Consultants’s Corner
Consultant’s Corner Introduction
Surviving Tough Economies in Retail
Understanding Your Retail Stock Ledger
Return on Investment
If I Were In Your Shoes
Consultant’s Corner Introduction
Allow me to introduce myself. My name is Alan Fisher and I have had a retail consulting business for over 4 years. I am currently working with SpectrumRetail on a number of business-development projects. After many discussions, we decided one way SpectrumRetail could help retailers attain inventory and financial goals would be regularly sharing good retailing planning, analysis and procedural principles through the SpectrumRetail Web site.
I will warn you, though: I am wearing my consultant’s hat. That means I will tell you what you need to hear, not what you want to hear. No warm and fuzzies in this column.
There is great news in the announcement that SpectrumRetail has launched a consulting division to help clients with inventory management issues, including planning and analysis. As a 16-year veteran of the retail systems and retail consulting industries, I have watched retailers invest significant amounts of money in systems that eventually become expensive cigar boxes. SpectrumRetail’s consulting division will help retailers apply sound retail principles to make specific business decisions and avoid owning one of those cigar boxes.
After viewing demonstrations and hearing how the vendor’s software can help them reduce inventory, increase margins, reduce shrinkage and improve customer relations, many retailers find themselves two years into using the system with no significant results. As a consultant, I can tell you that most of my clients want to blame the lack of results on the software vendor. I can also tell you that the blame is usually misplaced.
It is unfair to blame the vendor if the product provides the retailer with the tools to make a decision, but the vendor fails to use the information. It is also unfair to blame the vendor if the retailer does not know what information to analyze or how to analyze it. If a retailer watches a demonstration and sees how the system can create numerous detail-level reports of sales, stock-outs, and reorders, finds there is little substance to help make a decision, but purchases the system anyway, the vendor is not at fault. (By the way, regardless of what some salespeople show you, inventory management is NOT re-ordering merchandise.)
I have always been astonished to watch salespeople from some software companies review reports with retailers. They seem to assume that quantity of reporting and level of detail sell systems. Unfortunately, many retailers also equate quantity with quality. Once the software is installed, faced with thousands of combinations of reports, the retailer runs no reports, using the computer system simply as life-support for a series of procedures. The same uninformed decisions are made, maybe just a little faster.
Think about a controller’s approach to analyzing a business. At the end of the month, the controller does not start by saying, “I think I’ll review all the journal entries in the general ledger and see how we are doing”. The controller looks at a financial statement for the business to find areas that have missed the budget or have experienced significant change over previous periods. Then, details are reviewed to determine why these events occurred before a course of action is determined.
Inventory management should be approached the same way. The first step is to look at a financial statement for the inventory to determine problem areas that need further research. Starting at the top with a class-level look at performance, areas with high shrinkage, low profits, low turn rates or high markdowns should be reviewed with more detail to determine what is causing the problem and what action should be taken.
So, if you find yourself talking with a software salesperson who believes 10,000 reports are the answer to your problems or that inventory management is the same as reordering, run as fast as you can. Instead, find a company that understands what inventory management is and how it is done.
Alan Fisher is the president of Retail Business 101, Inc., an inventory management consulting firm. His company specializes in working with independent retailers on open-to-buy and system utilization.
Surviving Tough Economies in Retail
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We find ourselves in the midst of a tough economic period again. Consumer confidence is low, world unrest and terrorism looms over the horizon. But you still have a retail business to run. There are issues that you can control and those that you cannot. The challenge is for you to put effort into what you can control. FOCUS on these things.
I work with a client called Pickles & Ice Cream, a group of maternity stores across the US. Despite dwindling sales, several of these franchises are more profitable than ever before. Some that had not shown a profit are now profitable and, in a couple of instances, net profits have risen 11 percentage points.
What I would like to do in this paper is to first explain why I am a consultant and then review some of the efforts that Pickles & Ice Cream stores have made to progress from red to black.
I spent 12 years as sales manager for several companies that specialized in point-of-sale and inventory management systems. My single biggest frustration was watching retailers buy a system, struggle with implementing it and then, 3 years later, decide to replace it since the business had not changed significantly in that time period. Three years later, they were replacing the replacement.
