Sunday, September 26, 2010

The Future of Retailing

The necessity for better inventory control in retail operations is a given. We cannot continue to shove $60,000 worth of inventory in a convenience store and wait till the end of the month to see if it has produced a profit, and we have come to a standstill given the current environment. We need to know what's in our stores, how long it will last, and whether or not an item is profitable. We also need to explore frequent price changes to give customers the impression they are receiving a bargain, reduce shrink and expand product lines within the same selling space.

The next question is, "What avenues do we explore?"

I see three possible scenarios. That is not to suggest there may not be others. I invite you to join in and help me out here:

  1. Follow the Walmart model and develop proprietary, closed-loop systems.

    This will require an enormous upfront investment and maintenance expense involving a rather large IT staff and hardware that retailers do not have at this time. It's not to suggest it's impossible, but technology has to get a whole lot cheaper to make it worth the investment.

  2. Follow the 7-11 model and hire a third party to manage your network and provide the software for you.

    Much more economical than the first option, because the costs can be shared by many thousands of companies. The downside is, it forces you to rely on a third party who controls the cost of the system. Also, the only advantage to the third party is the money you pay them for the subscription service. However, contracts can be negotiated for several years in advance. 7-11 recently renewed its contract with HP Enterprise Services until the year 2012. 7-11 could have adopted the Walmart model, but obviously they felt the cost savings were worth the risk. We have a customer now who is running in a similar model we created with their help.

  3. Convince your suppliers it is in their best interests to provide these services for you.

    I have to say that in the end, I believe this to be the best alternative. My reason is this: Suppliers will profit equally if such a system were offered. I spoke with Nabisco two months before they were acquired by Phillip Morris and they indicated they would be amenable to such a relationship, citing their studies showed them if their drivers were to have knowledge of what products to load on their trucks before leaving the warehouse, it would save them millions of dollars annually.

    A supplier who comes up with a good plan to help manage their customer's inventory on a per item basis would gain an advantage that would be hard to equal, and I predict that someday retailers will choose suppliers according to the services they offer. The benefits would be mutual, with the supplier coming out slightly ahead. It would also be much more economical to implement because suppliers already possess the hardware necessary to do it quickly.

A Brief History of Convenience Stores

Some of you may have arrived here from the Convenience Store News Magazine discussion. I want to be clear that it is not my intention to sell any product or service through these discussions, nor will I tolerate anyone else using our discussion to sell anything.

This is a discussion of ideas revolving around the possibilities of utilizing Cloud Computing in retail industries. Personally I've had some experiences in other retail types of businesses, but the convenience store industry is where I have gained most of my knowledge.

I bring to the table thirty-two years of experience in working with oil marketers and convenience store operators; a few with one or two stores, some with twenty to thirty stores, and some with several hundred stores. I have performed almost every task that can be done in the convenience store environment. I have cleaned toilets and swept floors when employees have refused to do so, ordered inventory, managed employees and provided functioning computer systems in the stores and at the stores' headquarters.

As a result, I have had a great many experiences in the market of c-stores. I know where they are making mistakes and I know where they're not. My emphasis is on inventory control, because from where I sit, the lack of inventory control and merchandise marketing is killing the convenience store industry for the smaller to midsize retailers – those with 1,000 stores or less, and some even larger.

When I started working in this industry in 1978, 7-11's success prompted many oil marketers to get serious about entering the convenience store market. Mostly they were small service stations— selling oil, bulbs, batteries, cigarettes, chewing gum and gasoline. Very few sold grocery items as did 7-11.

Gasoline is what brought their customers to their stores. Putting the bathrooms inside the stores created opportunities to display a limited number of retail items for sale. The retail prices were much higher than the same items sold in conventional grocery stores. The employees that worked at these stores evolved from gas station attendants to cashiers. Most of the inventory came from the oil marketer's own stock. Markups were generally done by raising the cost of items to produce a 30% profit. Many made the mistake of multiplying the costs by 1.3 instead of 1.43, realizing a much smaller profit than they expected.

As stores began to stock more and more non-fuel and less automotive items, operators were reluctant to hire new employees to manage the grocery stock. Stores were commonly laid out over a 100 mile radius, and managing inventory from a central location was difficult if not impossible. They went to their suppliers who agreed to keep the stores stocked. Finding an excellent outlet to sell their stock, suppliers became more aggressive and set up programs to expand the market and bring on new outlets. At first the system worked fairly well, but the sheer volume of inventory being transferred and logistics lessened the suppliers' ability to keep up.

During the late seventies and early eighties, the convenience store industry experienced tremendous growth. Fortunes were made through fuel margins, in some areas as much as 40 cents a gallon.

Then something happened. The major suppliers of gasoline products to the stores began to open up more and more company operated stores, infringing on the independent convenience store operator's market. If you were branded, you were forbidden from competing with the majors. In 1986, Congress closed many of the loopholes in the tax system, and the industry began to experience a downhill slide that continues through today. Walmart exploded in size and developed the world's most efficient inventory control system and then they stepped into the fuel market.

