An Operator’s Insights on Retail Inventory Management, Part One

Good afternoon. My name is Rob Hendrix and as many of you may know, I own a State legal retail cannabis shop in Central Washington State, in my hometown of Ellensburg. We opened in August 2014 and have been successful, profitable and most importantly, violation free.

I have always said owning and operating a retail cannabis shop has all the challenges that any retail business has, except cannabis comes with several additional challenges that one needs to prepare for and be aware of. Today’s talk, however, is going to deal with an area that is not one of these unique challenges but rather an area that every retail business must contend with successfully and constantly in order to achieve success; inventory management.

After 29 years in the retail automobile business, 25 of those years in sales/general management, which included, among other things, inventory management. I have incorporated several key facets of automobile inventory management and control into my cannabis inventory management and honestly and thankfully it’s much less complicated in some ways. But it’s more complex in other ways as well. 

We have two standing orders in my store that I preach to my purchasing manager quite literally on a daily basis; never let any consumable items hit 45 days in stock and at 30 days in stock, gut the product, advertise it and make it go away BEFORE it hits the dreaded 45 day mark. Turn those dollars that are tied up in a non-selling item and get something we can move and make a good margin. Admit you made an error and turn the dollars into something that will produce profit.

The End. Sounds simple, right? This could and should be the end of this story, correct? Nope, not even close. There is so much to this story, I have already promised I would take this complicated and hugely important part of running a retail shop and break it into several parts. Now let’s begin.

Your inventory needs to be managed. What goes on your shelves and your display cases is totally necessary AND within your control. But how do you decide exactly what does make the cut and what your retail shop should offer to the consuming public?

In Washington State, we have a closed system in that I must acquire inventory from state-licensed growers/processors and they must sell to only those retail shops which are state-licensed. Today there are approximately 1100 grower/processor licenses in Washington that are active and just over 500 active, licensed retail shops reporting sales. Growers will send out sales reps to drop off “samples” of their products for review and hopefully, for the grower, a wholesale order will follow. In our shop, Cannabis Central, we have a simple but effective system for evaluating samples and this is a key part of our determining whether the product will appear on our shelves. 

Evaluating Samples

Our two managers will fairly distribute the samples to all of our employees. We have designed a form that will be filled out by the sampling employee which will attempt to grade the product being tested. We grade taste, looks, packaging and most importantly, the effect. This is somewhat subjective as people have varied tastes and what might be awful for one individual may in fact be judged to be “top shelf ” by another. We work on a majority rules basis, a democracy insofar as what is considered by Cannabis Central to be a quality product. This process is good in several ways. First, the employees have a say in what we stock and sell. This empowers our employees and makes them feel as though they are an important part of a very important part of the operation of the store (and that is because they are!). Secondly, it greatly reduces the fact that we may get “tunnel” vision as to what is good and something we should stock. It’s human nature to fall into a comfort zone and maybe get too comfortable and cozy with one supplier. When you have at least seven others contributing opinions about product quality, we stay fresh and honest in our evaluations and therefore we stay open to changes regarding what we stock. 

After the samples are judged and opinions are tallied by the purchasing manager, then a conversation ensues regarding the wholesale price of the sample product. This process may be quite involved and frankly it’s not a perfect science. (For the sake of conversation, we are discussing adding a product to our inventory rather than discussing replacing a vendor. This is another topic for another article. Stay tuned!) 

When adding a new vendor, we will start with a smallish order following a “buyers beware” policy. Sometimes vendors will object to this policy based on delivery costs, minimum order policies, pride perhaps. I learned quite some time back that there are bad actors out there who may try to switch product on you. Let me explain.

Remember we took in samples and passed them around to our employees and evaluations followed. We have had growers bring us A+ samples and then deliver D- product. I do not forget these events; fool me once shame on you…. So we guard against this by not agreeing to a large scale order in the beginning. We have a relationship to begin building and I may be old fashioned, but we are going to proceed with caution. This is just good business and if a grower will not agree, then we terminate the relationship at that point. I will never attempt to tell anyone else how to run their business, but neither will I ever deviate from my own sound policies to suit another business. 

We take this process very seriously. I take my business inventory seriously; it is a critical component of any successful enterprise. I also respect other businesses especially grower/processors. They have it tough these days and many are struggling to adjust to over-supply issues and the inevitable drop in wholesale prices. Business models have been adjusted, reworked or thrown out and business owners and managers have had to literally start over.

We do not participate in adding to their grief and stress and will always attempt to be fair, but diligent, in deciding whether or not to carry a grower’s product(s). However, at the end of the day, this is a business. And it’s my business, my livelihood, the livelihood of my managers and employees. I feel a strong sense of obligation to the industry, the community, and to the State but I feel no greater obligation than I do to Cannabis Central.

In the coming articles, we will delve deeper into inventory control, working with vendors, pricing, turning inventory, cash flow, projections, adjusting to market changes and seasonal changes and I suspect much more. Thanks for reading, go out and make it a great day, your best effort yet!