Sunday, April 17, 2011

The Case Against Category Management – Escape from CM - 3

When we began setting up stores for just-in-time inventory back in 2003, I had no idea how critical the situation really was until I discovered HALF the inventory in every store is either dead, unprofitable or creating an overstock situation. In store after store, we consistently found $30,000 worth of inventory at cost that fell into those classifications. That’s right. If you have ten stores, most likely recovering the value of $300,000 worth of unnecessary junk could send your child to Harvard to get a law degree, or give you enough cash to build another store, or buy a virtual mansion in the finest neighborhood in your city (with maybe the exception of California, Connecticut and Massachusetts).

I have seen situations where suppliers have exerted tremendous pressures to prevent you from lowering your stock. Remember what I said in a previous post: The key factor that allows a supplier to remain is to increase the customer’s profitability on the supplier’s products. If your supplier fights you on these issues he or she IS NOT doing their job. You need to have a serious “come to reality” meeting with your suppliers. You cannot continue to operate in this fashion and remain in business over the next ten years.

In our book, “Turning Convenience Stores Into Cash Generating Monsters,” Jim and I related an event I personally experienced, where a major drink vendor came through the door of a store with an eight-foot train of soft drinks and told the manager, “If you don’t take the entire order, the pre-salesman told me to BRING IT ALL BACK.”

In another instance, the only way a store could acquire a certain brand of cookies was to buy a ninety-day supply in a situation where the delivery cycle was a mere three days. In yet another store, I found enough Orbit Wintergreen chewing gum to last for two years, and in yet another, there were enough cigarette lighters to burn down Yellowstone 1,000 times. Stores have become warehouses for suppliers’ unsalable and overstocked inventory… and that’s the truth.

Back in the day, the number of categories a store could handle were limited by whether a clerk could tell the difference a bag of chips or a screwdriver… I’m not kidding you. Consequently, in most stores, both a spark plug and a soft drink are simply assigned to the grocery category.

Categories and sub categories became commonplace, e.g.  ‘groceries/health and beauty aids/pain killers’. Categories and sub-sub-sub categories expand and collapse faster than Lawrence Welk’s accordion. (He was the guy on TV in the sixties with the bubble machine.)

In an item-level inventory control system, categories are used only for broad overviews and reports, depending upon the level of data required. The CEO may not want to know how many 1 ounce bags of Lay’s Potato Chips a store sold between 3 PM and 7 PM, but the merchandise manager might very well need that information in determining a variety of things he needs to know about potato chips; e.g. Let’s say, prior to a week ago, the smallest size bag of Lay’s Potato Chips sold in a particular store was 1.5 ounces. The merchandise manager decided to experiment and see if he could increase the profit on chips overall by stocking a smaller size. A week later he discovered in both stores the 1.5 ounce chips suffered, but in one of the stores, the less profitable 1 ounce bags’ turns were high enough to result in a greater overall profit than was previously attained with the larger bags alone.

Oh my, I can hear you moaning and grumbling again. “Why would I ever need to know stuff like this?” We’ll one thing’s for sure. Right now if you’re concentrating on just making a profit in the categories, it’s because of the limited tools you have to work with.


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