Grocery suppliers began to experience problem of their own. Wholesale prices of groceries to retailers began to rise. Inside the stores, margins which once were much higher began to shrink to 28% then 22%. Today, a convenience store has to be very creative to see a 20% gross profit on overall grocery sales. Organizations, in many cases heavily financed by suppliers with deep pockets, began to exercise influence over struggling retailers, guiding them in directions that served their own agendas.

To compensate, convenience stores were forced to explore other avenues of making up for lost profits. One of their remedies included an expansion into deli. They began to focus on food services- fried chicken, pizza, hamburgers and french fries; even leasing parts of their stores to food franchisees like McDonalds, Wendy's and KFC.

But their troubles were far from over. As costs continued to accelerate out of control, reducing costs became the primary concern of everyone in the industry. The largest controllable costs being salaries and store maintenance, smaller, less profitable stores simply closed up shop, or sold out to Mom and Pop's and competitors. Government mandated wage hikes forced stores to lay off employees, prompting them to maintain a skeleton crew of minimum-wage workers who lived from paycheck to paycheck, unsatisfied with their pay and always looking for a better job.

The downward spiral continues, and today the average convenience store is lucky to see a 2% net profit before taxes. It makes one wonder why someone would invest a quarter-million dollars to realize a profit slightly higher than that offered by banks on CDs. Knowing the history helps us to understand better. If the convenience store industry was suggested today, it would probably never get off the ground.

Retailers throughout the world are facing the same problems. The current economy notwithstanding, the convenience store industry was already in desperate need of reinvention. If we look back into the history of how we evolved, we can see where we got off track and maybe these clues point a way to solutions.

If we look around and see others who continue to be successful, we have no alternative, but to come to the conclusion that they are doing something right and we obviously are doing something wrong. In my view, from my knowledge and experience, the answer lies not only in inventory control, but in other factors involving marketing techniques and attitude.

Henry Ford wrote in his autobiography, "The moment one gets into the 'expert' state of mind a great number of things become impossible."

We must thoroughly examine the techniques employed by other, more successful enterprises and ignore the knee-jerk reaction that they seem impossible in our situation. We must do the opposite, figure out ways to employ their techniques in our operations. We must realize that we are NOT experts. The market changes daily. We are constantly learning and there are infinite opportunities to change for the better.

Saturday, September 25, 2010

Developing a Supply Chain Environment

Developing a SCM environment for one small segment of an industry, say between a convenience store and one supplier, does not constitute a supply chain. It's only one small part of a much larger picture that spans the life cycle of everything you do and each product you sell or use internally.

It's doubtful that a true supply chain exists for any industry at the moment, but we're getting there. It can't be dictated by one single individual or organization. It has to be built from the inside and expanded bilaterally in an environment of non-competitive cooperation. Put plainly: In order to gain admission, we must share information that does not impede our ability to compete.

We haven't even settled the problems of receiving invoices electronically. Suppliers are being asked to exchange information in a never ending conglomeration of formats – XML, EDI, CSV, paper invoice, FAX and even voice mail — and every industry is trying to create their own unique methods of communication. Is it any wonder our suppliers are unable to give retailers what they need? This is analogous to railroad companies adopting different systems of rail widths prior to the Civil War. The Intercontinental Railway pushed our country ahead by one-hundred years, and look at the fortunes that were made during the process. In order for any technology to mature, sooner or later an agreement must be made as to exactly what technology will be used.

Think of the things you are doing now where the costs could be shared by competitors. Obviously electricity, telephone service, roads and public transportation are four of them. What else, and where do we draw the line? To what lengths are we willing to hold on in order to keep what we have now?

So the big question remains: do we want to share information to become more profitable? If so, we cannot continue to operate in our own closed environment and attempt to communicate through endless flavors of disparate interfaces. We need to explore ways to integrate our information in secure, non-competitive environments.

I think history and the Internet have already made that choice for us. If not, you would not be reading this article right now.

Thursday, September 23, 2010

Supply Chain 101

The next time you buy a loaf of bread, think of John Holbrook. He's a guy in Richland, Washington working on new ways to fertilize wheat crops. For consumers, the supply chain goes no further than the retailer where they bought the bread, but without men and women similar to John, bread might be a lot more expensive.

I don't know John, and I hope he doesn't mind me using his name, but John is only one of the hundreds (if not thousands) of unspoken heroes that have an effect in the supply chain with regards to bread.

The retailer's supply chain begins with the wholesale distributor, where the money generated from the sale of a single loaf of bread filters down to pay the scores of employees that manage the stock, pay the bills, sweep the floors, and to the driver who trucks the bread from the warehouse to your store. If there's a baker involved, he adds another link to the chain. The guy that delivers the grain to make the dough… another. Then there's the ancillary links like the printer that prints the wrappers supplied by a paper company, and so on and so forth- all the way back up to John who at this moment knows less about you than you know about him.

