director of salon operations at You Salon, Inc. in Ellicott City, Maryland. But it's crucial that you do track it. After all, inventory translates into dollars, and more importantly, it often represent a good deal of your salon's profit. Beate Assmuth-Ong, co-owner of Mane Attraction Salon in Phoenix, Arizona, puts it this way: "Owners dread inventory, but if you have systems in place, it's really easy. And it's important, because that's where your money is!" To that end, we've rounded up owners and experts who have created successful inventory systems and answered our questions about best methods and tools:
Who's in Charge?
Too often, a busy owner will turn over the ordering of inventory to front desk coordinators who rely on their district sales coordinator to advise them of what and when to purchase. This system seems easier, but it isn't to the financial benefit of the salon. Experienced owners stress the need to have one designated person in charge of inventory. Why? It helps centralize the process, allows the individual to gain experience over time, and places accountability in the hands of one person. These inventory managers, who are typically in charge of both retail and backbar product as well as other general supplies, have titles such as director of salon operations, manager of inventory and procurement, or director of purchasing.
While they may have a business degree or experience as a retail buyer, the most important criteria for an inventory manager is someone who understands the numbers of your business, can read reports and will work to stay on budget. In cases where businesses are not big enough to have dedicated inventory personnel or lack a sufficiently trained individual, the responsibility usually lies with the owner.
A competent inventory manager needs in-house training and may opt for further training from manufacturers or outside consultants (see "Tips from the Experts" on page 28). But a lot of learning is on the job, too. Anna Martin, operations director at The Loft Hair Design in Escondido, California, says she was initially trained on the salon's then-existing inventory/ordering systems by the lead salon coordinator. But over the past three years, "[I have] combined our pre-established systems, training from Bumble and bumble, trial and error and personal experience to perfect our inventory and ordering systems," she reports.
|Tips from the Experts|
Plenty of salon owners, including some interviewed for this report, have relied on industry consultants like Summit Salon Business Center for training seminars and personalized coaching in areas such as inventory management. We interviewed Summit's Director of Training Dave Kirby and Director of Communications Heather Bagby for their expert take on the profit potential and pitfalls of inventory. For more information on their services, visit summitsalon.com.
Q. What are the biggest mistakes salons make in regard to inventory ordering and management?
A. Salon owners are not traditionally aware that retail and professional inventory is the number two company expense. There are two common mistakes made by salon owners: The first is simple-not ordering on a budget. Most owners simply walk over to their retail area or dispensary and create an order based on visual need. The second most common mistake is not conducting a physical count of all on-hand retail and professional products once per quarter to ensure that they are managing the trends and have adequate inventory controls in place.
Q. What are some signs that retail inventory is not being ordered/ managed correctly?
A. One indication is products that are unsold for more than 60 days. Another is phantom profit. Phantom profit is when a salon owner receives a statement from their accountant indicating they were profitable that month; however, that profit doesn't translate to cash in the bank because it is likely sitting on the shelves as inventory.
Q. Is there an optimal number of retail lines that a salon should carry?
A. It is common for salon owners to get in financial trouble when they try to manage too many product lines. For most salons, it is important that that they have a belief system that connects the professional and retail products. For example, matching the color line to the retail line is a wonderful way to provide a consistent message to the consumer. Other niche lines should be added as needed (men's products, thinning hair). It is not necessary to overwhelm the consumer with multiple choices, but rather impactful to have a dedicated consistent message that the entire salon company can stand behind.
Q. Are there rules or guidelines for how much and how often a salon owner should order retail product?
A. If possible, weekly ordering provides the most efficient use of inventory dollars. SSBC's formula for retail ordering is 52% of the previous week's retail sales if you are ordering weekly. Additionally, we recommend the owner also calculate the order prior to submission to ensure they have not gone over budget. A salon owner should never be surprised when they open a supply bill; they should already know what they spent!
Q. How much of a salon's budget should be tied up in inventory?
A. The amount of income that comes from chemical services and retail sales impacts the inventory budget. As a rule of thumb, starting with enough product for one month of chemical and retail sales is a good starting point.
