Balmori Software Inc.

[ Article ]

If you are in retailing, you have to deal with dozens, perhaps hundreds, or even thousands of SKUs (stock-keeping units). In this line of work, inventory control can quickly become a quagmire of failed plans, institutionalized inefficiencies, and shattered good intentions. It can become a fertile area of opportunity for internal corruption. For many, experience in the front lines can turn the phrase inventory control into a bitter oxymoron. Why does this happen so often across the Philippine business landscape?

Proper inventory control in a retail trading organization involves a chicken-and-egg situation. Actually, an entire series of chicken-and-egg situations. How familiar is this:

• To maximize store sales, you must have the right quantity of stocks (no overstocks, no stock-outs).


• But to ensure adequate stocks, you must have first purchased the correct quantity of stocks and placed them on the shelves.


• But to purchase the correct quantity of stocks, you must have been wise enough to have originally specified the correct minimum stock levels.


• But to have the wisdom to know the correct minimum stock levels to aim for, you must first know the maximum potential sales of each SKU, to give you a basis for setting your minimum stocks.


• The maximum potential sales (in the short run) is reached when you have no stock-outs and no overstocks. But to really know the maximum potential sales per SKU, you must first have adequate stocks in your stores such that there are never any overstocks or stock-outs.

And so we come full circle. Every fact that we need to know depends on us first knowing another fact before that, and so on and on until we bump up against our original, and still unanswered, question. We can’t seem to get any firm footing anywhere. How can we ever get started on solving the problem? How can we ever get clarity?

Most retailers respond ad-hoc to stock-outs. They deal with each case in isolation, getting distracted by the details of what went wrong. Oh, the branch replenishment was delayed by the delivery van breaking down. Oh, the supplier showed up with the goods two days late. Oh, the goods were there all the time, but they were in the wrong shelf. Oh, we were late in ordering, so sorry about that. And so some hotshot assistant manager - or maybe some bored clerk - is sent in to troubleshoot.

NO TO BRUSH-FIRE FIGHTING.

But this approach leads to an endless cycle of frantic brush-fire fighting. Every episode becomes a special case that has to be dealt with, special. This soon becomes expensive and time-consuming. You need a better approach. You need a systematic approach.

In a quest to get a foothold on something solid, let’s start someplace logical. How about estimating maximum potential sales of a product? If you knew the maximum potential sales per month of Alaxan in your market, then it would be simple to determine your desired inventory level target as a function of monthly sales.

But what if you’re dealing with dozens, or hundreds, or thousands of SKUs? Can you estimate the potential monthly sales of each SKU? Do you have the time? And can you market research the total demand for each SKU in the micro-market served by your branch? Not likely. Perhaps it’s not really possible in practical terms to do a market estimate for each of your SKUs; you’d need to make a career of market research. We need something quicker-even-if-dirtier.

How about this: we accept that we can never know anything for sure at the start. Accepting this, we start out by first trying out a reasonable course of action, then carefully watching the results, then adjusting our behavior in the next cycle. After a few cycles, we are smarter than we were during the first cycle. And we get smarter with every cycle that we go through. Or so we hope.

Let’s try this. Let’s start with setting the minimum stock levels for each SKU. Not the correct minimum stock levels; we don’t know that yet. We just start with a reasonable estimate of what strikes us as sensible minimum stock levels. For simplicity's sake, let’s pretend that our current company policy is to have one month's sales in inventory at any one time. But keep in mind that this figure - one month's sales - is just an estimate. An opinion (of the operations manager, of the COO, of the bodeguero). It’s not sacred, as illustrated by that cycle of uncertainty mapped out at the start of this article.

For example, let’s say lately we’ve frequently been going out of stock on Alaxan. Which means that recent Alaxan sales would have been greater if we had kept adequate stocks; and therefore our current minimum Alaxan stock level standard of one month's sales is based on actual sales that were "choked" by inadequate stocks. Therefore our current opinion about what constitutes one month's sales for Alaxan may be understated (i.e., wrong), based as they are on sub-optimal sales. And therefore, potential, realizable "one month’s sales" for Alaxan is really a for-the-moment-unknown number, about which the only thing we can say for sure is that it's a larger number than our current number.

