Tuesday, July 20, 2010

Misunderstandings

Recently, I was explaining to an 'expert' about the necessity of tracking inventory. At the point where I emphasized the importance of knowing how many units of a given item a retailer had on his shelves, he stopped me.

"They already do that," he insisted. Then he jumped up to his chalkboard and wrote the following:

Beginning of the Month

10 Units

Sales

6 Units

Purchases

20 Units

Current Inventory

24 Units


 

I looked at his figures and I said, "You have several mistakes in your equation." He quickly re-added, 10-6+20=24, and he stared at me like I couldn't add and subtract. I grabbed his marker and drew:

Beginning of the Month

5 Units

Sales

3 Units

Purchases

0 Units

Theft

2 Units

Current Inventory

0 Units


 

Then I began to explain: "You didn't have ten units at the beginning of the month. You only had five, because your auditor miss-counted. You didn't sell six because one of them was an overring and two were actually something else that was sold by the clerk with the wrong PLU. And third, you didn't receive twenty units because the supplier sent you something else entirely, and the clerks stole the two that were left, so the real answer is: 5-3+0-2=0 … and finally, why did you order twenty of something you can only sell six of to begin with?"

Now before you laugh, consider this. The truth is even more appalling. The current method of controlling inventory in convenience stores is done like this:

Groceries

 

Beginning of the Month

$12,000.00

Sales

6,000.00

Purchases

8,000.00

Adjustments

-2,000.00

Current Groceries

$12,000.00


 

It's called 'departmental' or 'category management' accounting. How do they determine the cost? The cost can be anything from charging off the amount of the purchases (at cost) for the entire month, or calculating what's called a 'cost ratio', determined by the dividing the purchase costs by the retail value, multiplying it by sales and entering it as one lump sum. Then outside auditors come in and add up the retail value by department and adjust the ending value accordingly; creating a loss or gain, depending upon which way the adjustment goes.

Is it any wonder why convenience store operators don't know what they have in their stores?

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