Saturday, April 30, 2011

The Case Against Category Management – Three Current Scenarios

1.       In a category management environment, a supplier may assign a Category Captain to help make decisions regarding the makeup of a retailer’s categories, consisting of not only the supplier’s own products, but of the products carried by other vendors. The Category Captain may receive proprietary information from the retailer. In the past, Category Captains have been accused of price fixing and blocking competitors. Under the best of circumstances, the Category Captain will be biased on which products make their way into the retailers’ stores.

2.       Most small to medium-sized retailers are not large enough to get that much attention from any one supplier, so the mid-sized operators often employ Category Managers to work with their vendors. In even larger enterprises, the Category Manager may oversee a Category Development Team.

Unlike the Category Captain, a Category Manager works for the retailer, but you can’t dismiss the influence a major supplier has over the Category Manager. In most cases, the CEO of the retail operation approves of this arrangement because the supplier’s services are free, and he encourages his Category Manager to develop an excellent working relationship with his suppliers.

In addition to this ‘good ol’ buddy’ relationship, there may also be a dark side. Some suppliers assists the Category Manager with other things as well— like junkets to Maui for golf, a nice widescreen television every now and then, tickets to NASCAR races, weekends in Vegas, and free drinks and admission to private parties at various trade show functions… all in the interest of the retailer of course. The retailer doesn’t mind so much as sometimes he gets to accompany the Category Manager on these all-expense paid trips for events the manager attends. In this case, everybody’s happy… except for the company’s bottom line. It may not be doing too good.  

3.       The third scenario is the most common one of all… short and sweet: The retailer is NOT assigned a Category Captain, and he can’t afford a Category Manager, so he just lets the suppliers battle it out on his sales floors.

In none of the above scenarios can the best interest of the retailer be found. Needless to say, CM is BIG business, and it’s not going away anytime soon. But there is a bright side to this coin. During recessionary times such as these, there is greater opportunity for change and anything different is likely to get some attention. For years, retailers have relied on Category Management in a mass market environment. Maybe it’s the environment that’s changed and CM is merely a victim of the times.

Could be, there are some advantages for CM, if you’re working in a large grocery store environment; but in any case, it’s a poor substitution for item-level control in any retail operation. Suppliers are NOT at fault. We have built our stores to function in this kind of environment, and purposely sidestepped technological advances of the past three decades. While retailers are frying chicken and warehousing their suppliers’ goods, they are also drowning in a sea of red ink. 

Go out into your stores and look at your categories. There’s no better example than the health and beauty aids section: 25 percent of the stuff is making you money, 35 percent is costing you money, and the other 40 percent is also costing you money by just being there. There should be no free rides on your shelves.  Items must pay their own way… not categories.  

Thursday, April 28, 2011

The Case Against Category Management – An Urgent Message To Suppliers


The benefits of creating Managed Supplier Partnerships through the implementation of ‘Vendor Managed Inventory’ are amazing. The latest figures I’ve seen promise an increase in supplier sales of a whopping 28 to 40 percent. Why? Because by delivering the inventory stores can sell, you will be selling more of it; and gaining control of your retailers’ order patterns will significantly decrease your cost of operations.

For suppliers, a retail store is the end of your supply chain. This is where the problem is.  When you start viewing your retailers’ stores as outlets for YOUR inventory instead of being merely customers you sell to, your sales will explode. Your retailers need your help, and those of you who choose to give it, will be giving them something no other vendor can.

We have the tools to help you create a seamless, integrated environment with your retailers and their stock. You will be able to see what’s selling and what’s not, what’s profitable and what’s not, and what they need and what they don’t need; and most important of all, what they will need next week, next month, maybe even next year. This will allow you to plan like you’ve never planned before.

Let me offer an example: As a supplier myself, for over two decades I sold computers and software to oil marketing and convenience store customers. Oftentimes, when a small operator would contact me about my products, I would discourage them because I knew the hand-holding that would be required to support a smaller company would cost me too much money to be profitable.

Eleven years ago, my environment suddenly changed. I stopped selling computers and software and became a service provider on the Cloud. It wasn’t long before it became apparent: Cloud Computing allowed me to service smaller customers as good as, sometimes even better than I had been able to service my larger customers in the past. Why? Because, each node in a client’s company became a customer, rather than simply a department the company itself had to support. I quickly figured out by providing services to the individual stores, small difficulties ceased becoming big problems at headquarters.

I could have never accomplished this in my prior setting. So, rather than hours of trying to explain to one person how they could help another person… help another person, I found I could just take control of the situation when and where it was happening and eliminate a minor issue before it escalated into a BIG problem. And it saved me a huge amount of time and money.

