F. Curtis Barry & Company » Forecasting & Inventory Management

Registration Has Begun for Online Inventory ShareGroup

Jeff Barry — Thu, 10 Sep 2009 20:25:02 +0000

With the economy where it is most travel budgets have been cut to a bare bones minimum at most catalog and eCommerce companies. That means that most industry conferences have had a substantial reduction in the number of registrants – even when they give away free VIP passes to attend. We know all too well how tough it is to sell a conference; as most of you know we offer a series of warehouse, call center and inventory ShareGroups for catalog and eCommerce companies. With such a tough sell we decided to offer a ShareGroup that everyone can join no matter the size of their budget.

We have started our first online ShareGroup – the Inventory Management ShareGroup. Businesses that have a limited travel budget or can’t take the time to be out of the office can join and receive annual benchmarking data and have the tools to discuss strategies and issues that they are encountering in their business.

The Inventory Management ShareGroup registration and data collection has started and goes through October 9th, 2009. We will then have an indepth conference call discussion regarding the data once all of the output reports are distributed back to the members. After the data discussions we kick-off our series of monthly 1 hour conference calls to discuss hot topics identified by members prior to the call. Lastly, in between the calls we have an online discussion forum that is always available to all members to post and respond to questions regarding strategies and hot topics.

Please take a second to visit our website and read the ShareGroup overview and schedule as well as review the type of data we are collecting and analyzing. We hope to see you register for this great ShareGroup.

Contact Jeff Barry with any questions about the ShareGroup or our consulting services.

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Escalate Retail Delivers Landed Cost Capabilities

Brian Barry — Thu, 30 Jul 2009 14:33:36 +0000

In a recent press release, Escalate Retail has landed a beta site for its newest release. And it’s the direction the application has taken that will really allow multi channel businesses to reach peak efficiency and profitability. Here is an excerpt and one of the most important pieces of the press release:

San Diego – July 13, 2009 — Escalate Retail today announced that Homemakers, Iowa’s largest furniture store, will launch as the Beta partner for the latest Enterprise1 version 12.1 this July. Additionally, Homemakers will upgrade its customer-facing solution by moving to the latest release of Customer1 version 4.2.

Version 12.1 of Enterprise1 provides Homemakers with functionality they can begin using immediately, including:

True landed cost tracking: Provides a breakout of all costs for freight, customs, and more for every item on a purchase order; also tracks that cost throughout the life of the item within Homemakers’ inventory until the item is sold

True landed cost is one of the most important cost aspects that a company can utilize. What is so significant about landed cost? Landed cost will allow you to understand the following:

1. It will allow you to really understand how much freight, duties, agent commission, etc. you are spending to bring in the product, and its true impact on the margin earned.

2. It also allows you to drive at the true net contribution to profit for that item.

3. A company can also utilize the landed cost to determine their buying strategy by understanding whether they can afford to bring in smaller shipments on a more frequent basis, turning the inventory faster and investing less cash in inventory.

I feel that this type of functionality will greatly improve a company’s understanding of product profitability while assisting with the development of a comprehensive inventory strategy. I encourage you to read the rest of the press release and to visit Escalate Retail online at http://www.escalateretail.com

Need help reviewing your inventory strategy, if so we offer inventory assessments for typically $6,500 – designed to be performed quickly with a high ROI and actionable recommendations – click here to learn more.

Brian Barry is a Senior Consultant with F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking; Learn more online at: http://www.fcbco.com.

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Understanding Your Demand Winners

Brian Barry — Wed, 22 Jul 2009 14:09:07 +0000

Almost every company that we work with can easily rattle off and name the top 10-20 products with the highest gross sales, or demand winners. But often times these same companies couldn’t tell us which of those items are profit winners. The first guess is usually those core items that they never want to be out of stock on because maybe they are private label or unique products but usually have a nice price point and good margin. But in any case, companies should be able to point out the top demand winners but then also be able to point out the most profitable items as well, or those that contribute the highest net contribution to profit.

What do we mean by net contribution to profit? Net contribution is derived from taking an item’s (or category etc) gross demand dollars and subtracting out the cancel and return dollars. This leaves you with net sales dollars – or most importantly what you put in the bank. Now take the net sales dollars and subtract out that item’s allocated marketing, operational (call center and fulfillment) and lastly its general and administrative (G&A) dollars. This leaves with the true profit or loss earned by that item.

