Tuesday, May 22, 2012

Critical Success Factors In Buying and Running a Store #4 – Part 1


Professor Hoch’s next Critical Success Factor is child’s-play, IF you have the right decision-support tools. This topic is ‘Out-Of-Stocks’ (OOS).

The definition of OOS is simply this: A condition that exists when available product is not sufficient to satisfy demand. You can’t sell what you ain’t got! A good system helps forecast future product needs to lessen the chances that OOS will occur.

OOS is the bane of the retail industry. In 2008, Supply Chain Digest reported OOS costs retailers $93 Billion in sales annually. According to ECC research, the loss of sales due to OOS is 9%, while still others have said, “The losses created by OOS are incalculable.”

In general, you can put the blame for OOS on two conditions: Buyers making planning mistakes and store management failing to execute. However, the loss of sales pales in comparison to the loss of customers. Experts have said, “If your customers can’t find items they are seeking three times in a row, most likely you will lose them for good”.

OOS are more likely to appear within the fast-moving item categories, within your INVENTORY MOVEMENT FINGERPRINT we talked about in a previous article. Using our test store, in order to narrow the sample down, I selected categories of items that move more than once per day. (Note: When I refer to categories, I am targeting MOVEMENT categories and not categories by types of inventory). Starting with the speediest mover, Marlboro Gold HP, at 32.1675/packs per day and including all items through Cotton Candy at 1.0045/per day, I come up with a total of 484 or 16.60% of the 2,915 items to study.

Our item with the most turns, Marlboro Gold HP, is not seasonal, and this store receives cigarette deliveries from their vendor on Tuesdays and Fridays. Using simple math, in order to meet customer service levels, after a delivery is received, the store must have as many packs of product in the store as needed to satisfy a minimum of four selling days; meaning on Fridays, we need a minimum of (3.21675 * 4) = 13(rounded up) cartons on hand, and on Tuesdays (3.21675 * 3) = 10 cartons. Simple math, right? Nothing complicated; however, I am not quite done.

A quick search tells me on Nov 25, 2010, the sales for that one day totaled 6.3 cartons, nearly twice the amount as our current average of 3.2; 5.8 on March 4, 2011 and 5.4 on December 25, 2010… In fact, with this limited information, I can’t be 100% certain maintaining a level of 10-13 cartons is going to be enough to prevent stock-outs, can I? So erring on the side of over-stock, I might feel compelled to impress Marlboro Gold HP to my highest historical turn rate of (6.3*4=25 cartons). However, before I make a final decision, I will dig a little deeper and investigate recent sales.

Over the past week, this store sold 17.3 cartons; past 2 weeks, 38.6 cartons; past three weeks, 58 cartons; past 30 days, 77.8 cartons; and finally, during the past two months, they have sold 157.9 cartons of Marlboro Gold HP. Therefore, the average sold for the past two months amounts to only 2.63 cartons per day. The average of 2.3 cartons and 6.3 cartons (see previous paragraph) is 4.465 cartons per day or 17.86 (18) cartons for any given four-day period. The larger of the two (13 and 18) persuades me to go with the higher value, and I order enough to impress this brand up to 18 cartons on my next deliver. I can scale it down later as my averages decline.

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