Controlling Your Inventory
Why implement an inventory control system? For one thing, it can reduce the cost of running your business. Furthermore, it can improve customer service through lower out of stocks. And the best reason of all -- it makes the job of ordering much easier.
Setting up an inventory control system offers other benefits, and the results can be substantial -- a fluid inventory, increased margins, and reduced shrink. It also enables the operation to prepare for the buyer's absence, because the records created will enable someone unfamiliar with the task to do the ordering.
Inventory control systems offer a fluid inventory, increased margins, and reduced shrink.
The first key to controlling inventory is to keep accurate ordering records. Order sheets should be set up by vendor and include all vital information needed to fill out the order. At the top of each order sheet, include the name of the vendor, the phone number, time order is placed, name of contact person, and other information, such as who calls who, minimums, etc. Also put the date at the top of each sheet and above each ordering column.
List all products and divide ordering responsibilities in a logical manner, such as by department and location. Leave room for additions in each section. When ordering, record the quantity on hand and ordered. Also indicate out of stocks and items discontinued.
The information gathered will take the guess work out of ordering. The purchaser will know when to order and will be able to reduce out of stocks and overordering.
Organizing your ordering will also help your suppliers. It will be easier for them to maintain the necessary level of stock if your ordering is consistent.
Keep order sheets to create a historical record, and study seasonal and yearly fluctuations in sales. From this information, you will know which items to discontinue, determine product and shelf allocation and set sales goals for each department.
Set guidelines for dealing with slow movers. Look at the current column, and determine the potential volume. Also evaluate the margin and contribution to departmental margin (see below). Before discontinuing, consider providing promotional support and giving it a more prominent spot on the shelf if the product and potential warrant the support.
In order to maintain the optimum level of stock, it is important to determine the lead time necessary for ordering some items. The lead time is the amount of time it takes to receive the merchandise once the order has been written. By determining the lead time for an order and the average weekly sales of a product, the order point can be determined.
Ideally, the current stock of an item should be running out just as the new shipment comes in. In some cases, the lead time should also include time to process and stock an order.
A good example to use is ordering bulk herbs. Let's assume the lead time is one week, and we want to determine the order point for garlic. Average weekly sales for garlic are ten pounds a week, so our order point is ten pounds: when our current stock reaches that point, we need to place another order.
Average Weekly Sales x Lead Time = Order Point
Your order system needs to reflect seasonal fluctuations. The weekly selling rate is not fixed. Another considerations that needs to be made when determining the order point is the desired amount of safety stock of fast movers to guard against out of stocks or irregular lead times. This may be needed for back stock, etc. The operation's desired level of customer service must also be determined. Ideally, your store would never have any out of stocks; a more realistic goal may be to aim for a 95 percent instock rate. This goal is weighed against the goals for inventory turns which should be developed for each department.
Creating a Fluid Inventory
Inventory turns are directly related to product margins and each department's contribution to margin. It costs money to carry an item. The longer that item sits on your shelf, the more it costs to sell -- which is why slower moving items, such as bodycare, historically have a higher margin than fast moving items, such as dairy products and basic staples. Inventory turns and margins may vary within each department also, reflecting the volume of sales for each product category. For example, shampoo may have a lower margin compared to styling mousse because of the difference in sales volume and inventory turns.
Use the following formula to determine inventory turns:
Inventory Turnover = Cost of Goods sold/Average Inventory
Determining margin contributions, by department or by item, and setting goals for inventory turns for each margin category are very helpful in evaluating specific items in stock and creating a fluid inventory.
This formula is used for determining the contribution to margin:
Margin x Percent of Total Sales = Margin Contribution
To determine the total realized margin, add up the contributions to margin. For example, if we were examining the margin contribution of each department, our analysis might look something like this:
|Dept.||Margin||x||% of Sales||=||Contribution|
Buying Ahead on Specials
A common practice is to buy extra of a product that is on special and sell it at the regular price to make extra margin. As a general rule of thumb, buy no more than a month's worth of inventory and only on high volume items. For example, if you sell 3 cases a week on a product normally, buy 12 cases right before the special goes off (including current stock that will be leftover after the sale ends) and sell it at the regular price.
Many wholesalers offer computerized ordering systems to their retail accounts. These systems have many benefits. They can speed the ordering process by eliminating the need for lengthy phone calls, creating ordering sheets and movement records and making inventory control easier for the retailer.
