Use Reorder Points to Eliminate Lost Sales Due to Stockouts

With the advent of online sales digging into retailers’ pockets, it is more important than ever for independent retailers to eliminate lost sales that occur as a result of stockouts. According to a study in May, 2018 by retail research organization IHL Group, customers of department stores and specialty retail shops experience a stockout 1 in 4 shopping trips. They estimate that stockouts are costing North American retailers more than $47B a year in sales! And where are these sales going? To Amazon; where else? IHL states that nearly 24% of Amazon’s North American retail revenue can be attributed to consumers who first tried to buy the product at a local store but couldn’t find it on the shelves.

Another study by Stitch Labs estimates that the Worldwide retail industry loses over $634B each year to stock-outs; even though the average retailer overstocks their shelves by 50%! This emphasizes what is arguably the most significant “Catch 22” for retailers that want to expand; that is, you need inventory to ensure business growth but if your cash is tied up in keeping inventory on hand, it can’t be used to grow your business.

In a perfect world, you would sell out of every product in your store just as you’re replenishing your shelves with new stock. That way you would get the highest return from your inventory investment and you wouldn’t have excess stock. Unfortunately, that’s just not realistic. What I have observed after working with hundreds of specialty retailers over 25 years is that most retailers follow one of two strategies:

  1. They worry so much about losing a sale from a stockout that they over-stock every popular product, thus tying up significant amounts of capital that could be better used elsewhere.
  2. They use rigid purchasing budgets (or have limited funds available) so they don’t buy enough merchandise and frequently stock out of popular items.

In many cases, these retailers have adequate computer systems in place; they just aren’t using them – or they don’t know how to use them to get the most bang for their inventory buck. According to Harvard Business Review, 72% of stock-outs are due to faulty in-store ordering and replenishing practices: ordering too little or too late, generating inaccurate demand forecasts, or otherwise mismanaging inventory. Only 28% of stock-outs can be attributed to replenishment and planning problems in the supply chain, which are out of the retailer’s control.

So how do you walk that fine line between eliminating stockouts but not having too much inventory? Well, it all starts with having dependable inventory information and then using that information to replenish stock in a timely fashion. The objective is to understand what your optimal on hand inventory quantities are and then issue purchase orders with enough products to ensure you don’t run out before the next shipment arrives – but don’t order too much either. The process of analyzing your requirements and determining when to place supplier orders and for how much is called “Inventory Planning’. In its most basic form, Inventory Planning leverages two key calculations for each product you order: Reorder Point and Economic Order Quantity. Having accurate Reorder Points for each inventory item will help eliminate stockouts; Economic Order Quantities will further optimize inventory levels by minimizing over-stock situations. By calculating these values and incorporating them into your replenishment procedures and systems, you stand the best chance of walking the thin line between having enough merchandise to meet demand and tying up too much money in unnecessary stock. For the purpose of today’s Blog post, let’s focus on Reorder Points. We’ll handle Economic Order Quantity in a future post.

You’ll go a long way to maximizing the impact from every dollar invested in inventory if you have realistic Reorder Points for each product you sell. Here’s how to calculate them to ensure you always have enough (but not too much extra) available stock. First you need to multiply the average daily usage of an inventory item (in unit sales) by the lead time (in days) to replenish it. However, it’s entirely possible that a spike in demand could occur, causing a stockout situation before the product is replenished. This is why you should also add a component for Safety Stock. The longer the lead time to get a product from your supplier, the more important it is to have adequate Safety Stock values. Safety Stock is the difference of a product’s maximum daily sales multiplied by the maximum lead time in days, minus the average daily sales multiplied by average lead time. The calculation takes into consideration the worse-case scenario and adjusts it so that it provides a more reasonable number. Make sure you also rely on your own industry knowledge and market insight; and adjust your Safety Stock requirements to reflect realistic values.

So let’s review the formulas:

Reorder Point = (Average Daily Usage X Lead Time) + Safety Stock

Safety Stock = (Maximum Daily Sales X Maximum Lead Time) – (Average Daily Sales X Average Lead Time)

If you have never calculated Reorder Points before, it might seem like an insurmountable job. So start by focusing on your most popular products with the longest lead times and then work your way through your Product list as you accumulate the required data for each item. You should be able to get sales and order history from your POS system; and if you don’t already know your lead times, you can easily get them from your suppliers or by reviewing purchase orders and invoices. Once you enter the data into a spreadsheet, it will do the hard work of actually calculating Reorder Points for all your products. Make sure you use at least 10 – 12 weeks of sales history – more is better. If you’re using MyPOS Connect, it’s easy to export product sales and order history to Excel, then import the calculated Reorder Points back into MyPOS Connect’s Product File. If your POS system doesn’t have this capability, then it will take longer to manually enter the raw data into your spreadsheet and the calculated Reorder Points back into your purchasing system; but it’s still worthwhile and you’ll still save a ton of money as a result of your efforts.