As a supplier to convenience stores, you are accustomed to dealing with retailers that are made up of hundreds, sometimes thousands of smaller stores; far too small to be serviced in your current plan. As a result, by the time you hear about an issue, everybody at headquarters has had a chance to hear the story and blow it out of proportion. When you have a way of knowing what’s going on in each of your retailer’s stores, it will change the way you run your operations.

For instance: if you were to instruct your drivers to pick up merchandise occupying an unprofitable space, you might be able to make that space profitable with something the retailer could sell, providing profit for the retailer as well as for yourself.

When a retail customer has a log-jam of dead inventory, as many of them do today, it’s costing you BIG money.

*****

Wednesday, April 27, 2011

The Case Against Category Management – CM vs. Item Level Control -2


Other advantages of Item Level Control:

1)     The date of the last time you received an item in your store is crucial to determining how long it’s been sitting on your shelves. If an item has sat there for a month without turning, something’s wrong.

2)     The date of the last time a product sold is crucial, because if it suddenly stops moving, it could be something easily corrected that might get it moving again. Maybe it’s been camouflaged by a rack jobber on a previous delivery; it’s a seasonal product and Halloween is over; there are 500 more in the stockroom feeding the mice. Maybe you’re OUT.

3)     As it stand, the profit on the sale of a single item is a complete mystery. How do you know whether you’re making any money from the sales of that product or not? Has the supplier’s price increased and the manager forgot to change the retail; maybe he’s misplaced the label gun; maybe he was asleep when the order arrived; maybe your supplier shorted you a dozen and you paid for items you never got.

4)     How many days do you have left of a product before you’ll be out-of-stock? In most convenience stores today, out-of-stocks occur on fast moving items constantly and you have enough slow moving items on hand to supply customers for the next six months; a terrible waste of operating capital that could be put to better use.

5)     The turnover rate (how many times on average, a product is moving each day) is unknown to most operators. Not only does it serve to calculate days left, it can also be used to adjust retail prices to affect turns and maximize profits. Who manages profits in your company?

6)     The knowledge of how the presence of one item affects items around it is critical, especially when it is cannibalizing a more profitable item or it’s a companion item and its absence or presence  determines whether another product sells or not.

7)     Theft analysis by category on a monthly basis pales in comparison to being able to see theft on items by shift, allowing you to put an end to employee grazing before it bankrupts your company. If employees sense you don’t care about items, it makes stealing them easy.

8)     Experimenting on pricing in real time is only possible if you get up-to-the-minute updates on sales and profits by item. Every item has its ‘sweet spot’, the time when it starts making you money, and every product is unique. Similar items within a category may be vastly different as customers access their value. 

All the above and much more is available in an item-level inventory control system. A convenience store operator is hard pressed to put together a demographic model of his customer base and their buying habits, because there’s too much overview information and practically none that is specific to an item, a store, or its particular neighborhood. 

The CEO of Walmart said, “Retail is detail.” We will take that a step further and say, “Detail is that insignificant can of tuna that’s been occupying space in your store since 2009.” You know the one. The side is bent, the lid has a quarter-inch of dust on it, and your customers side-step it like it was a roadside bomb.

One-third or more of the products in your stores are unprofitable by any measure, and 20 to 30 percent of your inventory is working like the devil to make up for the losses. Do you know which ones are which?

*****

Monday, April 25, 2011

The Case Against Category Management – CM vs. Item Level Control -1


Beginning on page fifty-eight of our book, “Turning Convenience Stores Into Cash Generating Monsters,” available at Amazon.com, Jim and I talked about the advantages ‘Item Level Inventory Control’ offers over ‘Category Management’. We will touch lightly on just a few of those advantages here.

You may be able to find your ‘Last Cost Paid,’ but, what’s the true cost of the items on your shelves today? Lately, my clients have been calling me, confused as to why their fuel profits at stores are so high. The answer is simple, as of this writing, fuel cost are going up faster than retailers can get rid of the cheaper fuel stored in their tanks. 

As the prices the suppliers charge for their fuel increases, these increases are reflected almost immediately on the street. Generally, the reason is, most convenience store operators don’t know what their true cost of fuel is at any given moment in time. So, when the supplier’s cost goes up a nickel, the street price quickly follows suit. For example, let’s say you have one-million gallons of fuel in your tanks for which you paid $2.95654, and today, the trucks deliver 140,000 gallons which cost you $3.00 per gallon. Since the cost has jumped up nearly a nickel in twenty-four hours, the chances are everyone in your area heard of the new costs and your competitor across the way raised his street price by $0.05 per gallon. You of course, follow suit.

Now, let’s calculate the true cost of your inventory at that moment. The formula is (Old_Inventory_At_Cost + Received_Inventory_At_Cost) / Total_Gallons_On-Hand.

