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.

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