By David McMahon
It is my goal to share with you observations, practices or thoughts that come from being out there on the road working with retailers to improve their organizations. Today, I’ll give you a few tidbits that are fresh in my mind after working with a five-store, one-warehouse operation that grew from five to 25 million in volume.
I was having a conversation with this particular store’s owner about what it really takes to operate a great distribution center (DC). We agreed that a good operations manager was important, but both felt that something even more critical than that was running the proper physical facilities with the proper retail management systems and processes.
Many times over the years I’ve received complaints with regards to warehousing: too many customer service issues, slow picking, delayed delivery of merchandise, inaccurate inventory, too much returned merchandise, trouble finding stock, employee turnover, theft, too much movement between stores, not having space, ineffective management, exceptional expenses – you name it. From my experience, the majority of these problems come from the combination of having inadequate facilities for the sales volume and poor systems and processes.
My client and I both agreed that an average warehouse manager could outperform a top manager every time if equipped with a better stage to perform their daily acts. Even if a top manager had top processes, they would lose to the average manager with a better facility because of something called “throughput”. To put it simply, “throughput” is the idea that a facility can get more merchandise in and out faster, and in better condition, if its resources can “flow” it better. Poor facilities and inefficient systems and processes are what cause the enemy of all production: Bottlenecking.
Imagine a DC as a funnel underneath a water tap. If you have the tap on slow, the water gets through the funnel effectively and without issue. Once you increase the speed at which the tap releases water, however, the funnel can’t process it through quickly enough causing build-up and eventually overflow. Now imagine keeping the tap on the same high speed, but adjusting the funnel to be wider and with larger filtration holes. What happens? The water goes back to flowing through effectively and without issue. This is an analogy for what happens with warehousing and distribution. The back-end logistics are the funnel, determining how much top-end volume (or water from the tap) an organization can handle before diminishing returns.
With this in mind, I summarized seven critical factors that, together, can trump a top manager:
Whatever your current situation, it’s worth it to consider where you’d like your volume to go in the future when looking at your facilities, and whether your current systems and processes enable you to operate as efficiently and effectively as possible.
David McMahon, CSCP, CMA, EA is VP of consulting and performance group at PROFITsystems, a HighJump Company. He holds professional certifications as a Certified Supply Chain Professional and is a Certified Management Accountant. David directs four performance groups (the Kaizen, Visionary, Gladiator and TopLine groups) and multiple consulting projects. He can be reached at firstname.lastname@example.org.
This year at Las Vegas Market, industry expert and consultant David McMahon, held a seminar on retail challenges and solutions in the home furnishings industry. The goal was to conduct the seminar in an open-forum fashion, letting those in attendance share their biggest hurdles and discussing potential solutions for each with the group.
Below are the three issues cited most frequently by seminar attendees, followed by David’s response and proposed solution to each.
Warehouse management, inventory management and strategies to keep best-sellers in stock
In response to this challenge, David began by explaining what he felt was the key to managing inventory as effectively as possible: the 80/20 rule. “In order to manage inventory more effectively, you really need to know which parts are producing for you so you know where you need to be spending your time,” David said. The 80/20 rule states that, typically, 80 percent of your profitability or margin comes from just 20 percent of your items. If retailers are able to determine this 20 percent portion of their inventory that’s contributing most to their bottom line, they’ll know which items need to be ordered often, displayed well and stocked appropriately to be as profitable as possible.
David highlighted the importance of also having a systematic routine for the way retailers dealt with the portion of their inventory that wasn’t producing – their dogs. “The only way to buy new inventory as fast as possible is by identifying your slow-moving items and getting rid of them so you can make better purchases at market,” he said. “With inventory management, the systems define the outcomes. If you want to manage your inventory more profitably, you need a good system to handle reporting for best-sellers, and an equally good system to handle the markdowns for your dogs,” David added.
When asked about how to manage pricing, David said: “Pricing is tricky. You don’t want to be known as the guy with the highest prices and you don’t want to be known as the cheap, discount store either. I’m a believer that you should be pricing higher on what’s working and a believer in high-low pricing. When an item is working, you should test the ceiling on its price. When an item is not selling as well, that’s when you mark down.”
“Some things are more expensive, some are average and some are cheap. The issue is most every retailer uses the cost-up approach, where all of the margins are the same. Say everything in your store is marked at 50 percent margin or 100 percent markup; that doesn’t work because you have some things underpriced and some things overpriced. You need to take a detailed view and price high with some things and low with others,” David added.
David wrapped up the pricing discussion by reminding listeners that it’s not only about price and GMROI plays a very important role. “If you’re turning items really quickly you could be making more margin dollars or GMROI (Gross Margin Return on Investment). Therefore, that needs to be looked at too: not just how you price an item, but how many you carry and how quickly it turns,” he explained.
Managing store traffic and staffing appropriately
David responded to this ever-common issue in the industry without mincing word. “You have to know your traffic, period,” he said. He continued to explain retail traffic counting, and how investing in a traffic counting system is a great way to be sure of your traffic volume and determine things like when it peaks versus when it’s slow, as well as average weekend traffic.
“The number one issue of sales floors that underperform is not having enough people staffed at the right time, and the number one way to fix that problem is by figuring out your traffic patterns and getting enough people on the floor to match them,” David concluded.
While there are countless challenges in home goods retailing that could be picked a part and put back together again, inventory management, pricing, and store traffic topped the list for this particular set of retailers. Hopefully this shed some light on how to meet these specific issues head-on with advice from an expert consultant who’s successfully dealt with them before.
To learn about more top challenges in home goods retail and their potential solutions, read the results of David’s two-year study aimed at figuring them out here.
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