An Epicor White Paper

Eliminate Hidden
Holding Costs:
Mastering Your
Inventory
Retail Best Practices Series
 Eliminate Hidden Holding Costs: Mastering Your Inventory

Table of Contents
Introduction.............................................................................................1

Clearing Out the Cobwebs: Saying Goodbye to Dead Items..................3

Ordering the Right Products in the Right Quantity:

Reliable Suppliers and Advanced Technology..........................................5

Maintaining an Accurate Inventory Part I:

Refining the Receiving Process................................................................7

Maintaining an Accurate Inventory Part II:

Now Lets Count Whats Important.........................................................9
 Eliminate Hidden Holding Costs: Mastering Your Inventory

Introduction
If youre like other retailers Epicor works with on a daily basis, then youre likely
facing challenges such as fierce competition, increasingly complex needs and costs
associated with managing inventory, and a lack of time caused by time-consuming,
manual methods that exist in spite of the addition of technology.
With inventory being one of a dozen areas to attend to, Epicor has found that
retailers often have no choice but to spend more time putting out daily fires than
on refining their inventory mix. And many are still relying on gut instinct instead of
system data to get them through the day, in spite of the time-consuming nature of
manual processes.
Epicors work with other retailers has shown us that on average, those not relying
on system data often have 65% of their inventory value invested in the bottom
15% of sales. For every $500,000 in inventory, its a good possibility that retailers
could take 10% of the inventory value out (at least $50,000) without losing
customers or profitability.
Carrying $50,000 worth of unprofitable inventory is costing you more than you
think. Actual carrying costs are far greater than the value of shelf space and the cost
of the item.
For example, lets take a retailer with a 2500 square foot location, selling $2.5M a year,
which has approximately $100,000 worth of excess inventory. Not only is it costing
them $100,000 that could be spent on alternative, more profitable investments, its
actually costing them another $54,000 to house this unprofitable inventory.
From the insurance and financing unneeded inventory to the cost of storage and
utilities to labor costs and lost sales, not focusing on refining inventory has larger
implications. It really is costing you!

Company X with $100,000 in Excess Inventory

How many consumers do the same thing?

Dollars tied up in unneeded inventory $100,000

Cost to finance unneeded inventory $10,000
Expense to insure excess inventory $1,000
Cost of storage space per square foot per year $2,500 (250 square feet
of total space devoted
to excess)
Estimated utility cost for space filled $400 ($4,000 annual
with excess inventory utility on 2,500 square
foot space)
Cost to insure storage space $3
devoted to excess inventory
Cost for labor performing unnecessary tasks $7,500
(duplicate work, searching)
Cost due to employer taxes, vacation, retirement $1,500
Gross margin on lost sales $31,250
Total Cost of Housing Excess Inventory $154,153

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 Eliminate Hidden Holding Costs: Mastering Your Inventory

After a house, a car is often the second most valuable purchase most people will
make. However, instead of parking their car in the garage, a lot of people fill their
garages with items that arent as valuable as their car. They are using their most
valuable storage space for low-value items, while the car becomes exposed to the
elements and quickly depreciates in value.
Just as consumers inadvertently leave their most valuable asset out in the rain, it can
happen to retailers too, where without a focus on refining inventory, valuable shelf
space is filled with less profitable items, while the most profitable items are left to
gather dust on the shelves in the back room.
With retail space becoming increasingly valuable, and merchandising strategies
becoming more sophisticated, retailers can save thousands of dollars a year by
reducing inventory dead stock and unprofitable items, increasing the accuracy of
their inventory counts from a streamlined receiving process to cycle counting and
beyond, and by using data to make smarter purchasing decisions.
Theres only so much space in a retail location; it must be used strategically.
At Epicor, we have the software to help at every step of the inventory management
process, to help you reduce your hidden inventory costs, and to make sure the right
items end up on the shelves. Use the tips on the following pages to help you get
started today.
Read strategies on:
1. Clearing Out the Cobwebs: Saying Goodbye to Dead Items
2. Ordering the Right Products in the Right Quantity: Reliable Suppliers and
Advanced Technology
3. Maintaining an Accurate Inventory Part I: Refining the Receiving Process
4. Maintaining an Accurate Inventory Part II: Now Lets Count Whats Important

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 Eliminate Hidden Holding Costs: Mastering Your Inventory

Clearing Out the Cobwebs:

Saying Goodbye to Dead Items
An important first step to better inventory management is to identify and eliminate
unprofitable items. Its time to dust off the cobwebs, put those unprofitable, dead
items on clearance, and free up prime retail space (and reduce those hidden carrying
costs). Its a tough job, but somebody (you) has to do it.

