Retail and Inventory Control
Retail’ as a word has its origins in late Middle English word retaille, re=”expression of force” tailler = ‘to cut’. So, simply put, retailers cut big pieces to small pieces for consumption rather than resale. Just like the butcher needs careful consideration to the art of providing small pieces of a large piece of meat to satisfy each of the numerous customers, retail is not an art unless inventory control is put into practice.
Every retailer needs inventory to smoothen the process as goods being demanded are being supplied. Like all businesses, a retail business begins with the need for generating more money from investment. Much of the investment gets tied up in inventory; so, it is not surprising to note that a retail business with good control of inventory gets the biggest bang for its bucks. This leads to a fundamental question- “How to get that bang?”
Business management is science applied to art. Inventory control is no different. The first and foremost challenge for inventory control is quantifying the results of the efforts put in.
“How do we know we are on track? How much are we lagging from the target? What is the target we need to set? “
The answer lies in KPIs- Key Performance Indices. The following KPIs are of particular interest:
|KPI||Poor Practice||Best Practice|
|Average Warehouse Capacity Used:||<78%||>=95%|
|Peak Warehouse Capacity Used||<90%||98.4%-99.3%|
|Inventory Count Accuracy||<95.6%||>=.14%|
|Inventory Shrinkage (% of total inventory)||>=1.25||>.0043|
It is obvious that all of the KPIs above require the physical inventory account to be performed before their values are determined. So, inventory control begins with physical inventory (PI). PIs can help determine the KPIs and comparing the values of KPIs over time, sources of inventory shrinkage and stock-out can be assessed. After the sources are identified, appropriate measures will be taken to address those prioritizing based on the seriousness of the issues.
Most retailers perform PI on an annual basis. While that is a better practice than performing no PI, best practice requires performing PIs on a regular basis often called cycle counting. Some use Pareto rule to determine the top 20% items that provide 80% of the sales and then perform the count on those 20% items more frequently than on the rest utilizing what is called a hybrid cycle count.
Many retailers after implementing a cycle count have often found that they have overstocked low flow items and for many also, they have found that shrinkage (loss of inventory by pilfering or other reasons) is overwhelmingly concerning. Whatever the situation might be, the best thing about a cycle count program is that the retailers get their focuses on the pressing issues. With their focuses on the real issues, they can dramatically improve inventory health and with massive positive impacts on the business bottom line.
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