Catching Retail Pilferage

Every year, retailers, businesses has to conduct an annual audit and inventory check of all their merchandise on hand.  To ensure that whatever inventory information they have in their computer system are accurate, to know if they have excess inventories or there has been losses, and more often there are alot of losses due to pilferage, wrong encoding of quantities of stocks, typographical error in inputs sometime in the past several months.

Its a tedious process, more often being done manually.  I have worked for a major footwear brand in the past that after conducting the inventories, we discovered a huge discrepancy in the quantity indicated by our system as against the actual stocks on hand of each stores and after carefully reviewing inventories, deliveries, actual counts, we conducted a thorough investigation on the matter.

I have to personally review input data, financial data, stock records and when I couldn't seem to actually find any probable explanation, I decided to look into our importation records, bill of lading yet still did not significantly gave me an answer, so I have to request records of all past cash register receipts from the accounting department. A tedious, prolonged hours of checking, auditing, analyzing the receipts, Lo and behold, I got my answer, there were several transactions that does not match the actual record.

I was curious why the receipts has shown several transactions that have suspicious void cash transactions, yet several credit card transactions and later also being voided.  This made me delve deeper into the matter and requested top management to do reassignments of staffs, Previous cashiers and store managers has to be transferred to other outlet stores, the old sales staff has to learn cash registering, I hired new staffs to fill the vacancy due to the "promotion" of previous sales and inventory staffs.

I have to observe the behavioral pattern amongst those I have to move to other stores, especially the store managers and the cashiers, and whenever I frequently visit them on a regular basis, gets to hear some complaints of their reassignments, ranting their dissatisfaction and grievances.  They not having a single clue that the very person who had them reassigned was me.

I have to pacify, explain managements decision was for their benefit of future promotions to be area managers, I have to come up with several valid reasoning to show them that their job movement was for their benefit in the long run.

And those that complaint the most, gets my attention and after the investigation was over in 3 months, I found out that those who have shown grievance over their area reassignment were involved in a unilateral intent to defraud the company of stocks, even cash from the coffer of their store sales.

After going through all the due process that I have requested HR to conduct, and the admittance of three of the co-conspirators to defraud the company and pinpointing each and every store managers and cashiers involved, the company filed criminal charges against the accused, for which summing it up, in 4 years, we had been defrauded of over 5 million pesos, in inventory pilferage and cash pilferage.

So bottom line, the saying that its always an insider most often holds true, and to be complacent and too trusting in delegating tasks does not mean well at times.  Though this experience and instance may be a case-in study for us, I have to make new changes in merchandising, inventory management policies within the company to avoid the same from happening.  I also have to institute new policies on rewarding best employees, honest staffs, gave a lot of "carrot on stick" benefits to operational staffs and management.

Necessary Risk to Increase Profit

In business as in any other endeavours in life, we sometimes have to take the necessary risks to make money.  I remember there are times in the course of my work as a merchandising manager, be it in a boutique setting, department store, supermarket or hypermarket banners, I relatively apply the risk-taking instinct in me in doing my budget calculations and purchases.  Even to some extent exceeding what has been allocated in my budget.

Don't get me wrong but my instinct tells me to take the calculated, well analyzed approach in my risk-taking. For example, there was a year when the crisis in 2003-2004, business has been slowing down but on the world stage there is the war between the US against Saddam Hussein in Iraq, after figuring the events and the prevailing conditions at that time, it does not take a genius to that social sentiments and peoples awareness are about the war that is going on.

Having had to handle several importations, my immediate boss, the owner and vice-president for merchandising gave me a last minute call the night before my flight going to Xiamen, China.  She said to me "Stick to the budget and do not buy anything that is not saleable".

Taking that warning as her way of reminding me that if I do not follow her advice and go beyond my purchase power and budget allotted for the categories I am handling, and if I fail in delivering the target sales for the following sales quarter, I assumed that my head will roll and I could possible be losing my job for neglecting to take her sound advice.