Here is our first lesson in inventory: dont hang on to items that arent
making you money now and wont make you money in the future.

Unprofitable items are called dead items for a reason: they garner little to
no sales activity. Theyre stagnant. Dead items do nothing to enliven and
enrich the bottom line. As we mentioned on the first page, they can even
cost you in terms of customer service hours, wasted valuable retail space,
and reduced cash flow. Thats why you must clear the clutter to get a
handle on your inventory.

Follow the Steps to a Healthier, Refreshed, and Revived Inventory

33Determine the value of your inventory and whether you have dollars
invested in the wrong items. Look at department and item gross margin return
on investment (GMROI). GMROI is a key financial indicator that measures
movement against margin. Did your items achieve or fail to meet expectations
for generating profit?
{{ Another way to decide whether you need to clear out your inventory is
to analyze quantities-on-hand (QOH) versus order points. If your QOH is
Back to Basics Quiz greater than the order point, youre probably sitting on excess product
and dollars.
Q. What is your largest asset in
your business?
A. Your inventory! It is
33Identify underperforming items or items that have outlived their popularity
by running a product performance report. What are your top 20-25 dead items
the heart and health of your per department?
businesskeep it in tip-top
shape, and you will be rewarded
33Free capital. Put underperformers on promotion! Require each department to
put a plan together to move inventory out and not repurchase it. Donate them
with improved turns and dollars and take the tax breaks. It will free up cash AND prime retail space. Once you
to the bottom line! Mismanage clear out the top 20 dead items on your list, move to the next 20 dead items.
it, and your businessand Your cash will increase as you move these items out. Then focus on moving out
bottom linewill suffer. items at the bottom 5% of sales (Epicor refers to these items as D-ranked items).
Following the Trends
Do you have items that were
popular back in the 80s? Many
retailers often bring new items in,
for promotions or to try new lines,
but then fail to clear items out
because of the thought, What if
a customer asks for it? As your
customers needs change, and
new products are introduced into
the marketplace, your inventory
selection should be changing to
match those needs.
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 Eliminate Hidden Holding Costs: Mastering Your Inventory

If an item is key to a product mix, skip it and move on. For D items,

Eagle Does That

! you really only need to keep one or two on-hand. Focus on getting rid
of excess.

Epicor Business Advisor 33Going forward: If you have a lot of dead items, the rule of thumb is this:
for every one new product in, three items should be targeted for close out.
and Compass allow
33Put a plan into action so that your items generate more profit. For every SKU
ask: is the item not performing because there are too many similar products? Is
you to identify GMROIs
it overpriced? Is it outdated? Consider remerchandising the store so customers
below a target value at can discover items that have always been there.
the department, class, or
individual SKU level. The For Every One New Product in, Three Items Should
Be Targeted for Close Out
Eagle system enables you
to run reports like the For Example: Typical Hardware and Lumber and Building
Inventory Valuation Report Materials (LBM) Turns
(RIV) and the Product Category of Product Typical Supply Needs with Annual Turns
Minimal Risk of Stock Outs
Analysis Report (RPA) to Hardware 6-8 week supply 6.5-8.5 annual turns
identify and rank your LBM Products 4-6 week supply 8.5-13 annual turns
items from high-margin
fast-moving items to low-
margin slow-moving items
to dead items. Use Epicor
Inventory Planner to view
charts reflecting Overstock
Value by Store, Turns by
Department or Store, Slow
Movers on Order, and
Inventory Trends by Store.

