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How to Reach the Optimum Peak of Product Balance

April 24, 2008

7 Min Read
How to Reach the Optimum Peak of Product Balance

Selling Smart

Like Sisyphus of Greek mythology, endlessly pushing a boulder up a hill only to have it roll back down, the purchasing manager keeps striving toward the perfect balance of products, all in stock and beautifully faced on the shelves.

Yet perfection keeps unraveling as consumers snap up products, suppliers run out of stock and tastes change. You can wind up out of soymilk and holding 20 cases of fish-oil smoothies in the blink of an eye.

Everyday low backstock
I know of one naturals retailer with a stated goal of 0 percent out-of-stocks at all times. There are two problems with this. One, it is impossible. Manufacturers and distributors frequently go out of stock on items despite your best intentions. Two, it leads to massive overbuying. This same retailer had huge amounts of cash tied up in inventory, and very high shrink numbers from frequent markdowns on perishable overstocks. The store even contemplated a costly building expansion, just to make room for more inventory.

To minimize out-of-stocks on critical items:

  • Shorten your order cycle. Pester your distributors for more delivery days. Less time between deliveries will mean fewer out-of-stocks and lower inventory levels. If you have many sources of supply now, you may need to consolidate in order to convince one supplier that your volume warrants more deliveries. It will be worth it.

  • Identify a short list of individual products that you must keep in stock because your customers need them regularly and are unlikely to accept substitutes. Keep your inventory at a healthy multiple of sales: If you usually sell five units by the next delivery, keep 20 in inventory. Try to proactively develop multiple sources of supply, so that if one supplier is out, you can move to the next.

  • Identify a short list of categories that you must keep in stock. Your customers may not care so much if you are out of one brand of milk, but if you are out of milk completely, they may leave and never come back. Develop two or three manufacturers within critical categories, as well as backup distribution.

Your customers will blame you for out-of-stocks, even if your suppliers are to blame. You can minimize customer irritation by putting a sign on the empty shelf that indicates the reason for the outage, the estimated date of arrival and a suggested alternative product.

The danger of a good deal
Do you know anyone who drives 30 minutes out of his or her way to save $10, or who will wait in a monstrous line for the ?cheap? Asian food? It?s what economists call ?transactional utility?—the pleasure of getting a good deal—and it can cost us money in the long run.

One natural products buyer in the Midwest prided himself on always shopping for the best deal. Every time he placed his order he would check four suppliers, item by item, for the lowest price.

Unfortunately, the actual amount saved was small relative to the time spent ordering, the hassle of receiving lots of little shipments and increased shipping charges. When a new buyer took over, she sensibly launched a policy of using one primary distributor (with whom she was able to negotiate a second shipment each week) with a couple of backups. She continued to check relative prices and specials on high-volume items, both to take advantage of really important deals and to make sure she was being fairly treated by her primary distributor. But she greatly simplified her life.

Strategic price promotions
Mo Busby of Chico Natural Foods in Chico, Calif., tries to pass every sale on to his customers. In Mo?s view, this is just good customer service. Distributors are offering a deal that will save money, and he wants consumers to have it.

Courtney Landi of Healthy Living Natural Foods Market in Burlington, Vt., only acts upon ?real specials? of at least 30 percent off suggested retail price. Otherwise, the store just strives to give customers fair value by holding to a 15-percent-off-SRP guideline.

Whether you put 1,000 items on sale or just a few, choose a small subset of items that you really ?get behind.? These deals should:

  • Expand category sales. A special on frozen entrees that encourages new customers to try the category, and then causes them to buy prepared natural foods once a week, is the Holy Grail of specials. It?s much better than a deal (20 percent off vegetable shortening) that just encourages forward buying—?I?ll buy two this month, but none the next.? It is also preferable to a deal that merely switches consumers from one brand to another.

  • Clearly show price significance to consumers. Landi is right. A 30 percent discount will likely produce much more than twice the effect of a 15 percent discount. And remember that old maneuver?if an item is marked as ?3 for $5? people will purchase more than if it is marked ?$1.67 apiece.?

  • Have good volume potential based on past history, similar items and seasonal considerations.

  • Be fun. For some reason, specials on chips and salsa with a demo attached do more for your store atmosphere than specials on cleaning supplies. Theme specials (pie-making, summer picnic, holiday gifts) creatively displayed can really put people ?in the mood? and enhance their in-store experience.

Say it loud
Getting behind a special means making it visible to your customers in every way you know how:

  • Endcaps. Research has shown that endcap placement is the single biggest factor in making specials effective. On a given endcap, display a large quantity of a few sale items, rather than lots of SKUs. This will give a feeling of abundance and will keep the shelves from running bare.

  • Demos and sampling. Especially for new items and new categories, giving customers a chance to try the item is critical to the success of the program.

  • Cross-promotion. Put complementary items on sale together. Examples: Thai noodles and Thai peanut sauce; packaged coffee and biscotti.

Tools to make it all easier
You are probably familiar with handheld barcode scanners that allow you to assemble orders on the store floor. Supplied by particular distributors, they can save considerable time compared with writing orders by hand. On the other hand, scanners often don?t allow a purchaser to easily review the entire order before submitting it, which leaves orders prone to error.

Two companies have developed systems that enhance the handheld concept.

Living Naturally of Venice, Fla., offers a handheld called Scan Genius that allows users to view catalog listings from multiple suppliers at the point of purchase. Retailers can use the Scan Genius to print out shelf labels, evaluate different suppliers? prices and specials, take inventory and ?suggest? an order quantity. Orders can be reviewed before they are transmitted to vendors, so errors are reduced. Scan Genius is supported by PC software.

OrderDog is a Dallas company with a Web-based system that accepts data from a variety of handheld units, including the Scan Genius. OrderDog also allows users to compare vendor prices and specials, including those from more than 200 manufacturers who supply directly to retail stores. Purchasers can then buy from multiple suppliers all at once. Wild Oats recently began using OrderDog for all of its Natural Living departments, primarily to save time managing direct purchases. The OrderDog system also lets users view order history and see open invoices.

OrderDog is used by approximately twice as many stores (1,000) as Scan Genius, but availability may depend on your primary distributor. Scan Genius can be used by all UNFI distributors; OrderDog has a close relationship with Tree of Life. Some distributors will accept orders from both sources, in addition to their proprietary systems.

As in all things, the ultimate task is to test and learn. By continually challenging yourself to improve on the old ways, even in the midst of the million day-to-day tasks you have to juggle, you may find the boulder getting a little easier to push.

Sherwood Badger Smith is a marketing and strategy consultant based in Traverse City, Mich. Reach him at [email protected].

Natural Foods Merchandiser volume XXV/number 3/p. 78-79

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