Retail Inventory Control

Inventory Control

There has been a lot of information going back and forth about item management, category management and inventory control.  Actually, considering this is the biggest line on a retail financial statement, the amount of discussion is sadly lacking.  What is the actual cost of inventory?  What is your true cost of a promotion, write off of inventory?  There are many questions but retailers sadly keep to the old metrics of inventory turns and margin.  Unfortunately, these numbers are mostly after the fact.  We are building bigger and bigger stores, yet most of the SKU we carry do not carry their weight of cost of capital.  How do we justify the use of all this square footage?  There are retailers that do an excellent job of maximizing sales per square.  But how do you truly arrive at a top quartile, best practices assortment.  Not through dealing with vendors.  No matter what, their goal is opposed to yours.  We talk about partnerships but if you realistically look at the business, they are making money off of you.  So how do we tighten our supply chain and assortment?

There are new metrics being introduced to retail.  After a long, long time, quantitative analysis and analytics are being used in retail.  Wall Street has been using them for years but retail management has for the most part been relying on outdated analysis.  Will your customer substitute?  What is the cost of out of stocks?  What is the cost of carrying additional inventory to make sure you are not out of stock? 

As more retailers switch to enterprise based software and have access to OLAP item level transaction data, the choice is not having data to look at but how to look at such a multitude of data.  The modern C store management team is increasingly heavy on analysts or quants that provide filters for management and marketing to allow them to make sense of the reams of data.  All one has to do is look at one daily transaction file and your head begins to hurt.  Even now as we attempt to distill this new data into KPI that make sense, we have to start lumping data together to try and make sense.  Most of the material I deal with now is item level logarithms but rely on assumptions that lump items together based on some quality so we can make some type of relationship appear and make sense in execution.  There is no doubt the average store carries way too much inventory.  How do we justify carrying three cans of something that we may only sell once every several months but need to have some presentation or we will not sell any at all?  What is the best use of cash?  I struggle with stores that are getting larger and larger but yet really have no unique offering.  Perhaps services are the new key to utilizing all this space.  They have a low carrying cost, usually have some barrier to entry and do provide value added to the customer.  And maybe most importantly, they provide the human factor to the shopping experience.   Our next blog post will examine this in more detail.  Future shock as the term was first coined years ago.  Take care….

Retail Strategies and Failure

So, what leads to failure?  There is a wide range with everything from basic human performance to acts of God and Murphy’s Law which is probably my favorite.  Another one of my mantras is expect the best but plan for the worst.  Again this shows how we always have failure in the equation but it is not our favorite agenda to deal with it.  Failure ranges from deliberate deviation, lack of competence to something that is just so complex it cannot be executed.  I used to love those cardboard display pieces that would come into a store with the easy to assemble directions that I could never ever get it to come out like the picture.  Please send two because I was guaranteed to destroy the first one.  There is another level of failures that exist in a controlled environment to prove or disprove a hypothesis but we will not address that in any great detail in this article.  As we explore the spectrum of failure, the increased ratio of variables to a process or policy makes it increasingly difficult to execute and increases the predictable failure rate.  We all want the 100% execution or return on our assets and efforts but myself at least have always planned for a predicted failure rate.  Whenever trying to estimate sales revenue, margins and expenses I have to build that “pad” into the equation.  I quickly became tired of having my head handed to me after not taking this into effect. 

We try to avoid failure for the most part by building structures to reduce the variables we have been discussing.  Everyone from Ford to Ray Kroc developed structures to reduce the variables or improve the speed of the required task by repetition of the task.  Turning men into machines was a common criticism of this process.  It took the soul out of man.  As we move down the timeline of history, we continue to seek the balance necessary. Using policies and procedures also allows us to establish benchmarks to measure productivity and improve working conditions.  Back in the day, there were just a few issues such as child labor, hazardous working conditions and just about every other abuse of human we could imagine.  And it is always worse than what is documented in the movies.  Anyone who has traveled to developing nations knows the struggles they have trying to achieve growth, reduce income disparities and not establish so many governmental controls that free enterprise is strangled. 