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 Eliminate Hidden Holding Costs: Mastering Your Inventory

Ordering the Right Products in the

Did You Know? Right Quantity: Reliable Suppliers
An article on automatic and Advanced Technology
replenishment by Retail If youre in the purchasing department, you know you cant rely solely on intuition
to make buying decisions. The purchasing staff must be able to seamlessly anticipate
Economics estimates that future demand, understand the relationship between quantity-on-hand and cash
50% of out-of-stock flow, source reliable suppliers, and execute the best purchasing strategies for
company profitability.
events occur because of
Its a tall order. If you get it right, youve reached the inventory all-stars. Howeverif
manual ordering errors. you get it wrong, its money out-of-pocket tied up in stale stock.
Are you willing to risk Heres our second lesson in inventory: purchasing directs the flow of goods
forcing loyal customers to in a company. To manage it well, youve got to have these two elements:

shop elsewhere? Think of

1. High-quality, accurate, and reliable suppliers
what you gain by using
technology 2. Accurate inventory data and fine-tuned forecasting capabilities

in purchasing.
These two components above are crucial for making smarter buying
decisions that reflect seasonal changes, trends in the market, and those
products your customers want to buy.

Identifying Quality Suppliers and Cultivating these Connections

33Source reliable suppliers.
{{ Can they deliver quality merchandise at a suitable price on time? You
should be meeting with prospective suppliers at their plants whenever
possible. Maintaining an accurate inventory has as much to do with the
quality of your suppliers (and the accuracy of their shipments) as it does
with the quality of your own inventory processes.

33Dont immediately jump at your suppliers incentives.

{{ Review suggested orders before meeting with a product sales
representative so you get the product and quantity you want and need,
not what the rep wants to sell.

One customer of ours had an inventory manager that wanted to purchase

five truckloads of a product to take advantage of a suppliers winter
buy incentive. Using sales and inventory data, it was clear that only two
truckloads were needed. The dealer saved money and kept from having to
store eight months worth of inventory on hand.

33Optimize order cycles to prevent stock-outs and reduce shipping costs.

33Use vendor EDI communications to reduce ordering mistakes, receiving errors,
and possibly gain discounts on orders.

5

Eagle Does That!
Use Inventory Planner
for Setting
More Sophisticated
Order Points
Inventory Planner assists you
in determining the most
optimal levels of inventory. It
ties inventory levels directly
to customer satisfaction and
loyalty. The software offers
precise forecasting capabilities
that analyze best practices
and historical sales to most
accurately predict future
sales levels.
Eliminate Hidden Holding Costs: Mastering Your Inventory
Use Technology to Streamline Purchasing and Gain Fine-tuned
Forecasting Capabilities
33Leverage your ERP system for calculated and weighted order points to
reduce seasonal spikes, stock outs and overstock, and trim inventory costs
33Use smartphones at buying markets to instantly access your inventory and
determine the quantities you have in inventory and what you need to purchase.
This prevents you from overbuying and eventually having to put your overstock
on clearance.
33Set safety stock high for popular items in the system. Review quantities-on-
hand for popular items regularly to ensure you wont be at risk for stock-outs of
your most popular items. Lower the safety stock level for less popular items that
also have longer vendor order cycles.
33Use your ERP system to keep better track of order multiples so that youre
not only ordering correctly but selling those items at the right price and quantity.
Examples:
{{ Sod bought by pallet, sold by piece
{{ Mulch bought by truckload, sold by scoop
{{ Rope bought by spool but sold by foot
Eagle Does That!
The Eagle system can keep track of units of measure in its inventory
Maintenance file.
33Reduce order quantities by balancing stock more effectively across
multiple stores. Use an ERP system to auto-generate transfers and reduce
the time it takes to manage a multi-store inventory. Transferring inventory will
prevent you from wasting money on more of same products you already have.
One of our customers set up automatic transfers on overstocks of C and D
items (Eagle-speak for slow-moving products) as long as the transfer value
was over $50. They reduced their buys with their co-ops, increased turns
by one, and reduced inventory value by $80,000. These improvements
were partly attributable to setting up automatic transfers.
33Determine more accurate future demand using forecasting models
(Eagle can help!)
6

