Looking for $3 Million?
How managing inventory better can produce stunning results.
Step by Step
Chains that have achieved high levels of item-level inventory adopt other, similar steps, with automating the ordering process being first. Flash Foods started with cigarettes back in 2000, with a category rollout in 2005. At the time, it cut $1.4 million in slow-moving inventory and return reduction.
The work in that category uncovered inefficiencies in their manual processes as well. “Anyone manually ordering doesn’t take the time to figure out what’s selling,” Settle says.
- With ardent support from the chain’s owners, employees spent 2006 to 2007 developing systems and then started their rollout. Some of the steps included:
- Working with their technology provider, The Pinnacle Corp., to access and augment item-level software.
- Training in-house auditors on scanning and inventory taking.
Making sure the pricebook was correct, accurate and in sync with vendors. What helped in Flash Foods’ case was having its own warehouse, which pared down the number of vendor connections required.
Manipulating variables within the software to obtain the best order. An initial consequence was a “significant” amount of overstated inventory. “I bring it up because taking that adjustment could be a factor in your decision to move to item level,” he says. “It can hit the [profit and loss] area.”
Of course, the path chains follow will differ. For Dempsey of Love’s, engaging the chain’s many suppliers is his biggest big challenge. “You have to be tied electronically to suppliers to be able to do electronic purchase orders and receive advanced shipment notifications (ASNs),” he says. “The data needs to be in sync at all levels to flow smoothly.”
For retailers considering item level, buyin is critical. For Flash Foods, that meant an interdepartmental task force, constant communication and weekly meetings. Settle spent a lot of time with vendors and suppliers, and Bullard worked on the technology end.
In the field, the biggest hurdle was trust. One recurring issue was minimum display quantities. Typically, managers need a minimum quantity of any given product on hand. The software would tell them one thing, but their instincts told them another.
“You wouldn’t believe the number of times we had to explain the system,” Bullard says. “People didn’t trust the technology.”
Sometimes change meant doing nothing. Take markdowns, for example. Bullard says retail-cost accounting required systems to track any promotional markdowns, or employees to write notes as they sold those items. If they didn’t, the end-of-day retail inventory value would be off by the discount.
With item level, retailers go by the cost of the goods, so noting markdowns or markups isn’t necessary. “Cashiers were so engrained at looking at retail price,” Settle says. “We had to get them to stop worrying about selling at the right price and, instead, focus on receiving at the correct cost.”
Item level often cuts complexities that could be costing money, Gilkerson says. For instance, tracking markdowns on cigarette cartons—the store’s highest-cost items—is a “confusing area to get right,” even with automation, he says: “Those steps are not needed with item level.”
Other things that go away are stockpiles of boxes in the back room, Settle says. Statler of PAJCO agrees, saying he can tell when a store does item level: “It’s just a cleaner look.”
But to succeed, employees need to own the process. “If I see that product is damaged, I cannot throw it into the return area or in the garbage,” says Bettesh of Retalix. “I need to tell the system that it is out and take [the count] one unit down.”
They need to know their actions or inactions affect store audits, Bettesh says. “Even when you take an item and put it on an endcap, you did something,” he says. “Even though your total is in balance, the plan-o-gram [program] needs to know.”
That commitment leads to store-level “readiness,” says Ann Marie O’Connor, director of retail for RedPrairie, Alpharetta, Ga. Most recently, the software provider has focused on readiness in its solutions. “As an example, when you have a big promotion, how do you know the products are there, available and on time?” she says. “It’s about the flow-through of product—associate awareness, managing shrink, rebates and ensuring products and [point-ofpurchase] materials are set.”
Hard, Soft Costs
Determining cost for item level is difficult. Providers have different pricing models, costs rise depending on software features, and larger chains can leverage scale to reduce per-store costs.
Retailers and suppliers interviewed say a low-level pricebook solution can run about $5,000. A midtier with item-level inventory may run in the range of $5,000 to $10,000. To develop a system from scratch, one retailer guesses $200,000.
Many providers use a licensing model, with upgrades coming over time. Some of them are free, some not. Others charge a per-store ongoing fee. The scan-in element means software and the hand-held device, which combined can cost $2,100 per site plus training. So for many, cost is a barrier. Chris Kiernan, director of retail applications for ADD Systems Inc., Flanders, N.J., recalls one customer saying, “Everyone is looking to make money off me and margins are so short ...” “[Retailers] want to manage on a more detailed level,” Kiernan says. “But without item level, you can’t do that.” Time is also an expense. For instance, cleaning the current catalog file of inactive items—items in the system but not in the store, items not sold in the last 26 weeks— have to be removed, possibly taking an entire month, says Bettesh of Retalix. Dempsey of Love’s says pricebook maintenance becomes more of a challenge because of “the intensity in the level of data integrity and amount of timely detail needed to maintain … item level.” The intensity trickles down. For Love’s, the HR department, along with divisional marketing managers, had to develop itemmanagement curriculums and extend training periods. For Flash Foods, the auditing time doubled, which resulted in the doubling of auditors.