And so during the course of my sourcing of merchandise in China, from Xiamen to Yiwu to Shantou and Chenghai, China.  I diligently went through the nitty gritty work of selection of goods, computing the budgets, visualize how each products will be displayed once they arrive in our retail store, I have to remove those that do not fit or has high costing, I test, scrutinize, check every details of a product, see the product information, make sure there are no damages, is not prone to damage during transport shipping etc.

Even for the tedious tasks I am still exceeding my allocated inventory purchase budget by Php 16 million, so I have to reduce again the quantity for purchase of some stock keeping units (SKU), and there are times when the factory would not accept orders that are less than 10 cartons, to this my only resolve is not to buy it at all.  At the end of my 2 weeks "buying" spree I am still way above my budget by a fraction of 10 million.

So I said, I am sticking by those purchase, I will just need to fixed the budgetary overdraft once the first few shipments arrive in Manila.  42 container-full of various merchandise have been expected to be shipped to the port of Manila in stages of deliveries.  Initially I have to give the go signal for the first 6 containers to be shipped out of China in 2 weeks.

The first six containers has to reach the store shelves within 5 days, thus I have to authorize the receiving department for immediate barcoding and tagging of the goods and must meet the 5 days time-table I have set out for operations to carry out.

I went hands-on in training the salesforce, my front-end staffs that has the day to day interaction with the consumers and listen to their opinions, I have to listen how each customers would react, move, roam around the store selling area.  I have to orient them on the new products that have just arrived.

Amazingly, the first 6 containers sold 40% of the inventories within 2 weeks, and so I have to give the go signal for 18 new containers prior to the depletion of the first batch.

In the end, I not only got to stay for the next several years in my job, but that was the year I beat the highest sales ever made in the 27 years of that company's sales history, a whooping Php 175 million.

Did I exceed my budget, i can honestly admit to my boss that I reneged on her advice, but at the end of that meeting, she told me "I don't know how you did it, but from hereon, i trust you know your own judgment, Just rake in as much money as the company needs, You are really a magician".

And so I was called the miracle magician by my peers for being defiant in maintaining the budget, yet was able to hit the highest recorded sales of the company.  It has been a very satisfying and humbled me in every way that made my skills in retail more masterful by experience

What is an "Open-To-Buy"?

In the world of retail, Open-To-Buy is quite a buzzword. Do a Google search on "Open-To-Buy" and over 100,000 references come up, many that are for consultants and software vendors offering Open-To-Buy programs. Many small retail software packages offer an Open-To-Buy module as an add-on option. But there are few retail software packages that include an Open-To-Buy function as part of the core package. As a result, many small retailers struggle to find some way to effectively budget their merchandise dollars. Frequently when I'm talking with a potential client they'll ask, "Do you think I need an Open-To-Buy?" without really knowing exactly what an Open-To-Buy is.

So what exactly is an Open-To-Buy?

The clearest and simplest definition is that it is a financial budget for retail merchandise. Let's look at this more closely.

• An Open-To-Buy relates directly to retail merchandise, is structured specifically to address the needs of retailers, and is a tool designed to assist retailers manage and replenish their most significant asset, their inventory investment.

• An Open-To-Buy is a budget, and involves the full range of budgetary functions. It begins with the planning process, is future oriented, provides guidance on how much to buy, and provides benchmarks for evaluating progress, and adjusting future plans.

• An Open-To-Buy is a financial tool, in that the units of measure are typically dollars, usually retail dollars but sometimes cost dollars, and that it can be tied back to the financial control process.

• An Open-To-Buy can work on any level that a retailer needs it to. It can be used to track merchandise at the company, department, classification or sub-classification level. In rare cases for a small retailer, it can even be used to track an individual item.

Fashion and Seasonal Merchandise versus Basic In-Stock Items

It is important to note from the start, that as a replenishment tool, an Open-To-Buy is not appropriate for all categories of merchandise. It is most appropriate for fashion merchandise where the specific items may change, but the departments, classifications and sub-classifications remain relatively stable, and seasonal merchandise where inventories are brought in at the beginning of the selling season, and need to be managed down to pre-determined ending level at the end of the selling season.