Back to Basics Quiz
Q. What is Blind Receiving?
A. Blind Receiving is the process
when a shipment is not checked
against a PO. Instead, the vendor
is trusted to have shipped the
order correctly, and the items are
immediately put into inventory.
This method saves time but can
lead to inaccurate counts.
Eliminate Hidden Holding Costs: Mastering Your Inventory
Maintaining an Accurate Inventory
Part I: Refining the Receiving Process
When your purchasing department is buying more accurately and relying on quality
suppliers, we suggest you then focus on receiving. Do you have a receiving process you
trust, one that allows your employees to receive new shipments quickly and efficiently?
Heres our third lesson of inventory: An accurate, trustworthy receiving
process paves the way for better accuracy in other areas of the business.
Likewise, mistakes at receiving create errors throughout the store.
The Ultimate Goal for Your Receiving Team
Your receiving mission: Accurately move items as fast as possible from the
trucks to the shelves and, at the same time, handle the merchandise as
little as possible.
Receiving Practices for an Accurate Inventory
33End the practice of putting out merchandise before it has been received
into inventory. It may have helped in the past with maintaining accurate costs
and quantity, but if stock is sold prior to being available in the system, it throws
inventory counts into the negative.
33Move from blind receiving to receiving against a PO, which holds your
vendors more accountable and increases accuracy of counts.
{{ Ensure that every item processed by receiving has a purchase order with
accurate quantities and pricing
{{ Go a step further and make sure POs are on file with the receiver before a
shipment even arrives at the dock
33Aim to receive new products into inventory the same day as they arrive
to improve customer service
{{ Immediately update inventory levels and costs and accurately pass off
receiving detail to accounting to streamline the payables process
33Use RF scanners to check each SKU against the PO. RF scanners help you
capture UPC numbers before products go to the floor. You can quickly receive
new goods while keeping labor costs low.
{{ Print new bin labels so that shelf pricing is updated as items are
being stocked.
{{ Keep special orders to the side to be properly labeled for
customer pickup.
33Allow enough physical space in the receiving area for your team to more
easily complete the job.
7

Eagle Does That
The Advanced Receiving
software in Eagle assists
and simplifies correcting of
errors in quantity, pricing,
or missed freight charges
to ensure that inventory
and payables are accurate.
Also, the latest RF scanner
software, Eagle Mobile,
provides exceptional speed
and accuracy in receiving.
Eliminate Hidden Holding Costs: Mastering Your Inventory
Managing Supplier Relationships to Improve Receiving
Vendors are so important. They effect both your purchasing and receiving
departments. They can really make or break your attempts to control your inventory!
Thats why its important to get these relationships right.
33Catch vendor shipping errors at receiving to reduce detective work when
the invoice arrives weeks later.
33Be proactive with vendors. Insist on confirmations for all drop-ship material
so POs can be created/updated before products arrive. Vendor confirmations will
help you load new items into inventory before they clog the receiving dock or
get put on shelves and sold under generic or dump SKUs.
33Track vendors performance. Reduce issues in receiving by tracking fill rates
to know which vendors consistently ship correctly. If a supplier is reluctant to
improve or unwilling to reduce error rate, search for a new supplier.
33Use EDI Communications
{{ Update line item cost changes from vendors.
{{ Receive notification of short or no-shipped items as well as substitutes
and alternative items prior to the truck even arriving.
{{ Paperless tracking is most accurate and error free.
{{ Ask for supplier discounts for ordering with EDI (ordering through EDI
means turning in orders faster, using less paper, making fewer errors).
Receiving is like the hub of a wheel: from this central point, it touches all areas of
the business. Its worth taking time to get this process right!
Quick Five Keys of Receiving
1. Encourage accurate and consistent processes.
2. Maintain accurate POs.
3. Reduce check-in times with RF scanners.
4. Use EDI vendor communications and quality suppliers.
5. Provide enough room in receiving area.
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 Eliminate Hidden Holding Costs: Mastering Your Inventory

Maintaining an Accurate Inventory Part II:

Now Lets Count Whats Important
Once the items are received they go out into the retail store, and then things get
dicey. To maintain an accurate inventory count, youre going to have to physically
count your items on the shelves and match them against your ERP systems
quantities. However, the latest strategies in inventory management suggest that you
dont have to count everything like you do in traditional year-end inventory or in
cycle counting.