There were two primary reasons a system failed to change the business:
1) Bad selection
2) Totally inadequate use of the system
Bad selection usually occurs because the retailer wants to find a system that automates all of the processes they currently do-exactly in the way they currently perform these tasks. In other words, they seek to automate all of the good and horrible business practices already under way. Usually, they can find a generic product that lacks focus and control so that it meets these minimal requirements. Another problem, always on the second and third selections, is a narrow focus on correcting one problem uncovered in the last system. For example, if the receiving function was labor intensive in the last system, retailers will focus on that one issue in the next search at the exclusion of many other necessary functions.
Inadequate use of the system is the fault of both retailer and software vendors. Retailers are to blame because they rarely run reports that might provide them with the information to make a smart business decision. I hold software vendors accountable because most of them believe that inventory management is stock replenishment and reviewing what you sold last month. Therefore, many of their systems are a collection of lists of information. A list, not a report.
I have sat in on many system sales presentations and watched someone (who needed spell check to spell PC) show the reports. “Here’s our sales report of what you sold last month. You can sort it by department, by sales clerk, by hour of day, alphabetically according to height, blah, blah, blah. We can also rank it according to gross profits, quantities sold, blah, blah, blah.” And just what would you do with this 500-page report?
If you know anything about accounting, you know that it provides an analysis of a large number of transactions over a period of time. These transactions are stored as general ledger entries. Now look back at the previous paragraph and imagine an accounting system salesperson demonstrating the system. “Here’s our general ledger report of what you did last month. You can sort it by blah, blah, blah. We can also rank it according to blah, blah, blah.” The controller, who rarely laughs at anything, would be laughing hysterically. A controller reviews a financial statement, not a list of transactions. The reason is that no one can look at a list of transactions and make a determination (or decision) as to how successful a business is. That is true for accounting and retailing.
Therefore, I became a consultant to help a retailer find a way to use a system to make a difference in their business.
Now, back to the story of Pickles & Ice Cream and some of the reasons they have made significant strides in profits. Keep in mind these business practices are as applicable for hard goods as well as soft goods. It Works!
1. They use an Open-to-Buy.
In tough economic times, buying more inventory than necessary is a formula for disaster. Prior to each buying market, the stores review their sales performance by department by month against a Plan. Based on trends, the sales plans are adjusted upward or downward so that the right amount of investment is made in each department.
If Dresses are performing below expectations, the natural tendency of a buyer (without an Open-to-Buy) is to purchase more and more until they find the right dresses. This is what I call the mud approach: if the retailer throws enough of a product at customers, they will eventually find a product that sticks. However, all of that mud at that bottom of the wall has to be cleaned up (paid for, marked down and/or donated to charity).
With an Open-to-Buy, if sales are 25% below Plan, then the future sales plan will be adjusted. Therefore, less inventory, not more, will be purchased. The retailer on a budget has to make a smart decision on where to invest this money. If there is no dollar limit, then the buyer will buy from as many vendors as possible. If there is a budget, it is necessary to focus on what has a high likelihood of success.
In the case of Pickles and Ice Cream stores, there are also departments that perform above expectations. Each month, the stores can identify where additional merchandise needs to be ordered quickly to fulfill inventory levels that are below plan. If Tops are selling above expectations by $3,000 one month, then the store’s inventory decreased by $3,000 more than was planned. The store cannot wait until the next market to fill this hole, so they try to find available inventory from another store or from a profitable vendor who might still have some available merchandise for the current selling season. (Since the vendor is now producing goods for another season, they are usually trying to get rid of this older merchandise and will offer it at lower prices.)
There are several results that a typical store can expect from the implementation of an Open-to-Buy:
. A 10-15% reduction in inventory investment.
Retail trade associations have estimated that the cost of carrying excess inventory is 30-35%. With an inventory investment of $300,000 at cost, a 10% reduction in inventory would result in savings of $9,000 to $10,500 annually.
. A 3-5% point increase in gross margins.
This is accomplished by significant reductions in markdowns due to overbought situations and by controlling the timing of deliveries for optimum selling price. For $500,000 in sales, this would represent $15,000-$25,000 in additional margins.