Q. What tools can help track inventory? Are there any in particular that you recommend?
A. SSBC utilizes a manual tracking form for monitoring and ordering. This form should be updated on a weekly basis for management and on a quarterly basis via a physical count. The salon should have processes in place for receiving and deleting product in its inventory. Many salons utilize software systems. These are excellent resources as long as the data entry is done properly. Regardless, a salon owner should understand how to manage the inventory and can't afford to ignore this important part of owning a salon.
Q. Do you recommend designating an "inventory manager" and what kind of training should this person have?
A. Remember, we are talking about the salon's number two expense so in most cases the salon owner needs to be the inventory manager. With some assistance from a well-trained sales consultant, this can actually be a very simple process. Owners may utilize hourly employees to assist, as long as the budget is set and approved by the owner. The training required is to understand the budget (formulas), monitor the top eight retail products, and monitor trends in professional use.
Ginger Bay Salon & Spa in St. Louis,
Missouri, created a director of purchasing
position when they started open book management
in 2008 and realized they needed a
better handle on their inventory systems. "No
person really âowned' inventory," explains
owner Laura A. Ortmann. Now, Colleen May,
who has filled that position, is responsible
for ordering all inventory and supplies in the
company, as well as "overseeing stocking
and safekeeping of all inventory, overseeing
the budget for inventory purchases, and
reporting regularly to leadership regarding
her budget and what irregularities she identifies with inventory counts and usage," says
Ortmann. "On our P&L, Colleen's name is
beside each inventory and supply expense
entry to signify that she is responsible for
those items." Inventory managers are accountable,
but they don't work alone. They need
assistance from everyone else in the salon
to maintain an accurate count and efficient
turnover (more on that later), so inventory
management is truly a team process.
How Much to Order?
Ordering inventory is more complex than just refilling your shelves. Most salons utilize software or spreadsheets that track how much product has sold or used for backbar, then averages it out over a weekly or monthly period to determine out how much to re-order. Since you don't want to sell out completely before you re-order, you'll need to keep a certain amount of product on hand- typically a one-to-two month supply. A hot product or a busy season (think Christmas) may warrant two or more months of supply, but if you have slow moving product that you wish to keep selling, or are coming up on a slow time of year, a few weeks supply might be sufficient.
Whatever amount you keep on hand, you should know its "turnover rate." That's the period of time it takes to sell-through an established amount of product, explains Bryan Nunes, co-owner of Blo in Raleigh, North Carolina. "We set our on-hand minimums to a predetermined turnover rate. In other words, if a product has a âminimum' of 12 units on hand, and our turnover rate is 90 days, then we expect to sell 12 units in 90 days. If we do this, then our minimum or âright' amount of retail product is in line with what we like to have on hand." On the other hand, he says, "If we discover that our minimum is taking 120 days to sell through, then we adjust the minimum to make sure we are not leaving cash fl ow on the shelves."
At Mane Attraction Salon, Assmuth-Ong uses an Excel spreadsheet to track sales and usage of both retail product and backbar (see "Keeping Track: One Owner's Method" on page 30). That way, she has a history on each product that helps her know how much to re-order at a glance to fulfill the two-month supply that her salon keeps on hand. "It works for us," says Assmuth-Ong. "Three to four months is too much money out of pocket, and two months guarantees you won't run out of product."
New products can pose a challenge because their sales are diffi cult to predict. For example, Assmuth-Ong had no history on a new Brazilian Blowout product they decided to stock, so they estimated an order. But the novelty of the item excited stylists, who received training and education on it, and they helped drive up sales.
"Sales can spike up two to three times what a manufacturer suggests," warns Assmuth-Ong. While enthusiasm is always a good thing, you never want to lose a sale due to inefficient inventory. If you're out of stock, take a tip from many owners and get the client's name and payment info-offer a 10% discount for prepaying-and then notify them when it's back in stock, or even ship it to their home for no extra charge. To streamline your order process, consider limiting the number of retail and backbar lines you carry. Steve Gomez, professional development manager for Milady/Cengage Learing, says a good rule of thumb is no more than four lines that appeal to different customers and demographics.