A couple of additional points to consider. Begin by focusing on products that take more than a week or two to get in. If you can place orders for a product and take delivery within a couple of days, you can ignore calculating Safety Stock; just set a reasonable Reorder Point for that item. Also, since there are so many factors that affect your customers’ buying behavior, you should consider revisiting your Reorder Point and Safety Stock values at least Quarterly. This will enable you to adjust your requirements for seasonal fluctuations or for one-off events that you didn’t previously take into consideration.

7 Mistakes to Avoid When Buying a POS System

If you’re thinking of purchasing a new POS solution, ensuring you avoid these 7 mistakes will save you time and money.

  1. Waiting too long to buy a POS system.

The number one mistake made by a lot of first-time retailers is buying a POS system with just a week or two before opening their store. They spend all of their time buying merchandise, managing tradespeople and hiring employees. But the important task of purchasing a POS system is often left until the last few weeks, or days, before opening. This is a huge mistake because the process of evaluating POS systems, choosing the right one for your business, and then deploying it can take weeks or even months. It’s not a trivial task; it’s a big job and it’s a complicated one. So start your evaluation as soon as possible; why not right after you sign the lease agreement for your store? You can use the next few months to evaluate systems and find the one that best suits your business and budget. Oh, and make sure you learn how long it will take to order all your hardware components and perform the specific tasks necessary to deploy your system. You don’t want to go through a long evaluation process to find the right system, then find out that you don’t have enough time to deploy it before you open your store. Your vendor should be able to provide a basic overview of the deployment process, including approximate delivery times of any hardware components, and a list of tasks you will have to complete on your own before you can start using the system. Work with your vendor to create a realistic installation and training schedule that will ensure your POS system and your employees will be ready to go when your store opening day arrives.

  1. Buying the hardware before the software.

Don’t buy your POS hardware before you choose your POS software. It’s like putting the cart before the horse and it’s one of the biggest mistakes that new retailers make when investing in a new POS system. It is always better to evaluate software solutions first. Choose the software that fits your business environment and budget, then buy the hardware that works best with the software. Plus, your software vendor will be able to recommend the best hardware products for their software. Proving that it’s a bad idea, here are some examples of common predicaments in which retailers find themselves when buying hardware first:

  • They buy an iPad or Mac because it looks great but then they take all Windows-based apps out of their evaluation. Since the majority of business programs run on Windows, they can’t find software that is flexible enough for their needs or expandable enough for their growth plans.
  • They buy a computer system with a regular monitor; and then they buy a software program that relies heavily on using a touch-screen monitor. Now they have to buy a touch-screen monitor and they have a regular monitor that collects dust and takes up space.
  • They buy equipment online such as POS peripherals (receipt printers, cash drawers, barcode scanners, etc.) to find out that they don’t match the ports on their computer.
  1. Not evaluating the hardware vendor.

Many retailers purchase hardware on the internet with no regard for the company supplying the products. Unless you have prior experience with their products and services, evaluating the vendor is a must. What retail-specific experience do they have? What are their warranty programs and how do they handle repairs and replacements? If they are an online vendor, where is their repair depot? Who bears the cost of shipping warranty repairs to and from the repair depot? How easy is it to access support after hours and on weekends? Talk to each vendor and learn what support services they offer to complement the products they sell. It usually makes sense to pay a bit more for hardware if the vendor can provide value-added services, like Next-Business-Day swap-outs, or technical assistance with device drivers and operating system upgrades. A knowledgeable vendor will also assist you in comparing different products and ultimately choosing the specific models that will work best in your environment and with your software application.

  1. Not evaluating the software vendor.

The software vendor you choose is as important as the software itself. Many retailers buy their POS solutions solely based on functionality and price, without any regard for who is selling them the software. Ask yourself, does the vendor have a lot of experience selling to retailers in my market? An experienced vendor who has deployed systems for a lot of similar retailers can help you learn the software faster and provide a lot of tips and tricks that will save you time and money. In addition, most software vendors are familiar with their competitors’ products and can speak to key differences in their offerings. This will help you compare apples to apples more easily. What about the professional services offered by the vendor? Can you sign up for one-on-one training programs or do you have to teach yourself how to use their software, relying on online tutorials or user manuals? These are great tools as occasional reference materials, but they don’t compare to the benefits you’ll get when you’re trained by an experienced software expert who can personalize your training program and offer guidance and knowledge throughout the deployment process. What about after your system is deployed and you are actually using the software in your business; do you have access to end-user support when you need it? Many POS solution vendors provide support during business hours, but then you can’t reach them after 5:00 PM. You’re a retailer, make sure your software vendor can provide emergency support during retail hours.

