Eliminate Hidden Holding Costs: Mastering Your Inventory


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Retail Best Practices Series: A Guide to Merchandising Strategies

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Eliminate Hidden Holding Costs: Mastering Your Inventory

  1. 1. An Epicor White Paper Eliminate Hidden Holding Costs: Mastering Your Inventory Retail Best Practices Series
  2. 2. Eliminate Hidden Holding Costs: Mastering Your Inventory Table of Contents Introduction.............................................................................................1 Clearing Out the Cobwebs: Saying Goodbye to Dead Items..................3 Ordering the Right Products in the Right Quantity: Reliable Suppliers and Advanced Technology..........................................5 Maintaining an Accurate Inventory Part I: Refining the Receiving Process................................................................7 Maintaining an Accurate Inventory Part II: Now Let’s Count What’s Important.........................................................9
  3. 3. Eliminate Hidden Holding Costs: Mastering Your Inventory Introduction If you’re like other retailers Epicor works with on a daily basis, then you’re likely facing challenges such as fierce competition, increasingly complex needs and costs associated with managing inventory, and a lack of time caused by time-consuming, manual methods that exist in spite of the addition of technology. With inventory being one of a dozen areas to attend to, Epicor has found that retailers often have no choice but to spend more time putting out daily “fires” than on refining their inventory mix. And many are still relying on gut instinct instead of system data to get them through the day, in spite of the time-consuming nature of manual processes. Epicor’s work with other retailers has shown us that on average, those not relying on system data often have 65% of their inventory value invested in the bottom 15% of sales. For every $500,000 in inventory, it’s a good possibility that retailers could take 10% of the inventory value out (at least $50,000) without losing customers or profitability. Carrying $50,000 worth of unprofitable inventory is costing you more than you think. Actual carrying costs are far greater than the value of shelf space and the cost of the item. For example, let’s take a retailer with a 2500 square foot location, selling $2.5M a year, which has approximately $100,000 worth of excess inventory. Not only is it costing them $100,000 that could be spent on alternative, more profitable investments, it’s actually costing them another $54,000 to house this unprofitable inventory. From the insurance and financing unneeded inventory to the cost of storage and utilities to labor costs and lost sales, not focusing on refining inventory has larger implications. It really is costing you! Company X with $100,000 in Excess Inventory How many consumers do the same thing? Dollars tied up in unneeded inventory $100,000 Cost to finance unneeded inventory $10,000 Expense to insure excess inventory $1,000 Cost of storage space per square foot per year $2,500 (250 square feet of total space devoted to excess) $400 ($4,000 annual utility on 2,500 square foot space) Estimated utility cost for space filled with excess inventory Cost to insure storage space devoted to excess inventory $3 Cost for labor performing unnecessary tasks (duplicate work, searching) $7,500 Cost due to employer taxes, vacation, retirement $1,500 Gross margin on lost sales $31,250 Total Cost of Housing Excess Inventory $154,153 1
  4. 4. Eliminate Hidden Holding Costs: Mastering Your Inventory After a house, a car is often the second most valuable purchase most people will make. However, instead of parking their car in the garage, a lot of people fill their garages with items that aren’t as valuable as their car. They are using their most valuable storage space for low-value items, while the car becomes exposed to the elements and quickly depreciates in value. Just as consumers inadvertently leave their most valuable asset out in the rain, it can happen to retailers too, where without a focus on refining inventory, valuable shelf space is filled with less profitable items, while the most profitable items are left to gather dust on the shelves in the back room. With retail space becoming increasingly valuable, and merchandising strategies becoming more sophisticated, retailers can save thousands of dollars a year by reducing inventory dead stock and unprofitable items, increasing the accuracy of their inventory counts from a streamlined receiving process to cycle counting and beyond, and by using data to make smarter purchasing decisions. There’s only so much space in a retail location; it must be used strategically. At Epicor, we have the software to help at every step of the inventory management process, to help you reduce your hidden inventory costs, and to make sure the right items end up on the shelves. Use the tips on the following pages to help you get started today. Read strategies on: 1. Clearing Out the Cobwebs: Saying Goodbye to Dead Items 2. Ordering the Right Products in the Right Quantity: Reliable Suppliers and Advanced Technology 3. Maintaining an Accurate Inventory Part I: Refining the Receiving Process 4. Maintaining an Accurate Inventory Part II: Now Let’s Count What’s Important 2