Here is a perfect example of understanding demand winners but not evaluating profit winners. Just the other day we were analyzing a clients merchandising results for spring and early summer 2009. We reviewed the top 25 demand winners with them and then allocated the additional expenses form marketing operations and G&A. The results were very interesting.

Nothing too out of the ordinary in the top 5 or so items – they were the top demand winners and for the most part were all in the top 5 from a net contribution to profit perspective.

But the 9^th highest demand winner happened to be ranked 621 in terms of profitability out of 1630 products.

The 12^th highest demand winner was ranked number 1,630 – making it the least profitable item offer in the spring and summer campaigns.

Numbers 17 and 18 of the top 20 were ranked in the bottom 20 of the all time least profitable products.

In this case these products fell into two categories. The first category was the low retail price and high margin percent. But the problem is that these products were under $10 with a 48% gross margin percent. After allocating marketing, operational and G&A expenses these items lost a tremendous amount of money – especially considering the sheer number that were sold.

The second group were those items that were technical in nature and required a lot of question and answer in the call center but were also fragile. So their allocation of costs were much higher than most other items. Longer to answer customers questions and much more care and packaging in the fulfillment center. This ate up margin dollars, of which the margin was relatively low compared to other items.

It’s important to understand how items are performing, which ones are your “bread and butter” and those that add to the bottom line instead of chewing up the bottom line. When was the last time you did a thorough merchandise analysis and revealed what the numbers are really telling you? How many of your top 20-30 demand winners are also your profit winners? If you can’t answer these questions then maybe it’s time that we talked about assisting you with an in-depth merchandising analysis. Call or email us and see how we can assist you with this process today.

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What Is Your Inventory Strategy For Christmas 2009?

Paul Sobota — Mon, 20 Jul 2009 18:45:39 +0000

A few years ago I was in Australia in July and saw a lot of retailers advertising specials for “Christmas in July”; a novel idea as it is winter in the southern hemisphere at this time. Well I have started seeing ads for layaways from Kmart and Hallmark debuting their Christmas ornament collection. U.S. retailers are doing this for different reasons than our Aussie friends.

U.S. retailers are trying to stimulate sales now as merchandise is arriving in stores for fall, and back to school. U.S. retailers don’t want to be burned like they were last year, so inventory levels will not be purchased anywhere to the extent that they were last year.

According to The Commerce Department, inventories are down 8% through May from last year at this time.

Here is a sample of what our clients are saying about their Christmas inventory planning:

Hard Goods Catalog

Limited initial buying. Going to read sales forecast after the catalog is in the field and then place larger re-orders. Willing to sacrifice some early backorders to limit over inventory exposure. We can not have excess inventory on hand at the end of December.

Children’s Catalog

Ours is really business as usual, we have ramped up with a few more drop shippers than we have in the past, but we still continue to grow our import business and rely a little bit less each year on domestic shipments.

Hobbyists

Just in time as much as possible and attempt to carry less inventory Holiday 2009 vs Holiday 2008.

Home Catalog

Our plan is flat with Holiday 2008 actual demand. Less decorative and gift items, more focus on functional products which tend to carry over from campaign to campaign so a better exit strategy. In addition, we are ordering within lead-times, thus closer to demand. This has been a shift from the past when the need get your orders into the production cycle was critical. Consequently, our open receipts are significantly down from last year and even budget. We are finding that Chinese vendors, in particular, are turning orders very quickly.Inventory is the biggest balance sheet asset in most businesses. Slow selling, discontinued and obsolete inventory can build up reducing inventory turns, cash flow and space in the distribution center.

Will consumers have the deals they had last year? I don’t think so. Scaled back inventory levels will sell out with fewer sales events leaving some consumers without much of a selection the closer we get to December.

U.S. retailers touting “Christmas in July” are looking for consumers to commit on electronic and large ticket items now while they may have a few extra dollars or through the utilization of layaways to secure there Christmas gifts.

Is your inventory at the right level for this Fall selling season? Have you adopted the best practices for forecasting and managing inventory? Have you implemented vendor compliance policies? Do you need to upgrade your systems?

F. Curtis Barry & Company can assist with evaluating your company’s inventory practices through our proprietary inventory assessment process. Contact us today to learn more about managing inventory profitably.

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Internal Scorecards for Merchants and Inventory Buyers

Brian Barry — Mon, 20 Jul 2009 17:40:07 +0000

Every day, companies evaluate a merchandise vendor’s performance against goals and their worth to the company through a vendor scorecard, such as:

§ How many backorders were caused by the vendor?

