Tuesday, June 12, 2012

Automated Store Replenishment – Volume XXI

Are you getting the idea that I feel controlling inventory is a key element in running a profitable retail business? Good! It is you know. My reasoning is this: ‘He who controls the inventory, controls the cash flow’.

By default, most retailers assume their store managers are controlling their inventory. Others assume suppliers are in control. Truly inept retailers leave inventory control up to their customers, who give them feedback on items that are out-of-stock, or on items they would like to purchase but cannot because the store does not carry them. However, even in the best of these organizations, the reality is a mixture of all three.

Empirical studies prove, in the majority of retail operations, NO ONE IS CONTROLLING THE INVENTORY; therefore, NO ONE IS IN CONTROL OF THE CASH FLOW.

I does not matter how many changes you make inside your store(s), how many competitors you try to emulate, how many super deals you buy into, or what suppliers you do business with; if someone, with your best interest at heart, is not controlling the money that flows into your business, you are lucky to have a business at all.

Someday soon, the first supplier is going to realize that retailers are merely conduits to move their inventory into the hands of consumers, and they only survive as long as their retailers survive. Now you can look at this in two ways. The choice is pretty much up for grabs. You can cool your heels until your supplier decides to help you out (maybe never), or you can take the initiative to become the master of your own destiny.

Retail Store Replenishment, whether it is automated (as the title of this article implies), or done manually by walking around the store with a pad and pencil, is a series of actions with its primary goal being, increasing YOUr cash flow… nothing else matters.

Retailers are forever trying to solve the equation, “How much do I have to SELL to pay my bills and show a reasonable profit?” Over twenty-five years ago, while I was creating a computer system for a large oil distributor, he gave me my education in wholesale inventory management. Both retailers and wholesalers have the same goal, but the specific question the wholesaler had was, “How much inventory do I have to BUY to pay my bills and show a reasonable profit?” He was not in the least concerned with sales. That was the responsibility of his salespeople, and if they did not perform as expected, he would simply fire one and hire another.

For me, it was an entirely new way of addressing the same old problem; both businesses wanted to pay their bills and show a profit, but they had different ways of coming up with the same solution. The emphasis for both was the solving of an unknown. In mathematics, if there are two unknowns in an equation, the problem is unsolvable until you have reconciled yourself with one unknown or the other; otherwise, the solution is ambiguous.  

Getting the answer for the wholesaler was simple. Obtaining the same answer for the retailer was not. Why? Because the retailers’ margins were all over the place and the wholesalers’ margins remained static. If the oil wholesaler categorized his inventory as the retailer does, and applied the same margin to all items within like categories, he would have discovered that 30% of his oil sales accounted for almost all of his profits. And as for the other items in the same category? His customers would be buying those from his competitors.

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