We’ve had the same inventory manager on our team for almost two decades. Mark Wasson came to us when the process of “doing inventory” was tedious, manual, and quickly becoming outdated. He not only participated in full-store counting exercises, but he was also in charge of ordering product each week for us.
He carried his trusty clipboard around the store, counting items prior to each order date and would manually input his findings into the system. A day or two later a delivery truck would show up and he accepted the order into our system.
The errors this process caused at POS were tenfold. Mark didn’t have time to go through any backstock on most days and he relied on his eyes to determine order quantities. But up until then, that was the best we could do.
In my last article I highlighted the “BIG 5” – the actionable, measurable data points we track and bonus our team around. Those Five are:
- Inventory Record Accuracy (IRA)
- Scan Rate
- Employee Engagement
- Overall Satisfaction
- Sales per Hour worked (SPH)
For the next couple editions, I want to take you through a deeper dive into each metric, starting with Inventory Record Accuracy.
As its name suggests, IRA measures to see if the product quantity we have on our shelves matches what our inventory system says we have. These data points can dramatically impact the orders we place, the customer service we provide, and our financial position.
Our company’s goal is to sustain 80% accuracy. This means that 8 out of 10 quantity-on-hand numbers match what’s in the database.
Of course, 100% accuracy would be amazing, but between shipping errors, cashiering errors, data errors, and theft, that simply will never happen. Not only that but the labour costs associated with trying would not be worth it. 80% is a metric that has been proven to put us in a solid position for serving our customers without expending too much labor to achieve it.
Let’s Start With What We Know
Historically, inventory was calculated on an annual or semiannual basis. Oftentimes stores would shut down, employees might work in shifts throughout the day and night to speed up the process, and a full store count of everything inside its walls was documented.
Research proved that this process typically introduced more errors than already existed and created an average error rate of 30% despite the fact that it was done by “experts”; an internal team that knew the store well or outside companies that charged thousands to get the job done faster.
Next Up – Cycle Counting
The next phase in the inventory revolution became cycle counting.
Stores were instructed to ALWAYS be counting inventory, but in four-foot sections so that items were being counted in a more structured way. This process seemed more manageable, and we were catching empty pegs and zero quantity on hands more quickly and frequently. As a result, we recaptured lost
revenue more quickly by paying more attention to what was on the shelves.
But like its predecessor, cycling counting was not a perfect solution.
Time to Count the Mangos
Then Dan O’Haver introduced my team to his research and his solution on how to most efficiently and effectively manage our inventory accuracy.
Dan estimates that the average store introduced $30,000 in errors in their databases participating in cycling counting. Furthermore, if a section being counted held 100 items, data showed 33 errors were introduced! We were spinning our wheels with this method as well.
Dan is a third-generation Ace Hardware retailer who affectionally earned the nickname “Mango Dan” over a decade ago. His grandfather, the founder of Dan’s two store chain, used to say “It’s time to count the mangos” when he would close up shop and start tallying shelf totals. But by the time Dan took over the family business, he knew there had to be a better way and went on to found a software company called Mango 2007, (now Mango Report).
The “big disconnect” Dan said, “was between what is actually on a retailer’s shelves versus what their computer system claimed was there and if you’re only looking for errors once or twice a year, the errors are more onerous to catch. The adage “garbage in, garbage out” takes on an even bigger meaning here. Also, more than half of our customers are single store or two-store owners. The system costs about 1/10th of the cost to hire an outside company to perform a physical inventory.
That alone easily ROIs, plus there are other benefits of the system including exception reporting, assortment reporting, order point suggestions, back stock processing, and show buying deal scoring, and more!”
Current Evolution
Cycling counting, while a step up, still introduced errors so the current iteration, introduced by Dan and his team has a laser focus on two things:
- Negative quantity on hand based on a daily inventory report
- Shooting the outs daily
This process allows you to determine a few things:
- Is the peg really empty?
- Why is it empty?
- Do you need to look at backstock?
It also allows you to set some clear guidelines in order to:
- Determine better minimum order points so that you don’t run out of high selling items
- Establish maximum stock levels on items that are frequently bought in clusters
- Reduce wasted footsteps restocking low cost items
- Ensure project quantities are always available
- Identify frequently stolen or mis-shipped items
Bringing It Full Circle
I think it’s important to note that Mark Wasson, the inventory manager I mentioned at the beginning of this article, was with us every step of the way in our inventory evolution – he was not always comfortable with change, but he was always willing to improve how he was helping us grow our business and maintain record accuracy.
I caught up with Mark to get his current opinion on IRA – now that he’s been in charge of making it work across our 13 locations for the past 17 years.
How has your role evolved?
We went from being product focused to being software focused. Counting individual items was the “old way” and now it’s counting what is important.
My primary focus when I started was one store with a daily focus to get new items on the shelf. I bet that was taking me about 32 hours a week for $350,000 of product.
There wasn’t enough time to focus on whether we had enough inventory or the right inventory. Twenty years and a good software program later, my focus is on 13 locations requiring 12 to 16 hours a week to manage $8.5 Million dollars in inventory.
That’s allowed the company to grow and help customers better. Cleaner inventory means we can better serve our customers because we have what they want, when they want it. It means our CFO is happier with the numbers he’s budgeting from and reporting on. We have a much better understanding of the return on our investment.
Where do you see the most errors occurring?
Without a doubt, the majority of our errors occur at point of sale; meaning when a customer is being checked out, items are not scanned into the system properly which affects the quantity on hand numbers. Let’s face it, anytime a human is involved in a process, whether cashiering, receiving or data entry, we have to assume some margin of error.
How do you mitigate those errors?
We have cashier testing that doesn’t stop with just the cashiers. Anyone who touches a cash register including managers and back-office staff are required to go through testing. We create a basket with like items that would be easy to confuse to help our team focus on our mantra “Scan every item, every time”. It’s easy to think you are ringing up six of the same items when in fact the items just look alike – and all of a sudden, you’ve created a new error in inventory.
Have you a method for calculating lost revenue due to outs? Yes, we calculate .58 cents per day per item. If we have 100 items out of stock the formula is 100 items x .58 = $58USD per day. You can see how that can add up to a lot of money over the years.
What advice do you have for retailers just getting started? Audit your process – how are you counting and tracking now? Then invest in improvement; pay for software, hire a consultant or a coach, include your team members throughout. We’ve made the mistake of thinking “we’re really good at this” but when we take a deep dive, we see old habits have been reintroduced.
What did you do with that old clipboard?
It hangs behind my desk as a reminder to me that growth and change is necessary to run a first class hardware business.
If I can provide any more details, please don’t hesitate to contact me. I can be reached at gina@acehardwaredc.com
Gina Schaefer is a visionary entrepreneur and dynamic keynote speaker, best known as the founder of a chain of Ace Hardware Stores, acehardwaredc.com. With nearly 22 years of experience, she has transformed a single hardware store in a neglected neighborhood into a thriving enterprise with 13 locations across Washington, D.C., Maryland, and Virginia. Gina’s business not only provides essential services but also empowers the community, including the recovery community, by fostering an inclusive and supportive workplace.
