Let’s say you own a business. Some of your products or services will sell much slower than others. We’ll call these slow movers. Unfortunately, companies can be far too patient with slow movers. Why? Other items arselling well enough and the owner or manager thinks, “I’ll give it more time” or worse, “I don’t have time to look into it now, maybe later.”
So why is this question so important? Think of the inventory on the retail shelves or in a wholesale warehouse as an investment. I will bet that you are not happy when cash in the bank gives you ¼% interest, a stock has only gone up in value 2% in a year or you own rental real estate property with a high vacancy rate. You’re not happy when you are making close to zero or losing money on your investments. Looking at the ROI of your inventory or of the costs associated with providing a service is the same thing. This is important to the success of your business.
Products and services don’t talk to you and tell you what is wrong and causing their lack of sales. So, you need to investigate and find out whether you are going to keep this product or service or discontinue it.
Kroger, one of the most successful grocers in the USA, doesn’t have to worry about putting systems and the right people in place to find out what they need to do next with products. Why? Because they already have them. They are masters at this. Note that Kroger was also the first supermarket to test electronic scanning of items. That was in 1972. They have a culture that ensures they know the data about the movement of their products. Kroger is amazing at managing their product and sales data and making decisions about what products to discontinue, what products to keep, what products to add, what prices to retail them at, where to locate them in their stores and how to promote them with signs and advertising. This is called “category management.”
Here is a link to a chart showing the steps that may be used in a category management system http://planograms.org/wp-content/uploads/2015/05/planogram-cycle.png . However, for many businesses, including large ones, the process shown on the chart in this weblink is too complex and takes far too long to gather data, analyze, make decisions and implement.
If you run a medium or small size business you know that you don’t have close to the massive resources and technical skills that Kroger has. The good thing is, you don’t have to. But you do have to have in place what is appropriate to your business size to increase the ROI of your products or services.
What do you need to do?
Action Step 1
Commit to appoint someone to be in charge of gathering the movement of each item and deciding what products stay and what products go away. Find that person. Put that person in charge and get the process going.
Action Step 2
Get a system to collect movement data. This is best done with a Point Of Sale system or POS. If you cannot afford one yet, do research on good POS systems and put money aside each month toward getting one or find out about financing a POS system. There are good and there are mediocre POS systems. None are perfect. While you are at it, research the company that will install and provide the service for the POS. This is actually as important as the POS system itself. Get references. Visit the references and see how the POS works and find out how good or bad the POS service company is. This due diligence of the POS supplier / tech support company is critical. You will regret it if you do not do this.
Action Step 3
Now this is the hardest part. You must commit the payroll to do movement reports on every item in the store. How often? I would suggest at least twice per year for every item, and more often for items that have proven to sell well. And why should you run movement reports more often on faster selling items? The fast movers are the items that are making you money. You want to experiment with these fast-moving items to see how you can get them to sell faster. This can be done with promotions or testing displays in various locations in the store or on changes in your online catalog to see what significantly improves sales. Hint, you should organize your product data by category so you can run movement reports by category. If you have put items in a logical category, it will be a lot easier to use category movement reports than a movement report with every item on it.
These 3 action steps above are essential. You need to know what products and services are currently making your business money and those that are wasting your money. It is very easy to delay running the data, delay analyzing it, waiting too long to get feedback from employees who order, merchandise or advertise these items. After all, there are many urgent items in your business that demand your and your staff’s attention. The urgent items tend to push the important ones into the future. Managing the movement of your products is important. Set a deadline for each movement report to be generated, reviewed and provide recommendations on which items to discontinue and which items to add. Otherwise, someday never comes.
What else will help you get a handle on the ROI generated from your products?
These 4 things.
- Report all transfers of items between departments.
- Keep records of items that are spoiled or donated.
- Do a regular inventory of all department items.
- Calculate ratios for company gross margin, department gross margin, current ratio, percentage change in inventory by department after each inventory
Now there are retail businesses that do not do these things and are still successful. However, not doing them loses you the opportunities that will make your business stronger and significantly more profitable. “Retail is detail” as the saying goes. What you can’t see you really can’t know. Without doing regular inventories, tracking transfers and spoilage you cannot generate an accurate balance sheet. Without an accurate balance sheet you cannot know the above ratios. Without the above ratios, you are missing important information on how to leverage your cash and be more profitable.
Think back to the idea of cash earning next to nothing in your bank account, a stock that hasn’t gone up in a long time, or a vacant rental home. There may be valid reasons for these, but the reason must be a good one that you can accept. The same goes with the products or services that you offer. Are they contributing to the success and profitability of your store? If not, can they be managed to contribute as they should, and if not when are you going to discontinue and replace them with something better?
Photo Credit: “Traffic Jam. New Zealand style.” By Bernard Spragg, NZ