2. They use their system to increase the likelihood of successful inventory investment.
Pickles and Ice Cream stores use a retail stock ledger report to identify vendors in each department (not SKU’s) that perform profitably and with good sales numbers to decide where to place that investment. If, within a department, Vendor A products provide a gross profit percentage of 52% and Vendor B products are at 43%, then we have our first tidbit of information that may provide us with an indication of where to invest. There are other factors to review from their retail stock ledger report. What was the sell-through percentage? How many did we sell? When the buyers get to market, they will review a lot of vendors and products, but they already have some valuable information in their minds that can influence the outcome. The beauty of this is that it is factual information, not a feeling. When the decision is made on where to invest, it is influenced by emotion, but decided with a combination of facts and emotions. Therefore, it has a higher likelihood of success once it reaches the store.
Their approach goes back to our discussion of not running a list of what sold. The retail stock ledger serves as the sales and inventory equivalent of their financial statement. After identifying a problem at the department level, the store will drill down one level to look at the vendors’ performances. Since there is little likelihood of being able to reorder specific colors or sizes of fashion merchandise, there is little need to look at the performance of styles, colors and sizes. However, there is a time when the information at these other detail levels is valuable. The buyers from Pickles and Ice Cream work with their vendors, even one whose products performed poorly. The performance is discussed with the vendor in the hope that corrections will be made. Some of the problems that Pickles and Ice Cream identified related to bad fits, inferior material, durability, wrong colors, etc. Some of this is available from this report. Some of it is knowledge from being in the store and working with customers.
3. They stopped using a formula to calculate selling price.
In the past, the stores all had the same selling price. When you are trying to earn enough profit to pay your cost of doing business (operating expenses), a store in Dallas, TX pays a lot more rent each month than one in Augusta, GA. These two stores can and should have different selling prices for the same merchandise. When we first discussed this, I used the concept of hotel chains. I said that I could not stop at the Courtyard by Marriot in Atlanta (Buckhead), GA and demand that they charge the same price from the Dalton, GA location. So they started a concept called “charging a price that the market will bear”.
Astute buyers will tell a vendor at buying markets to not tell them the cost price until they have had a chance to determine what price they believe their customers would be willing to pay for that item. If they look at what they consider to be a great top that they believe their customer will pay $50 to own and then the vendor says cost is $40, they say “Pass!”. If that top turns out to be $15, they still try to sell it at $50.
There is more to the story, but these are the significant items that led to a change. I can tell you that there is not much that can give me more satisfaction in my career than knowing that a client who was facing bankruptcy or forced sale of the business is now both profitable and sleeping at night again.
With Pickles and Ice Cream stores, the change was to work on planning, evaluating, analyzing and reacting. Not one “500-page report” was produced to accomplish this. Rather it was a series of small focused reports that gave someone the information to decide an issue with a high likelihood of success.
Alan Fisher is the president of Retail Business 101, Inc., an inventory management consulting firm. His company specializes in working with independent retailers on open-to-buy and system utilization. He can be reached at 866-32 RB101 (866-327-2101) or via e-mail at alan.fisher@retailbusiness101.com. Visit their web site at www.retailbusiness101.com
Retail Stock Ledger
Alternatively titled “Vincent LaGuardia Gambini Splains RSL To You”
By Alan Fisher
The primary purpose of the Retail Stock Ledge (RSL) is to provide a single report that includes the most important retail statistics used for analysis purposes. To draw an analogy to its utility, it is a financial statement for sales and inventory.
I often state that no controller for a business would close off an accounting period and then begin analysis by looking at the general ledger entries for that month. Yet, this is the focus of many retail systems. A controller starts with the financial statement. Then when they discover a problem with perhaps a revenue or expense account out of line, they drill deeper to determine why. For example, advertising may have skyrocketed over last year or over budget, so the controller would look at the expense entries related to advertising to determine why.
The RSL can function in the same manner. A retailer reviews Department-level sales for a period of time and can analyze sales, turn rates, performance gross profits, etc. and then drill deeper, first to classes, then vendors, then specific product to further define the problem.
The report can be run at the Department – Class – Vendor – SKU levels and in any order. For example, a retailer can run a Vendor – Department report and view one vendor with activity for all departments in which that Vendor supplies products.
Definition of a Basic RSL
A standard RSL report measures inventory transactions over a specified period of time. It starts with an opening inventory (A) on the left side and an ending inventory (B) for the measured period on the right. The middle of the report lists all the types of transactions that got us from Point A to Point B. For PLW, the RSL measures Retail, Cost and Units.