  5. 5. Eliminate Hidden Holding Costs: Mastering Your Inventory Clearing Out the Cobwebs: Saying Goodbye to Dead Items An important first step to better inventory management is to identify and eliminate unprofitable items. It’s time to dust off the cobwebs, put those unprofitable, dead items on clearance, and free up prime retail space (and reduce those hidden carrying costs). It’s a tough job, but somebody (you) has to do it. Here is our first lesson in inventory: don’t hang on to items that aren’t making you money now and won’t make you money in the future. Unprofitable items are called dead items for a reason: they garner little to no sales activity. They’re stagnant. Dead items do nothing to enliven and enrich the bottom line. As we mentioned on the first page, they can even cost you in terms of customer service hours, wasted valuable retail space, and reduced cash flow. That’s why you must clear the clutter to get a handle on your inventory. Follow the Steps to a Healthier, Refreshed, and Revived Inventory the value of your inventory and whether you have dollars 33Determinethe wrong items. Look at department and item gross margin return invested in on investment (GMROI). GMROI is a key financial indicator that measures movement against margin. Did your items achieve or fail to meet expectations for generating profit? {{ Back to Basics Quiz Q. What is your largest asset in your business? A. Your inventory! It is the heart and health of your business—keep it in tip-top shape, and you will be rewarded with improved turns and dollars to the bottom line! Mismanage it, and your business—and bottom line—will suffer. Another way to decide whether you need to clear out your inventory is to analyze quantities-on-hand (QOH) versus order points. If your QOH is greater than the order point, you’re probably sitting on excess product and dollars. or items that have outlived their 33Identify underperforming items report. What are your top 20-25 popularity by running a product performance dead items per department? 33Freeacapital. Put underperformers on promotion! Require eachit.department to put plan together to move inventory out and not repurchase Donate them and take the tax breaks. It will free up cash AND prime retail space. Once you clear out the top 20 dead items on your list, move to the next 20 dead items. Your cash will increase as you move these items out. Then focus on moving out items at the bottom 5% of sales (Epicor refers to these items as D-ranked items). Following the Trends Do you have items that were popular back in the 80s? Many retailers often bring new items in, for promotions or to try new lines, but then fail to clear items out because of the thought, “What if a customer asks for it?” As your customers’ needs change, and new products are introduced into the marketplace, your inventory selection should be changing to match those needs. 3
  6. 6. Eliminate Hidden Holding Costs: Mastering Your Inventory Eagle Does That Epicor Business Advisor and Compass allow you to identify GMROIs below a target value at the department, class, or individual SKU level. The Eagle system enables you to run reports like the Inventory Valuation Report (RIV) and the Product Analysis Report (RPA) to identify and rank your ! If an item is key to a product mix, skip it and move on. For D items, you really only need to keep one or two on-hand. Focus on getting rid of excess. you have lot of dead items, rule of 33Going forward: Ifproduct in,athree items should thetargetedthumb is this: for every one new be for close out. into action so that your items generate 33Put a planitem not performing because there are toomore profit. For every SKU ask: is the many similar products? Is it overpriced? Is it outdated? Consider remerchandising the store so customers can discover items that have always been there. “For Every One New Product in, Three Items Should Be Targeted for Close Out” For Example: Typical Hardware and Lumber and Building Materials (LBM) Turns Category of Product Typical Supply Needs with Annual Turns Minimal Risk of Stock Outs Hardware 6-8 week supply 6.5-8.5 annual turns LBM Products 4-6 week supply 8.5-13 annual turns items from high-margin fast-moving items to lowmargin slow-moving items to dead items. Use Epicor Inventory Planner to view charts reflecting Overstock Value by Store, Turns by Department or Store, Slow Movers on Order, and Inventory Trends by Store. 4
  7. 7. Eliminate Hidden Holding Costs: Mastering Your Inventory Did You Know? An article on automatic replenishment by Retail Economics estimates that 50% of out-of-stock events occur because of manual ordering errors. Ordering the Right Products in the Right Quantity: Reliable Suppliers and Advanced Technology If you’re in the purchasing department, you know you can’t rely solely on intuition to make buying decisions. The purchasing staff must be able to seamlessly anticipate future demand, understand the relationship between quantity-on-hand and cash flow, source reliable suppliers, and execute the best purchasing strategies for company profitability. It’s a tall order. If you get it right, you’ve reached the inventory all-stars. However…if you get it wrong, it’s money out-of-pocket tied up in stale