Tuesday, May 22, 2012

Critical Success Factors In Buying and Running a Store #4 – Part 2

Given the number of items that have to be considered, it’s a lot of work for a human; in fact, it’s just too much to be done manually. Without the proper tools in place, most likely, our store manager, terrified of having stock outs, will order enough units to impress his on-hand to a full week, somewhere in the neighborhood of 22 cartons (or more). A computer can perform these calculations in the blink of the eye and make the determination to place a more precise order mere seconds before it is sent electronically to the vendor and this saves everybody money. Finally, an ‘alert system’ tracking activity in all stores should be implemented so items can be transferred from an overstocked store should the need arise.

Empirical research performed in many European stores suggests Automated Store Replenishment (ASR) might reduce Out-Of-Stocks (OOS); however as of yet, not enough data has been analyzed. Our research suggests to a large degree, if the condition of overstocks is solved, solutions for out-of-stocks will follow, for the primary reason: Overstocks tend to camouflage OOS just by filling in empty spaces left behind. Quantitative analysis however, has proven the probability that employing even a simple ASR system makes it possible to do both. The accuracy of inventory disposition is paramount, and can only be solved by frequent audits integrated into a good ASR system.

It’s easy to see why overstock seems to be the chosen method of inventory control when we understand that seventy-percent of customers change to the competition for good if they experience repeated OOS, but it’s an expensive way to solve a problem. Sales-per-square-feet is a helpful yardstick. Turnover-per-square-feet however is even more critical. Inventory holding costs are one thing, but inventory handling costs are four to five time as large. Handling costs lessen as inventory turns increase.  In almost all cases, increasing inventory turns on individual items is the key to solving all sorts of problems.

Most retailers operate in a push-based replenishment environment; meaning the supplier is expected to forecast and choose the proper amount of inventory that goes into the store. ASR is a pull-based system; meaning the consumer determines the inventory that goes to the store. The switch from push-based to pull-based replenishment systems will require retailers to rethink their inventory procurement processes.

I bought my big mower from a local farm supply store. This family has been in business, I’m willing to bet, since the Civil war. The inside of this store is a perfect example of the wrong way to handling inventory. When you walk through the front door, you immediately see piles of junk and all sorts of farming paraphernalia hanging from hooks around the room. If you are looking for a specific item, you have no alternative but to wait for an available clerk to take you to it.

These kinds of situations do not occur overnight. The nature of all retailers is to evolve gradually toward a condition of overstock, and it happens over an extended period of time. I like to compare it to my office. My wife is always complaining about the mess. I must admit, if it wasn’t for frequent nagging, sooner than later, I would disappear into a jungle of file folders and old receipts. Obviously, this man’s wife doesn’t work in his store. One thing most women definitely have over the majority of men is the tendency to maintain order.

A “what’s good for the goose” approach to ASR is probably not a good idea either. Retailers and even retailers’ products require a slightly different approach in determining order times and quantities. Things to take into consideration when ordering are delivery frequencies, employee working behavior and how quickly the enterprise adapts. Certainly intra-organizational aspects of the company will need to be changed.   

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