In considering manpower, Bettesh recommends creating an analyst’s position. “Now that you have real-time data, it’s beneficial to analyze and find the root cause of [any] anomalies,” he says.
Retailers reluctant to make the item-level leap have options. Suppliers and wholesalers for years have offered retailers tools, plan-o-grams and customized reports, but bias remains a concern.
Last August, Minneapolis-based General Mills Convenience launched a new website (generalmillsconvenience. com) to educate retailers about category management and provide reporting applications they could populate with their own sales data.
“We’ve built an objective tool that empowers retailers to make decisions,” says Drew Helmey, associate channel marketing manager for General Mills. “Our product might be No. 5, and that’s OK. It’s up to us to make that better. We first want to contribute to the health of the category.” The website offers tools that can bring geographic and competitive metrics into play, assessing unit and dollar sales and turns.
Retailers have other options on this front. The “Grow My Store” section of kelloggsconvenience.com offers plan-ograms based on category and space needs, says Lisa Costigan, business unit manager for convenience for Kellogg Co., Battle Creek, Mich. Also, profit calculators allow retailers to input their store’s velocity for each Kellogg product and see potential weekly, monthly and annual profit. By looking at labor, space-to-sales and other factors, Terry Holshouser, director of category strategy and insights for The Hershey Co., Hershey, Pa., says his company works with retailers to understand “true” costs.
What shocks retailers most is what they’re missing out on, says Kelly Fulford, category development manager for General Mills. “We provide a dollaropportunity calculation, so if you … delete lower-performing items, it shows you what’s going to happen with sales,” she says. “It’s eye-opening to see missed opportunity.”
The data often leads to dramatic changes at the store, says Paul Metko, president of Convenience Store Automation Inc., Appleton, Wis. When retailers realize that coolers take up 10% to 15% of floor space but account for 50% of sales, they start thinking more coolers, fewer gondolas, he says.
It also sheds light on day-part effects and product placement. “Get gondolas with wheels,” he says. “You can move products around during the day to where they sell better.”
The result is better decisions, says Gilkerson: “You’ll have new loss-prevention figures, customer-loyalty reporting, operational metrics based on time and itemlevel detail you couldn’t see before.”
The Right Technology
To track an item-level inventory, Melissa Hadley of The Pinnacle Corp. says an enterprise software solution must have:
- Pricebook— The solution for maintaining the item catalog and facilitating POS scanning.
- Advanced merchandising strategies— These include promotions and combos and “mix-match,” as well as provide for operational control for linked items and restrictions on sales, age, daypart and tender.
- Loyalty solutions and business intelligence systems can also play an important role in item-level inventory goals.
- Back office— The solution managers use to reconcile daily paperwork for sales and cash, fuel inventory and merchandise inventory.
- Computer assisted ordering— A solution that uses the transaction sales data to generate store orders.
- A POS that can scan items and provide the back office system with the transaction data to support item level.
- Hand-held inventory management solutions that allow for receiving merchandise into the store by item and the ability to audit the data on a routine basis.
Here’s a short list of benefits as well as challenges of item-level inventory:
- Reduced inventory, freed up cash and just-in-time retailing
- Elimination of markup, markdown tracking
- Reduced register adjustments and chance for abuse
- Better foodservice accounting and ingredient tracking or “menu explosion” capability
- Turn tracking
- Electronic replenishment
- More complicated auditing or counting processes
- The need for a detail-oriented culture
- DSD vendors unable to give timely invoices electronically
- Operational “buy-in,” with false perceptions of labor and workload requirements
- Time-sensitive data entry that, if not done, can throw off reports, invoices and orders Sources: PDI, The Pinnacle Corp
From an item-level perspective, the industry bugaboo of foodservice may make for strange bedfellows. For years, retailers have yearned to excel in the high-margin category only to have their own zero-waste, packaged-goods mindset drag them back to reality.
“We found retail [cost accounting] detrimental to roller grills,” says Catherine Porter, senior manager of customer marketing for convenience stores for Sara Lee Foodservice, Downers Grove, Ill. “If you throw out two hot dogs, you’re assuming a lost sale of $1.11 per hot dog. But you didn’t throw away the condiments or the bun.”
Item level provides a better measure for profit and doesn’t penalize stores for shrink that doesn’t exist. That said, shrink will never go away. “No one’s going to buy the last, sad hot dog on the grill,” she says. “You can minimize what you’re throwing away, but if shrink is at zero, you’re not selling as much as you could.”