stock. Are you willing to risk Here’s our second lesson in inventory: purchasing directs the flow of goods in a company. To manage it well, you’ve got to have these two elements: forcing loyal customers to shop elsewhere? Think of 1. High-quality, accurate, and reliable suppliers what you gain by using technology 2. Accurate inventory data and fine-tuned forecasting capabilities in purchasing. These two components above are crucial for making smarter buying decisions that reflect seasonal changes, trends in the market, and those products your customers want to buy. Identifying Quality Suppliers and Cultivating these Connections 33Source reliable suppliers. {{ Can they deliver quality merchandise at a suitable price on time? You should be meeting with prospective suppliers at their plants whenever possible. Maintaining an accurate inventory has as much to do with the quality of your suppliers (and the accuracy of their shipments) as it does with the quality of your own inventory processes. 33Don’t immediately jump at your suppliers’ incentives. {{ Review suggested orders before meeting with a product sales representative so you get the product and quantity you want and need, not what the rep wants to sell. One customer of ours had an inventory manager that wanted to purchase five truckloads of a product to take advantage of a supplier’s winter buy incentive. Using sales and inventory data, it was clear that only two truckloads were needed. The dealer saved money and kept from having to store eight months’ worth of inventory on hand. 33Optimize order cycles to prevent stock-outs and reduce shipping costs. 33Use vendor EDI communications to reduce ordering mistakes, receiving errors, and possibly gain discounts on orders. 5
  8. 8. Eliminate Hidden Holding Costs: Mastering Your Inventory Eagle Does That! Use Inventory Planner for Setting More Sophisticated Order Points Inventory Planner assists you in determining the most optimal levels of inventory. It ties inventory levels directly to customer satisfaction and Use Technology to Streamline Purchasing and Gain Fine-tuned Forecasting Capabilities 33Leverage your ERP system for calculated and weighted order points to reduce seasonal spikes, stock outs and overstock, and trim inventory costs markets to instantly your inventory and 33Use smartphones at buyinghave in inventory and accessyou need to purchase. determine the quantities you what This prevents you from overbuying and eventually having to put your overstock on clearance. items 33Set safety stock high for popularensure in the system.atReview quantities-onhand for popular items regularly to you won’t be risk for stock-outs of your most popular items. Lower the safety stock level for less popular items that also have longer vendor order cycles. your ERP system to keep multiples so 33Use only ordering correctly butbetter track of orderthe right pricethat you’re not selling those items at and quantity. Examples: {{ Sod bought by pallet, sold by piece loyalty. The software offers {{ Mulch bought by truckload, sold by scoop precise forecasting capabilities {{ Rope bought by spool but sold by foot that analyze best practices and historical sales to most Eagle Does That! sales levels. The Eagle system can keep track of units of measure in its inventory Maintenance file. accurately predict future balancing stock more effectively across 33Reduce order quantities bysystem to auto-generate transfers and reduce multiple stores. Use an ERP the time it takes to manage a multi-store inventory. Transferring inventory will prevent you from wasting money on more of same products you already have. One of our customers set up automatic transfers on overstocks of C and D items (Eagle-speak for slow-moving products) as long as the transfer value was over $50. They reduced their buys with their co-ops, increased turns by one, and reduced inventory value by $80,000. These improvements were partly attributable to setting up automatic transfers. more 33Determine help!) accurate future demand using forecasting models (Eagle can 6
  9. 9. Eliminate Hidden Holding Costs: Mastering Your Inventory Maintaining an Accurate Inventory Part I: Refining the Receiving Process When your purchasing department is buying more accurately and relying on quality suppliers, we suggest you then focus on receiving. Do you have a receiving process you trust, one that allows your employees to receive new shipments quickly and efficiently? Here’s our third lesson of inventory: An accurate, trustworthy receiving process paves the way for better accuracy in other areas of the business. Likewise, mistakes at receiving create errors throughout the store. The Ultimate Goal for Your Receiving Team Your receiving mission: Accurately move items as fast as possible from the trucks to the shelves and, at the same time, handle the merchandise as little as possible. Receiving Practices for an Accurate Inventory out 33End the practice of puttinghelpedmerchandise before it has been received into inventory. It may have in the past with maintaining accurate costs and quantity, but if stock is sold prior to being available in the system, it throws inventory counts into the negative. receiving against PO, which 33Move from blind receiving toincreases accuracy ofacounts. holds your vendors more