§ What are the gross sales for the vendor?

§ How many RTV’s or defective products for the vendor?

§ How many early deliveries and late deliveries for the vendor?

§ What is the overall net contribution to profit for the vendor after all expenses?

But how often do you set the same goals and objectives for your merchants and inventory managers and create an internal scorecard? Often times we find that companies have rigid standards for their vendors and goals in terms of margin and profit, but often times they don’t measure their staff in a similar way. By not doing so, you leave the door open for problems that could erode your margin.

Develop a similar list of metrics that are important to your business. Convey your goals to each person and measure the actual performance against their individual goals. What are some that companies use?

Category sales
Gross margin and percent
Return percent
Cancellation percent
Adherence to vendor compliance
Turnover
Vendor coop
Net contribution to profit
“Markdowns”

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When Should a Good Inventory Buy Be Avoided?

Brian Barry — Mon, 20 Jul 2009 17:24:10 +0000

You might be asking yourself – if it is a good buy, how could it be bad? First, let’s take a look at several aspects. Companies have always been aggressive with squeezing every margin dollar they could, even more so in this economy. And in order to do this many have looked over seas to foreign manufacturers as a way of increasing the potential margin. The downsides to this is typically larger minimums from manufacturers, in addition to cubing out shipping containers for maximum efficiency, and very long lead times.

Let’s take a look at how some of this can make what seems like a good inventory buy a bad buy. A while back we worked with a company that imported a specific merchandise category from an Asian manufacturer. The lead time for these products was 8-9 months. By doing this they were able to go from an average gross margin of 44% to 55% with an average price point of $51.

Recently they made a purchase from the same manufacturer which allowed them to go from a 55% gross margin to 60% gross margin – or go from $28.05 in gross margin dollars to $30.60. The downside was a substantial increase in the vendor minimum and a much shorter set of payment terms. But still it seemed like a good buy, and they felt like they could sell through the extra quantity.

The reality of the situation was the quantity purchased turned out to be a 15 month supply of inventory causing several problems that made this a very unprofitable buy. Here’s how:

1. A 15 month supply of inventory equates to less than .8 turns annually.

2. With a 60% gross margin and .8 turns annually, the gross margin return on investment (GMROI) is 0.48; in laymen’s terms this means for every dollar they invested in inventory purchases, the income is less than $0.48. This is devastating to the business. You can calculate GMROI by multiplying the decimal equivalent of your gross margin (50% = .50) times your annual turns.

3. The increase in inventory levels and the length of time the product was warehoused cause several issues. First the warehouse was running close to capacity and this prolonged the pain of running low on warehouse space. Secondly, the gross margin was further eroded by the inventory carrying costs, the longer it sat the longer the margin was eroded.

4. Most importantly, the company tied up much more cash in inventory then they should have, by not turning the inventory quickly a significant portion of the inventory will need to be liquidated in order to free up cash and invest in other items. Fifteen (15) months is a long time when you need to continually refresh the product mix with new products. The liquidation will further erode the gross margin.

5. Not only did this tie up more cash than they should have but they had to pay the vendor even faster than normal.

These factors come into play and can make what seems like a good buy a very bad decision. Having to carry more inventory, invest more cash in inventory and pay the vendor in even shorter terms will lead to several problems. You should stick to a well disciplined buying and inventory strategy and run all the numbers before deciding whether or not it is a good buy. If the numbers work out then consider making the investment in inventory. Just don’t erode the increase in gross margin with higher shipping costs, higher inventory carrying costs, and then end up liquidating a large portion of the inventory.

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Merchandising and cost of backorders

Brian Barry — Fri, 17 Jul 2009 14:46:03 +0000

The other day we worked with a mid-sized gift marketer to have them analyze their Spring book and web campaigns from a price range perspective. They had never done this and were surprised to find that 39% of their SKU’s were $25 and under – the average price point in this group was actually $11.15. This group of SKU’s represented 32% of the gross sales but only had a 44% gross margin which meant that on average they were only earning $4.91 per SKU. After allocating marketing expenses, operational costs and general and administrative costs – each of these SKU’s lost over $10.00 each time they were ordered. What made the situation worse is that this price point also represented around 59% of the total backorders. With their cost of processing a backordered unit being around $12 this made the loss even greater – more like $22.

This company is now working to develop a strategic merchandise plan to improve the average price points over time. Something that cannot be done overnight or you will alienate the existing customer base. In addition they have opted to avoid taking backorders on low dollar and low margin products to avoid the additional costs. You could also decide if the items are essential to customer service to order larger quantities.