We can see the effects of the supply chain in every loaf of bread we consume. The North Dakota Wheat Commission reported in 2008: it took about 20 cents worth of wheat to produce a single loaf of bread— and it's going up. The rest of the costs is spread out over energy, transportation, bakers, advertising companies, marketing, packaging, wrapper manufacturers, labor cost, down to the little twisty that holds the wrapper closed.

The 20 cent figure mentioned above was approximately 13% of the in-store cost of a loaf of bread ($1.50) back in 2008. The other 87% came from all the other links in the chain. These costs are not fixed as there are opportunities to adjust costs at every step. For example: Walmart worked closely with manufacturers and suppliers to streamline their manufacturing and delivery processes, resulting in lower costs to Walmart. The truth is, there is opportunity to work at every level of the chain to affect costs.

A convenience store's common profit denominator is the penny, not the dollar. Every single item in a store should be there for a purpose. Either it produces a profit on its own, or it causes profit to be generated on a sister item. The other side of the coin is it might produce a loss, or cannibalize a profit-producing item next to it. Even if it just sits there smiling pretty, you're paying rent on the space it occupies. If you owned 100 pieces of real estate, how many would you allow to be occupied for free? Most real estate investments are made in income producing property. It really doesn't matter whether it is three acres or three inches.

Don't forget about John. He's working hard on the west coast to help you make a profit. The least we can do is to help ourselves. Go to your store. Pick up and item you have never seen before and ask, "What have you done for me today?"

Couche-Tard The Northern Invasion

Every now and again something comes along that affects an industry in such a way that it creates a paradigm shift within that industry. In my new book, I talk about ‘Tears (holes) in the environment’ that are natural reoccurring phenomena that generally go unnoticed – like when American Airlines created the Sabre System and took control of the air travel industry .  This is another big one.  ‘Okay, so he’s gonna talk about game changers,’ but wait. This is a really good story and I think you’ll find it interesting. 

There’s a big company out there that’s come to America from Canada, acting like a sneaky shark and picking off sleeping convenience store operations left and right, and they’ve been getting away with it for over a decade. 

You know who I’m talking about – Couche-Tard. It’s not my intention to disparage this aggressive enterprise. No, not at all. In fact, I am awed by their actions and hold them in great esteem. They are doing something right. I’m just jealous it’s not someone I know.
So what does Couche-Tard know the rest of us don’t know?

If you do a little research you’ll see that Couche-Tard has read the Walmart playbook and spent millions of dollars forming synchronous relationships with their suppliers and automating their inventory control system. Now they’re gobbling up crippled multi-store chains like hot-dogs at a ballpark.  Couche-Tard has implemented Just-In-Time Inventory (JIT). 

Now, JIT is a magnificent system that’s been around since Henry Ford started using it to make his famous Model T’s. How it works is deceptively simple:

  1.  A customer buys an item
  2.  A replacement is immediately re-ordered
  3. The replacement arrives at the selling place Just-In-Time for the next sale

There are many advantages, but from an expense assessment, the reduction of inventory on hand created by setting up a JIT environment has a huge effect on costs.  For example, Couche-Tard appears to maintain a level of inventory that is about 14% less than the average convenience store operator. According to their website, the company has 3,500 stores in the US operating under the Circle K Banner. If the average convenience store in America has around $60,000 worth of inventory (at cost) a quick exercise in math tells us that 3,500 US stores stock about $210 Million versus Couche-Tard’s $180.5 Million, a difference of around $29 Million and some change. Now these figures are generalized, but you get the idea. 

Another action being performed from the Couche-Tard playlist is more frequent store deliveries. Okay, so they have their own distribution centers, but things didn’t start out that way. In efforts to further reduce inventory in the stores, the company has implement robotics in their distribution center to pick single units. 

There are certainly other tools available in this Canadian company’s arsenal, but a paradigm shift has occurred and if it continues to go unnoticed, the American convenience store industry is in big trouble.

Friday, September 17, 2010

How Our Supply Chain Works

  1. A customer comes to your counter and purchases a drink and a bag of chips.
  2. Within seconds, the transactions are on their way to a leased data center located in Colorado, Wyoming and California, decrementing the quantities of each item in your store.
  3. The Re-order Level of each product is checked.
  4. At the data center, the instant the On-Hand quantity falls below the preset Re-order Level, a Purchase Order is generated equal to the minimum order mandated by the supplier(s).
  5. The Purchase Order is sent to the supplier.
  6. At the data center, the On-Order field is incremented to prevent new orders to inventory already ordered.
  7. On delivery day, the supplier picks the items needed and loads them on his truck.
  8. An Inventory In Transient record is logged at the data center, accessible by the supplier, the store's headquarters, and the store itself.
  9. The inventory arrives at the store where it is scanned upon arrival.
  10. The data center compares the inventory received to the Inventory In Transient notification and any discrepancies are logged and immediately reported to the supplier and to the store's headquarters.
  11. An invoice to the supplier is created and logged at the data center.
  12. The retail price is checked, the average cost at the store is recalculated, and the retail price is adjusted to compensate for the changes in cost. New items are priced according to a preset mark-up percentage by category.
  13. The data center sends the new retail prices and new items to the POS.
  14. The inventory is placed on the shelf.
  15. On the due date, the data center generates an ACH to your bank which results in an electronic payment to your supplier.