accountable and {{ Back to Basics Quiz Q. What is Blind Receiving? A. Blind Receiving is the process when a shipment is not checked against a PO. Instead, the vendor is trusted to have shipped the order correctly, and the items are immediately put into inventory. This method saves time but can lead to inaccurate counts. Ensure that every item processed by receiving has a purchase order with accurate quantities and pricing {{ Go a step further and make sure POs are on file with the receiver before a shipment even arrives at the dock products 33Aim to receive newservice into inventory the same day as they arrive to improve customer {{ Immediately update inventory levels and costs and accurately pass off receiving detail to accounting to streamline the payables process RF 33Use RF scanners to check each SKU against the PO.You scanners help you capture UPC numbers before products go to the floor. can quickly receive new goods while keeping labor costs low. {{ Print new bin labels so that shelf pricing is updated as items are being stocked. {{ Keep special orders to the side to be properly labeled for customer pickup. enough physical 33Allowcomplete the job. space in the receiving area for your team to more easily 7
  10. 10. Eliminate Hidden Holding Costs: Mastering Your Inventory Managing Supplier Relationships to Improve Receiving Eagle Does That The Advanced Receiving software in Eagle assists and simplifies correcting of errors in quantity, pricing, or missed freight charges to ensure that inventory and payables are accurate. Also, the latest RF scanner Vendors are so important. They effect both your purchasing and receiving departments. They can really make or break your attempts to control your inventory! That’s why it’s important to get these relationships right. 33Catch vendor shipping errors at receiving to reduce detective work when the invoice arrives weeks later. proactive with vendors. Insist on confirmations for all drop-ship material 33Be POs can be created/updated before products arrive. Vendor confirmations will so help you load new items into inventory before they clog the receiving dock or get put on shelves and sold under generic or dump SKUs. performance. Reduce 33Track vendors’vendors consistently shipissues in receiving by tracking fill rates to know which correctly. If a supplier is reluctant to improve or unwilling to reduce error rate, search for a new supplier. 33Use EDI Communications {{ Paperless tracking is most accurate and error free. {{ and accuracy in receiving. Receive notification of short or no-shipped items as well as substitutes and alternative items prior to the truck even arriving. {{ provides exceptional speed Update line item cost changes from vendors. {{ software, Eagle Mobile, Ask for supplier discounts for ordering with EDI (ordering through EDI means turning in orders faster, using less paper, making fewer errors). Receiving is like the hub of a wheel: from this central point, it touches all areas of the business. It’s worth taking time to get this process right! Quick Five Keys of Receiving 1. Encourage accurate and consistent processes. 2. Maintain accurate POs. 3. Reduce check-in times with RF scanners. 4. Use EDI vendor communications and quality suppliers. 5. Provide enough room in receiving area. 8
  11. 11. Eliminate Hidden Holding Costs: Mastering Your Inventory Maintaining an Accurate Inventory Part II: Now Let’s Count What’s Important Once the items are received they go out into the retail store, and then things get dicey. To maintain an accurate inventory count, you’re going to have to physically count your items on the shelves and match them against your ERP system’s quantities. However, the latest strategies in inventory management suggest that you don’t have to count everything like you do in traditional year-end inventory or in cycle counting. Here’s our fourth lesson in inventory: choose the inventory counting method that provides the most efficient and accurate inventory control for your business. While most are still practicing cycle counting or yearend counts, another alternative is to sign up for managed inventory accuracy services which analyze your data and send you monthly customized count sheets and inventory reports to better assist you in inventory control. What is managed inventory accuracy? Managed inventory accuracy is a new strategy focused on counting a selection of important inventory in order to better control inventory, monitor accuracy, identify potential theft, reduce dead items, and recover frozen SKUs. It is an alternative to traditional cycle counting. Inventory Accuracy Management Tips daily with the goal to completely 33Practice cycle counting each item 3x/year (sections should eliminate8year-end inventories and to count be small ft of gondola or peg board) or try a managed inventory accuracy service (Mango Report is one of the companies providing this new service). remind staff of your goals improve staff 33Regularlyand invested in the process.to your staff accuracy–get themaintain involved If is invested, they’ll the momentum. Turn a good employee into a key employee devoted to inventory control. {{ Assign staff to be accountable for specific aisles or departments as well as any back stock for those aisles–and include incentives for tidiness and product knowledge, improvements in margin, etc. {{ Train clerks to audit products at POS (does it have a wrong UPC code?) {{ Aim for accuracy everywhere (purchasing, receiving, point of sale, transfers, returns, write-offs) Involving your staff in inventory control brings dollars to bottom line, reduces stock outages, and eliminates mistakes at POS, while improving overall morale. 9
