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For cannabis inventory management and purchasing professionals, the benefits of standardizing processes and how you measure success comes with a ton of benefits.
The biggest of which is driving quantifiable results. Meaning you can use data to prove that what you are doing is having a positive or negative effect on the business.
Beyond that, you can use that information to lower costs associated with inventory and stock more of what gives moves fast while giving you bigger margins. that means more revenue
Get yourself started off right with a foundation of knowing what to buy, in what quantities, to support your customers, AKA demand planning and forecasting.
In case you missed our initial post on the subject, check out our introduction to demand planning and forecasting, here.
Establishing and following these guidelines ensures you make intelligent purchasing decisions for your retail dispensary based on concrete data from your specific retail location(s).
It's important you don't get sucked into the trap of relying only on industry-wide data. That will show you trends and behaviors that simply may not be relevant to your specific region or customer base.
All this to say, it's our mission to show you how to get the biggest bang for your buck with the least amount of legwork.
Getting Started with Demand Planning and Forecasting
These should be the numbers you track on a weekly basis and how to calculate them to know if you are getting good at meeting demand. If you take nothing else away from this article, make this the focus.
- Export your daily sales data by SKU and category for the last 30 days.
- Remove days in which the product was not in stock from the calculation.
If you don't have that data, you can make a basic assumption that, if it was sold, it was in stock.
Note: for longer time ranges you can't make that assumption.
- Calculate the unit run rate, i.e. how many units per day sold over the last X number of days.
- Multiply that by the number of days of inventory you need based on how often you receive orders from that supplier. If it's once every two weeks, then simply use 14 days.
- Track how much over-stock you have by each Monday morning, taking a sum of all of the inventory you have.
- Compare how much you have this Monday vs the last Monday.
Products that saw no change in quantity are very likely over-stocked.
Consider promoting, discounting, or moving those items to a different area of the store.
- Each Monday, generate a list of the SKUs with the most inventory that did not change from last Monday. These are the biggest culprits of aging/stagnant inventory and need to move first in order to free up your capital.
- Track gross margin you have on a weekly basis. This is going to tell you which inventory is landing you a sizable return on investment versus which inventory is costing you, or at least not pulling its weight relative to higher performing SKUs.
Here’s how you do it:
Start by calculating Gross Margin (call it Gross Profit, if that's easier for you):
Gross Margin = Revenue - Cost of Goods Sold (COGS)
Then, calculate your average inventory cost:
Average inventory cost = (Current inventory + Previous inventory) / Number of periods
Example: Calculating Gross Margin Return on Investment (GMROI)
Let’s imagine that Deb’s Dimes and Dabs, a retail dispensary, needs to calculate GMROI for a year, based on the following figures:
- Annual revenue: $600,000
- COGS: $195,000
- Inventory cost for the year:
Using our data from the table above, let’s calculate GMROI using the formulas mentioned earlier:
STEP 1: Find gross profit
- $600,000 - $195,000 = $405,000
STEP 2: Find average inventory cost (for the year)
- $1,551,000 / 13 = $120,858
STEP 3: Find GMROI
- $405,000 / $120,858 = $3.35
This example shows that for each dollar Deb’s spends on inventory, the business makes $3.35.
Keep in mind that GMROI should always be higher than 1, which indicates a profitable business.
That said, it’s important for you to rely on industry benchmarks to see how you stack up against industry competitors relative to your area of operation.
It’s not an apples-to-apples comparison, but current GMROI trends suggest that pharmacy and drug retailers enjoy some sizable returns on inventory investment, landing between $5.20 and $7.50 in revenue per dollar spent on inventory.
Cannabis is considerably more volatile than your local pharmacy, which puts Deb’s $3.35 in a good spot relative to profitability.
The Retail Owners Institute is really a tremendous resource for operators, vendors, and peripheral businesses to find insights, which places GMROI as the #1 measure of inventory productivity.
Have a look at their in-depth resources for retailers and get acquainted with this important metric for you to track.
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