Beginning Inventory
+ New Purchases
+ Additional Markups*
+ Transfers
– Sales
– Markdowns**
– Discounts***
– Adjustments****
= Ending Inventory
* Additional markups are items on the shelf that increased in retail price, typically as a result of new merchandise coming in at a new retail and cost. The items on hand are marked up to the new retail price.
** Markdowns represent the dollar reductions of items that could not sell at the originally intended retail price. They represent a failure to properly price that merchandise.
*** Discounts are a reduction in the price of an item based upon the purchaser of the product. This is reflected as employee discounts, frequent buyer discounts, senior discounts, etc. It might have sold at full price, but the retailer elected to sell it to this person at a reduced price. Later, in Performance Gross Profits, items that were sold with a true discount are reflected as if they sold at full price.
This is an important distinction and a competitive advantage. When a retailer analyzes the success of particular vendors or products, they get a truer picture of the actual success of that product.
**** Adjustments are from the taking of a physical inventory.
Statistics on the RSL
What makes our report really great are the additional statistics. Remember when you are thinking of how these stats are calculated to recall that we are calculating for an individual line on the RSL. For example, if I am reviewing Footjoy – Department sales for 2001, the RSL is calculating these stats for Department – Shoes by Footjoy, Department – Gloves by Footjoy, Department – Socks by Footjoy, etc.
• Store %. This line’s percentage contribution to total store sales. Store Sales are $100,000 and Footjoy shoes are $1,500 so this calculation would represent 1.5% of total store sales.
• Department %. This line’s percentage contribution to total department sales. Department – Shoes sales are $10,000 and the Department – Shoes by Footjoy would represent 15% of Shoe sales and Footjoy competitors would account for 85%.
• IMU% (Initial Mark Up %). This calculation takes into account only the original retail and original cost from a purchase order and maintains a running total for all products on this line. As a consultant, I use it to review new Purchase Orders to make sure that the retailer is building enough margins to cover operating expenses*****.
***** Operating Expenses are typically expressed on financial statements as a percentage of sales. If Operating Expenses (also called the break even point) are 42%, that means that departments, vendors or items that do not attain or equal Actual Gross Profits % over the Operating Expense % are losing money for the retailer.
• Current MU%. After accounting for markdowns, this is the average mark up of items in stock today. If I sold one item at $100 from this line today, it would give me an average profit of $52.10 and would have cost me an average of $47.90.
• Actual Gross Profits. This measures the ending profit when you include Markdowns and Discounts. It shows Dollars and Percent.
• Performance Gross Profits. This assumes that Discounted sales would have sold at full price. This is the more important analysis statistic (over Actual Gross Profits) as it allows for negotiation with a supplier based on the performance of their products. It also reports Dollars and Percent.
• Turn Rate, aka Stock Turn Rate. This is the number of times that a $1 inventory investment sold during a year. It is calculated as Annual Sales divided by Average Monthly Inventory (retail to retail, cost to cost, or units to units). PLW calculates off of Retail. Improving the Turn Rate should be the focus of a quality inventory management system, which we are.
• Sell-Through. This calculation (based on units) measures the percentage of available merchandise the retailer sold. For example, the retailer is measuring sales from January 1, 2001 to July 31, 2001. On January 1, the store had 25 units on hand, received 25 more in March and 25 more in June. The store had a total of 75 units available for sale during this period. If they sold 60 units, the Sell-Through would be 80%. It is used as a comparative number. If a retailer received Spring merchandise beginning in March, they might use a low number on this statistic in April or May to identify items for the markdown rack. OR they might identify high numbers to attempt to reorder.
• Markdown %. This measures Markdowns as a percentage of Sales and is also a good comparative tool among vendors. Many industries report vertical market averages on a yearly basis.
• Discount %. This measures Discounts as a percentage of Sales and can be used to identify products that are not reaching the floor because employees are buying them at time of receiving. Another excessive Discount problem can be that employees are buying for others.
• Shrinkage %. This is also calculated as a percentage of Sales. A good target for a retailer is 1% of Sales. Many retailers have higher, depending upon the industry. Many industries report vertical market averages on a yearly basis.
