Successful Service Department ManagementTh ese free, downloadable IDDBA Job Guides cover topics like Understanding Profi t, Reducing Shrink, the G.R.E.A.T. salesmanship model, etc

Successful Service Department

ManagementCourse 4: Controlling Inventories

A Management Series for Supermarket Deli, Bakery and Cheese Department Managers

Course 4: Controlling Inventories

Successful Service Department ManagementA management Series for Supermarket Deli,

Bakery, and Cheese Department Managers

PO Box 5528Madison, WI [email protected]

First Edition

© 2011, International Dairy•Deli•Bakery Association™

No part of this publication may be altered without the express written permission of the International Dairy•Deli•Bakery Association.

The information presented in this book has been compiled from sources and documents believed to be reliable. However, the accuracy of the information is not guaranteed, nor is any responsibility assumed or implied by the International Dairy•Deli•Bakery Association.

© 2011 International Dairy•Deli•Bakery Association™ i

About Th is Series

Th e Successful Service Department Management series has been designed specifi cally for deli, bakery, and cheese department managers. Its purpose is to provide you with the information you need to manage your depart-ment successfully.

Whether you are a newcomer to management or an expe-rienced veteran, this educational series will help you gain knowledge of the workings of your department.

Th is series is divided into seven courses:

• Course 1: Understanding the Concept of Profi t

• Course 2: Sales and Merchandising

• Course 3: Increasing Gross Margins

• Course 4: Controlling Inventories

• Course 5: Managing Direct Expenses

• Course 6: Developing a Profi t Center Team

Successful Service Department Management includes six courses, a Final Quiz, a Final Quiz Answer Key, and an Associate Tracking Tool.

As you work through this series, you’ll fi nd:

Exercises

Answer Keys

Skills Enrichment Activities

Links to FREE Job Guides at IDDBA’s Web site

How To Get Th e Best Results

Th is Successful Service Department Management training series has been designed for you to take all six of the courses from start to fi nish or to choose course subjects based on your needs. To get the full benefi t of the series we recommend that you take one course per week in the order we’ve provided and complete the Skills Enrichment Activities (SEA). However, you can customize this based on your available training time, what works best for you, and the needs of your business.

PDF

What You’ll LearnWhat You’ll Learn::• How to determine profi t, margin, and gross

margin for your department’s products and for your department.

• How to use merchandising techniques to increase sales in your department.

• To explain where shrink comes from and how to reduce it in your department.

• How to write an eff ective order for your department.

• To read a department profi t & loss state-ment knowledgeably.

• To write a department schedule that maxi-mizes customer service and profi tability.

• How to build employee motivation through training and communication.

Successful Service Department Management Series

ii © 2011 International Dairy•Deli•Bakery Association™

Successful Service Department Management

Skills Enrichment Activities

Th e Skills Enrichment Activities are at the end of each course. Th ey will help you further your professional development by giving you a chance to apply the knowledge and skills you’ve learned in each course. Using information unique to your department, the SEA process will give you insight that could impact department profi tability and prompt you to make new management decisions. It will also help you examine new ways to motivate and inspire your team. You may choose to do one, several, or all the enrichment activities.

IDDBA Job Guides for Department Associates

Some of the concepts and skills you learn will be helpful for your department staff to know. Aft er all, an inspired, moti-vated team is one of the best investments you can make in your pursuit to greater profi tability and customer engagement. Th ese free, downloadable IDDBA Job Guides cover topics like Understanding Profi t, Reducing Shrink, the G.R.E.A.T. salesmanship model, etc. Use them during on-the-job training and coaching sessions.

Progress Record

Use this Progress Record to keep track of your course and exam completions.

Course Name Completion Date Skills Enrichment Activities Completion Date Job Guides Used ✓

Course 1: Understanding

the Concept of Profit

A: Category Profit AnalysisUnderstanding Profit

B: Department Operating Report

Course 2: Sales

and Merchandising

A: Store Display Test Capturing Impulse Sales with G.R.E.A.T. Success

B: Plan an In-Store Promotion Sign Management and Effective Communication

Course 3: Increasing

Gross Margins

A: Generating Profit by Increasing Prices

B: Generating Profit by Promoting High-Margin, Slow-Moving Items

C: Generating Profit by Determining Which Categories Should be Promoted

Course 4:

Controlling Inventories

A: Analyzing Ordering Methods

Reducing ShrinkB: Ordering for a Difficult Category

C: Analyzing Mark-Downs

D: Analyzing Other Sources of Shrink

Course 5: Managing

Direct Expenses

A: Tracking and Creating an Hourly Sales History

B: Creating a Task List

C: Creating a Daily Assignment Schedule

Course 6: Developing a

Profit Center Team

A: Improving the Interviewing and Orientation Processes

B: New-Hire Questionnaire

C: On-Going Positive Feedback Challenge

Final Quiz

© 2011 International Dairy•Deli•Bakery Association™ 3

Shrink

In the last course, we saw how improving profi t margins can increase gross profi t in your department. In this course, we’ll look at how controlling inventories can reduce inven-tory shrink.