Sunday, September 12, 2010

Marketing the Supply Chain

"The undirected worker spends more of his time walking about for materials and tools than he does in working; he gets small pay because pedestrianism is not a highly paid line." – Henry Ford

With regards to any discussion involving Supply Chain Management (SCM), the above quote seems appropriate to all of them. Henry Ford was a simple man, but a brilliant one. Born in what is today, Dearborn, Michigan, he spent his early years doing chores around the family farm and later aspired to the job of Chief Engineer for the Edison Illuminating Company. Soon after his marriage to Clara Bryant at the age of 25, he supported his family by running a saw mill. He was a patriotic American, a hard worker, a devoted husband, and a loving father — just like many other men of his time. But Henry Ford was different.

Ford Motor Company came into being in Detroit in 1903. While serving as Vice-President and Chief engineer, the fledgling enterprise produced only a few motorcars a day. Ford is best known for building the Model T – the flagship of the Ford Empire, initiating a new era in personal transportation. In an environment well suited for what we now call SCM, the Ford Motor Company constructed the largest complex in the world of industry on the banks of the Rouge River in Dearborn. It included a steel mill, a glass factory and an automobile assembly line. Iron ore and coal were brought in on Great Lakes' steamers and by railroad, and used to produce both iron and steel. Rolling mills, forges, and assembly shops transformed the steel into springs, axles, and car bodies. Foundries converted iron into engine blocks and cylinder heads that were assembled with other components into engines. By September 1927, all steps in the manufacturing process from refining raw materials to final assembly of the automobile took place at the vast Rouge Plant, characterizing Henry Ford's idea of mass production.

He was a man with a dynamic personality and a workaholic to boot. But what he really was, was the father of time-management. After he became proficient with the creation of automobiles, he watched his assemblymen perform their work, and a kind of madness crept over him. In his mind, he began to slice their movements into smaller and smaller pieces; he began to analyze his workers as a microbiologist might study an elephant as being a collection of electrons, revolving around protons and neutrons to form molecules, with DNA guiding the formation of cells using proteins and enzymes to construct tissue, organs, muscle, and bone. Yes, Henry Ford viewed his enterprise as a microcosm of manufacturing that he insisted on managing down to the lowest common denominator.

There is no doubt in my mind that Henry Ford could describe not only the location of each of the 5,000 parts that made up his creations, but for hours he would discuss each part's purpose in great detail. Even today, there is not one man-made creation that does not begin with a single element that is expanded upon to form the whole. Henry may have started with the idea of building a motor car, but someone, somewhere within his organization had to grasp the first piece of tangible steel and connect it to another, and then to another and another. By following a precise, step-by-step procedure, 5,000 individual parts sprang to life and became a functioning machine. If it performed without error, the plan was considered to be viable, and other machines were built in the exact same way. If a subsequent machine did not function as the others, it was a certainty that at some previous step in the production process, a deviation in the plan had taken place, and by a process of elimination the machine would be inspected through actions of mental and physical dissection until the mistake was discovered and corrected.

Later on, all products were produced in that way. From buggy-whips to televisions, you could go to Sears & Roebuck or to Montgomery Wards, purchase just about anything, and you could expect it to last a lifetime. When something broke, it could be fixed. If you wanted something new, you would just wait until the old one wore completely out before obtaining another – which might take decades.

Today, almost everything we buy is disposable… televisions, radios, CD players… even computers are considered not worth the effort of having them repaired. The boom in American manufacturing has changed our perception of 'value'. Today, we make things so quickly, before you can get a computer out of its box, it's already obsolete. Whether planned obsolescence is a purposeful action or a side effect of mass production is a moot point. It has planted itself into our culture as surely as if it were written down in a set of laws we are forced to obey. We accepted this new way of life because it's cheaper. As a result, when something breaks, we just throw it away and buy another. We have been trained and educated to overlook quality in preference of price.

Businesses are run by boards and stockholders who think only about profit. They have no understanding of the original mission or the plan that created the enterprise they serve. They may not have even been born when the enterprise started. They only care when a factory is not making a profit - close it. If a product has stopped producing cash – add the text "New and Improved", re-price it, or simply discontinue it. When an employee is not performing to expectations —fire him or her and get another one. Or better still find a machine that can do the same job cheaper. We have turned this throw-away mentality into assumptions that guide our every action.

