Making The Sales Call – Retail Inventory Management ( 1,5 Rule ) (E)
What is the best way of Sales Order Generation? Why do we manage the Inventory? How to avoid Stock-outs? How to take care about retail inventory and avoid the overstocking?
Posted: Mar 2008
During the Sales Call ( Visit to the Customer ), the most important task of the Salesman is to Generate Order. The purpose of order generation is to manage the retail inventory. Here we put stress on word "Generate" instead of "Take" order. To "take" is passive way by definition of the word. This means that in this case Salesman mostly just pick the order given and prepared by the outlet owner. To generate is an active process where the Salesman leads the process. He assess the needs, propose order quantity, create back-up Profit Story that will support him with his proposal, overcome objections and conclude the sales, with the purpose of retail inventory management.
In order to really master this process, the Salesman must be equipped with specific tools and sets of knowledge. One of the most important things is the skill and knowledge of the Retail Inventory Management in the outlet. By default you may think that this is the job of the outlet owner, since he orders, he pays product, store it, sell it further etc.
The truth is that outlet owner is managing too many things at same time: outlet premises ( rent, utilities, maintenance ), staff ( employment, training, supervision ), legal obligations ( accounting books, taxes ) and on top of all this he have many product categories, among whom your portfolio is one out of many in his retail inventory.
From this it is clear that the outlet owner can never be more focused and trained than your properly trained Salesman.
During the process of Order Generation, for every SKU individually, it is important to take many things separately: sales history, trends and expectations, seasonality, strength of the brand, safety stock of retail inventory, etc.
The Inventory Management model of "Rule 1,5" offers you a good balancing of Order Generation, taking into account History, Trend and Safety Stock of Retail Inventory. The Formula for the Rule 1,5 is:
Explanation: Order is created on the base of the last week sales, but is increased by 50% for case that sales increase. This is in accordance with the policy of keeping of Retail Inventory Safety Stock. In case that sales increase in the next period, the retail inventory stock is safe until the next sales visit.
If the opposite happens, meaning that the sales in the next week is lower than in previous, there is no fear of overstocking, since the formula will balance the next order ( reduce it ). The mechanism of the formula is shown on the example below:
As you can see the orders are increasing while the sell-out goes up, but also decreases in the period when the sell-out is declining. That makes this mechanism of Retail Inventory Management very useful for both, the Supplier and Customer, since it secures fluent supply of products, avoid Stock Out, balance capital invested, decrease obsolete stocks, increase consumer's shopping experience and maximize profit.
This Retail Inventory Management model is suitable for all FMCG products. The model is explained in more details in attached free tool kit.