Looking for $3 Million?

How managing inventory better can produce stunning results.

By  Angel Abcede, Senior Editor/Content Development Coordinator

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Phil Settle obsesses over the perfect order.

Not a utopian society, but what managers fill out to bring in the right mix of goods, brands and price points to turn notoriously thin c-store margins into ever-increasing, year-over-year profit.

For retailers such as Settle, the scan-in, scan-out daydream typically involves zero out-of-stocks; high-turn, high-margin sales; and an uncluttered, relevant customer experience.

While perfection for most is a journey, Settle, director of marketing for the 172- store Flash Foods Inc., Waycross, Ga., is as close as he’s ever been, and light-years ahead of most.

Where others track overall categories, Settle knows how many 2-liter Diet Pepsis, 12-ounce Cokes or king-sized Hershey’s with almonds are in each store on any given day. There’s no over-ordering in fear of running out, leaving shelves streamlined, clean and more profitable.

The differentiator for Flash Foods is item-level inventory. It’s a method of accounting widely accepted in other industries that retailers are coming back to, spurred by declining gasoline and tobacco sales.

By comparison, most operators use retail-cost accounting as a way to value and track goods. As items come into the store, managers note categories and value boxes, cases and crates at retail price. They gauge that value against what’s sold at the register. In contrast, item-level principles value goods at what the retailer paid vs. retail price and track each 2-liter bottle, single-serve soda and candy bar.

And Flash Foods’ effort has freed up $3 million from inventory.

Impressive, yes, but what’s more surprising is how retailers such as Settle continue to stand on high ground over the competition, given most c-stores today scan at the register and technology overall is both cheaper and more powerful.

The truth is that item-level ordering presents another dynamic, forcing store-level staff to go from receiving in bulk to counting each item. While easy to imagine, the shift means new disciplines, retraining and change at all levels.

So while the perfect order may be every retailer’s dream, most take a pass. Instead, many rely on sales and store-purchasing data, manufacturer-supplied reports and services (though biases may exist, some suppliers tout objectivity), instinct, or simply reordering what’s run out, regardless of potential theft or shrink.

In a CSP Daily News survey, 38% of respondents said they employed itemlevel inventory. Another 7% said they were in the process of rolling it out.

But Jenny Bullard, CIO of Flash Foods and a colleague of Settle’s, says those numbers are probably high. When Bullard was a panelist last fall at a NACS workshop, the moderator asked the packed room of about 200 if they practiced item-level inventory. Only five hands went up.

“It’s because people have different ideas of what it is,” Bullard says, citing that some may scan items but still do retail-cost accounting, or do item level for only one category. At Flash Foods, item level covers the whole store. “There are very few of us who’ve done it the way we do it.”

One technology provider, Temple, Texas-based PDI, says 5% to 10% of its customer base is at true item level, with a far larger group (a little less than half) having “site-level item inventory for key categories.”

The financial and operational benefits are compelling. Here are numbers that Settle and other retailers, manufacturers and technology providers have seen:

  • Inventory cuts of 10% to 25%.
  • Sales increases of 1% to 3.5%.
  • Out-of-stocks cut by 60% to as much as 90%, with one technology provider reporting an out-of-stock rate of less than 1% for its c-store clients. Typical industry out-of-stocks are 7%, the provider says.
  • Return-rate cuts of 66%, says one retailer, with a newfound awareness of expiration dates, slow movers and other factors that lead to returns.
  • Spoilage reduction of 30% to 50%. Once the transition is complete, store managers won’t need to walk the store filling out order sheets, says Melissa Hadley, retail solutions manager for The Pinnacle Corp., Arlington, Texas. With items getting scanned in upon arrival, managers simply push a button and let the computer do the order. “The guesswork is removed, the right mix of products in the right quantities are ordered,” she says, “and you end up with more of the products you do need and less of the ones you don’t.”

“It’s a game changer,” says Greg Gilkerson, president of PDI, pointing out that item-level adoption is a likely sign of forward-thinking retailers. “It’s superior execution in all facets of the business. … The candidates for item level are focused. They are typically the best operators and have a real appetite for information and know how to use it.”

Item-Level Barriers

No one interviewed for this article disputes the power of item-level inventory. It’s the optimal solution for understanding what sells and what doesn’t. It’s key to having “the right stuff.”

“Item level is not an easy thing to take on in any organization,” says Jay Dempsey, manager of merchandise technology for Love’s Travel Stops and Country Stores, Oklahoma City. “It starts with how effective you are at site level in ordering merchandise, getting it in and processing the paperwork efficiently.”

Dempsey is implementing item-level replenishment, working toward item-level inventory at the chain’s 285 stores and considering it a multi-year process. He describes the problem as moving from one routine to a more rigid one. That transition gets more complex the more stores, employees and supplier partners involved.

That extra level of discipline, Hadley of Pinnacle agrees, represents the greatest barrier for most operators: “[It’s the] cultural shifts that need to take place in order to make these new additions a success.”

With item level, store managers have to count and scan items coming into the store, as well as produce reports and reorders by set times of the day or week. Cashiers have to scan everything individually instead of hitting the “multiply” key for products in the same category with the same price, and account for anything damaged or lost. Pricebook managers have stricter deadlines. And vendors must be automated, timely and in sync.

At any point, things can derail, with issues including lack of executive-level support, departmental discord, technology costs and resistance at the store level.

Change comes easier when operations is able to hire from the likes of Wal-Mart and Home Depot, companies that prioritize detail. “They’re already used to doing things with a major focus on item level,” Dempsey says.

That outside perspective, combined with strong support from the chain’s owners, was pivotal for PAJCO Inc. The Cape Girardeau, Mo.-based retailer of 30 stores got into item-level inventory in 2006, partly because key executives came from finance, medical supply and manufacturing fields, where cost tracking and item-level detail were priorities.

“In manufacturing, we tracked down [products] to the minute detail,” says Duane Statler, PAJCO’s vice president of information management. “We produced millions of an item [at low margin], so everything squeezed out meant more to the bottom line.”

Many Drivers, One Car

With c-stores, item level is often an afterthought because of limited staffing. Dempsey of Love’s says different departments have different motivations, vying for a specific benefit without realizing the need for one piece: item-level inventory.

For buyers and category managers, “it’s all about improving in-stock conditions, replenishment and invoice validation,” he says. “For accounting, it’s about inventory valuation. And for operations it’s all these things, but more so visibility into what shrink might be and better control over how to keep [theft down].”

From a global perspective, European retailers tend to be more financially driven, wanting item level to more accurately value inventory, according to Uri Bettesh, head of merchandising products for Retalix, Plano, Texas. “In the U.S., it’s the opposite,” he says, citing a decidedly U.S. focus on product movement. “They think: I need to go to demand-driven replenishment, so I need item level.”

But having underlying motivations doesn’t always lead companies to item level. Bullard of Flash Foods says companies may have a goal of scanning items into the store to better manage inventory, but don’t take it into their books. Some have gotten only part of the way, falling victim to failed implementation.

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