Profit improvement opportunities f or retailers

By Francis C. "Frank" Grau

First In A Series

aFf URRENT consumer uncertainty and the cost pres- Ysures of continuing inflation have created an environment in which retail management is experiencing intense competition coupled with severe expense-control and liquidity problems. The adverse impact of these conditions on profitability is significant. In this economic climate, a thorough reassessment of operating practices, procedures and controls can be critical to achieving an acceptable profit margin. Finding efficient, cost-effective methods for dealing with rising costs across the board should also be a top priority.

This series is designed to help you, the store owner and manager, examine specific phases of your operations and evaluate the potential for making them more profitable and less costly.

Frank Grau, manoging partner of the San Diego, Ca., office of Coopers & Lybrand, has extensive experience with retail companies and is currently the industry chairman for the retail industry. He is co-author of Retail Accounting and Financial Control; o/ Lifo-A Guide for Corporate Decision Makers and has coordinated publication of Profit Improvement Opportunities for Retailers. A member of the Standardization Committee of the Financial Executives Committee of the Notionsl Retail Merchants Association; the board of directors of the Internal Audit Croup of the NRMA; the Americon Institute of Certified Public Accountants; the New York State Society of Certified Public Accountonts, and the Nat iona I A ss ocia t on of A ccoun tan ts.

A certified public accountant in N.Y., La., N.C. and Va., he groduated from the University of Notre Dame. His major retail client at present is ll'ickes Componies, Inc. This is the first of a series of profil improvement orticles written by him.-ed.

Buying and merchandising are at the core of every retail establishment. Knowing what to purchase at what price and how to stock items is the buyer's first responsibility, and realizing the full profit potential of each purchase is the hallmark of a successful merchandiser.

This questionnaire deals with the buyer's pragmatic considerations-buying procedures, promotional purchases and basic stocks. In addition, open-to-buy, inventory investment, markdowns, reorders and the correlation between dollar sales and merchandise units are reviewed. The responsibility for editing duplicate merchandise and for monitoring branch-store operations is treated as part of the buyer's control function.

Questionnaire and Work Guide

Buying Procedures

Yes No

(1) Is the open-to-buy stated in units, price lines or types within classifications, as well as dollars? ! !

Departments are selling merchandise units (however classified), not dollars, and all basic buying planning should be mode in terms of these units.

(2) Are specific items and merchandise classifications correlated to percentages of dollar sales? If so:

(a) What department information is furnished about fast sellers? Slow movers?

(b) How often is this information updated?

(c) How is this data correlated with vendors?

Generally, a small percentage of the merchandise items in a department accounts for a disproportionately large percentage of sales volume. Tests have shown that (a) I}Vo of inventory items account for 50Vo of sales,

(b) 5070 of inventory items account for 9070 of sales, (c) 1070 of vendors account for 50Vo of sales, and (d) 5070 of vendors account for 97Vo of soles. This information should be used to determine which vendors contribute little to sales and to remove slowmoving items.

(3) Are lead-time studies developed by resource, noting the average time between placement of a purchase order and receipt of the merchandise?

Buyers can use this information to anonge for better service from exbting sources or to consider new sources. Further, by correlating the deportmental information on important vendors (see question 2) with leadtime data, buyers can identifu those vendors whose volumes are such that an improvement in lead time would make a significant contribution to inventory reduction.

(4) Does a review of purchase orders show numerous "as ready" delivery dates or the absence of specific delivery dates?

Definite delivery dates facilitate promotional plonning and adjustments to stock levels in response to consumer demands. Buyers should be aware of those vendors who do not make timely deliveries.

(5) Is a correlation made between specific merchandise items (or classifications from specific vendors) and:

(a) Merchandise returns?

(b) Merchandise adjustments?

(c) Initial markon percentages?

(d) Markdowns?

(6) Are markdowns summarized by: ll'hen markdowns ore anolyzed and the cause of morkdown noted (e.9., old stock, goods received at end of season, excessive quontities), management can gain insight into the effectiveness of the buying stoff and established merchandising policies.

(a) Classification?

(b) Resource?

(c) Price line?

(d) Causative factor?

(7) Do reports on slow-selling merchandise trigger markdowns?

(t) Does an analysis of markdowns or age of stock indicate that buyers are purchasing cooperative advertising rather than salable merchandise?

An analysis of responses to questions 5-8 will help identifi vendors and merchandise items (or classifications) that contribute to profitable soles. A periodic review oI substitutable items or clossifications should be made with the purpose of upgrading initiol ond maintoined markon percentages.

(9) Is there an established procedure for obtaining information about walkouts?

(10) Is this procedure effectively monitored?

(11) Are salespeople trained to inform buying personnel when they are getting low on an item?

(12) Has the share of risk between the store and the vendor been determined for initial purchase and backup purchases?

It is advantageous to cultivate vendors who will provide "back stop" on stople merchandise ond on sales promotions.

(13) Is walkout or low-inventory information communicated to merchandising personnel?

(14) Is the status of debit balances communicated to buying and merchandising personnel?

(15) Are buying and merchandising personnel required to account for the planned disposition of debit balances?

A monthly list of aged debit balances should be given to all merchandise managers and buyers, and these personnel should report on the prospective application of these balances to future purchases or to anticipated cash collections. The controller's office should follow up on old debit balances and review the propriety of written-off debit balances.

Story at a Glance

make effective methods top priority potential for prolit is there.

Promotional Purchases

(1) Does the promotion plan provide for periodic comparison of the amount and ratio of promotional, competitive or low markon merchandise with the regular or more profitable merchandise?

(2) Are the buyers required to set anticipated sales in units and dollars before promoting an item?

(3) Are actual sales compared with anticipated sales?

(4) Are accompanying costs (e.g., advertising, workroom and delivery costs) considered when planning promotions?

Basic Stocks

(1) Are basic stock lists frequently revised to show:

(a) How they relate to records of customer walkouts?

(b) How they relate to the rate of sale?

(2) Are reorder points and reorder quantities responsive to the peaks and valleys and duration of the selling season(sX If so:

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PRESIDENT,S RECEPTION Set the oace and attitude f or the (1) Lumber Merchants Association of Northern California conventi0n. (2) Incoming pres. Bruce Pohle presented a bouquet of red roses to Kav McCann, wifeof theoutgoing president. (3iTime management and capital improvement were topics for Dr. Tom Porter, Touche Ross Co. (4) Frank Jason, Paramino Lumber Co. , received the Hobbs Wall t-

Leonard is the incoming treasurer.