Several years ago, I was reworking a convenience store on behalf of the owner. The store was already a pretty good store… as good as stores go in most small towns, I guess. After a few weeks of ferreting out all the stock (which turned out to be a real job, because it had been pretty much scattered all over creation), I determined the store had enough inventory to last from three months to over 1,000 days of some items. At the same time, out-of-stocks had become an issue with some of the popular brands.
Can you imagine a convenience store that carries octopus soup? This store had three cans of octopus soup that had been ordered for a customer three years before, and all three, rusted cans were still occupying a prominent position on the soup gondola.
I have found the worst problem with overstock to be that it becomes impossible to manage, then there is the cost involved in carrying the inventory, and its contribution to lowering overall sales. Surprisingly, I have often been questioned as to how maintaining excessive amounts of inventory can have a negative impact on sales. I realized I was going to have to have some help on this issue, as it is counter to the accepted belief that overstock helps to make the store look full, and if you carry everything a customer might want, it will enhance the customers’ shopping experience. Right? Not true!
Have you heard about Walmart’s out-of-stock problem and how Walmart chose to address it? Last year, Paula Rosenblum, a retail analysts and contributor to Forbes, wrote an article which addressed this very issue. She said, “The company [Walmart] was trying to cut back on total inventory.” The reason cited was that Walmart’s inventory growth had been outpacing sales for three years running. Has Walmart managed to solve its problem? From where I stand the answer is, “No”.
If you have the tendency to an aversion to detail, you might want to skip this, but whoever the decision maker is in your supply chain, they are possibly gauging sales by the performance of overall categories.
Why? Because somewhere along the line, people responsible for replenishing inventories were taught to use a formula based on the “velocity of sales as a percentage of average inventory.”
How does that work?
It’s like you have a team of horses and one dies. The rest of the team has to pull harder, not only due to the loss of power provided by the deceased horse, but also from the extra load the dead animal imposes on the overall team. Everyone knows a team of six white horses makes a good impression. No one said that all six had to be living. And as long as the team continues to move at the accepted industry average, it’s not worth the trouble to unhook the team and replace the dead horse, even if it means breaking out the whips and beating the rest of the team to death.
Listen, I may not be the world’s greatest merchandising manager, but I have worked in the industry for 37 years, and I’ve paid attention. An overstocked store is not a good thing by any stretch of the imagination.
Just yesterday, I helped an overworked manager do a spot audit on cigarettes; and a job that should have been accomplished in one hour or less, took three hours to complete. The main reasons are that we uncovered over $5,000 worth of damaged stock scattered all over the stock room. That plus the fact that we had to crawl between the cashiers’ legs to drag the cartons out from their hiding places under the sales counter.
“Oh, I’m sorry, did that hurt?”
“I have to get into the safe.”
“Wait a second, my foot’s caught in the computer cable.”
“Can you hand me a pack of Marlboro Lights?”
You see, in average conditions, 30% of the inventory in categories is making all the profits, and the rest is either costing you money or is questionable. The reason is the overwhelming majority of the stock is there to make the store look good.
There is a simple answer to this problem. The store can look much better if we remove some gondolas and give the customers more room to shop. If all of the shelves contained just the stuff the customers were buying, you could cut your investment in stock, on average by 63%. Customers would be able to find what they want, and subsequently make more visits, buy more product, and happily pay more for it.
If you end up with a space you can’t fill, have your kids paint some rocks and arrange them in little boxes to fill up the holes. They look good, they are free, and low maintenance.
Bill Scott is the president of StoreReport LLC. He is an author, speaker, cloud service provider, and consultant to the c-store industry since 1978.