In any department, actual sales fall short of expected sales. Th e diff erence is shrink.

For example: If your department’s sales were $7,000 for a week and your expected gross margin was 45%, you would expect $7,000 × 0.45 = $3,150 gross profi t for the week.

However, when the results are in, your department’s profi t was only $2,940 or a 42% gross margin. Th e dif-ference, $3,150 − $2,940 = $210, is shrink.

In this case, shrink is $210 ÷ $7,000 = 0.03 or 3%. (Note that 45% − 42% = 3%.)

Known Shrink vs. Unknown Shrink

As the manager of a perishable products department, you expect some shrink. You probably know where some shrink comes from — this is called known shrink. For example, when a product passes its sell-by date it should be dis-carded. If the product is correctly logged before it is discarded, appropriate inventory adjustments can be made. It is still shrink, but it’s known shrink. Known shrink also comes from normal processing, cutting, and trimming of product in your department.

Chances are you don’t know where some shrink comes from — this is called unknown shrink. Unknown shrink can come from, among other things:

• A cashier ringing a purchase on the wrong key

• An associate discarding product without correctly logging it

• Failure to match a delivery to its invoice

• Products sold for the wrong price

• Improper portion control

• Dishonesty


What You’ll LearnWhat You’ll Learn

• Th e Diff erence Between Known Shrink and Unknown Shrink

• How to Calculate Shrink

• Gathering Information for an Order

• Order Organization

• Controlling Product Loss Th rough Billing, Portioning, and Recipe/Formula Costing

4 © 2011 International Dairy•Deli•Bakery Association™


Since unknown shrink cannot be tracked, it is best to try to make as much of your shrink known as possible.

Reducing shrink has a direct impact on your department’s bottom line. In fact, in the low-margin supermarket envi-ronment, reducing shrink can have a far greater impact on profi t than increasing sales.

Keep in mind, however, that a perishable department must have some shrink. Th e only way to reduce shrink to zero is to reduce sales to zero.

Department managers are key in controlling shrink in a number of ways. First, we’ll examine ordering.

Ordering

Ordering is the department manager’s primary tool for controlling the amount of inventory the department car-ries. Writing a good order is not easy. It is a delicate bal-ance between:

• Ordering enough product to fi ll cases and special dis-plays and

• Keeping back stock at minimal levels.

Planning the Order

Before writing any order, it is crucial to develop a plan to build sales and profi t for the department. Among the things you’ll need to consider are:

• Th e ad. How will you merchandise for the ad? What kind of displays will you create? What will you tie in around the ad items? How much product will you need? Advance planning is the secret to ordering the right amount of product.

• Special promotions. What kinds of promotions will you create? Do you need to generate extra sales? Or promote more high profi t merchandise? Or build more variety into your product line? Special promotions require careful planning to order the right items in the right amounts.

• Seasonal changes. What season are you moving into? Out of? What seasonal items should you plan to order? What items should you order less of? Being aware of sea-sonal trends is vital to avoiding costly ordering mistakes.

E X A M P L EE X A M P L E

Calculating Shrink

Given the following, find shrink:

• Sales: $15,000• Expected Gross Margin: 50%• Actual Gross Margin: 46%• Actual Gross Profit: $6,900

Find expected gross profit

Sales × Expected gross margin = Expected gross profit

$15,000 × 50% = $7,500

Compare expected gross profit with actual

gross profit

$7,500 − $6,900 = $600

Express the difference as a percentage of sales

Shrink ÷ Sales = Shrink %

$600 ÷ $15,000 = 0.04 or 4%

Note that 50% expected gross margin − 46% actual gross margin = 4%.



• Coming events. What local events might be coming that could change your ordering patterns? A parade? Or a sporting event? Any local activity can cause changes in movement that aff ect planning.

• Production requirements. Do any of the items you are planning to promote require advance processing or packaging? If so, they need to be ordered in advance.

Inadequate planning is a major reason for both under-ordering and over-ordering in the department. It is extremely diffi cult to order the right quantities when you are under a deadline to fi nish the order.

Gathering Information for the Order

Another important part of writing an eff ective order is having the right infor-mation about product movement, space allocations, holiday sales, and the like.

Th e more information you have about your department’s sales and movement, the more accurate your order is likely to be. Here are some of the kinds of information you may need to research:

• Average product movement. You should know the aver-age movement of every product ordered for at least the last month. Depending on your ordering system, you can check your order guide history, your inventory records, or even your invoices to see how much you normally sell of each item.

