Saturday, April 16, 2011
The Case Against Category Management – Escape from CM - 2
If you have followed the exercise in the previous post, ‘Escape from CM – 1,’ by the end of six months, whatever number of brands you started with, you should have eliminated 10 to 15 percent from your stock. So if you started with 3,000 unique brands, you should now have 2,550 to 2,700 brands that are producing a little income. You will also have terminated about $6,000 worth (at cost) of death-row brands from your store; ten stores = $60,000.
Exercise 2: The previous exercise was designed to decrease your on-going costs. This exercise serves to further decrease your costs, and is the first step for turning up the heat on your profits. Note: We’ll talk about getting them to boil over and out of the pot a little later on.
Using the same spreadsheet you started in ‘Exercise 1,’ use your turn rates to calculate how many items of each product you need to satisfy NO MORE than two delivery cycles. Our goal is to eventually get as close as we can to having just the right amount of inventory to satisfy customer demand, plus a little safety stock… just in case.
In the end, no more than 1.5 times the delivery cycle should be in each store. In other words, if you currently sell five Snickers of a certain size each day, and the delivery cycle for this brand is seven days, you should have no more than (5 * 7 * 1.5) = 52.5 or fifty-three in your store at the beginning of each cycle. We call this figure ‘preferred on floor.’
A typical 2.07 ounce Snickers comes in boxes of forty-eight bars. Do not accept another box until your stock drops below the (1.5 * delivery cycle) figure. If you get two deliveries a week, the ‘preferred on-floor’ figure drops to (5 * (7/2) * 1.5) = 26.25 or 26. In this case, when you hit twenty-five bars, accept another box. You must draw the line on this. Doing this with one product may seem like overkill, but when you consider you have 2,700 products just like it, it makes the severity of this situation stretch far past the critical stage.
Now I can already hear you mumbling and grumbling from all the way over here. “That’s too much work. I don’t have the time, yada, yada, yada.” Listen, you CAN do this. You just have to get started and it will become a habit. It’s nothing to me whether you do these things or not, but as the friend you don’t know, take some advice and at least make an attempt. I promise you, these exercises will make a substantial difference in your costs and profits. If you only do what you can, I promise, you will see a difference almost immediately, and that will give you the incentive to double your efforts.
Note: Fast moving items are less susceptible to overstock, so concentrate on slow-movers first. If a candy bar turns at a rate of one bar per-week, you can’t afford to stock a year’s worth. If you have more than one store and you can’t avoid situations like this, spread the products around to other stores. In most instances you can do this at no cost. Believe me, it’s worth the effort.
You are going to discover two things right off that you may not be aware of: 1) You are running out of some fast-moving items between delivery cycles because they’re under-stocked and you’re losing sales and profit because of it, and 2) you may have on your sales’ floors, as many as 2.7 years of some items (140 delivery cycles or more). Think about it, would you invest in a CD that paid LESS THAN 0% interest for 2.7 years? Then why keep doing what you’re doing now?
Having too much inventory may be worse than having dead stock, because inventory that does not sell during your delivery cycles cost you just as much as inventory that just sits on your gondolas taking up selling space where other products might sell; PLUS it clutters up your stock rooms, impedes traffic on sales floors, in stockrooms and in coolers; or worse, covers up products making it difficult for customers to find brands they would buy if they were in view.