Fewer lines also help you keep a consistent message and develop stronger partnerships with your distributors and manufacturers. As a bonus, ordering more product from fewer manufacturers means it will be easier for you to fulfill their minimum order requirements. Now that you have an idea of quantities to order, make sure those numbers are in line with your budget. Gomez suggests that a salon's weekly retail budget be no more than half of their previous week's retail sales. "Order product based upon a 50% budget per line," he says. "Meaning, I sell $400 this week in line A, my budget to restock the shelves is $250." Backbar budgets will typically be even less than half, sometimes substantially so.
Laurie Helmick, co-owner of Luxe Salon in Denver, Colorado, focuses less on percentages and more on hard numbers. She keeps total inventory at $30,000 at cost. Her ordering assistant takes care that inventory never goes above that dollar amount, and she's rewarded for it with a quarterly bonus. Whether you base your inventory by budget percentages or specific dollar amounts, you'll know you're on the right track when your products are consistently stocked with neither shortage nor surplus.
When to Order?
When to place your order is a two-part question: How often you should order, and what day of the week you should order. Most salons we talked to order on a weekly or biweekly basis, but how frequently you order is influenced by your sales volume, your manufacturer's order minimums and even by shipping charges. The shipping charges are no joke, says Helmick. "Our financial statements break out shipping, and we spend five figures annually on it." For that reason, the salon limits retail orders to twice per month, with the exception of the KÃ©rastase line, which is ordered weekly since shipping is free. So far ordering twice a month has worked for the salon, Helmick says, noting that most importantly, "I don't sit with a lot of inventory-that is cash I could spend on something else."
An optimal time to place an order is after a busy weekend, says Nunes of Blo. "We currently order every Monday before 8:30 a.m. This allows our distributor to guarantee delivery by Tuesday morning, which is not a high-traffic time because we host our continuing education on Tuesdays. This allows our guest services department the opportunity to check the inventory without distraction." Because his salon has recently expanded to nearly 5,000 square feet and two color bars, Nunes says he will likely switch to ordering two times per week. He feels the benefits will outweigh the costs:
"Checking in inventory for that type of volume can take half the day," he explains. "That is not prudent for maintaining proper on-hand amounts, as well as minimizing the opportunities for human errors at check-in."
For ordering purposes, salons with more than one location may want to treat them each as separate entities. "For our larger salon, we have chosen to continue weekly ordering," says Johanna Morgan, manager of inventory at Mango Salon in Richmond, Virginia. "For our newer salon, we have chosen to use biweekly ordering for retail because the manufacturer only allows ordering in quantities of six and they have a high shipping cost." However, both locations order backbar weekly to keep stock consistent. The benefit for individualized ordering is that you can adjust for each location's specific need-if one has more walk-in traffic, for example-but still have the option of transferring product from one salon to another in a pinch.
How to Track It?
Software is a valuable tool when managing inventory. Make sure your salon software has a program for tracking stock levels in real time, generating automatic retail orders, creating reports that list the fastest selling and slowest moving products, and displaying sales trends over time-then make sure you or your inventory manager knows how to use it. Additionally, manufacturer inventory workbooks and customized spreadsheets from Milady/Cengage Learning's Financial Analysis and Coaching Tools package can assist with tracking.
Integrated POS systems utilize a barcode scanner so that when a product is sold or put onto the backbar, it's simply scanned out and inventory automatically updates in the computer system. To eliminate stylists forgetting to "scan out" backbar, You Salon, Inc. developed an easy system: "We have a bin in the styling area, and everyday stylists throw their boxes (with the barcode) in that bin," explains Haran. "At the end of day, we take them out and scan them so they are out of inventory."
When salons see they have a product that is not moving, they can take action. That may mean specific product education for stylists, or creating a promotion or product focus display. Helmick of Luxe Salon tries to negotiate a poor seller with her rep, who might let her swap it out with something that does well-though Helmick cautions that most reps don't work like that! If she can't return it, she'll mark it down 40% to get it moving. "It hurts my margins, but it's better than it just sitting there," she says.