Computerized order systems, which go by names such as Texlon or MSI, are usually purchased or leased from the wholesaler with the initial cost often rebated through purchases.
Items are ordered directly off the shelf tags which are provided by the wholesaler. The shelf tags include the item's order number, product description, and UPC code.
Most co-op storefronts and wholesalers have yet to reach this level of computerization, but many of the larger wholesalers now offer these services. The system reduces retailers' labor needs by providing a lot of the data needed to control inventory, such as product movement reports, lists of top sellers by category, outlines of margin contributions by invoice, etc. They also provide special pricing systems that increase pricing accuracy and reduce shrink. It mav be just a matter of time before co-op wholesalers begin to offer computerized ordering services to help maintain customer loyalty.
Order for the shelf. The buyer's goal is to balance between out of stocks and low inventory, and this is possible with proper ordering record.
If you have the choice of holding backstock or ordering more often, the best choice, most likely, is to increase the number of times you order. If you have good control of your inventory, your backstock area will contain only high volume items and products on sale. Organize the backstock area to make ordering and stocking easier. Items can be organized in the same manner as they are stocked on the retail floor.
When discussing backstock, we cannot overlook the need for sufficient shelving space on the retail floor. Having the proper equipment is a very helpful tool for creating inventory controls. Having shelves that are deep enough to hold full cases of product will decrease ordering and stocking time.
Some businesses take monthly inventories, but quarterly inventories are generally sufficient. However, more frequent inventories may be needed for perishables and when establishing new departments.
Track all shrink and spoilage in each department. This is especially important in the perishables department, but should not be overlooked in other areas of the store. Make it easy by setting up clip boards and notebooks by the register, backstock area, return area, etc.
Record all shrink at retail prices, including product markdowns (difference between original retail price and price sold). Calculate shrink monthly to determine the realized margin as compared to ideal gross margin. Use the chart shown above to track shrink.
Some retailers buy direct to reduce costs to the customer and increase the store's margin. It is important to consider the cost ofcarrying inventory if you choose to buy direct. It may not be to your advantage to buy direct if the minimum order forces you to carry the inventory for more than one month, or if you are passing all of the savings on to the customer. Not that it is not nice to offer great savings to your customer, but it may cost your co-op more to order in this manner, and thus a higher margin will be needed to defer these costs.
An important aspect of inventory control is controlling the amount of product that goes out the door unpaid for. Although many of us feel certain that shoplifting is not a problem in our own business, others are aware that the least suspected people can be robbing the business blind. That lesson, unfortunately, is often learned through experience. Retailers are often surprised to find that they have more pilferage problems from employees than they do from shoplifters.
Basic precautions must be taken. Your operation's goal should be to keep the honest people honest. The following check points will help:
- Locate all keys or change the locks. Organize operations to reduce the number of keys issued. Set up the schedule so that no one is ever working alone at the store.
- Provide lockers or a secure area for employees to store personal belongings (away from cash registers, etc.). Do not let employees ring up their own purchases at the register.
- Set up a cash register accountability system. All transactions should be trackable to a cashier. Set up systems for paid outs, voids, and refunds. Develop a count out procedure that is verified by a second party.
- When receiving goods, check all orders and have the person who checked in the order sign the invoice.
- Do not leave delivery people unattended in unsecured backstock areas.
Improve Security Through Store Design
It is easier to prevent shoplifting than it is to catch a shoplifter. Reduce the risk by designing a store that minimizes the opportunity. Run all aisles in the direction that provides greatest visibility of departments to key personnel. For example, locate the vitamin, body care, and gift departments near the checkout area. If your store is long and narrow, run the aisles lengthwise instead of across.
Use lighting and product allocation to deter the prospective thief. Turn dark and dead end areas into bright and noticeable attractions. Customer traffic is as much a deterrent for the shoplifter as an employee is.
Back stock is also vulnerable to theft. Keep the receiving door closed and locked from the outside when not in use. Pay particular attention to vitamins, bodycare and other product of special value.
Installing mirrors also can deter shoplifting. Alarm systems are helpful also. Some alarm systems have codes for employees, which they must register in order to enter the building during off hours without setting off the alarm. This is another way to help keep employees honest.
Check the interior and exterior of the building for each access. Consider extra security measures, such as a light by the back door, a fence around the loading dock, or leaving some lights on inside the store.
Remove all money from the cash register at night and leave the drawer open. Deposit receipts every day.
[For more tips on store security, see articles in Cooperative Grocer #12-13,, #15, #25, and #28.]