  12. 12. Eliminate Hidden Holding Costs: Mastering Your Inventory 33Establish basic rules Eagle Does That Use Eagle Mobile to speed up physical inventory, receiving, UPC capture, print bin tags, and attach location codes to items. {{ Every item stocked or sold has unique SKU – limit exceptions {{ Every item is to have a bar code {{ Bar codes affixed to stock or stock locations must be accurate always {{ Policy on returns, refunds, exchanges are clear and consistent (address defective items, validation procedures)–post policy for all to see 33Maintain back stock like you would maintain your store RF scanners to capture counts, create orders, update prices, and print 33Uselabels bin {{ This is where you can evaluate quantity-on-hand variances (differences between what is counted and what is in system) and also better track inventory shrinkage–if a process is generating shrinkage, you can take steps to correct it. When you have an environment that encourages accuracy, you’ll end up with: 33More accurate and timely counts 33Finely tuned inventory control 33Better, more reliable numbers 33More potential revenue since your business can stay open during counts 33Better customer service–what is in the system is on the shelves To continue your quest for inventory accuracy and better inventory control, check out the Epicor booklet The Quantity-on-Hand Best Practices White Paper. Or call us today at 888.463.4700 to find out more about how you can better manage inventory. 10
  13. 13. About Epicor Epicor Software Corporation is a global leader delivering business software solutions to the manufacturing, distribution, retail, and service industries. With more than 40 years of experience, Epicor has more than 20,000 customers in over 150 countries. Epicor solutions enable companies to drive increased efficiency and improve profitability. With a history of innovation, industry expertise, and passion for excellence, Epicor inspires customers to build lasting competitive advantage. Epicor provides the single point of accountability that local, regional, and global businesses demand. For more information, visit www.epicor.com. Contact us for more information on Epicor Products and Services  +1.888.463.4700  Worldwide Headquarters San Francisco Bay Area 4120 Dublin Boulevard, Suite 300 Dublin, CA 94568 USA Toll Free: +1.888.448.2636 Direct: +1.925.361.9900 Fax: +1.925.361.9999 Latin America and Caribbean Blvd. Antonio L. Rodriguez #1882 Int. 104 Plaza Central, Col. Santa Maria Monterrey, Nuevo Leon, CP 64650 Mexico Phone: +52.81.1551.7100 Fax: +52.81.1551.7117  eagle@epicor.com  Europe, Middle East and Africa No. 1 The Arena Downshire Way Bracknell, Berkshire RG12 1PU United Kingdom Phone: +44.1344.468468 Fax: +44.1344.468010  www.epicor.com/eagle Asia 238A Thomson Road #23-06 Novena Square Tower A Singapore 307684 Singapore Phone: +65.6333.8121 Fax: +65.6333.8131 Australia and New Zealand Level 34 101 Miller Street North Sydney NSW 2060 Australia Phone: +61.2.9927.6200 Fax: +61.2.9927.6298 This document is for informational purposes only and is subject to change without notice. This document and its contents, including the viewpoints, dates and functional content expressed herein are believed to be accurate as of its date of publication, October 2013. However, Epicor Software Corporation makes no guarantee, representations or warranties with regard to the enclosed information and specifically disclaims any applicable implied warranties, such as for fitness for a particular purpose, merchantability, satisfactory quality, and reasonable skill and care. As each user of Epicor software is likely to be unique in their requirements in the use of such software and their business processes, users of this document are always advised to discuss the content of this document with their Epicor account manager. All information contained herein is subject to change without notice and changes to this document since printing and other important information about the software product are made or published in release notes, and you are urged to obtain the current release notes for the software product. We welcome user comments and reserve the right to revise this publication and/or make improvements or changes to the products or programs described in this publication at any time, without notice. The usage of any Epicor Software shall be pursuant to an Epicor end user license agreement and the performance of any consulting services by Epicor personnel shall be pursuant to the standard services terms and conditions of Epicor Software Corporation. Epicor, Business Inspired, the Epicor logo, Eagle, and Compass are trademarks or registered trademarks of Epicor Software Corporation or its affiliated companies registered in the United States and certain other countries. All other trademarks mentioned are the property of their respective owners. Copyright © 2013 Epicor Software Corporation. All rights reserved.