Sunday, April 10, 2011

The Case Against Category Management – CM in Small Retail Stores

Reading the definitions of CM in the previous articles, I hope I have convinced you that few, if any small retailers are using CM at all.  As Jim and I discussed in our book, “Turning Convenience Stores Into Cash Generating Monsters,” when I began servicing small retailers in 1981, we had to come up with a way to track and report inventory activity in an environment where the actual costs of items were impossible to ascertain. Convenience stores are like other retailers on steroids. In that environment there is a limited amount of space to display retail items. With most stores occupying a selling space of 2,700 square feet or less, items moved in and out of the stores as fast as you could put them on the shelves. The idea of adopting an inventory control system that focused on items, at the time was understandably impossible.

Back in the day, most convenience stores were extensions of local oil marketers, the companies that sold gasoline, diesel fuel and lube oils to primarily gasoline stations, government entities and farmers. The idea of convenience stores appeared to be a way to increase gasoline sales and sell fuel at a higher profit, so many oil marketers began constructing convenience store as fast as they could find a piece of property where they could build one. I had a pretty good idea as to how the inventory should be managed, as I cut my teeth on gasoline sales by wholesalers. In that environment, inventory was handled by using last-in-first-out, first-in-first-out, or a similar method to take advantage of tax breaks. I never liked that method because it was next to impossible to keep an adequate number of pools of inventory to accurately track the costs.

I settled on an average cost method so the marketer could see what he was making on a daily basis and wrote a system to track all the complicated fuel taxes he had to keep up with to be in compliance with federal, state and local taxing entities. The methodology was straight-forward. If you had thirty of something you had paid $10.00 for at the moment in time when you received twenty more for $12.00, you simply multiplied 30 X $10 to get $300, multiplied 20 X $12 which equaled $240.00, added the two results together and then divided the total amount by the total number of units on-hand to get a new average cost. In the above case ((30 X $10) + (20 X $12)) = $540 / 50 = $10.80. Then, everything you sold until you got a new shipment in was tracked at the new cost.

This method worked quite well for many years, and still does in a wholesale warehouse environment. The system was easy to implement even in the beginning when sales tickets were entered into receipt books and posted later by data-entry operators at headquarters.

In the mid-eighties we began installing computer terminals in the warehouses and taught the warehouse people how to create and print customer invoices at their desk; but the idea of carrying this kind of inventory control into the convenience store environment was simply unheard of. Can you imagine entering a coke and a bag of chips into an order entry program while the customer waited impatiently for his change?

So, for the stores we had to develop a different scheme; one that would produce a set of figures as accurate as we could come up with at the time. We called this “Retail Accounting,” as it differed due to the fact that we lost track of the items themselves the moment they were distributed onto the sales floors, and therefore their costs.

Items were de-unitized down to their retail values and placed into categories, e.g. groceries, beer, health and beauty aids, cigarettes, other tobacco products, soft drinks, fountain drinks, deli, etc., etc. If we received $1,200 worth of something that went into the grocery category, we would increase the value of that category by that amount, and reduce the category according to the Z-tapes taken from the cash registers at the close of the shifts.

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