Using the above figures, your new cost of fuel would be ((1,000,000 * $2.95654) + (140,000 * $3.00)) / 1,140,000 gallons, or ($2,956,540 + $420,000) / 1,140,000 = $2.96188, an increase of only $0.00534 per gallon­— pretty startling right?

Now, if everybody in town raises their street price by $0.05 per gallon to compensate for the increase in supplier’s prices, in your case that would result in an increase in profits of $0.04466 CPG over and above the profit you would have made if the cost had remained stable. If inflation continued on like this indefinitely, in a few months you could retire; but what actually occurs is you give all of that money back again when the price starts going down. In fact, if the cost of fuel should ever drop by $1.00 per gallon in one day, within a month, listings for convenience stores would overwhelm the market and operators would be going out of business left and right, unless they invested that temporary fortune into something they could get their hands on fast when prices start to fall.

The long and the short of this lesson: We rarely experience this kind of volatility in the grocery market, but our time is coming… very soon I’m afraid. Increases in supplier prices on groceries may create a similar boom in temporary profits, but only if you possess the tools to handle it correctly.

If things remain as they are, my predictions go something like this. 1) Suppliers’ grocery prices will increase and operators will not take notice fast enough, and instead of making more money during inflation, they will suffer catastrophic losses.  2) If they can hang on long enough to wait for the period of deflation, they may be able to stay in business, however the chances are they will over compensate at some point during the inflationary period and drive their customers away.

Regardless of any of this, customers will tighten up on purchases and seek more economical alternatives. In order to survive this kind of environment, operators will need to be careful about raising prices and work hard to convince their customers their prices are not that much more than Walmart’s. Walmart on the other hand, will just build another twenty superstores.

*****

Saturday, April 23, 2011

The Case Against Category Management – Let’s Go Fishing


I have two ponds in my front yard, and the Pearl River running through my back yard. One pond is stocked with brim and catfish, the other with white perch and catfish. The river has everything in it from one-hundred pound catfish to massive turtles as big around as coffee tables. Each fish and each environment calls for a specific bait. The brim prefer live crickets, and I do better with the perch using a tiny yellow jig on a casting rod. Catfish on the other hand are bottom feeders and prefer something REALLY disgusting.

I look at retail stores in the same way as I look at fishing. In order to catch what you want, you have to use the right bait for the environment you’re working in; the main differences being: the demographics are a great deal more complicated, and the customers, a lot more particular.  I wouldn’t fish for small brim with live shrimp as it would be too expensive and the brim would probably avoid it anyway. Likewise, if a customer hounded me to stock Matsutake Mushrooms at $1,000/pound for his convenience, the chances are I might lose his business pretty quick.

Mass marketing Walmart style, may have run its course in the U.S.A. An indication of this may be Walmart’s dismal figures and its experimentation with Walmart Express. Something is happening in America and the big boys are on to it. Shoppers are getting more selective about their purchases and making it harder to be “all things for all people”. Just as there are profitable and unprofitable stores, the same can be said for suppliers, categories, items within categories, and even a retailer’s clientele.

While New York City was struggling to solve the problem of horse manure in their streets, some visionary invented the automobile. He didn’t do this to solve New York’s specific problem. That little caveat was, as they say in Louisiana, “Lagniappe.”

It’s an age old scenario. Some businesses struggle in the quest to solve a particular problem while they miss, often even deny, the existence of available technologies that will eventually demote them to the status of ‘pooper scoopers’ somewhere down the road… dragging their most loyal supporters with them.  Every day, computers are becoming faster and more capable of solving many of our problems, and creating misery along the way. If the IT department for a company does not keep up with these advancements in technology, they are likely to find themselves in similar circumstances. 

Over the past three decades, the chosen environment for most small businesses has been desktop PCs and Windows operating in a Client/Server environment. For many, it’s hard to think there might be a better way to solve their problems. Couple this with the fact most companies have invested heavily in legacy technology, e.g. Client/Server, the tendency to deny the existence of anything that might be better is unthinkable.

As you consider the steps I have suggested in Exercises 1, 2 & 3, you may have seen the trap you have fallen into. You may have said, “Yes, that all sounds very good, but I don’t have the time and resources to devote to such a plan.” If all you know is a fishing poll made from a stalk of cane, you may not be able to envision landing a two-hundred pound marlin in the Gulf of Mexico. Technology will continue to evolve with or without you. In the face of all that has happened in the industry over the past few years, it’s past time to start considering new alternatives. Not only can you afford to consider new management ideas, you can’t afford not to; and with it, the de-emphasis on CM and a far more superior method of controlling your stock.

*****