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One up on Wal-Mart

Jul 1, 2005 12:00 PM
By David Hest


AN IMPORTANT part of the success of Wal-Mart, the world's largest retailer, is attributed to its sophisticated inventory management systems.

In the world of agricultural retailing, Hefty Seed Company, which has 14 stores in South Dakota, Minnesota, North Dakota and Iowa, someday could attain the status of Wal-Mart, at least when it comes to innovative inventory management.

Like Wal-Mart, Hefty Seed, which is headquartered in Baltic, SD, tracks sales from all locations on a daily basis. But it one-ups Wal-Mart on two counts. First, it captures all sales at all locations in central company computers as they occur. Wal-Mart, on the other hand, is thought to capture real-time sales information on only its top 200 products. It updates sales information on its remaining thousands of products once a day.

Second, Hefty Seeds conducts a physical inventory during the spring and summer sales season on every product at every store at least twice a week. Most of the time, all inventory is physically counted every day. Even with the availability of high-tech radio frequency identification chips and bar codes, Wal-Mart is thought to conduct physical inventory counts far less often.

“We don't have the number of products and transactions that Wal-Mart has, but our products cost a lot more, so a mistake is much more expensive,” says Hefty Seeds general manager Brian Hefty.

He admits that the company's inventory management regime may be excessive. But the family-run business, which has grown from a single store to 14 locations over the past decade, prides itself in getting the details right, sometimes despite the lack of immediate payback.

“We are detail people,” Hefty says. “It may not pay for itself in savings. We just like doing it because we know it is right and that it will make a difference in how we conduct business.”

He says that when the company began developing its inventory management system, the goal was to eliminate unexplained product disappearance, no matter what the cause.

“I have worked in the warehouse myself and know how a simple mental error in filling an order can result in product loss,” he says.

Automated reports

The Hefty inventory management system is driven by reports that are automatically generated from accounting and inventory software. The reports, which take a minute or two to generate, provide new inventory counts for store managers to verify.

“If the count is off, we have to figure out why,” Hefty says. “We may have received it wrong or keyed it in wrong. It could have been miscounted. Or it could have been misloaded.”

Counting inventory takes about an hour per day per store during the growing season at an estimated cost of $30,000 to $40,000 per year across the entire business.

In addition to providing inventory information to each store daily, the company also shares daily inventory status with a key distributor. Says Hefty, “They don't want to get surprised at the end of the year by their biggest customer.”

Inventory system benefits

Hefty says the company's inventory management system helps him make better purchasing decisions.

The system also saves the company money by avoiding excess or stale inventory. “What we try to do is never run out,” Hefty says. “Our goal is that when the last customer walks in, we can fill his order and then we are out.”

Above all, the system helps avoid mistakes that could increase costs for the company or its customers. In one case, the system caught a mix-up between Accent and Accent Gold. If the customer had applied the mis-delivered higher-load Accent at the Gold rate, his entire corn crop could have been damaged or killed.

“It was really our mistake, but it counts in our favor with the customer,” Hefty says. “That one case alone paid for a year or two of inventory counting.”

Improve your inventory management

THE STORY of Goldilocks and the challenge of managing inventory have something in common. Having too much or too little is bad. Having just the right amount is best, but reaching that balance is a challenge.

Frank Dooley, who specializes in supply chain management issues at Purdue University, says many agricultural retailers have too little information about their inventory. They pay the price with excessive ordering and high carrying costs, or being out of stock and losing an important sale — and maybe a customer.

If your approach to inventory management could use some tweaking, Dooley suggests trying these ideas:

  1. Take a trial run

    Before jumping into an intensive inventory management system, take a trial run using a market basket of 10 or 12 products. Include some best sellers, a new product or two, plus some tried-and-true products. In most cases, you will want to track sales in more detail than your current practice, whether every day or every week.

    “Some people equate a physical count to managing inventory,” Dooley says. “What you really need to do is monitor sales activity and its implications on inventory. If you are only looking every month, that is not enough. You may carry too much inventory to avoid running out.”

  2. Evaluate over-stocking

    “There is a lot of incentive to place a big order because it may qualify the retailer for an incentive,” Dooley notes. “But if the product takes too long to sell, it can end up costing more than the incentive.” A rule of thumb is that it costs $15 to $25 to carry $100 of inventory for a year.

  3. Examine out-of-stock rate

    “If inventory is cut too much, it is more likely that you will start running out,” Dooley says. “If you carry substitute products for an item, being out of stock probably doesn't cost very much. If you don't carry a substitute product, farmers are a lot less forgiving than grocery store customers. Most farmers will cut you slack once or twice. After that, the customer could be lost.”

  4. Monitor sales trends

    “Where Wal-Mart is smarter than the competition is that they monitor sales so they know what is moving faster or slower than anticipated,” Dooley says. “Remember K-Mart's Blue Light Specials? These are products that K-Mart suddenly figured out weren't selling.”







 

SEFP ATE




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