• Space allocations. Check the plan-o-gram to see how much space each item should have in the case. Correct space allocation is another important part of inventory control. Over-ordering slow-selling merchandise causes markdowns and lost product. Under-ordering fast-selling merchandise causes lost sales and lost customers.

• Sales history. When ordering for a holiday or seasonal event, it is extremely helpful to know what items you ordered and how much of each you sold the year before. If you don’t currently keep a calendar detailing each event, now is the time to start. While recording the items and quantities ordered and sold, you should also make notes about what you could have ordered more or less of.



Order Organization

Th e last part of writing an eff ective order is organization. Systematic order-ing requires a systematic method. Here are a few tips that other department managers have found helpful:

• Make one person responsible for ordering. Having the same person do the ordering is essential for consistency. Ordering correctly for movement, inventory levels, and buying habits takes week in, week out practice. Having more than one order writer can result in erratic orders and costly mistakes.

Review the merchandising plans. Make sure all ordering information, advertising plans, and bulletins are kept available. Review all informa-tion before starting the order.

Check back stock before you start. Before you begin ordering, check the freezer, the cooler, and all special display areas to see what you have, so you don’t accidently over order. Note any products with short sell-by dates that may need special promotion.

Reorder shorted items fi rst. When you start the order, fi rst check your invoices and reorder any items shorted from the last order. Th ey can be easily forgotten.

Make out the order from the sales fl oor. When ordering, it is best to do the order in the department, not in an offi ce or the back room. Ordering by guesswork can be risky.

Take advantage of multiple deliveries. If you get more than one delivery per week, plan your orders for “just-in-time”deliveries. By minimizing back stock, you increase your turnover and your gross profi t.

Controlling inventory shrink starts with controlling inventory levels. When inventories are too high, products may have to be marked down at the last minute to avoid complete loss. Markdowns are a signifi cant source of shrink. Refer to the markdown policy for each department.

Skills Enrichment Activity A:

Analyzing Ordering Methods

▶



Exercise 1: Effective Ordering

Directions: Answer each question below.

1. Your sales last month were $8,500. Your expected gross profit margin from your sales was 47 percent, without shrink. However, your Operating Report shows your actual gross profit margin was 42 percent of your sales. How much in dollar profit did you lose due to shrink?

2. You have just replaced the previous manager in the department. Today your first order is due and you have never ordered for this department before. Before you start the order, what information should you try to find out?

3. You ordered 50 extra units of a high-profit item for a special in-store promotion, but due to some problems in your depart-ment, you weren’t able to execute the promotion.

The 50 units of product are now close to their sell-by date, so you are planning to mark them half-price to get rid of them. The items were supposed to retail for $2.79 each. The cost is $1.19 each. At half-price, they will retail for $1.40 each.

At $2.79, how much profit would you have made on the 50 units?

At $1.40, how much profit will you now make on the 50 units?

Answer Key

page 17



Controlling Product Loss

As you just saw, one of the biggest sources of shrink in fresh departments comes from product loss — that is, from merchandise that has to be marked down or thrown away because of slow sales or poor quality.

Controlling the amount of product loss in a fresh depart-ment involves not only how products are ordered but also how they are handled from the moment they arrive at the store to the moment they are sold.

Sound food safety practices help to minimize product shrink. Follow proper product handling procedures. Here are some key procedures that should be carefully monitored:

• Receiving. Most product must be put under refrigeration or frozen imme-diately. For each hour most fresh products sit out, their shelf life is reduced by 50 percent.

• Storage. Products should always be stocked using the FIFO method — First In, First Out. Proper rotation in coolers, freezers, and cases insures that older products are always used fi rst.

• Sanitation. Keep walls, shelves, coolers, and cases clean. Proper sanitation helps to control the growth of bacteria and prevent product loss.

• Food Preparation. Keeping foods out of the Danger Zone — that tempera-ture range between 41°F and 135°F (5°C and 57°C) where bacteria multiply freely — is the secret to preventing food spoilage. To maximize shelf life, don’t allow slicing meats and cheeses or other foods to sit out longer than needed. Also, check that holding temperatures of warmers and steam tables will keep products above 135°F (57°C). Cooler temperatures should be set so products will remain below 41°F (5°C); freezer temperatures should be set so that products remain frozen at 0°F (−18°C) or below.

• Merchandising. Th e sell-by dates of all stock in coolers, freezers, and cases must be checked oft en. For products nearing their pull date, creative mer-chandising can stimulate impulse sales and head off shrink.

Deliveries should be visually inspected for signs of tempera-ture abuse:

• Make sure no packages are stained, broken, open, or leaking.

• Make sure no cans are dented.

• Frozen products should be frozen and packaging should not be moist.

• Potentially hazardous foods should be out of the danger zone.

