Saturday, March 26, 2011

Advantages of Cloud Computing– Part XX – Obsolete Assumptions

In 1984, a wholesale client introduced me to a new line of thinking. The conversation resulted from my emphasis on the importance of profit analyses. He disagreed. His primary focus was on purchases and he expected his sales department to average a thirty-percent profit. Based on this assumption, if he set his profits at thirty-percent, he could extrapolate the volume of inventory he needed to acquire in order to make enough gross profit to run his operation and pay his taxes, with a little left over for growth. For example, to make a gross profit of one-million dollars, he would need to purchase $2,333,341 worth of inventory (at cost) over the course of the year and he fully expected his salesmen to sell the inventory for $3,333,341.

Eight years later, during a visit with another client, I was looking at the results from a printout as his computer was processing his daily sales. I was alarmed to see the profits from his bulk plant sales. It was apparent my client was losing money on almost every sale of lube oil. Just then, my customer came into the computer room and asked me what I was doing. I expressed my concern over lube oil profits and his response was, “I need the volume.”

If you examine these two scenarios, you can see the correlation. Between 1984 and 1992, fluctuating profit percentages began to challenge the assumptions of both distributors.

During times when profits were deemed ‘acceptable’, many retailers relied on sales figures to measure the health of a company. Today, these figures don’t mean what they used to. In a business where ‘costs’ are only calculated at the end of each month, based largely on retail audits of stores’ inventory, the reasons for lost profits are unclear. Expecting store managers to inform them when costs increase is an unreliable method of telling us whether we are losing money or not.

In order to be profitable, we need to know beforehand when we are going to lose money on future sales. The best time to do this is before the inventory is placed on the shelves; however, a convenience store environment makes this difficult, because when totes are received from suppliers, in order to recover clutter, too often the inventory is scattered throughout the store before the store manager has time to check what was received against the invoices left by drivers. There is a better way.

Invoices should be electronically distributed by the supplier prior to the inventory’s arrival at the store. This is where cloud computing comes into play. Walmart allows their suppliers to look into the stores’ inventory before an order is picked. How do they do this? The stores share their inventory volumes with their suppliers. In a system such as ours, a supplier can examine not only the contents of the store, but they have privy to the number of day’s left of the inventory that is there.

Several events have occurred over the past eleven years that have caused me to envision the absolute necessity of shared information between retailers and suppliers.

In the fall of 2000, I received a call from Nabisco. They had read an article about our system in the New York Times and said they would like to explore the possibility of installing a just-in-time inventory system in their 100,000 customers’ stores. They concluded that the ability to let the driver know what to put on the truck before he left the warehouse would save them “millions of dollars.” Unfortunately, Phillip Morris acquired Nabisco December 11, 2000 and the line of dialogue we had with Nabisco evaporated into thin air. I have often wondered how my life, and the lives of my customers would have changed if it were not for that unfortunate event. However, it only strengthened our resolve to move forward with our plans.


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