Men and women long for change, but change terrifies them. They hunger to make things better, but are afraid they will make a mistake which will result in ridicule from their business associates. Any outrageously popular idea is adopted with no thought whatsoever as to the outcome. Do you remember the idiom? "No one ever got fired for buying IBM." They make short term investments and demand immediate results. They will never understand, as Thomas Edison did when he tested 7,000 materials before making a success of the incandescent light: We MUST fail in order to succeed. This fear of failure guides their actions more than they know. New ideas that come about are too soon flagged as 'nonsense', too hard to implement, unnecessary and unpopular. Yet, it is the pathfinders that earn the big bucks. The early adopters reap the lion's share of the rewards, and only when proven, the 'me too' crowd picks up the scraps, usually when it's about to be replaced by something entirely new.

Attempting to get companies to adapt to Supply Chain Management (SCM) is like herding cats, because it deals with the intricacies that make up an enterprise. Henry Ford understood the advantages of managing the supply chain. Sam Walton did too. Both these men grew up in a different world than those who we deal with today. They came from a world of hard times, sacrifice, struggle, overcoming resistance and chancing ridicule. Today, CEOs live by the mantra of volume instead of quality, immediate profits as opposed to longevity, and gimmicks and tricks in an effort to gain customer loyalty.

Henry Ford understood you have to get up close and personal to the basic elements of your business in order to fix things when they fall apart. Today, you have to treat every product you handle as if its importance was a life or death decision. Colleges and universities don't teach you what it's like to crawl in the dirt, sweep the floor when it needs to be swept, clean the toilets when they need to be cleaned, help an old lady carry her purchases to her car when she's too old and feeble to do it alone. Too important to get their hands dirty, today's leaders are afraid to peer into the bowels of their organizations. As a result, it is difficult for upper level management to understand SCM. Retailers in particular, have adopted a strategy of passing the buck, allowing others to tell them what products they need to stock and believe that a miracle will occur and gold will begin to pour out of their stores. Is it any wonder so many are going broke?

There are countless elements of SCM that make it difficult to view as a complete environment. A multitude of systems – mechanical, electronic, manual and philosophical must come together in order for SCM to function. Yes, manual and philosophical elements must be of concern because all parts make up the total systems solution. I like Patricia's phrase 'intensive cooperation' because it explains exactly what's wrong with the supply chain today. Sometimes we learn so much about a system we feel others should understand as easily as we do. We must never forget that our passion to further the advancement of Supply Chain Management is of no concern to the individuals we are trying to steer to our way of thinking. Their concern is to solve problems and increase profits. So when we discuss SCM with others, we need to relate it in a way that does these things specifically.

Friday, September 10, 2010

First Run at Forecasting

This is the first in a series of articles discussing the art and science of forecasting. A 'science' with regards to the mathematical formulas used in determining needs, and the 'art' of applying assumptions that defy all attempts at computerization.

Forecasting may consists of multiple systems addressing multiple objectives. For example, merchandise planning, labor management, planograms, replenishment and allocation – each deserve a slightly different approach. In short, forecasting should be a single objective driving multiple actions.

Grocery stores, having huge categories, may use forecasting to forecasts categories in a non-product specific environment. Small retailers, such as convenience stores, who often have smaller categories when subdivided into types such as chips, cookies, candy, etc., are more suited to forecasts by specific items. Although Category Management (CM), with regards to convenience stores, may be important in determining and maintaining product mix, once the proper mix has been established, CM provides no help whatsoever in forecasting. This type of forecasting is called 'demand forecasting' as opposed to forecasting at the category level.

Demand Forecasting uses three major sources of history. The first consisting of orders generated for the stores and/or inventory receipts. The second is the scanned data from the Point-Of-Sale (POS, or cash register). The third source is frequent and timely audits. In order to be accurate these functions must be networked in real time, else the disposition of the inventory will always be a wild-guess and contributes to over-stock and out-of-stock situations. Suppliers have a bad habit of replicating the last order with no regards to the actual stock on hand in the store, oftentimes selling the store operator inventory he does not need. It's estimated that the average convenience store has invested in 100% more inventory than needed to meet customer demand. Given a limited amount of space, this means the average store could operate in 50% less space or double its product lines.

Items that move less than once per week are called 'slow movers'. Discounting items that are 'dead', slow movers probably occupy 50% of your inventory. If you invest a dollar in something and it takes a year to sell it, it's costing you money. It makes no sense to display a box of twenty-four candy bars that will take you eight months to sell. One of the primary reasons for overstock can be accredited to minimum order levels imposed by suppliers. Redistribution of slow movers might save you a bunch of money. You don't need a bunch of delivery trucks to redistribute. Put them on the store supervisor's desk and have him drop the products off when he makes his rounds. Other reasons for slow movers include out-of-season and cannibalization by other products.

Items which are classified as 'good sellers' in the morning may become 'slow movers' for the rest of the day. Dropping the price later in the day can put more money in your pocket. This is difficult to do if you don't have an intelligent pricebook linked to your POS.

Not having an efficient way to notify suppliers that you want to discontinue certain items can be another big drain on your cash. I once worked in a store that had 1,000 days of Orbit Wintergreen chewing gum stashed under the cigarette display. The last time I looked, the pile was still growing. If the supply doesn't know what you're selling, he assumes you're selling the inventory because your store manager simply puts the order in the stock room or hides it under the counter. The lack of communications between your convenience stores and your suppliers may be killing you.