Department Success:

Reducing Shrink

IDDBA.ORG/JOBGUIDES.ASPX

PDF

Skills Enrichment Activity B:

Ordering for a Difficult Category



• Markdowns. Excessive markdowns are a major source of shrink. To minimize loss from markdowns, a writ-ten policy is essential. And everyone in the department, including the closing shift , should understand it. Th e policy should cover such things as:

• Time of night for reducing prices of hot prepared foods or that morning’s bakery products

• How to handle products nearing their sell-by date

• Th e amount that any product should be reduced

• How markdowns should be recorded

• Reporting. Another essential part of controlling shrink is keeping accurate records on all markdowns and follow-ing the markdown policy for each department. Keeping accurate records can help you track your shrink and determine where your losses are coming from.

Billing

Another way that shrink can occur in the department is through billing — in other words, through the way mer-chandise is charged and credited to the department.

To see how charges and credits are made, you can picture the billing system as a giant cash register. Every time you order, the cost of the product is added to your bill. Every time you are credited by your warehouse or your vendor, the amount of that credit is subtracted from your bill.

Problems occur most oft en when products are shorted or scratched from your order. All products listed on the invoice are automatically added to your bill. If you don’t receive a product, then you — or the vendor, depending on your organization — must submit some paperwork to get credit for the shortage.

• If you don’t complete the paperwork, or

• Th e vendor doesn’t complete the paperwork, or

• Th e billing clerk doesn’t process the paperwork,

• Th e credit won’t be subtracted from your bill. Instead, it will be unaccounted for lost profi t — or shrink.


How Markdowns Affect Shrink

You have just discovered three cases of blueberry donuts (36 per case) that were misplaced in the freezer. According to the sell-by dates, they have only three days left before they are outdated. To move them quickly, you’ve decided to sell them at 39¢ each rather than 59¢ each. They cost $9.54 per case (26.5¢ each).

Your normal gross margin would be

($0.59 − $0.265) ÷ $0.59

$0.325 ÷ $0.59 = 0.55 or 55%

But, at 39¢ each your actual gross margin

will be

($0.39 − $0.265) ÷ $0.39

$0.125 ÷ $0.39 = 0.32 or 32%

Even if you sold all 108 donuts gross profit will

still be down significantly

At 59¢, sales are 108 × $0.59 = $63.72

At 39¢, sales are 108 × $0.39 = $42.12

Since cost remains $28.62 in either case, gross

profit is

$63.72 − $28.62 = $35.10 at 59¢ each

$42.12 − $28.62 = $13.50 at 39¢ each

Selling the donuts at 1⁄3 off cost the department

$21.60 in sales.



To minimize potential shrink from improper billing, it is important to check every item you receive on your load against the invoice. If you fi nd items shorted, scratched, or substituted, follow your company’s policy for reporting the problem and receiving credit for the shortage.

As a side note, the same kinds of billing errors can happen with items transferred into or out of the department.

• If merchandise is sent to another department, or

• If products from another department are used,

• Th e amount of each transfer must be accurately recorded or it can become another part of over-all shrink.

Incorrect pricing is another obvious cause of department shrink. As you well know, the amount of gross profi t you make depends on the prices charged. When an item is under-charged, it has the same eff ect as a markdown, lowering your overall gross profi t and creating shrink.

Some of the pricing procedures that need to be monitored closely to prevent excessive shrink include:

• Price Changes. When price changes, especially price increases, are not completed on time, it has the overall eff ect of reduc-ing the amount of gross profi t you make on those items.

A fi ve percent price increase on several high-volume items could mean several hundred dollars of lost profi t, a big jump in shrink.

• Price Marking. Items that are not price marked or set up in the register by means of a UPC or PLU code are another potential source of shrink, unmarked items can be a problem.

Without a scanning system, a clerk faced with an unmarked item may guess the department, price, or ask the customer. Th e sale may be credited to another department or the price may be too low. To minimize the possibility, all key-entered items should be clearly marked with the price and the department.


How Pricing Errors Affect Shrink

Imagine your department sells Cheddar cheese for $7.00 per pound, but the scale printed labels selling it for $6.50 per pound. You purchase the cheese for $3.25 per pound. If five pounds were sold before the error was caught, how much shrink does the mistake add? How does it affect gross margin?

Expected gross margin is

($7.00 × 5) − ($3.25 × 5) = $18.75

$18.75 ÷ $35 = 0.536 or 53.6%

Actual gross margin is

($6.50 × 5) − ($3.25 × 5) = $16.25

$16.25 ÷ $32.50 = 0.5 or 50%

The difference in profit is $2.50.

Now imagine the scale was inaccurate causing it to weigh a pound of product 10% heavy — 17.6 ounces rather than 16. To figure out how this error affects shrink, we’ll convert sales and costs to dollars per ounce by dividing by 16.

