Tuesday, May 31, 2011

The Case Against Category Management – SRDC and Suppliers -1

Suppliers can be connected to the SRDC computers in the same fashion retailers and stores are connected; however, because most suppliers operate in an environment identical or similar to SRDC’s, the connection can be equally efficient. NOTE: Our retailers are using our computers, so they are already integrated.

In our book “Turning Convenience Stores Into Cash Generating Monsters,” Jim and I delve deeply into the issue of “Interfacing vs. Integration,” but to put it simply, ‘interfacing’ is a connection in which computers trade information, and ‘integration’ involves a situation in which computers are actually working together in a real-time environment.

Here are two simple examples:

Interfacing: Let’s say I prepare a collection of data, whether it be an invoice, a list of inventory items, sales, or names and addresses, and send them to another computer through a format such as, EDI, XML, NAXML, CSV, XLS, flat-file ASCII, etc.; at the moment the transactions are sent and received, our computers are loosely connected through some type of interface, oftentimes referred to as a ‘parser’.  If we decide to change the attributes of the data on either side, parsers need to rewritten by computer programmers on both ends.

Integration: If the data is located on my computer and our computers are integrated, we both share the same copy of the data. If you change the data on your computer, the data on my computer is also changed. Integration precludes the necessity for EDI, XML, etc., and the elimination of the need for any kind of parser. It also solves another problem: It prevents the need for ‘synchronization’, because there is nothing that needs to be synchronized.

The reason most computers today cannot integrate, is because they are dissimilar in the way they function which make any attempt at integration impossible. Someday, ALL computers will be integrated; but today, integration is limited to only computers with similar data processing environments.

Case in point: In 1985, I wrote an interface for one of my customers to interface a GasBoy pump to our accounting system. Everything worked perfectly until the GasBoy technician upgraded a chip in the pump, resulting in billions of dollars in charges appearing on customers’ statements. It took us two weeks to get the information we needed to fix the interface. I’m sure you can imagine the turmoil it caused.

Interfacing only works if all parties synchronize their parsers. In the past, changes in data have been successfully used to purposely destroy a competitor’s ability to function. In an era when every software company was suing every other software company for copyright infringement an illegal competitive activities, there was a rumor: When Microsoft decided to compete with Lotus 1-2-3, there was a sign at Microsoft headquarters that said, “DOS ain’t done til Lotus won’t run.”  

PCATS is an ‘interfacing technology’ to do the best it can to make it appear there is some form of integration going on, but no amount of interfacing can offset the advantages of integration. If you would like to know more about this subject, you can Google “integration versus interfacing” and you’ll find millions of discussions, far too complex to get into here.

The lowest form of interfacing, the paper invoice, has served to paint how retailers are forced to work with their suppliers, and for this purpose, electronic invoices serve to lessen the time it takes to handle physical documents. Most retailers who receive invoices electronically must continue to use Category Management, because rarely do suppliers send valid UPC codes with their invoices, and even if they did, very few retailers have the ability to track items. We have been successful in changing all this.


Saturday, May 28, 2011

The Case Against Category Management – A Radical New Idea -4

The excess inventory you have in your stores is bringing down the value of your company. When a vendor brings more items than you can sell, he’s hurting you in several ways: First, he relieves you of some of your precious working capital, and to add insult to injury, he’s decreasing the value of your investment and taking up shelf space that should be making you money.  

Your store is an investment. You invested your money and your time into a piece of real estate that’s supposed to provide income for your employees, your banker, the government, and hopefully if there’s anything left, you get to take a little bit of it home.

Let me share some facts: In 2005, Walmart’s inventory growth was almost 90 percent when compared to sales growth. In 2007, Walmart started a ‘Deload Program’, designed to get inventories back to where they were before they started to rise. As a result, Walmart reduced their inventory growth to 12 percent of sales growth and increased their cash flow by 25 percent… and their stock prices started to rise. A report by Dan Gilmore at Supply Chain Digest tells of a similar project to lower inventories by Home Depot that was expected to create a $1 Billion cash flow bonanza. 

But inventory growth is only part of the problem. Stock that’s just sitting there is inflating the level of growth by raising its base, and over a period of time reducing the growth has less and less effect.

So, how do you solve this? It’s easier than you think. You simply need to reduce inventory growth relative to sales and get rid of the dead stock. Every dollar in inventory reduction, leads to a dollar reduction in working capital requirements.  You may have heard the old saying: “In times of recession, cash is KING.” That’s never been truer than it is today.

Soon, I hope to show you how to lower the value of your inventory by as much as 60% and still have more product than you need to meet customer service levels. I can’t tell you about it today because there are several things coming into play that prevent me from revealing everything just yet. Then, we’ll discuss ways of getting rid of that excess stock that’s not making you any money. Are you interested? Then read on.

