Manage The Bottom 30% for Better GMROI

I encourage every retailer to actively engage with all key vendors. The ideas in this post will help.

Jack Welch, the former GE leader, was widely known for his 10% rule. He would insist that the workforce was culled by 10% every year as part of a continuous improvement process. The genius of the policy was not necessarily that you got rid of the dead weight, but that it forced his managers to make a decision about how to deal with under-performing personnel.

A similar discipline should be adopted for inventory performance. I work with a store that is very diligent about this process and the results speak for themselves with better margins, double-digit sales increases, sales per square foot numbers that are 2.5 times the NSRA average, and an improvement in inventory turnover that is double the industry average. Their mantra is simple, they aggressively manage the bottom 30% of their inventory, along with vendor engagement.

Here’s How It Works

Every week the store’s buyers send vendor sales representatives reports detailing the activity (or lack thereof) of the styles being carried from their respective lines. If there isn’t acceptable sales performance within a 30 period, the store requests that the vendor take action. This action might be a swap out for another style, increased advertising allowances, clinics and incentives for sales associates, or in extreme cases a total return of the product. Obviously, consideration is given to any number of circumstances that could possibly affect sales, including seasonality and merchandise received with terms to name two. The vendors are asked to manage the bottom 30% of the styles purchased for that season. The store manages to remaining 70%.

This retailer evaluates vendors based on historical criteria that includes sales, margins, turn and GMROI. All vendors are reviewed in person every six months and are given a vendor report card. Vendors that meet and exceed the benchmarking numbers are rewarded with bigger orders. Vendors that fall short of expectations are dealt with in the following manner: the first 10% below the cutoff are contacted to see what can be done to improve performance. The middle 10% are put on notice. This is like retail purgatory. Things could go one of two ways. Either noticeable improvement is made or they could be the next to go. There are no surprises this way. The very bottom 10% are informed that the relationship has run its course and that they should move their success elsewhere. The management of the “bottom 30%” is an ongoing discipline that everyone in the company adheres to.

If there is no significant response from a particular vendor, the merchandise manager or owner may need to get involved to force action. After 45 to 60 days, if there is still no resolve and if sales do not pick up to a respectable level, the first markdown is taken. This action will most likely land the vendor in the bottom 10% range. The result of this ongoing analysis is that the store does not end up putting additional funding into lines that are not productive. Let’s say the average GMROI for a given classification is 2.7. Any line with performance less than 2.7 is identified via the POS reports. Things either improve according to the schedule outlined previously or the vendor is dropped, the merchandise liquidated, and the money used to reorder top sellers on lines that are performing.

Narrow the Resource Structure

This process helps the store to narrow the resource structure. If for example, Vendor A is responsible for $100,000 in sales and Vendor B generates only $5000 in annual revenue, it might well be decided to discontinue Vendor B if is determined that more volume cannot be generated, even if Vendor B is profitable. The additional dollars are then added to Vendor A.

This retailer is always on the hunt for new lines. A significant portion of open-to-buy dollars are kept available for reorders and of hot trending styles, fill-ins on basic inventory, an off-price buy, or a new line that needs to be “tested”.

Another common request from this store is that when possible the vendors are asked to “locker stock” inventory. Basically, this requires the vendor to warehouse the backup inventory being reordered weekly instead of the store having to. This practice alone reduces inventory and increase turnover.

In years past, this type of approach may have been considered too aggressive for some. In today’s retail environment, managing vendor assortment is essential. Brand loyalty must be a win-win. Gone are the days when retailers should be expected to buy a line unconditionally that is under-performing simply because they always have. Retailers cannot afford to carry a line for a handful of customers who, in some cases, don’t buy until the line is on sale anyway. The resource profits when the store profits. If the store is not profitable with a particular line, the sooner the problem is dealt with, the better.