Redefining Retail

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Redefining Retail

Imagine knowing the exact amount of each SKU in each store throughout your chain. Envision eliminating out-of-stocks and excess inventory, leaving on-hand only what will sell in the next two weeks.

What about having a computer generate individual store orders based on what has sold in the past and what it expects to sell in the future? Or getting a handle on shrink once and for all?

After a successful launch of item-level inventory and computer-assisted ordering (CAO) for its cigarette category — which saved the company $1.5 million in overstock alone — Flash Foods Inc. is attempting to make all of these dreams a reality by expanding the system across all of its 186 stores. "This has been a goal of our company ever since we started scanning back in 1997," said Jenny Bullard, CIO of Flash Foods, a division of the Jones Co., Waycross, Ga. "It has been one of the big automation leaps our CEO has been wanting to make for several years. As we started doing item-level inventory with CAO in our cigarette category, we saw the benefits of having better control over our inventory and eliminating out-of-stocks and overstocks."

It's CAO that's driving the transition, according to Bullard. Item-level inventory helps the company move toward CAO, which in turn allows it more control over inventory — which is the real bottom line.

The company adopted a step-by-step approach to implement the new procedures and systems, which began in the late '90s with scanning. "We have been receiving our product at item-level since we automated the store," said Bullard. "Today, we take a perpetual retail inventory."

And in the midst of all this, the company plans to switch from retail accounting to cost accounting across all categories as well.

The implementation is beginning with a testing phase at a beta store in Waycross, Ga., and the company plans to implement item-level inventory, cost accounting and CAO across the chain by the third quarter of 2006.

One Item at a Time

Knowing it eventually would implement item-level inventory and CAO throughout the chain, Flash Foods began the practice of receiving stock at item level years ago, which helped the company prepare for today's changes.

The company plans to start item-level inventory and CAO with its wholesale company — which, like Flash Foods, is owned by The Jones Co. This will "make it easier for us because the file generated at store level will be on our network," said Bullard. In the future, the company plans to explore expanding the processes to direct-store-delivery (DSD) suppliers.

"The way we are approaching item-level inventory will completely change the way store-level inventory is taken," explained Bullard. "Right now, the store managers are counting the inventory on their cigarettes since we switched to item-level and CAO in this category. But with the new system, we will have our in-house auditors in charge of inventory. Now the managers will only have to review the numbers with the auditors on the days they come to count."

An auditor will visit each store once a month and, using a handheld PSC-PT 40 Falcon unit, will scan the UPC number for each item and enter the quantity.

"The new system will add some hours to the auditor's job because it will take him or her longer to count the store at item level," noted Bullard. "Right now they are counting the store at the retail value of an item, and they group things together. For example they will count all the Coke products that retail for 99 cents, which could be 100 products. Instead of grouping all 100 by the same retail price, they will have to break it down into individual flavors of Coke."

This is where the biggest amount of training will lie, said Bullard. The auditors need to learn to take inventory at item level. "Today they have an adding machine and they enter in a count of products times the retail value, but now they will be scanning the items and entering the quantity."

As a result of turning the majority of inventory responsibility over to the auditors, store managers will spend less time on paperwork and more time merchandising the store and working with employees and customers.

"I am very much looking forward to the change," said Dorothy Mercer, store manager at the company's beta test store in Waycross. "We will just be checking quantities with the auditors. We will be eyeballing it to check if the auditor put down 20 cases for a product that we actually have 20 cases there. Now we can spend time merchandising the store better and be more hands-on in the store and with employees."

Employees have already been trained on accurate scanning and returning of items at the register, which will be "critical to the item-level inventory method," said Bullard. "It will be imperative for managers to train and continually stress to their employees the importance of scanning all items at the POS."

For example, if a customer buys a 2-liter bottle of Coke, a 2-liter bottle of Pepsi and a 2-liter bottle of Dr Pepper, and the clerk scans only one and multiplies it by three, the item-level inventory is off because it will appear that three bottles of Coke were purchased instead of three separate SKUs, explained Phil Settle, director of marketing at Flash Foods.

Additionally, when CAO is taken into consideration, the system will think it is down three bottles of Coke, and order more than is necessary, while not ordering enough Dr Pepper or Pepsi, thinking the inventory is still on hand.

"It will be an ongoing process with training to make sure everything is scanned properly, but if it is, the system works like a charm," said Settle.

One of the biggest benefits to item-level inventory is knowing where your inventory is as well as locating what is missing. This will cut down on shrink because missing items can be pinpointed down to the SKU.

"In the past, our auditors would do a count and tell you your inventory is $2,000 short, but there was never a way of knowing where the shortage was in the store," said Settle. "But with the new system we can see which items are missing."

The Perfect Order

Using CAO, which relies heavily on a computer system to create an accurate order, should theoretically cut down on out-of-stock items as well as the large amounts of excess inventory sitting on the back-room shelves.