$7 ÷ 16 = $0.4375 per ounce

$3.25 ÷ 16 = $0.2031 per ounce

Expected gross margin is 53.6% (same as the expected margin above), but with the miscalibrated scale, customers are getting 17.6 ounces for $7, making the price per ounce $7 ÷ 17.6 = $0.3977 per ounce. At that price, actual gross margin is

($0.3977 − $0.2031) ÷ $0.3977 = 0.489 or 48.9%

Skills Enrichment Activity C:

Analyzing Mark-Downs



• Price Verifi cation. When a price must be verifi ed, it’s very important that everyone in the department know how, and where, to fi nd the cor-rect price. Of course, it goes without saying that all retail prices in the price book or computer must be kept current and correct.

If you are not sure that everyone on your staff knows how to fi nd prices in the price book or computer, it may be worth the time to ask each person to show you.

• Scale Calibration. Another invisible way to lose money in a fresh depart-ment is inaccurate scales. If your scale is not weighing correctly or if the prices are not accurate, you may be creating shrink without knowing it. Scales should be calibrated daily, and prices checked routinely.

Portioning

Th e fresh departments are diff erent than non-perishable departments in that there are many items — such as sandwiches, lunch and dinner plates, and specialty items — that are priced not by the unit but priced according to the weight of the ingredients they are made from.

For example, the deli may sell a dinner that includes a four ounce serving of turkey, three ounces of mashed potatoes, and three ounces of vegetables. Th e price of that dinner, $3.99, is based on the weight of each of the items included in the dinner.

With unit-priced items like these, it is extremely important that the portions on which the price is based be followed exactly. When more product than the specifi ed amount is used, it causes another form of shrink in the department.


Portioning Errors Affect Shrink

Imagine your department packages boxes of 13 donuts and sells them for $9.99. Each box should have 7 donuts that cost your department 31¢ each and 6 donuts that cost your department 53¢.

Now imagine some of the boxes were made with 7 donuts that cost your department 35¢ each and 6 that cost your department 31¢ each. How does that affect gross margin?

7 × $0.31 = $2.17

6 × $0.53 = $3.18

Each box should cost $5.35, so expected margin is $4.64 ÷ $9.99 = 46.4%

7 × $0.53 = $3.71

6 × $0.31 = $1.86

The boxes with the wrong mix of donuts cost your department $5.57, so actual margin is 44.2%.

Even small errors have impact on shrink.

Skills Enrichment Activity D:

Analyzing Other Sources

of Shrink



Recipe/Formula Costing

Along with portion control, another important factor in controlling cost and maintaining profi t in a department is controlling the cost of the ingredients in any recipe you make.

Controlling recipe cost involves carefully weighing each ingredient in the recipe and calculating its cost to determine how much to charge for the item aft er it is made. For example, here are the calculations for fi guring the recipe cost of a All-American Sub sandwich.

Ingredients Weight or Quantity Cost Ext. Cost

Ham 0.19 lb. $2.39 $0.45

Cotto salami 0.08 lb. $3.76 $0.30

Bologna 0.08 lb. $3.76 $0.30

American cheese l slice $0.16 $0.16

Swiss cheese 1 slice $0.19 $0.19

9” sub bun 1 bun $0.29 $0.29

Lettuce, Tomato, Onion 1 slice ea. $0.21 $0.21

Italian dressing 1 oz. $0.10 $0.10

Totals $2.00

To calculate the retail price of the sandwich, based on the margin you want, fi gure the cost of the sandwich, in this case $2.00 per sandwich, and divide by the percent of profi t margin, 50%, to get the retail price of the sandwich.

$2.00 ÷ 50% = $4.00 retail for the sandwich. You might price the sandwich at $3.99.



Dishonesty

While dishonest customers, vendors, and associates can lead to shrink, the number one cause of shrink at retail is dishonest associates. As the manager, your best defense against theft is training. Make sure your associates know what kinds of activities are dishonest and make sure they know the consequences. Associates are oft en unwilling to tell their managers when they see other asso-ciates acting unethically, so make sure everyone is aware of the loss prevention measures present in your store — and of the legal ramifi cations of being caught.

• Grazing

When associates graze, they help themselves to products from the depart-ment while they are working. It is possible that some associates do not know it is inappropriate to do so. Teach your associates about grazing and its consequences:

• Grazing is not appropriate.

• Grazing can lead to health risks because it usually involves associates eating on the sales fl oor or in food production areas.

• Grazing is a crime and is punishable with termination and/or prosecution.

Grazing is diff erent from sampling. If your department allows associates to sample the products they are selling, make sure they do so appropriately:

• Track the products sampled using a shrink log.

• Use proper utensils to remove the product from the case.

• Never eat on the sales fl oor or in a food production area. Always eat in a designated break area.

• Wash hands aft er eating the sample.