Ginger Bay Salon & Spa puts slow movers in hard numbers. They distribute a list of poor sellers to the team leads, service providers and guest services, and include the dollar value of each and how much is still sitting in inventory. "Our department team leads can create goals and mini-games around selling these products within 30 days," says Ortmann.
"When our teams meet weekly for their respective huddles, they can see the progress they are making with their mini-game." And after the mini-game is over, service providers can see the monetary value of their efforts and, sometimes, even share in the rewards of moving a poor seller out of inventory.
Blo staff like to piggyback a slow seller onto a hot seller. "Buy this top performer and try this poor performer for free, or vice versa," says Nunes, who defines a "top" performer as a product that consistently outperforms its minimum turnover rate. Curious about which products are hot at these inventory-savvy salons? Answers vary, but most owners say their biggest category is styling products, followed closely by shampoo. When you track what's selling for you, you'll see where you're making money-and where you might be losing it.
How to Audit It?
To ensure accuracy, physical counts are performed to ensure that what's on the shelf matches up with what's in the system. Many salons do a monthly audit on retail and a quarterly audit on backbar, although some may even do it more frequently. Typically, two or more employees join the inventory manager to do the count and check each other's count. It sounds boring, but it's serious business, says Haran: "If you don't know what you have, you don't know what you need."
At Luxe Salon, physical inventory is done every month at the same time, with the same employees. "You learn to understand the product better and how to order better," explains Helmick. Not only that, she adds, but consistent inventory means you stay on top of your product and protect yourself against theft. That rings true: The majority of salons reported that a strict inventory system, as well as loyal employees, means that internal theft has never been much of a danger. However, shoplifting is a threat to any business. Haran says that she has noticed discrepancies in retail stacked by the front door of the salon. To counter that, the staff makes it a point to offer assistance to shoppers walking into the salon. Ginger Bay Salon & Spa takes more high-tech measures: "We have security cameras in the salon to deter theft, and we do prosecute shoplifters," says Ortmann. "If an individual displays suspicious behavior, we have the ability to immediately review video camera footage. Often, however, inventory losses are not that obvious." When there is inventory missing, they record the loss.
Most inventory discrepancies are innocent, say owners, whether from a backbar product that was not scanned out or just human error in counting. Since it can't always be avoided, most salons, such as Ortmann's, accept a reasonable minimum variance of around 2%. "Our 2% variance benchmark was derived from looking at past losses, estimating the dollar amount equated with any loss and creating an acceptable benchmark, and from looking at other acceptable inventory systems from our manufacturer, other salons, and other small businesses, such as restaurants/bars," she says. "Since creating our 2% variance benchmark, we have managed to stay below it in losses."
How to Display It?
Assmuth-Ong cites the old retail slogan, "Stack 'em high, watch 'em fl y," when she discusses the importance of a full display. "We keep 4-7 of each product on the shelf at a time," she says. "You want people to know you're serious, that you believe in the product."
Other salons have mentioned stocking an entire two-week supply on the shelves, and Helmick concurs that full shelves are essential to healthy retail: "It's a proven fact that people don't buy the last product on the shelf. You have to commit to having stock at all times, and it needs to be consistent." She should know, as she reports her salon does $300,000 a year in retail with little walk-by traffic. Helmick proclaims, "With inventory controls in place, anything is possible retail-wise!"
Not only should the retail area be teeming with product, but make sure it is pulled to the front of the shelves and organized professionally with rotating product spotlights, say our owners. That creates an exciting shopping experience for the customer. And after all, with all the time and money you've invested in inventory, you'll want to show it off.
Keeping Track: One Owner's Method
Beate Assmuth-Ong, co-owner of Mane Attraction Salon in Phoenix, Arizona, shared her Excel spreadsheet with us, which tracks her inventory in easy-to-read columns. In this snapshot of January 2010, she can easily view numbers for every product she carries, such as open count, amount received, and amount sold. An Excel formula automatically calculates the "should be" count. Finally, Beate's team takes a physical count, and any difference between the "should be" count and the actual count is recorded in red. This same chart is created for every month, and quarterly averages are tallied for a big-picture view of the whole year.