Case studies at Harvard ranged from a Toyota assembly plant to the R & D department of Eli Lilly.  Toyota was cited as having one of the best production and quality lines in the business.  Tasks were doable, codified, internal customer specifications well established and quality control verified at multiple check points during the process.  The Eli Lilly system was as controlled but the outcomes of these systems were entirely different.  While Toyota was looking for a zero defect outcome, Eli Lilly wanted failures to establish new frontiers and break away from the outdated medications of the past years.  The issues with Toyota’s production system were inattention not by the actual workers on the line but with plant management which was not holding the line accountable.  As a general rule, human beings we know take the easiest path possible. 

So how do we get away from the notorious blame game?  First, you must have a psychologically safe environment.  If no one wants to stick their neck out, no one will and you will be the one in the dark.  Integrity, walking the talk and truly encouraging open communication is essential.  I used to love walking into an office to relay a poor result and being screamed at until if felt like my face was melting.  There is venting about a situation and there is killing the messenger.  Neither is professional and should be avoided.  Next, make sure status is not a necessary component of the communication process.  You want the entry level line worker to feel as comfortable as the senior VP.  In studies conducted in various organizations, status could be directly linked to psychological safety while in others there was no correlation at all.  Rather than the caste system in some cultures and/or companies, management in the safe feeling companies had done an excellent job in truly abolishing barriers.  A recent article in the Wall Street Journal on India discussed the difficulty a growing economy was having trying to eliminate or even just reduce the caste system.  The country is experiencing the increased division that new money can cause.  With history and habit patterns as established as India’s are, it will be very difficult to break down the walls.

Next, a company must have a way to measure, evaluate and correct the failure.  All of these must be conducted in a framework that still maintains accountability.  The worst integrity breach of all is losing accountability and letting poor performers drag down your A team.  Not only will failure not be reported and corrected, it will become the new norm.  At that point you can say bye bye.  To recap establishing a safe environment, frame the work accurately, embrace the messenger, acknowledge limits, invite participation and make sure to hold people accountable.

More To Come 

Retail

RETAIL FAILURE

Learn From Failure & Grow

A Harvard Business School webinar this week was on learning from our failures.  A premise that we remind ourselves of in sayings such as “If we do not learn from history, we are doomed to repeat it” and others in every culture in the world.  Growing up, it was constantly hammered into me that failure is bad, success is good.  Over and over.  The world seemed to be very clearly divided between good and bad and it wasn’t until later down the timeline, that the grey areas in life start to become apparent.  There is a direct correlation between maturity and the ability to deal with those grey areas in life.  As a manager, it can be very difficult to deal with a grey area.  A real human being vs. a policy or procedure may pull at all aspects of a human being.  Intellectual debate, emotional attachment and sometimes even physical effects can be triggered as we try to reconcile all these energies and establish a win-win situation.  While many companies will state that they have an “open door” policy how many times do we shoot the messenger for bringing that wonderful tidbit of information at 4:55 pm on Friday.  We know we have to deal with it but I don’t believe it makes anyone’s day a wonderful occurrence.  We know we have to keep notes on our team for review time because our impressions tend to be what has happened most currently.  If our recollections are of a recent failure and not success, the individual being reviewed could have a very nasty time.  Even if the failure was close to a career ending event, we do not want it to wipe out what may have been a record year. 

So we as managers know we need to discover failure, address it and manage it, how much of our time is really spent towards this?  How many of us have “Discover failure” on our to do lists?  Sound a little absurd?  I know I have never written such an item down.  As many times as I have encouraged people not to be afraid, that I was not going to tear their heads off if they brought me bad news, it wasn’t anyone’s favorite thing to do.  It is one of those evil necessities that business brings to our world.  The welcomed results that come from discovering failures or disappointing outcomes are well documented.  We will first drill down on some of the whys before we get to outcomes.

In organizations that individuals learn to be comfortable with know knowing, not being right or reporting mistakes have precious espionage so to speak about their company.  Some companies have such a culture that they actually have to hire in cognito reporters to let them know what is actually going on.  One of my most hated processes is duplication of effort and this to me is one of the worst.  Degrees of failure can range anywhere from out and out insubordination to controlled failure in a scientific environment.  Depending on the degree of difficulty it may be a challenge to pin down where the variation from the desired outcome may be.  As well, the spill over effect and impact on others can be tied exponentially to the failure. 

MORE TO COME  PT. 2