• Organized theft of product or money

Unlike grazing, there is little doubt that associates know they are doing something wrong when they remove product or money from the store. When training your associates, talk openly about theft and its consequences — ter-mination and prosecution where applicable. Talk about the ways they can be caught, such as video surveillance, secret shoppers, and loss prevention staff . Also explain that theft has an eff ect on the department’s bottom line, so one person’s actions can aff ect everyone in the department.

Ways dishonesty

can lead to shrink

• Grazing

• Organized theft of product or money

• Sweethearting

• Vendor gifts and kickbacks

• Ways to reduce the effects of dishonesty



Th ere is no stereotypical dishonest employee. You will not be able to pick out a dishonest person from a job application or a job interview. Verify facts on job applications and do background checks on potential employees whenever possible.

According to Th e Manager’s Guide ot Loss Prevention by Kenneth L. Marquis, J.D., associates usually steal for one or more of the following reasons:

• Th ey think they deserve it (they think they are underpaid, over-worked, or both).

• Th ey have the opportunity.

• Th ey don’t think they will get caught.

• Th ey have fi nancial need.

Associates may work in teams to remove product or money from the store. For example, an associate might place a product or cash in the trash can for another to remove when taking out the trash. To prevent such partnerships from forming, periodically rotate responsibilities.

• Sweethearting

Associates who give unauthorized special prices to their family and friends are sweethearting. It is diffi cult to prove that sweethearting is taking place because it can so easily be justifi ed as a simple mistake. Tell your associates that sweethearting is unethical, that it costs the store money, and that it is punishable by termination or prosecution. Also, tell them that they may be caught by video surveillance or by secret shoppers.

Your behavior sets the tone for the department. Sweethearting is easy and nearly undetectable. Make sure you do not engage in sweethearting or some of your associates will undoubtedly take cues from you.

• Vendor gift s and kickbacks

Know and follow your store’s guidelines on gift s and kickbacks; oft en, they are forbidden. If a vendor off ers a gift or kickback in exchange for more product facings or a larger order, it is generally off ered to the department manager. Since the manager’s behavior sets the tone for department associates, if you accept gift s, it may encourage some associates to be dishonest in other ways. Always be aware that you are the example your associates follow at work.

▶



Review of Course 4

Directions: To test your knowledge of what causes shrink, answer the following questions.

1. Name five product handling procedures that are important to control shrink.

2. What is the most common problem that causes shrink in inventory billing?

3. Name three pricing procedures that can help to control shrink due to pricing errors.

4. Your department is featuring a ham dinner this week. You’ve purchased a quantity of ham and you plan to use 30 pounds of it to make 160 lunches using 3 oz. of ham per plate. You plan to charge $7.59 each, with a cost of $3.80 per plate. How-ever, a new trainee in the department makes up all 160 plates using 4 oz. of ham rather than 3 oz. and still sells the lunch for $7.59.

The cost per plate is now $4.50. How much gross profit has the department lost from this error? What percent shrink does this represent?

5. You have been working hard at controlling shrink during the past quarter and your efforts have been paying off. Your gross profit has increased again since last quarter, as shown in the department Operating Report on the next page.

To figure your improvement in shrink, calculate your gross margin for this quarter and compare it to last quarter. How much has it improved?

page 18



CURRENT PERIOD

10/1 to 12/30

13 WEEKS

WKLY AVG

PRIOR PERIOD

7/1 to 9/30

13 WEEKS

WKLY AVG

AMT $ % AMT $ %

SALES 19,225 4.20 18,357 4.10

COST OF GOODS SOLD 9,372 48.75 9,225 50.25

TOTAL GROSS PROFIT 9,853 51.25 9,132 _____

DIRECT CONTROLLABLE

WAGE 3,652 19.00 3,089 16.83

VACATION PAY 110 0.57 110 0.60

HOLIDAY PAY 138 0.71 138 0.75

OPERATING SUP 288 1.50 209 1.14

TOTAL 4,188 21.78 3,546 19.32

DIRECT NON-CONTROLLABLE 11 0.06 11 0.06

TOTAL 11 0.06 11 0.06

CONTRIBUTION TO OVERHEAD 5,654 29.41 5,575 30.37

ALLOCABLE EXPENSES

PAYROLL TAXES 392 2.04 392 2.14

GROUP INSURANCE 0.00 0.00

BAL OF OPERATING 1,269 6.60 1,269 6.91

TOTAL 1,661 8.64 1,661 9.05

TOTAL OP EXPENSE 5,860 30.48 5,218 28.43

OPERATING PROFIT 3,993 20.77 3,914 21.32

NET OPERATING PFT 3,993 20.77 3,914 21.32

6. Name three ways dishonesty can lead to department shrink.



Exercise 1: Effective Ordering

Check your answers

1. Your sales last month were $8,500. Your expected gross profit margin from your sales was 47 percent, without shrink. How-ever, your Operating Report shows your actual gross profit margin was 42 percent of your sales. How much in dollar profit did you lose due to shrink?

