Eliminate Hidden Holding Costs: Mastering Your Inventory

An Epicor White Paper

Eliminate Hidden Holding Costs: Mastering Your InventoryRetail Best Practices Series

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

Eliminate Hidden Holding Costs: Mastering Your Inventory

1

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)

Estimated utility cost for space filled with excess inventory

$400 ($4,000 annual utility on 2,500 square foot space)

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

IntroductionIf 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 InventoryHow many consumers do the same thing?


2

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


3


Clearing Out the Cobwebs: Saying Goodbye to Dead ItemsAn 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

3 Determine the value of your inventory and whether you have dollars invested in the wrong items. Look at department and item gross margin return 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?

{ 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.

3 Identify underperforming items or items that have outlived their popularity by running a product performance report. What are your top 20-25 dead items per department?

3 Free capital. Put underperformers on promotion! Require each department to put a plan together to move inventory out and not repurchase it. 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).

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.

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.

4


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.

3 Going forward: If you have a lot of dead items, the rule of thumb is this: for every one new product in, three items should be targeted for close out.

3 Put a plan into action so that your items generate more profit. For every SKU ask: is the item not performing because there are too 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 Minimal Risk of Stock Outs

Annual Turns

Hardware 6-8 week supply 6.5-8.5 annual turns

LBM Products 4-6 week supply 8.5-13 annual turns

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

items from high-margin

fast-moving items to low-

margin 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.

!

5


Ordering the Right Products in the Right Quantity: Reliable Suppliers and Advanced TechnologyIf 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.

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:

1. High-quality, accurate, and reliable suppliers

2. Accurate inventory data and fine-tuned forecasting capabilities

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

3 Source 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.

3 Don’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.

3 Optimize order cycles to prevent stock-outs and reduce shipping costs.

3 Use vendor EDI communications to reduce ordering mistakes, receiving errors, and possibly gain discounts on orders.

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.

Are you willing to risk

forcing loyal customers to

shop elsewhere? Think of

what you gain by using

technology

in purchasing.

6


Use Technology to Streamline Purchasing and Gain Fine-tuned Forecasting Capabilities

3 Leverage your ERP system for calculated and weighted order points to reduce seasonal spikes, stock outs and overstock, and trim inventory costs

3 Use smartphones at buying markets to instantly access your inventory and determine the quantities you have in inventory and what you need to purchase. This prevents you from overbuying and eventually having to put your overstock on clearance.

3 Set safety stock high for popular items in the system. Review quantities-on-hand for popular items regularly to ensure you won’t be at 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.

3 Use your ERP system to keep better track of order multiples so that you’re not only ordering correctly but selling those items at the right price and quantity.

Examples:

{ Sod bought by pallet, sold by piece

{ Mulch bought by truckload, sold by scoop

{ Rope bought by spool but sold by foot

Eagle Does That!

The Eagle system can keep track of units of measure in its inventory

Maintenance file.

3 Reduce order quantities by balancing stock more effectively across multiple stores. Use an ERP system to auto-generate transfers and reduce 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.

3 Determine more accurate future demand using forecasting models (Eagle can help!)

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

loyalty. The software offers

precise forecasting capabilities

that analyze best practices

and historical sales to most

accurately predict future

sales levels.

7


Maintaining an Accurate Inventory Part I: Refining the Receiving ProcessWhen 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

3 End the practice of putting out merchandise before it has been received into inventory. It may have helped 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.

3 Move from blind receiving to receiving against a PO, which holds your vendors more accountable and increases accuracy of 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

3 Aim to receive new products into inventory the same day as they arrive to improve customer service

{ Immediately update inventory levels and costs and accurately pass off receiving detail to accounting to streamline the payables process

3 Use RF scanners to check each SKU against the PO. RF scanners help you capture UPC numbers before products go to the floor. You 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.

3 Allow enough physical space in the receiving area for your team to more easily complete the job.

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.

8


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

software, Eagle Mobile,

provides exceptional speed

and accuracy in receiving.

Managing Supplier Relationships to Improve ReceivingVendors 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.

3 Catch vendor shipping errors at receiving to reduce detective work when the invoice arrives weeks later.

3 Be proactive with vendors. Insist on confirmations for all drop-ship material so POs can be created/updated before products arrive. Vendor confirmations will 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.

3 Track vendors’ performance. Reduce issues in receiving by tracking fill rates to know which vendors consistently ship correctly. If a supplier is reluctant to improve or unwilling to reduce error rate, search for a new supplier.

3 Use EDI Communications

{ Update line item cost changes from vendors.

{ Receive notification of short or no-shipped items as well as substitutes and alternative items prior to the truck even arriving.

{ Paperless tracking is most accurate and error free.

{ 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.

9


Maintaining an Accurate Inventory Part II: Now Let’s Count What’s ImportantOnce 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 year-end 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

3 Practice cycle counting daily with the goal to completely eliminate year-end inventories and to count each item 3x/year (sections should be small 8 ft of gondola or peg board) or try a managed inventory accuracy service (Mango Report is one of the companies providing this new service).

3 Regularly remind staff of your goals to improve accuracy–get the staff involved and invested in the process. If your staff is invested, they’ll maintain 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.

10


3 Establish basic rules

{ 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

3 Maintain back stock like you would maintain your store

3 Use RF scanners to capture counts, create orders, update prices, and print bin labels

{ 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:

3 More accurate and timely counts

3 Finely tuned inventory control

3 Better, more reliable numbers

3 More potential revenue since your business can stay open during counts

3 Better 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.

Eagle Does That

Use Eagle Mobile to speed

up physical inventory,

receiving, UPC capture,

print bin tags, and attach

location codes to items.

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

Australia and New Zealand

Level 34

101 Miller Street

North Sydney NSW 2060

Australia

Phone: +61.2.9927.6200

Fax: +61.2.9927.6298

Asia

238A Thomson Road #23-06

Novena Square Tower A

Singapore 307684

Singapore

Phone: +65.6333.8121

Fax: +65.6333.8131

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

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

Contact us for more information on Epicor Products and Services

About EpicorEpicor 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.

+1.888.463.4700 [email protected] www.epicor.com/eagle

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.

Eliminate Hidden Holding Costs: Mastering Your Inventory

Technology

Transcript of Eliminate Hidden Holding Costs: Mastering Your Inventory