Seasonal items are one of the greatest contributors of excess inventory because a supplier will generally deliver too much of it to every store. If it concerns only one store, the situation is manageable. But if you have fifty stores receiving the same amounts of inventory, it can lead to disaster. Out of season inventories should be warehoused so they can be used to restock the store(s) when the season comes around again.

Cannibalization of products can wreak havoc on a Category Management system because the little savages are difficult to identify. You may notice a category's sales have suffered, but that's all you know. If you don't have a way to audit individual items, I would suggest you have someone physically revisit the category and pull or re-price items that appear to be priced too low. Of course the obvious remedy would be to switch to an item-level method where you could monitor the effects of cannibalization in real time.

Here's another neat trick that can put extra dollars in your pocket. If your supplier imposes a minimum order on you which will take you eight weeks to sell, ask him to deter payment until the following month. It won't take him long before he gets the message and cuts your delivery in half. In other words, sit down with your supplier and remind him, these are difficult time, and you can't afford to pay for items in June, when you can't get your money back until Christmas.

Some items don't sell well enough to justify their being on your shelves, but you have to carry them because customers expect them to be there. Quite often they will switch from being out-of-stock to "Oh my God!" On these items you will need to adjust your forecast to zero in on the best profit that can be gotten from those items.

Tracking the value of promotions is difficult if not impossible in a category management environment and the reasons for an increase or decrease in an item's movement may be ambiguous. Was it cold? Was it hot? Or, was there a local football game nearby? In addition, the life cycle of a promotion can be effected by the promoted product, a companion product and/or a cannibalized product. By having the ability to monitor promotions in real-time, it will be easy for you to identify whether the promotion was good or bad.

Collaboration in Supply Chain Management

Measuring performance to select and evaluate suppliers
Contributed by Patricia Guarnieri


When we consider, in a supply chain environment there are two or more independent companies working jointly to align their processes, in order to create more value to end- customers and stakeholders, we realize it only works if companies involved act as a single entity, which means that companies must collaborate intensively. Actually, companies involved in the supply chain agree that joint decision makes it preferable to enhance profitability for all partners. However, it is important to point out when companies collaborate, they need to share responsibilities and benefits to create sustainable competitive advantage.

Although we know that trust and information exchange between manufacturers and suppliers, mainly regarding information about demand, are essential factors in the supply chain, making it is possible to perceive a large disparity between the potentials and the practice. In many cases there is bargaining power which does not allow both partners to reach the existing benefits. Informing the suppliers in real time about the demand, makes possible the fast requests of raw material, without delaying production and avoiding stock-outs, but this is possible only if the members of the supply chain have the similar culture about collaboration, which means that partners should cooperate intensively.

Continuous replenishment programs have been used as a solution to achieve collaboration among companies through intense information exchange. One successful example is the Procter & Gamble case, which controls the stock management for its retailers and receives information about retailer inventory levels and demand conditions in real time. Moreover, through this higher visibility of customer demand, Procter & Gamble experienced a five percentage point increase in perfect orders, less variability in retailer orders, and reduced delivery expenses by being able to utilize cube space in transit. At the same time, its retailers obtained benefits such as an increase of over 100 per cent in inventory turns, inventory levels were significantly reduced, service levels increased, retail sales went up 2 per cent, and storage and handling costs were reduced.

Another successful example is the Zara case, a fashion retailer which synchronized its global production networks with customer requirements in order to give a quick response to the changing tastes of fashion customers. You can imagine how this is important in this market segment. Therefore, as we can perceive through this examples, it is possible to truly collaborate in the supply chain in order to reach mutual benefits.

Nevertheless, many managers could ask: How can I trust suppliers while sharing strategic information with them? How can I choose the appropriate partners to share information? The answer is in the main factor pointed out in this article, which is: the importance of selecting and evaluating appropriate suppliers in supply chain management. To begin, it is important to consider, before you choose the right partner to collaborate, it is necessary companies define criteria to measure the individual partners and overall supply chain performance and, during this process it is essential there is continuous feedback to improve these indicators.

Through these indicators it is possible to monitor partners and implement improvements in various aspects, including reducing costs by eliminating wastes, continuously improving quality to achieve zero defects, improving flexibility to meet end-customer needs, reducing lead time at different stages of the supply chain, implement strategic partnerships… and so on. Indeed, manufacturers prefer to manage suppliers via different methods such as supplier development, supplier evaluation, supplier selection, supplier coordination, in order to forecast customer demand precisely. More and more, there is a growing importance of cross-functional team involvement in supplier selection and evaluation, because this process influences overall company performance.

Moreover, collaborative performance metrics are required to guide members of the supply chain in evaluating whether or not their actions are truly contributing to the global goal. These indicators consist of a set of metrics that identifies how the progress of collaboration is going.