Why is paid for inventory a liability? According to NACS, inventory turns in the average convenience store at around eight times per year. That means on average, your total inventory turns every 45.625 days. The reason is, only 20 to 30 percent of your inventory is making a profit and cross-subsidizing the losses from the rest.

You may not be aware of this is because you see your inventory in sections called categories or departments. The simple answer is to tear down those categories and clean house, so-to-speak. But it’s not going to be that easy, because to begin with, you don’t know what’s bad and what’s not. It’s more complicated than simply looking at your turns, although the basis of increasing your profits is to increase turns, turns by themselves mean nothing; e.g. you can be selling an item that turns fifty times a day and costs you money every time it leaves the store, or it can be turning once a month and making you a fortune. New technology to solve these issues is available, but the infrastructure to support the technology is wrapped up in a circus of decades-old assumptions that are preventing the technology from getting to you.

Not only have we studied this issue for well over two decades, we have designed a model and tested it for accuracy. You need to know about this, because with the current state of affairs as they are, we see no other alternative to building a supply chain that will work to the benefit of not just the few who can afford it, but to everyone who can’t afford NOT to have it.

Friday, May 27, 2011

The Case Against Category Management – A Radical New Idea -3

For years, retailers have been focused on the out-of-stock issues that plague the industry, but ‘out-of-stocks’ is only one small symptom of the ‘supply chain problem’. I found an excellent article entitled ‘Out-Of-Stock’ at Infosys.com that goes a long way toward pointing out the problems that exists even today, but it falls short of coming up with an answer for small to medium-sized retailers.

In the article, written by Kishor Gummaraju and Tom Holland, Miller Brewing’s, Jeff Schouten, said,  “In reality, when the problem affects the inability of the consumer to buy a product, everyone in the supply chain shares in the responsibility to fix the problem ... Retailers, suppliers and distributors must work together to identify the issues leading to the out-of-stocks.”

Cathy Green, COO of Food Lion was quoted as saying, “The retailer has direct responsibility to their consumer. We own [the out-of-stock-problem] ... The consumer leaves the store knowing that ‘Food Lion didn’t have what I wanted.’ I don’t believe the consumer would associate an out-of-stock with a failure on the vendor’s part.”

But, Gary Chartrand, CEO of Acosta Sales and Marketing said, “Retailers alone generally do not have the technology and manpower to analyze and solve each promotion opportunity. Suppliers also have a responsibility to ensure they are bringing sound recommendations to the retailers in terms of order quantities. Unless retailers and suppliers collaboratively share data and work together, consumers will continue to face promotional product shortages.”

Dee Briggs of Welch’s remarked, “The industry needs some type of third-party company that identifies out-of-stocks with the aid of the retailer, and then finds solutions to get the item back in stock … Currently, the stores don’t have enough people to do this effectively… There needs to be a  new entity that focuses on helping to resolve these issues at the store.”

But, Briggs hit the nail square on the head when she added, “The key issue is RETAILERS DO NOT HAVE ACCURATE PERPETUAL INVENTORY SYSTEMS, so store ordering can be difficult and lead to ordering the wrong items.”

Each of these industry professionals made valid points, but the one thing they left out of the article is the retailers’ ability to pay for the kind of technology necessary to implement such an adventurous plan. It’s clear… it can’t be done without INTENSIVE collaboration up and down the supply chain.

The supply chain is a structure, and can best be understood by relating it to a building. I bought an older home and spent in access of $100,000 renovating it. Then, one night, at around 4 AM, a main beam under the house broke and all the work I had done was in danger of total collapse. Luckily, I live in an area occupied by an abundance of carpenters, all looking for work. I was able to find someone who rebuilt the foundation of the house for $1,400 plus the cost of materials I acquired myself for around $1,000. The next thing I did was fire my termite contractor and hire a new one.

The basement of the supply chain is rotten and no matter how much renovation, e.g. EDI, XML, advancements in Client/Server technology, is engineered above the foundation, the system will eventually collapse, as in the case of my old house. We must rebuild the foundation the supply chain sits atop and it cannot be done by one, single company. It’s going to take all of us, working together, to fix it from the bottom up. It’s like the adage, “You simply cannot make a silk purse out of a sow’s ear.”


Thursday, May 26, 2011

The Case Against Category Management – A Radical New Idea -2

Sharing in a sense of ownership within an environment of trust and respect are key elements necessary for the success of any group, organization, small shop… even a Fortune 100 company.  I have yet to meet someone who has truly ‘done it alone’. Employees who have a sense of ownership are more honest, more dedicated, more motivated and far more valuable to an enterprise than those who aren’t.

I’ve worked with hundreds, if not thousands of convenience store personnel, both in the stores and at company headquarters. I have found some of them to be quite remarkable, but all of them capable of adding much greater value to a company than is expected of them.  Yes, you may be wasting extremely valuable resources you don’t even know about. I can promise you, there are diamonds in the rough just waiting to be polished.