It is extremely important for companies to analyze merchandising results, taking in to account not only whether or not an item covered the marketing expense, but also the cost to take and process orders and the general and administrative expenses. By doing this you essentially create a P&L at the item level as well as the sub-category and category level. This allows you to truly understand what your best sellers are and whether or not they are delivering positive dollars to the bottom line. Use this same model of analyzing profitability and sort the products by price ranges and I am sure you will find some interesting trends. Review this on a regular basis and make changes accordingly.

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Inventory turns and age of inventory

Brian Barry — Fri, 17 Jul 2009 14:37:55 +0000

In working with a client the other day, we were analyzing several inventory KPI’s. Their goal was to turn the inventory at least 4 times annually, up from the 3.15 turns they are doing today. We then talked about how long they carried inventory before they deemed it to be “aged” or beginning to get old. Their response to this question was 20 weeks.

This is a classic example of where most small to mid-size companies are from an inventory management perspective and using KPI’s. In the above case, by choosing to focus in on inventory as it hits 20 weeks on the average and older you are really aiming to only do 2.6 turns annually. Take 52 weeks in a year and divide it by the age in weeks that you deem “aged”, in this case 20 weeks and you get 2.6 turns annually.

In order for this client to be hitting 4 turns annually, they need to be concerned with inventory as it hits 11-13 weeks in age and develop a strategy to move the inventory to achieve their goals. It is important for companies to develop the long term strategies followed up by the actions or tactics to achieve those goals. It is also important to understand the goals, agree to how they will be measured and report on them regularly.

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Ways to Save Money

Curt Barry — Mon, 11 May 2009 15:30:48 +0000

The following is a brief email that we received from one of our eNewsletter readers, in response to an article we wrote about saving money in your company…

Curt:

Just received your electronic May newsletter and wanted to send you some ways we are saving money.

Cut utility usage
Drop non productive associates
Reduce fulfillment goals from 92% to 85%
Keep 15% of your OTB in your back pocket
Only mail your best customers ( we are thinking of prospecting again this summer )
Drop marginal books
Flow inventory, more smaller orders, more frequently.
Keep margins high, but salt the assortment with redlines for the illusion of markdown.
Offer free personalization instead of a mark down.

We are actually making money on a reduced sales plan.

Hank

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From the Dark Side of Productivity

Bob Betke — Mon, 02 Mar 2009 10:05:39 +0000

I’m with a firm that spends much of its time helping clients improve productivity and reduce costs. We are ever mindful of the negative side—the “dark side”—of productivity projects. What is the dark side? It’s what happens if we don’t take the human factor into account. As someone with 30 years of experience in industrial engineering, I can tell you that there is no way to achieve long-term success in a re-engineering project without considering the effect it will have on people.

Two articles in the Wall Street Journal serve as stark reminders of this reality. The first, “Retailers Reprogram Workers in Efficiency Push” (September 10, 2008) described installations of workforce management software at AnnTaylor Stores Corp. and other retailers. According to the article, workforce management systems are “sweeping the industry as retailers fight to improve productivity and cut payroll costs.” As the Journal noted, some workers aren’t happy about the trend, saying the systems leave them with shorter shifts, make it difficult to schedule their lives, and “unleash Darwinian forces on the sales floor that damage morale.”

The Ann Taylor system keeps track of the usual productivity metrics: average sales per hour, units sold, and dollars per transaction. The system schedules the most productive people during the busiest hours—and, because it awards more-productive salespeople with favorable hours, it gives employees an incentive to persuade shoppers to buy things. And it’s worked, as far as the overall economic goals are concerned; the chain’s director of store operations said it has helped turn more store browsers into buyers. But, as the WSJ story made clear, it also resulted in the loss of some veteran salespeople who had developed long-term relationships with customers. By focusing strictly on the metrics that could be easily measured, the system actually penalized associates whose selling style depended on longer interactions with the customer—even though such relationships often assured continued customer loyalty. Others found their hours cut back to the point where they could no longer afford to make the trip to work. During busy times, the formerly congenial staff began competing for customers, sometimes stealing them away from one another. While productivity was, indeed, increased, perhaps the most surprising unintended result of the system was that this story, with all its unflattering aspects, was splashed across Page A1 of The Wall Street Journal.

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F. Curtis Barry & Company » Forecasting & Inventory Management

Registration Has Begun for Online Inventory ShareGroup

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