It is important emphasize, during the criteria formulation process to select and evaluate suppliers, the main task for companies is assessing the key competitive factors in their segment to translate these factors adequately into a strategy. There is no 'success formula' to choose the appropriate criteria, for this reason, companies must study carefully which criteria to select to represent their competitive strategies.

I have researched some articles published over past years regarding the main criteria used to select and evaluate suppliers and I organized it below, in crescent order according to their utilization:
1) Price; 2) Quality; 3)Delivery; 4)Warranties and claims; 5)After-sale service; 6)Lead-time; 7) technical support; 8)Net price; 9)Training aids; 10) Attitude; 11) Performance history; 12) Financial Position; 13)Geographical location; 14) Management and Organization; 15) Labor relations; 16) Communication systems; 17) Response to consumer requests; 18) e-commerce capability; 19) JIT capability; 20) Technical capability; 21) Production facilities and capacity; 22) Storage transport; 23) Operational controls; 24) Ease-of-use; 25) Maintainability; 26) Amount of past business; 27) Reputation and position in industry; 28) Reciprocal arrangements; 29) Product development; 30) Flexibility; 31) Environmentally friendly products; 32) Product appearance; 33) Catalog technology; 34) Environmental responsibility; 35) Company size; 36) Packaging ability.

Of course, there are many other criteria that could be quoted here and we should consider the applicability of these criteria depends on the product or service offered and the market for which it is targeted. The companies in the supply chain should monitor supporting metrics in order to measure the individual and overall performance of the supply chain continuously.

To conclude, I want to emphasize: Performance metrics support managers in the decision making process and help partners in the supply chain to have uniformity. As a result, if the manufacturer/retailer wants fast delivery of certain products, the supplier will be able to fulfill this request. At the same time, downstream suppliers can require upstream suppliers to provide a similar service.

The consequence of this uniformity will be the overall improvement of supply chain performance and best responses to end-customers.

The Importance of Price Control

If you've been following along, I think most of you will agree, the key to increasing profits in your store is to increase profits on the items you sell. This involves 1)getting more 'valued' customers to shop in your store, 2)using 'specials' and 'deals' to bring an aura of excitement to the shopping experience, 3)having happy and helpful employees who greet your customers and make them feel welcome, and 4)the rather complicated process of effectively raising and LOWERING the margins on each and every one of those tiny little machines that generate cash. To borrow a phrase, you can't row a boat without making waves.

I talked more about how we do that in previous blogs, but first you have to switch your brain away from Category Management thinking to Item-Level thinking, else it will be difficult to understand in this new way.

Let's start by revisiting the Category Management (CM) environment. For one thing, CM is not working in today's market. Convenience store retailers have experimented with breaking their categories (or departments) into smaller and smaller pieces, creating sub-categories within major categories, like 'Groceries' or 'General Merchandise'.

Under 'Groceries' they may want to track 'HBA' separately from 'chips', and 'energy drinks' separately from 'drinks', etc. It's been my experience that operators dream about dividing their categories into smaller and smaller pieces so they can track them in an effort to maximize the profit in the overall categories.

One of the problems with creating these new sub-categories where employees are not scanning, they will find it difficult to recognize an 'energy drink' from a 'Pepsi', or understand a car air-freshener belongs under 'Automotive' rather than 'General Merchandise'. The results have shown that sooner or later, the idea of breaking these sub-departments has caused far greater problems than it has solved. Most retailers have gone back to four or five basic categories that are selected in accordance with the capabilities of the newest, least trained employee in the store.

  • Groceries
  • Cigarettes
  • Beer
  • Soft Drinks
  • Deli

On the other hand, Item-Level inventory control makes us focus on each and every item in the store. Software designed to run in a CM environment just doesn't work.

If you have only one store and sleep and eat in it, you may be able to manage your inventory by item. It depends on how much time you put in it; but for the multi-store operator, it's a very time-consuming process and you are going to need a more complicated array of tools that do almost all of the work for you.

Almost everything in your store is priced incorrectly and the correct price varies by dozens of factors — among these, time of day, day of week, the season and the neighborhood. I gave an example earlier of how one flavor of ice cream outsold another of the same brand in one neighborhood and how it was the exact opposite in another area located only two miles away.

Other, less common factors that call for the need to pay attention to retail prices include, how well the product is marketed by the manufacturers, economic conditions, competition among other products in your store, the overall image of your store, and the sales abilities of your employees, etc., etc.

As an example: If you want to drive traffic to your store, imagine you place a sign out on the street that flashes:

One-Hour Special!
20 Ounce Coca Cola – 39 cents

Do you think that would drive customers into your store? Of course it would. But you don't want to take these losses for an extended period. The goal is not to sell Coca Cola below cost. It's bait to catch the right customer. And the beauty of this is you can see the results right away. Was the experiment profitable or did it cost you money? By looking at the average overall profit moments after the experiment occurred, you can decide on whether you want to try this again. But you can't do the same thing all the time. Having the tools necessary to schedule these kinds of experiments and then analyze the results and hour later gives you another powerful tool that could not be performed without them.