• Stock-to-Sales Ratio. This takes Ending Inventory at Retail and divides it by Sales at Retail for a Month. It basically tells the retailer how many months supply they have, BASED ON THE CURRENT RATE OF SALE. Therefore, the retailer has to mentally factor for the selling season. Using units for simplicity, if your local store has 12 sweaters on hand today and sold 1 this month, the Stock-to-Sales ratio is 12. Yet since it is a little warm and muggy to be thinking about sweaters, that figure is misleading as they do not really have 12 month supply. In December, if the store only has 12, then the retailer will have a serious understocked situation.
Ways to Use The RSL
• Department Analysis on a Monthly Basis. Controller’s approach to inventory management.
• To analyze a vendor’s product before meeting with the manufacturer’s rep. For example, the retailer would run Vendor/Department and review the Performance Gross Profit% that were lower than Operating Expense % from their financial statements. Then they might run the report for problem Departments as a Department/Vendor report so that the retailer could easily compare all of the relevant statistics mentioned above among their suppliers of those types of products. This becomes a great negotiating tool with the manufacturers.
• For Markdown and Reorder candidates.
We call it the “One Page Business Manager!!!”
Alan Fisher is the president of Retail Business 101, Inc., an inventory management consulting firm. His company specializes in working with independent retailers on open-to-buy and system utilization. He can be reached at 866-32 RB101 (866-327-2101) or via e-mail at alan.fisher@retailbusiness101.com. Visit their web site at www.retailbusiness101.com
Return on Investment
By Alan Fisher
Would you like to know my biggest frustration working with retailers as a consultant? I will give you the final answer in a minute, but it involves the relationship with spending money and the expected result.
Let’s look at the buying decision you make to put stock on the shelves. For the most part, your purchases are made to gain you an expected profit (return) on a cost purchase (investment) that also fits your customer’s product expectations.
If you sell top of the line cameras, would you base your primary buying decisions on the fact that Kodak and Fuji sell disposable cameras that cost less than $5? If you sell mens’ suits at $500 to $1000, would you base your purchase decisions on the fact that there are discount suits available at $50-75?
Additionally, would the camera store purchase a large quantity of those disposable cameras, expecting to sell them at $300-$1000? Would the mens apparel store buy a large quantity of suits at $50-$64 and then expect to sell them at $500-$1000?
You also do not tell your camera suppliers that you can get Kodak and Fuji cameras for $5; nor do you tell Hartmarx that you can buy suits for $50.
None of the options present the retailer with a reasonable return on investment that would fulfill the customer’s willingness to pay or expectation of quality. You expect to make a reasonable investment and attempt to sell it at a reasonable price, based upon what your customer expects. (Your customer also wants a reasonable return on investment, too.)
However, when it comes to making systems decisions, many retailers make the above ridiculous connections. Often your responses are that someone else sells their system cheaper. Let me give you a hint: You can always find a cheaper price.
If you decide to purchase the cheapest system (and I will go to the bank with this one), then you will install a cash drawer balancing act and an inventory counting system. You will know (1) over and short and (2) shrinkage. (You should be able to control that with a $99 Costco cash register and a piece of paper.)
The second problem with this approach is that “how do you know how much you can afford if you do not know what it will do”? Would you pay $250 cost for a camera with no expectation as to what a customer would pay? What if it turns out to be the disposable camera?
When you make a systems decision, what is your expectation? What will be your return on investment?
What should your expectation be in buying a computer system? If you fit the pattern of most retailers, your decision should focus on reducing inventory investment and increasing gross profits without a negative impact on sales. If the software companies you are reviewing cannot show specifically how that can occur, then an investment in their system will result in “a cash drawer balancing act and an inventory counting system”.
What will be your return on investment? Return on investment for inventory is calculated as Gross Margins divided by Average Inventory at Cost. On a system, it is more difficult to measure, but still possible. Potential gains include:
• Inventory reduction (measured at 30-35% of the cost of the reduction)
• Improved gross profits (increase in GP% multiplied times total sales)
• Increased sales (GP% times sales increase)
• Labor savings
I was once asked by a retailer when he was ready to buy a system and my answer was “.when you determine it’s an investment and not an expense”. For those of you always seeking the lowest price system, you must still believe it’s an expense.
Alan Fisher is the president of Retail Business 101, Inc., an inventory management consulting firm. His company specializes in working with independent retailers on open-to-buy and system utilization. He can be reached at 866-32 RB101 (866-327-2101) or via e-mail at alan.fisher@retailbusiness101.com. Visit their web site at www.retailbusiness101.com