In the case of fashion or seasonal merchandise, an Open-To-Buy answers the question of how much to buy, but not necessarily the question of which specific items to buy. For that, a detailed assortment plan is necessary, which lays out exactly what items will be coming in when, and provides a plan for how all of the individual items come together to form a compelling merchandise assortment.

In contrast, an Open-To Buy is not appropriate as a replenishment tool for day-in and day-out basics. These staple items are more effectively replenished using an automatic replenishment program running off of pre-determined minimum and maximum inventory parameters. In the case of these in-stock basics, an Open-To-Buy may still serve a valuable budget and control function at a department or category level.

Planning

Like any budget, an Open-To-Buy starts with a plan, then compares actual results to that plan and quantifies any variances. Carefully considered planning is the critical first step in constructing an Open-To-Buy.

The planning process begins with building a sales plan. For small retailers, most sales plans are broken out by the month, although in some cases, especially highly seasonal businesses or categories, it may be more appropriate to plan sales by the week. The question to ask is a very basic one: "What is the most likely level of sales from stock (excluding special orders) by month (or week)?"

Once a sales plan has been developed, the next piece of the planning process is to build an inventory plan. The question to ask is this: "How much inventory do I need at the end of each month to support the next month's sales (in some cases the ending inventory may need to support more than just one month of future sales), as well as maintain effective merchandise displays?"

From there, other things like inventory adjustments and markdowns need to be planned.

Finally, from the plans that have been developed, an inventory receipt plan can be arrived at. For any given period (month or week), the planned inventory receipts is the planned ending inventory, plus the planned sales, markdowns and inventory adjustments, less the prior month's ending inventory. Stated another way, the planned inventory receipts answers the question, "How much inventory do I need to bring in to cover my sales, markdowns and adjustments, given my planned beginning inventory, in order to end up with my planned ending inventory?"

The inventory receipt plan serves several important functions. First, it serves as the inventory purchasing plan for future months. While it doesn't tell you specifically what to buy, (you need an assortment plan for that), it does tell you how much you need to by for receipt in each month. Second, because inventory purchases are typically the most significant cash outflow for a small retailer, the inventory purchasing plan serves as a critical input into a financial cash flow plan.

The completed Open-To-Buy plan also enables a small retailer to evaluate, before the season starts, critical inventory productivity metric like inventory turnover and gross margin return on investment GMROI) (see "Measuring Inventory Productivity"). These are critical measures of the productivity of the inventory investment, and evaluating the planned turnover and GMROI allows the small retailer to pro-actively manage these metrics for continual improvement.

In Season

A completed Open-To-Buy plan establishes the critical benchmarks for evaluating exactly where you are once you get into the season. It's after the season gets underway that an Open-To-Buy truly earns its keep. In season, key decisions have to be made about what to reorder, what to back off on, and how to allocate any remaining Open-To-Buy budget.

A well structured Open-To-Buy will present both the plan and actual results, and allow management to track the progress as the season goes along. Actual sales can be compared to planned sales, actual receipts to planned receipts, actual ending inventories to planned ending inventories, future open purchase order quantities to planned receipts for each month.

Like any good budget, an Open-To-Buy needs to have a future orientation. It needs to be able to tell management how much inventory is needed in any future month to make the sales and ending inventory plans, given the current purchase order commitments for that month.

The open-to-buy through any given month is the planned ending inventory less the projected actual ending inventory. For prior months it quantifies whether the company was over-inventoried or under-inventoried. For future months, it identifies through any given month whether additional inventory is needed or whether too much inventory has already been committed to.

The open-to-buy within any given month is the planned receipts for that month less the current purchase commitments. For prior months it measures the efficiency of the buyers and vendors in providing inventory as planned. For future months, especially for future seasons, it quantifies any remaining available open-to-buy for that specific month.

Like any management tool, an Open-To-Buy is merely a tool to help a small retailer better manage their inventory. It requires an initial investment in time and attention to build out a realistic plan, and diligence to maintain it as you go through the year or a season. But it can yield dramatic results quickly in most situations, from increased sales to leaner inventories and reduced markdowns and overstocks. It's a tool that in the hands of a fully committed small retailer can profoundly improve financial performance.