In a sense, CAO allows each store to create the perfect order for each category. "Whether it is a slow-moving or fast-moving item, the system constantly adjusts the build-to number based on fluctuations in sales," said Settle. "For instance, in the cigarette category the system uses the last 13 weeks of sales information to obtain an average weekly movement. It then builds an order for a two-week supply based on that sales average and current quantity on hand."

He continued, "Now the store will have two weeks of inventory on hand instead of the six to eight weeks of inventory we don't need, so there is a definite cost savings in excess inventory."

The biggest benefit, of course, is eliminating out-of-stocks, which Flash Foods has seen occur in its cigarette category over the past three years of applying item-level inventory and CAO.

"We have virtually eliminated out-of-stocks on our top brands for cigarettes," said Settle. "It's the fact that it is customized inventory for every store and is based on each store's sales. We go in and set a minimum display quantity for the category, but if sales are higher than that number, the system will base the number to order on sales. It's computer-assisted ordering, but it really isn't 'assisted' much. The computer brings up the order and the managers review it to see if they want to add or adjust it."

Getting Technical

Working with its back office and POS provider to create the software needed, Flash Foods will be able to achieve real-time perpetual inventory.

"We will be able to do CAO on any product in our store," said Bullard. The application for ordering will be based at the store and housed on the back-office computer. Additionally, when auditors take inventory using the Falcon handheld, it will be in sync with the back office and create a real-time inventory.

"When the auditor goes into the store once a month, he or she will scan the UPC number on items with the handheld unit and enter the quantities, which will be fed into the back-office system with a time stamp of when it was counted. The back office system then takes the inventory from the beginning of the day, adds the inventory purchases and subtracts the sales at the register that took place before the actual count. We then compare this perpetual book inventory number with our actual count and the manager and auditor review any variances."

Switching to Cost

For years, the retail industry has valued its inventory based on the retail price of an item.

"The biggest reason retailers take inventory at retail is because it has been the industry standard for many years and it is easier to take your inventory," said Bullard.

With retail accounting and inventory, there is no reconciling your count by the number of items, and because the information is not as detailed, it is less time consuming to enter the information into the computer.

"If managers are looking at an invoice from Coke, and there are 30 items, but 20 are the same retail price, instead of entering them as 20 different items, they can enter only one item," explained Greg Higginson, chief accountant at Flash Foods. "They will put Mello Yellow, Coke and Sprite in as the same, but with item-level and cost, it has to be entered in one at a time."

But what if a company valued its inventory at the price it costs to sell rather than the retail price? "You get a truer gross profit percentage," according to Bullard.

"The industry is wrapped around retail accounting and inventory, and what is holding everyone back is the way they receive inventory. I don't think a lot of people are receiving at item level and that is necessary to switch to cost. You can't do cost accounting without item-level receiving because you have to know how many of an item you have in order to know what the item cost you."

When Flash stores receive a delivery, the invoice shows both the cost and the retail value they are receiving by item level. Their pricebook then shows both the cost and the retail value, which allows them to utilize the cost information.

The auditors and store managers, who before were concerned with retail prices — especially managers, who needed to reconcile their paperwork with any promotions that went on at store level — will only be concerned with the cost and count of each item.

"Our base retail varies from store to store, and with promotions, from week to week at times, and now our auditors will only have to worry about the UPC number and the count," said Bullard. "It may take more time because they have to scan and enter the quantity, but it will end up being easier for them."

Additionally, it is the store manager's responsibility when it comes to inventory shortages. They are used to looking at retail price errors, which can throw off their gross margin reports, according to Higginson.

"They won't have to worry about these reports anymore with the switch to cost," he explained. "They will only have to worry about keeping the item-level inventory correct."

There are also benefits to the accounting department, which has to take each retail price down to cost when doing retail accounting. "When you do your inventory at retail, accounting has to bring the number down to cost and there is always a gray area that can vary from month to month," said Bullard. Cost accounting will eliminate this step as well as the time taken to work with the promotions.

"If you put an item on promotion, the retail price changes and it shrinks your margin, and a spike in one area over a period of time can throw off your gross margin," said Higginson. "But if you were running on cost, you would never notice the promotion. It's easier to work with and feel comfortable with your gross margins at the end of the day with cost accounting. There is less guesswork."

Only the Beginning

While Flash Foods has been working toward the goal of item-level inventory and CAO for years, the company is just beginning the testing of these sytems storewide.

"Moving your inventory from retail to cost and down to item-level is a culture change for your company because most of the company is centered around retail," noted Bullard.

But the benefits outweigh the struggles to get started, and Flash hopes to have all stores up and running on the new systems by the third quarter of 2006.

"A lot of the drugstores and Wal-Mart are already at item-level, but c-stores have had to get so many processes and systems in place first," said Bullard. "We feel like it will allow us to have the product in the stores that the customer wants."