A look at velocity coding
In the days of my family’s business, I remember that several of our vendors provided us with small spiral notebooks that we placed about our store. Each of the notebooks was referred to as a ‘want book’. The idea of a want book was to help us when a customer came into the store looking for any particular product.
In the event we did not have the item on the shelf, we would write the item in the notebook and tell the customer how soon we would have the item in the store from our vendor. We would wait for the vendor’s sales representative to arrive in a few days and then place the order for the customer.
The unique aspect of this scenario was that this arrangement was acceptable to all of the parties involved; the vendor, the store and somehow the customer.
In today’s economy we read and hear of so many businesses that are diminishing their inventory levels. With customers watching their dollars, the logic is a business needs to hold onto their dollars in their checking account as compared to having those same dollars sitting on the shelf. The logic is supposed to hold true for the inventory of most everything a business sells.
The problem with looking at the situation from this perspective is that it does not take into consideration the customer we have today. Our current customer is not like the customer that previous generations of our family dealt with. Today’s customer is one that asks if you have the item and if you do not, they move on to your competition to make the purchase there.
Unfortunately they may find the experience at your competition to be a good one and decide to continue to do business there. All of this happens because of your being out of stock on one item. This doesn’t paint a pretty picture; how can we solve it?
The solution comes by your understanding the concept of inventory control and velocity coding. In a point of sale system, all items are compared to how fast you sell them. The items you sell the most frequently are referred to as ‘A velocity’ items. At the other end of the sales chart, the items you sell the least often are referred to as ‘E velocity’ items, with everything you sell being assigned one of the letters between A and E.
While your concern about the investment cost for taking the gamble and stocking plenty of every type of item is justified, there is a solution that you can utilize. That solution is to begin an analysis of every item you stock and the quantities of each. Perhaps there are some of the ‘D’ and ‘E’ items that have inventory levels that can be diminished. There may even be some of the slower moving items you stock that should be relegated to ‘special order only’ status.
Freeing dollars as you ‘move down the alphabet’ will allow you to have additional quantities of the faster moving items so that you do not have the customer we previously described heading down the street to visit the competition.
There is one other aspect of this inventory control that we suggest you consider. It is the idea of stashing away the cash in a checking account and decreasing your inventory levels. If you drive down a street in your community and look at the signs posted by banks announcing the rate of return they offer you will undoubtedly see a very low rate.
Think about spending $100 in inventory and selling that inventory several times over the course of the year. When you look at the gross profit you made on the total of all of these sales over the course of the year and compare that gross profit to the $100 investment, you will quickly see that money in a bank does not make anywhere near what it can being properly invested in your business.
Inventory control is a delicate balancing act, but one that pays great dividends when properly done.