Monday, April 11, 2011

The Case Against Category Management – The Mistakes of the Past

There are several problems we have encountered while managing inventory via categories and I will mention a few of them here:

In a CM environment, the shortest period of profitability analysis is typically month-to-month. In other words, an operator has to wait until an inventory audit is done at each store to determine the profitability for that store. Back in the day, a month-to-month analysis was sufficient when costs were more or less stable and margins were at all-time highs. I’m not saying this was the best practice, but with the technology available at the time, it was the best we had to offer.

Typically, the audit process was (and still is, in most cases) performed by third party auditors who haphazardly storm through the stores like locusts and add up the retail value of the inventory in each category. With the ‘costs’ of the items at this stage being ambiguous, the retail results were all we had to work with: Groceries - $11,245.65; Beer – $5,322.75; Cigarettes - $8,011.50, etc., etc. These figures were retained as the “true” retail value of inventory by category at the end of the current period and became the retail values for the beginning of the next period.

Operators (or their computers) would then take the beginning period inventory at retail, add the purchases at retail, subtract the returns at retail, minus the sales at retail, while taking into account any mark-ups, mark-downs or adjustments, and then compare it to the ‘third party audit’. The results that came from the comparison reflected the unexplained gain or loss within each category.

In addition to shrinkage due to shoplifting, spoilage, errors from supplier invoices and employee grazing, there were mistakes made during the audit process. Other than calling for a recount of the inventory, these errors remained until the next period audit the following month.

There were ALWAYS errors due to several unavoidable factors: The expertise of the auditors, the time of day the audits were performed (usually between shifts), the unintentional skipping of items and in some cases entire sections; not to mention inventory stacked in storerooms and coolers that were difficult if not impossible to count, with some products being completely hidden from view; and last but not least, purchases and sales that came through and went out the door after the audits were performed. All of this resulting in a wild guess of sorts that spanned over a period of months leaving the store owner to operate in the hopes that all of the errors combined would level out to a ‘good enough’ assessment of where he stood at any point in time.

In short, the actual performance of the store was in a constant state of going one way or the other. This was a good thing if, in fact it swung back and forth; but when it continued to swing in one direction or the other, it might be months, in some cases years, before a panic arose and the boss threw a fit and started chopping off heads.

But, even the aforementioned inaccuracy pales in comparison to the inability of knowing what products occupy specific categories or how these individual products are performing. With suppliers constantly redesigning the mix of each of the categories, bringing in new products, raising costs on some items and reducing them on others, the store operator quickly lost control of the category as a whole and had no alternative but to continue doing what he was doing and only hope a profit would mysteriously materialize from actions beyond his control. 

This method of Retail Accounting provides a haphazard way of maintaining inventory by categories, but it’s a transitional method for sure as much better technology has arose that allows us to set this kind of inventory control aside and concentrate on a much more profitable way of accounting for our second, greatest asset – our inventory, with our employees taking the top spot, and I’ll talk about them later.

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