Heres our fourth lesson in inventory: choose the inventory counting

method that provides the most efficient and accurate inventory control
for your business. While most are still practicing cycle counting or year-
end counts, another alternative is to sign up for managed inventory
accuracy services which analyze your data and send you monthly
customized count sheets and inventory reports to better assist you in
inventory control.

What is managed inventory accuracy?

Managed inventory accuracy is a new strategy focused on counting a

selection of important inventory in order to better control inventory,
monitor accuracy, identify potential theft, reduce dead items, and recover
frozen SKUs. It is an alternative to traditional cycle counting.

Inventory Accuracy Management Tips

33Practice cycle counting daily with the goal to completely eliminate year-end
inventories and to count each item 3x/year (sections should be small 8 ft of
gondola or peg board) or try a managed inventory accuracy service (Mango
Report is one of the companies providing this new service).

33Regularly remind staff of your goals to improve accuracyget the staff

involved and invested in the process. If your staff is invested, theyll maintain
the momentum. Turn a good employee into a key employee devoted to
inventory control.
{{ Assign staff to be accountable for specific aisles or departments as well
as any back stock for those aislesand include incentives for tidiness and
product knowledge, improvements in margin, etc.
{{ Train clerks to audit products at POS (does it have a wrong UPC code?)
{{ Aim for accuracy everywhere (purchasing, receiving, point of sale,
transfers, returns, write-offs)
Involving your staff in inventory control brings dollars to bottom line, reduces stock
outages, and eliminates mistakes at POS, while improving overall morale.

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 Eliminate Hidden Holding Costs: Mastering Your Inventory

33Establish basic rules

{{ Every item stocked or sold has unique SKU limit exceptions
Eagle Does That {{ Every item is to have a bar code
{{ Bar codes affixed to stock or stock locations must be accurate always
Use Eagle Mobile to speed
{{ Policy on returns, refunds, exchanges are clear and consistent (address
up physical inventory, defective items, validation procedures)post policy for all to see
receiving, UPC capture,
33Maintain back stock like you would maintain your store
print bin tags, and attach 33Use RF scanners to capture counts, create orders, update prices, and print
bin labels
location codes to items.
{{ This is where you can evaluate quantity-on-hand variances (differences
between what is counted and what is in system) and also better track
inventory shrinkageif a process is generating shrinkage, you can take
steps to correct it.
When you have an environment that encourages accuracy, youll end up with:

33More accurate and timely counts

33Finely tuned inventory control
33Better, more reliable numbers
33More potential revenue since your business can stay open during counts
33Better customer servicewhat is in the system is on the shelves
To continue your quest for inventory accuracy and
better inventory control, check out the Epicor booklet
The Quantity-on-Hand Best Practices White Paper.

Or call us today at 888.463.4700 to find out more about how

you can better manage inventory.

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 About Epicor
Epicor Software Corporation is a global leader delivering business software solutions
to the manufacturing, distribution, retail, and service industries. With more than
40 years of experience, Epicor has more than 20,000 customers in over 150
countries. Epicor solutions enable companies to drive increased efficiency and
improve profitability. With a history of innovation, industry expertise, and passion for
excellence, Epicor inspires customers to build lasting competitive advantage. Epicor
provides the single point of accountability that local, regional, and global businesses
demand. For more information, visit www.epicor.com.

Contact us for more information on Epicor Products and Services

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This document is for informational purposes only and is subject to change without notice. This document and its contents, including the viewpoints, dates and functional content expressed herein are believed to be accurate as of its date of publication,
October 2013. However, Epicor Software Corporation makes no guarantee, representations or warranties with regard to the enclosed information and specifically disclaims any applicable implied warranties, such as for fitness for a particular purpose,
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