Expected sales are $8,500 × 0.47 = $3,995Actual sales are $8,500 × 0.42 = $3,570Th e diff erence is $3,995 − $3,570 = $425

2. You have just replaced the previous manager in the department. Today your first order is due and you have never ordered for this department before. Before you start the order, what information should you try to find out?

What will be in the ad?How well do these products sell normally?What kind of volume is expected during the ad?What changes in movement of other products are expected?What holiday merchandise should be discontinued?What merchandising changes are needed?What special promotions should be considered?What kind of promotions should be planned to generate extra sales aft er the holidays?

What is average product movement?What information in the order guide, inventory records, andinvoices could give you some clues?Are the space allocations right according to the plan-o-gram?How much extra product is in the department?What’s in the freezer, cooler, on special displays?What was shorted on the last delivery?How many deliveries per week does this department receive?

3. You ordered 50 extra units of a high-profit item for a special in-store promotion, but due to some problems in your depart-ment, you weren’t able to execute the promotion. The 50 units of product are now close to their sell-by date, so you are planning to mark them half-price to get rid of them. The items were supposed to retail for $2.79 each. The cost is $1.19 each. At half-price, they will retail for $1.40 each.

At $2.79, how much profit would you have made on the 50 units?

For each item, profi t is $2.79 − $1.19 = $1.60$1.60 × 50 = $80

At $1.40, how much profit will you now make on the 50 units?

For each item, profi t is $1.40 − $1.19 = $0.21$0.21 × 50 = $10.50



Review of Course 4

1. Name five product handling procedures that are important to control shrink.

(Any of the following)Proper receivingMerchandising slow-sellers

Proper storageHandling markdowns properly

Proper sanitationReporting markdowns

Proper food preparation

2. What is the most common problem that causes shrink in inventory billing?

Credits not processed for shortages on product deliveries

3. Name three pricing procedures that can help to control shrink due to pricing errors.

(Any of the following)Price changesVerifying prices in the book

Price marking itemsChecking scales for accuracy

4. Your department is featuring a ham dinner this week. You’ve purchased a quantity of ham and you plan to use 30 pounds of it to make 160 lunches using 3 oz. of ham per plate. You plan to charge $7.59 each, with a cost of $3.80 per plate. How-ever, a new trainee in the department made up all 160 plates using 4 oz. of ham rather than 3 oz. and still sells the lunch for $7.59.

The cost per plate is now $4.50. How much gross profit has the department lost from this error? What percent shrink does this represent?

Retail price − expected cost = expected profi t$7.59 − $3.80 = $3.79$3.79 profi t per plate × 160 = $606.40Actual profi t is $7.59 − $4.50 = $3.09$3.09 profi t per plate × 160 = $494.40 actual gross profi tLost profi t potential: $606.40 − $494.40 = $112.00 shrinkShrink ÷ Sales = Shrink %$112.00 ÷ $1,214.40 = 0.092Shrink: 9.2%

5. You have been working hard at controlling shrink during the past quarter and your efforts have been paying off. Your gross profit has increased again since last quarter, as shown in the department Operating Report on the next page.

To fi gure your improvement in shrink, calculate your gross margin for this quarter and compare it to last quarter. How much has it improved?Gross Margin: 51.25% Improved by 1.5 pts.



▶

CURRENT PERIOD

10/1 to 12/30

13 WEEKS

WKLY AVG

PRIOR PERIOD

7/1 to 9/30

13 WEEKS

WKLY AVG

AMT $ % AMT $ %

SALES 19,225 4.20 18,357 4.10

COST OF GOODS SOLD 9,372 48.75 9,225 50.25

TOTAL GROSS PROFIT 9,853 51.25 9,132 49.75

DIRECT CONTROLLABLE

WAGE 3,652 19.00 3,089 16.83

VACATION PAY 110 0.57 110 0.60

HOLIDAY PAY 138 0.71 138 0.75

OPERATING SUP 288 1.50 209 1.14

TOTAL 4,188 21.78 3,546 19.32

DIRECT NON-CONTROLLABLE 11 0.06 11 0.06

TOTAL 11 0.06 11 0.06

CONTRIBUTION TO OVERHEAD 5,654 29.41 5,575 30.37

ALLOCABLE EXPENSES

PAYROLL TAXES 392 2.04 392 2.14

GROUP INSURANCE 0.00 0.00

BAL OF OPERATING 1,269 6.60 1,269 6.91

TOTAL 1,661 8.64 1,661 9.05

TOTAL OP EXPENSE 5,860 30.48 5,218 28.43

OPERATING PROFIT 3,993 20.77 3,914 21.32

NET OPERATING PFT 3,993 20.77 3,914 21.32

6. Name three ways dishonesty can lead to department shrink.

(Any of the following)GrazingOrganized theft of product or moneySweetheartingVendor gift s and kickbacks



Skills Enrichment Activity A: Analyzing Ordering Methods

Directions: Evaluate your current ordering methods.

