STOP BUYING INVENTORY!

September 5, 2020

Lesson 3.2.0.0

September 6 Update - The video version is now available at https://youtu.be/RQ0emotavOc

Hi, I'm Bill Scott and welcome back to StoreReport's, Retail Store Innovative Management Training. This week we will be discussing moving into a consignment arrangement with our suppliers, a move that is certain to raise a lot of eyebrows.

Back in 2003, as I began experimenting with item-level inventory management in one of my customers' stores, immediately after a vendor delivery I noticed a store manager hiding two boxes in a cabinet under the cigarette display. After she went back to her office I opened the cabinet doors and guess what I found? Stacks of boxes of Orbit Wintergreen Chewing gum.

On the sales floor, there were four more, one opened, and I distinctively remembered earlier, having picked up two single packages from the bottom row and moving them back to the top. They were virtually falling out of the boxes that were there and landing on the bottom shelf. Looking at the data in my computer I calculated she had enough Orbit Wintergreen chewing gum to last the store for almost two years.

I immediately walked back to her office and asked her to tell me the story about Orbit Wintergreen Chewing Gum, and she said she got two additional boxes every week, sometimes more, and when she gets them she just adds them to the pile. Ten days later the office paid the bill.

Two years after that, in a different store, two dollies stacked with cases of a well-known national brand of beer suddenly materialized in each of the customer’s 28 stores, partially blocking the aisles and making it all but impossible to restock the coolers with other drinks. I asked around, and the V/P of stores mumbled something about a promotion, and the store managers told me they were just instructed not to put them on the shelves, and just "Leave them there". The manager paid for them with a check the day they were delivered. Three months later, they mysteriously vanished.

Not long after that, I was in a different store when a delivery driver burst through the front door with what looked to be an 8-foot train of soft drinks. The manager, peering out through a window that opened into the store, ran out to meet him.

 "Stop," he pleaded, "I don't have room for all of this", and the driver responded by saying, "The pre-salesman told me if you didn't accept the entire order, I was to bring it all back."

Half of the drink shipment contained product the store needed immediately, and the other half was junk that was piling up in the cooler like cord wood. The manager did not have the authority to reject inventory he was in dire need of, so he had no alternative but to accept the order. Back at headquarters, the V/P of all stores didn't seem to care. Ten days later, the office paid the invoice.

Look, I could go on and on relating actual instances like these. Almost 18 years of working in stores is a long time. One experience might suggest an anomaly, but after a while you begin to see a pattern, and I am not pointing my finger at the supplier or the retailer. As I alluded to in a previous video, it takes two to create this kind of a mess.

I wanted to come up with a solution that would benefit everyone, and through a series of actions, experiments, some leading to failure and some to success, I am certain that I have done just that, but the key to make it work is mostly held by the retailer.

The best solution is to create a consignment arrangement with suppliers. Don't laugh. That has been Jeff Bezos’ business model since he created Amazon, and has made him the world's largest retailer.

The first problem that comes to mind would be to gain the support of the suppliers. After all, the retailers had allowed the suppliers to manage their inventory for so long they might not like the idea of change. But why wouldn't they? By putting the ordering decision back on the retailer, the RETAILER would be responsible for stock-outs and overstock, and the suppliers I have discuss this with have indicated they would be delighted to give up that liability, citing instances of overstock in their own warehouses and dealing with irate retailers that tend to blame them for everything.

How about the retailers? What retailer would not like the idea of doubling his profits and serving the customer better by having the things his customers wanted at the time they were ready to buy. After all, overstock is a curse, because it aids in the instances of out-of-stocks, theft, shrinkage, and more importantly, debt.

Having control of his own inventory allows the retailer to buy only what he can sell during a delivery cycle, with a small amount added for safety stock.

But safety stock should be calculated based on frequency of sales. If you have a product that sells once every 90 days, it's doubtful you will need more than 2 in stock, where a fast-mover such as Marlboro Gold will require a higher percentage of safety stock to avoid costly stock-outs. But, why would anyone need four cartons when they've never sold more than two?

Ordering only what can be sold during a delivery cycle virtually eliminates debt. The supplier sends what the store will sell, the store sells the product within the 7 to 10 day window, and sends the supplier his cut from the money he's already collected. So, he never buys the inventory because the inventory is paid for before the retailer gets the bill. Perfect! Be honest, do you need $50,000 in cash tied up in inventory for no reason?  

We solve the problem by taking the responsibility of telling the supplier what we want to order, and the supplier's part is to send us no more than that amount.

Further, we know that 80% or more of new items fail to sell. There must be a better way of testing whether an item will sell in your area. One of the biggest problems of accepting new products is they do not sell, and the perks we get from the manufacturers never makes up for the losses. There is no such thing as a free lunch. 

Our solution is a simple one, and it should not cost a lot of money. In fact, to those of you who do not mind the extra work, it will most likely be a simple matter of restructuring your organization to support a more organized plan. 

If we dare to use the Pareto Principal, 20% of the retailers that read this will be excited to hear more, and 80% will not. So, if we can reach the 32,000 convenience stores that want to get ahead of the rest, it should be enough to start a movement.

1. The first stage of the plan is the actual restructuring of your business to support such a project.

2. The next stage involves how we go about attracting and selecting the right people to work in our stores

3. The next stage is how we train new hires to become cashiers

4. The next stage is to eliminate store supervisors and re-purpose them as 'Inventory Control Specialists'- I'll explain later.

5. The next stage is to expand the role of certain cashiers to take on the added role of 'Section Managers' - I'll expand that one later too.

 WE WILL ACCOMPLISH THESE TASKS WHILE AT THE SAME TIME

1. We will learn how to reduce our inventory to what we can sell during one-delivery cycle (plus limited safety stock based on simple data analysis), creating a consignment arrangement with our suppliers, eliminating debt and improving customer service level

2. We will practice the art of building a team through friendly competition and career advancement

3. We will learn how to select inventory according to turn rates and profitability and even seasons

4. We will learn how to make our stores look full without creating overstock

5. We will learn how to sell items at times when they do not normally sell

I am looking forward to sharing this information with you in depth. Our goal is to present a new lesson each week.

You may write to us at [email protected] and we will answer as time allows. Hope to see you next time