Therefore, we accept that we will have to fine-tune the minimum stock level in order to do better for Alaxan. Each time we adjust a product’s minimum stock level, this has an impact on the rest of the cycle; and our outcome changes: maybe we stock-out a little later than before, or maybe we don’t stock-out at all. Whatever; we go through the cycle again, and again and again, until the happy day when we experience maximum sales with neither overstock nor stock-out for Alaxan.

There’s an encouraging circumstance at work here for most companies: most of our SKUs in fact do not experience stock-outs; and therefore, based on the reasoning in the preceding paragraph, we have probably stumbled on the correct minimum stock level for these majority SKUs (assuming they are not overstocked, which would be another interesting problem: misallocated resources/idled capital). Therefore, setting aside overstocks for the moment, we only need to worry about those SKUs that have experienced stock-outs. They are the SKUs for which we are experiencing lost sales (kwarta na, naging hangin pa). They are the SKUs for which we need to increase the minimum stock levels, so that we can purchase the correct quantities for our sales-maximizing goal. (Overstocks we will deal with separately.)

All this is fine if we only have to worry about twenty, or fifty, or seventy SKUs. But how do we accomplish all this if we have to manage a few hundred SKUs (furnishings, lighting fixtures, fashion retailing), or ten thousand (auto parts, supermarkets, drugstores, hardware)?

FORMAL METHODOLOGY. First thing we have to do is to develop a formal methodology for spotlighting and dealing with SKUs that experience unwanted stock-outs. This methodology for singling out those SKUs must be speedy, reliable, systematic, and periodic. All those adjectives are equally important to ensure a good outcome.

Those SKUs that the methodology identifies are those for which demand is zooming, or for some reason or other is disappearing prematurely from our store shelves. (One common and irritating reason for apparent stock-outs is wrong data-inputting at the store point-of-sale (POS) machine: the store cashier records having sold Item A when in fact the customer had picked from the shelf, presented to the cashier, and paid for, Item B).

Once we have identified these SKUs with real or apparent stock-outs, we need to quickly address the mis-encoding problem that’s causing the false alarms, and raise the minimum stock level standards for the genuinely out-of-stock SKUs in order to increase sales.

But, but, but, our methodology – aside from being speedy, reliable, systematic, and periodic - must also be able to handle the phenomenon wholesale, that is, masses of SKUs together all at the same time, not one SKU at a time. A piecemeal, one-item-at-a-time approach would take too much time and we would never be able to do the job fast enough for our purposes. Therefore, no dwelling on anecdotal information, no dwelling on individual trees at the expense of the entire forest. Such a methodology as we are envisioning is attainable, but only by using information technology.

For example, the flowchart above is a viable process for handling our problem of stock-outs. But to be any use it should be capable of being undertaken often, even daily in the case of some industries. To be able to complete a cycle so quickly, you need information technology to deliver masses of fresh-but-perishable information in minutes.

One crucial consideration is speedy purchasing and receiving of replenishment stocks. Box 5 in the flowchart calls for you to increase the purchase of stocks to attain the newly raised minima. To do this in a business with hundreds or perhaps thousands of SKUs, Purchase Order creation must be automated. (Yes, you heard that right: with the right software, you can create PO’s automatically, without human intervention.)

(Just a little imagination is needed to adapt the above flowchart to the opposite problem – an overstocked situation.)

Simply put, if the entire cycle (Box 1 to 6) isn’t done speedily, and regularly, business events will get away from you; your data becomes stale; the quality of your operational decisions decays; and you continue to be mired in a sales-killing and profit-snuffing roller coaster of stock-outs and overstocks. Frankly, not a situation conducive to beating the global competition. -rsr


Title:   The inventory control tightrope: yet another area where you have to perform flawlessly to survive




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