Top 100 - Exercise 2

The principal of flight is simple to explain. I am curious as to why it took humans so long to figure it out. Leonardo de Vinci came close in 1505 AD, but it wasn't until 400 years later, when the Wright Brothers made their historic flight spanning a mere one-third of the length of a soccer field, that the entire world gasped, "Aha". Almost every 'giant leap for mankind' is composed of a series of smaller steps, each one blocked by fear and a serious aversion to change.

My 'Aha' moment occurred in 1989 at a seminar given by Pacific Bell that took place in an IBM facility in Honolulu, Hawaii, when the presenter described how the Bell System network handled telephone communications. I was reborn.

However, the realities of the technology were complicated and expensive. A normal person would quickly realize that it was out of the reach of convenience store operators. but that didn't stop me from working on a plan that would someday make it possible.

My original idea included linking every convenience store throughout the world into one gigantic network so they could share non-proprietary data such as UPCs and maintain relationships with customers and suppliers. It made sense to me that an awful lot of resources were being duplicated around the world, which if shared, would give everyone and no one an advantage, but at a far lessor costs. After all, we allow everyone access to the Internet, where do you draw the line and what would be the reasoning for doing it?

I have always been known to ride on the "bleeding edge" of technology, getting involved with something I couldn't sell and moving on to the next wild idea. I just couldn't help myself. To wait for the market to catch up was never an option. It was difficult for me to decide to stop and wait for the world to catch up, until I discovered a book called "Inside the Tornado".

In the decades leading up to 1999, I had been spending the majority of my time writing software for the oil marketing and convenience store industry, and knowing how convenience stores functioned, I had a rock in my craw (crop) since the first store I attempted to audit.

Most new convenience store operators would go to grocery suppliers for help, confessing they had no idea about what they needed to display on their stores' shelves, and suppliers would do their damnedest to stock the stores using an age-old method that later became known as 'Category Management'. What started out as a good idea to suppliers, ended up being an albatross hanging around their necks that they learned (sort of) to live with. It didn't take long before retailers expected suppliers to manage their inventories for them, and suppliers came to realize they had inadvertently signed on to a job that was far beyond their capabilities.

The thought of a supplier losing a 50-store operator to a competitor keeps suppliers up at night, and retailers were always suspicious that suppliers were charging them for stuff they didn't need or never received; and a 'love/hate' relationship began to permeate throughout the industry.

All this has led to suppliers cramming as much inventory into the stores as possible, as it is not uncommon to find an excess of inventory in stores to last for over a year, keeping stores in perpetual debt, carrying costs going through the roof, ridiculous insurance costs, and extra employees just to manage the mess. Add to this, rampant employee theft, strained employee/employer relationships, hatred for management, and enormous volumes of shrinkage and theft, not to mention out-of-stocks being a symptom of overstocks. Most stores contain easily twice the inventory needed to meet customer service levels, and they have no idea how much they have invested in their stores. With an average of 2.1% profit as reported by the National Association of Convenience Stores, the future for convenience stores is anything but bright IF they continue to refuse to manage their inventories properly.

In this exercise, I have picked a store at random to demonstrate major problems in almost all convenience stores, and that problem is the amount of unnecessary inventory being stored in them. If you have a better than average store, you may see your store operating as well as this one, and in rare occasions even better. But, I would advise everyone to at least read through this material to see where you stand. Average stores will fall below this store's performance and you may discover new ways to improve. COVID has changed everything, and post-COVID is going to pose issues that few of us are prepared to deal with.

I have eliminated lottery sales from this study because of the variety of methods imposed by most states to determine the timeliness of when the costs of sales actually occurs, plus the fact that lottery is pretty much out of the control of the retailer. You can add them in if you want.

If you want a copy of the full spreadsheet used for these calculations, you may write to me at [email protected] with the subject line 'Exercise 2A Spreadsheet' and I will send it to you so you can experiment with the figures and substitute your own. Also you will be able to see where you may be doing better or where there may be opportunities for improvement. I am going to continue to use this spreadsheet as we go on with future exercises.

In this table I sorted my sales first by the amount of profit each item produced, and in the second table I sorted the same data by units sold. You'll notice the same items appear in both tables, but in different orders. For example: you see where Ice produced the most profitable sales but switched places with 32 OZ Fountain which saw more movement.

In this store I can see that we sold 3,601 unique items from March 1, 2020 until Feb 28, 2021.

When downloaded in it's complete form, the above table shows every item in the store that had even one sale during the period. We cannot show them all here, but as I said, you can request the complete table if you want to work along. It's free, I won't ask any questions. I will NEVER intrude on your privacy.

How many items are in this store?

We know from experience that almost all stores stock 10-15% of items that are simply dead. Some may be hidden in the stock rooms and coolers or on the bottom shelf in the candy aisle collecting dust. Employees don't really care. In fact they may be reluctant to remove them in case a future inventory count shows them missing and they get penalized or even fired for missing stock.

In our table we have 3,601 items, since we assume that 12.5% are are not included in the sales reports, 3,601 items / 88.5% = 4,069 total unique items assumed to be in the storewith no regards to the duplications of the same product, so we will include that estimate for the number of items that do and do not produce sales into our calculations.

We say that 30% of the items in a store produce almost all of the profits. This is because the profitability of the second group (see below) is ambiguous. Some may make you money, some may lose money, some may produce no profit at all, so even though these figures are based upon average costs according to category, I have found they are generally incorrect to some degree. If this is true, we should see that in our calculations. Total Inside Sales for this store came to $1,424,668, producing a gross profit from non-fuel sales of $301,010 for the period.

Dividing them into three groups we get 1,222 in the top group, 1222 in the second group, and the rest, including the dead items that produce nothing and costing you money because of carrying cost.

Carrying cost are hidden cost that are included somewhere in operating expenses such as, use of working capital, lost opportunity, electricity, unneeded employees, excess insurance costs, and on and on.

I often referring to Carrying Cost as "the curse of overstock".

Group 1: 30% of 4,069 = 1,222 unique items. The Top 1221 items produced sales of $1,299,680 and 89.58% of the total profit

Group 2: The 2nd 30% of the total items produced sales of $107,661 and 8.99% of the profit of $27,059

Group 3: The third and final group including the items on hand that showed no sales and those that produced sales of $17,327 and 1.43% of the profit of $4,314 and leaving us to make our remaining profits from fuel sales.

If you have been following our group you will remember that I am proposing convenience stores move to a consignment arrangement with their suppliers. You do not have to rely on your supplier to agree to this. I am going to show you how you can make that decision entirely without their input.

Very simply put, a consignment environment means your supplier will furnish your store with inventory and you pay them AFTER you sell the inventory, keeping your profit for yourself. The reason this is rarely done is because suppliers have had no way of knowing what inventory you have sold and the opportunity for losses are just too risky. But, if you can find a way to order only what you need and are able to sell it before you get the invoice, it creates a "Virtual Consigned Environment" that you control. All you need to know is what inventory you will most likely sell during the next cycle, collect the money from these sales before you have to pay the invoice. I can teach you how to do this with a spreadsheet and the technology you probably have available right now.

The main benefit of a consignment arrangement would be to completely eliminate carrying cost and produce a different outcome for the store in question. SEE BELOW:

If we are able to eliminate these "Carrying Cost" by taking our stores into a virtual consignment way of handling inventory, can you see how we can increase profits by 68%? Isn't it worth your time to investigate how we do that?

In future exercises we will dig deeper into this data to show you how we advance further toward our ultimate goal of doubling, or even tripling the profit you make in your stores.

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