Interested? A good place to start is with your second most valuable asset, the inventory in your stores. If you’re like most convenience store retailers, you have two or three shifts. Take the number of employees you have and divide your stores into sections. Make each employee a ‘section manager,’ and ask them to take responsibility for the section(s) they manage. Have your store managers grade them on each section’s cleanliness and presentation. Once a week, give out a blue ribbon to be placed on the winning section and maybe a small gift… a coupon to use in the store, five dollars of gas to help them get to and from work, or maybe just a pat on the back and a ‘thank you’ note from a company manager. Employees work for pay… but they hunger for praise.

The store’s inventory should be audited by the store’s employees and spot-checked occasionally by a store supervisor. You can’t do this unless your computer tracks the number of items of each brand in your store. Using our system, we provide our clients with a printout at the beginning of each shift, targeting items that were over or short on the prior shift.

Starting on page 85 of our book, “Turning Convenience Stores Into Cash Generating Monsters,” Jim and I go into far more detail, but what we discovered when we began auditing our client’s stores in 2004, was that on subsequent audits, 85 – 90 percent of the items in the stores were neither over or short. This means in a store with around 2,700 items, only 270 to 405 items are high-risk.

Auditing the store requires approximately three-hours per day, most of the time devoted to the high-risk items, and our experience tells us there is more than ample slack-time to accomplish this task, with selected high-risk items to be audited daily, and the remaining items audited during a two to four-week period. It breaks down to about two hours and twenty-four minutes dedicated to high-risk items, and the remaining thirty-six minutes for low-risk ones. Spot checks by store supervisors on high-risk items, helps to remind store personnel how important those items are to you.

When a high risk item pops up on the shift’s high-risk list, an employee who may have forgotten to pay for that item will be reminded of the importance of that item to the company.

Audits are taken with a hand-held data terminal and transmitted to the SRDC computers the instant an item is scanned; the system adjusts the inventory, recalculates a new moving-average cost for the product and is used to prepare the next shift’s high-risk list. For example, if a pack of Marlboro Lights 100 goes missing on the first shift, an employee on the second shift will scan it again. The more often an item shows up on the list, the more likely it is it will reappear on the next shift’s list. It’s a decision made by the SRDC computer and based on on-going historical data for all stores networked to the system.

Tuesday, May 24, 2011

The Case Against Category Management – A Radical New Idea -1

In my three decades of providing data processing services to the retail industry, nothing has brought more controversy and ridicule than the suggestion we allow a store’s employees to take on the responsibility of maintaining and auditing the store’s inventory. For the life of me, I have never understood the logic behind this wide-spread conspiracy to prevent it from happening.

In 1982, when my first large convenience store customer explained it to me, I took it at face value. This particular client had a policy of firing every employee after they had been working for him for six months, because he was convinced that all convenience store employees began to steal almost immediately and rotating them out at six-month intervals was his primary program for holding down shrink. Believe it or not, he would go so far as to select employees at random to suffer through lie detector tests in an effort to scare them into being more honest during their short tenure of being an employee of his organization.

I began to see convenience store employees as sub-human slaves whose lot in life was to float from store to store like itinerant fruit pickers, dumb as a box of rocks and undeserving of any trust or responsibility whatsoever. Teach them how to punch the keys on a cash register, smile pretty when the customer walks through the door, and shiver like half-drowned rats when the boss’s name is mentioned.

One of my first customers told me, “When I go into a business deal, I automatically assume the other fella is going to try to get the best of me.” (Actually his vernacular was a quite a bit cruder, but you get the idea.) It should come as no surprise that our brief period of working together resulted in me losing $4,000, and I’ll bet you already know who was accused of being the crook.

Sam Walton was the quintessence of one diametrically opposed to this kind of management and probably best known for the way he treated his employees. Walton saw every employee as a valued asset, a business partner, just as important to him as whoever was his second in command in the early days.

Well, Sam has passed, rest his soul, but I’ve learned a great deal from his actions.  Sam Moore Walton trained each of his employees to focus on pleasing the customer; difficult to do when you think you’re ‘dumb as a box of rocks and incapable of any form of trust and responsibility whatsoever’.

Consequently, the convenience store industry reaped exactly what it sowed; and today, almost every convenience store employee I’ve talked to is either looking for another job, or hanging around because they don’t have anything better to do. If you hide in the corner and listen, you’ll discover most of them don’t even know who you are… nor do they care to know.

You see Sam Walton was an unfinished diamond in the rough. He was a good listener. He would often visit his stores and ask his employees their opinions because he recognized them as the face he would show to his customers; and they loved him for it.

Looking at Sam, and then trying to compare him with some of my clients, was like comparing a peaceful sunset to a raging hurricane. Both wanted to make money, but Sam Walton wanted his employees to make money too. And even more important, Sam wanted them to feel good about it. You see, the more money he made, the more they made. That’s the way his employees saw it.