Let's take it a step further. What if you could change the sign every hour without getting up out of your chair? Yes, you can do that NOW and with the profit generated by companion products it might not cost you a dime. One thing it would do is that it would get customers into your store you have never seen before; and most important of all it will create an environment of excitement and you would get the added advantage of 'word of mouth' advertising. A kind of promotional technique you can't buy at any price. You might even get a local television news crew out there to do a story on it.

The secret weapon is 'Price Control'. It's one of the major factors that made Walmart the largest retailer in the world.

Saturday, September 4, 2010

Push versus Pull

Does it make good sense that convenience store retailers should order what they can sell and not order things they cannot sell? That's a dumb question, right? Who orders stuff consumers don't want? Well, I'm sad to say… just about everybody.

One purveyor of unsellable products in your store is called a 'shipper'; but the worst contributor of unsellable products is not a shipper. It's a supplier who is allowed to PUSH product into your store. As I mentioned earlier, 10 % of the inventory in your store (on average, about $6,000 at cost) is not only NOT selling, it's occupying space where items that could be sold might be placed.

Let's assume a typical store's general merchandise, groceries, sodas, chips, etc., turns about eight times per year, producing a gross profit of a little less than $170,000. Now let's go back to the $6,000 that's not selling. Assuming an average markup of 1.43 (set for a 30% profit), (Cost_Value*1.43) = $8,580 retail * 8 Turns/per year makes up a total loss in sales $68,640 per store. Assuming the same 30% profit margin, it's a net loss of $20,592 per store. Seeing things in this light, would it be worth your time to replace the dead stock with items that would sell?

Items that are not selling should be sent back to the supplier for credit, or you can try getting rid of it for ten cents on the dollar, because no matter how long it remains on your shelves you will never make a dime out of it.

Products are tiny little machines that should be generating cash. While deciding on the correct retail price for an item may be a complicated process, tossing broken cash generators and replacing them with products that sell is a no brainer. But if that's all you do, six months from now I can guarantee you'll find yourself in the same situation. In addition to tossing unsellable stock, you need a plan to stop it dead in its tracks before it darkens your door.

By examining your scan data and comparing it to what's on your shelves, you can easily target the items for extinction. Next, be sure your supplier gets a list of these squatters and understands you will no longer pay for those items if they should show up on an invoice again.

Cleaning house.
Convenience store operators can no longer afford the luxury of having dead stock on their shelves. The first thing you should do is to have an understanding with your suppliers regarding "what happens to stock that does not sell." However, since we have proven having the ability to return unsellable stock is not the answer to solving the problem of the stock cannibalizing your shelf space remember, most suppliers do not have the software to track their inventory efficiently, therefore, in most cases you are going to have to do it for them. Items that do not sell for twelve months should be considered dead. You need to get it off your selves immediately lest someone actually buys some of it and you accidentally order more.

There are several additional methods being employed to rid a store of dead stock. One is to lower the price and train your clerks to sell it. Compensate them by putting the net profit in a pool and dividing it up among them. You can also bundle it with a top selling item. You might even consider having one employee in your company appointed as the 'dead stock manager'. You could design a clearance area where everything on a certain table is on sale at 80% off retail. As a last resort, you might be able to donate it to charitable organizations for a tax deduction, but whatever you do, get rid of it.

According to a recent study 80% of all new products do not sell. For every ten new items you suppliers PUSH into your store, eight will not sell or it may cannibalize good sellers already on your shelves. Several things to consider before allowing a new product to be put on your shelves:

  • Consumer Value Proposition – Is the selling price likely to produce sales?
  • Transaction Count, Transaction Value and Gross Profit Margin.
  • It's assumed effect on existing products, both competitive and non-competitive.
  • Manufacturers' and/or your supplier's ability to resupply in a timely fashion.
  • Will the product be advertised and promoted well? Are you being used as an alternative to proper research?
  • If the product is intended to replace an existing product, is there a reasonable depletion plan being offered?
  • Products that do well in some areas may not sell in others.

LIMIT the count of a new product. Depending on the item, you may only need a few to test. DON'T accept a case of something you know nothing about no matter the discount. I would rather buy three of something at a higher price and sell it for cost, as opposed to getting stuck with a case of unsellable merchandise. If the first few sell well, then I can order more. Example: Let's say you accept three items and it takes a week to sell them, at least you have a good indication that a box of twenty-four would take eight weeks to get rid of. I have seen as much as 1,200 days of a particular item clogging up gondolas. After three years, not even employees will try to steal them.

Suppliers may not know what they're doing is dishonest. Times have changed drastically since the convenience store industry flourished into existence. Their job is to make money for themselves. You provide a convenient outlet for their inventory. Presales men and women have tremendous pressures put on them to move inventory out of the warehouse. In many cases, the difference between a computer salesman and a supplier is: A supplier KNOWS when he's lying.