1. How much planning time do you allow before starting your order? __________________________________________________________

2. Are you able to plan special sales- and profit-building promotions in this time? __________________________________________________

3. What information do you currently use that could be helpful in writing a more accurate order? (Order guides, invoices, plan-o-grams, sales histories, etc.)

____________________________________________________________________________________________________

____________________________________________________________________________________________________

4. What additional information might help you order more accurately? _________________________________________________________

____________________________________________________________________________________________________

5. How is your ordering method organized? _________________________________________________________________________

____________________________________________________________________________________________________

6. Which of the following tips to organizing ordering are you currently using? (See Course 4, page 6, for a discussion of each tip.)

__ One person is responsible for ordering.

__ All merchandising plans are reviewed before ordering.

__ Back stock is checked before ordering (including the freezer and cooler).

__ Shorted items are reordered first.

__ Orders are made out from the sales floor.

__ You take advantage of multiple deliveries.

7. Circle tips on the list that would make your ordering more efficient.

▶



Skills Enrichment Activity B: Ordering for a Difficult Category

Directions: Ordering with more information can lead to more accurate orders. Select a product category that is diffi cult to order accurately. Analyze the category using the questions below.

1. The category which is most difficult to accurately order for is _________________________________

2. Usually we have: __________ under-ordered? __________ over-ordered?

3. What has been the average movement of each product over the last month?

Product

Average Monthly

Sales Volume Product

Average Monthly

Sales Volume

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

4. What changes in movement can you predict in the next 30 to 60 days? __________________________________________

_______________________________________________________________________________________________

_______________________________________________________________________________________________

5. Which items in this category are particularly vulnerable to fluctuations in movement during the month, season, or holidays?

Item When? Item When?

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________



6. Are your space allocations adequate for the fluctuations in movement of those items? Yes __________ No ______________

If no, which items do not have enough space? ___________________________________________________________________

7. Recommendations _________________________________________________________________________________

▶



▶

Skills Enrichment Activity C: Analyzing Mark-Downs

Directions: Mark-downs can quickly lead to unnecessary shrink. Analyze your mark-downs and use this information to create an eff ective system to track mark-downs, or improve the one you use, if needed.

1. What types of items most frequently appear on your mark-down sheets? ________________________________________________

_______________________________________________________________________________________________

2. What was the cause of each mark-down? (over-ordering, improper rotation, etc.)

Item Cause Cost Selling Price

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

3. How much does each mark-down represent in lost profit?

Item When? Item When?

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

_________________ _________________ _________________ ________________

4. If there is not a system in place to track mark-downs, develop one.

5. What are some cues that tell you action should be taken to prevent or reduce the number of mark-downs? Write some ways to take action.

Cues: Action:

_________________ _____________________________________________________________________

_________________ _____________________________________________________________________

_________________ _____________________________________________________________________

_________________ _____________________________________________________________________

_________________ _____________________________________________________________________



Skills Enrichment Activity D: Analyzing Other Sources of Shrink

Directions: As you have learned in Course 4, there are several sources of shrink. Consider your own department’s shrink. Using the questions below, analyze where your department’s shrink comes from and what can be done to reduce it.

1. How much shrink comes from the following?

Billing errors: ____________________________________________________________________________________

Pricing errors: ____________________________________________________________________________________

Improper scaling: _________________________________________________________________________________

Formula cost: ____________________________________________________________________________________

Production errors (under-/over-cooking, improper packaging/stocking, etc.): ______________________________________________

2. Pick one incidence of shrink that was caused by a production error in your department. Try to get at the “root causes.” What was the production error?

____________________________________________________________________________________________

____________________________________________________________________________________________

❑ People (lack of training, carelessness, misunderstanding, etc.)

❑ Equipment (malfunction of mixer, proofer, oven, timer, fryer, slicer, etc.)

❑ Methods (formula errors, wrong instructions, orders, etc.)

❑ Materials (quality, contamination, size, etc.)

Describe: _______________________________________________________________________________________

____________________________________________________________________________________________

____________________________________________________________________________________________

3. What can be done to prevent this problem from happening again? ____________________________________________________

____________________________________________________________________________________________

____________________________________________________________________________________________

4. What would it take to implement this prevention step? (Time, money, training, etc.) _________________________________________

____________________________________________________________________________________________

____________________________________________________________________________________________

5. If there is not a system for tracking errors, set one up.

Documents

Successful Service Department ManagementTh ese free, downloadable IDDBA Job Guides cover topics like Understanding Profi t, Reducing Shrink, the G.R.E.A.T. salesmanship model, etc