  1. Not evaluating enough POS software programs.

Don’t just purchase the first POS software program you evaluate; or the cheapest program on the market. Not all POS software is created equal. There are many POS systems that only provide very basic features and functions; and many that have hidden costs that you won’t know about until after you fork over your credit card info. By evaluating multiple POS systems, you can compare the features and costs of each and come to a more informed decision. You don’t need to evaluate every POS software program on the market but you should see demonstrations of at least two or three before choosing one for your business.

  1. Evaluating too many software programs.

After Mistake # 5, it might seem counter-productive to say this but sometimes you can evaluate too many solutions. After a while you experience “information overload’ and start mixing up which solutions provide which features. When this happens, it’s not uncommon for people to start their evaluation over from scratch – or just choose the first (or last) or cheapest solution and hope for the best. It’s okay to reach out to a lot of vendors and POS solution providers for your initial introductory calls or discussions; but distill your list down to two or three vendors that can give you detailed demonstrations of their solutions. You’ll be able to compare better and you won’t waste your time (and other people’s time) running around in circles trying to remember which products provided which features.

  1. Choosing a Merchant Services Provider before buying your POS system.

Another mistake retailers make when purchasing their first POS system is choosing the company that will process credit cards and debit cards for them before they buy their POS system. Since banks offer a wide variety of merchant services, including credit/debit card processing services, they will always try to sign you up for their merchant services offerings when you set up your bank account. But it’s premature to do it before you buy your POS system because if you want your system to integrate to your Merchant Services Provider’s host processor, you will need to choose a POS system that has already been certified by your Merchant Services Provider. Most POS systems are integrated to multiple Merchant Services Providers, but not necessarily to the one your bank promotes. So if you want the benefits of having an integrated card payment solution, make sure you choose your POS system first; then ask your POS vendor which Merchant Services providers they support; and negotiate a contract with one of them.

The Real Cost of Processing Credit and Debit Card Payments

In the 2016 US Consumer Payment Study, TSYS found that more than 75% of people surveyed preferred either credit cards or debit cards as a means of paying for purchases. This number was exceeded by Canadian respondents who preferred using credit/debit cards for more than 80% of purchases.

Accepting credit and debit cards as a primary form of payment is a necessary requirement in today’s retail world. But what are the real costs to you, the merchant, for processing payment cards? For years we have been told that the cost of processing cards is based on the “Discount Rate”. And we have been conditioned to think that we need to sign a multi-year agreement to get those rates. But that’s not necessarily the case anymore. First of all, Discount Rates only apply to credit cards; so if you’re focusing on Discount Rate as an indicator of cost, you’re ignoring the cost of processing debit cards, which represents more than 35% of all payment transactions and can fluctuate significantly. In addition, there are a number of other monthly fees that your Merchant Services Provider is charging you.

According to Ryan O’Leary, President of SonaPay, a leading merchant services agent for First Data Canada, the monthly cost of accepting card payments is based on four main fee categories: processing fees (the discount rate for credit cards and transaction fees for debit cards), the Interchange Rate (the fee the credit card companies charge your acquiring bank), your monthly account fees and equipment rental fees for devices like PIN pads, signature capture tablets, etc. So if a Merchant Services Provider claims they can give you the lowest discount rates in the industry, they’re only telling you a part of the story.

I frequently speak with customers who tell me that they are getting the lowest card transaction processing fees. I hear comments like “my provider gives me the lowest fees in the industry” or “I’m only paying a discount rate of 1.58%.” But when they conduct an analysis of the true monthly cost of accepting card payments, they often discover that their costs are much higher than they expected. Not only that, but many of them learn that their monthly costs have increased steadily year over year. In fact, many of my clients who have done a thorough analysis have found that the actual rate they are paying to process card transactions is closer to 3% or 4%!

And don’t be fooled by the slick salesperson who says they value your loyalty so much that they are willing to buy your business, just to beat out their competition. Some Merchant Services Providers might be willing to take a profit hit for a while, if they think that they’ll be able to sign you to a multi-year contract. However, eventually they will need to see a profit; so it’s just a matter of time before other fees begin to creep onto your monthly statement or your processing fees slowly rise – or both.

So how do you know if you can expect to see your rates increase when you are negotiating a contract with a merchant services provider? According to O’Leary, it starts with the initial contact with their sales rep. They will likely offer to perform a cost comparison, based on your current monthly statements. “Always compare the resulting comparison document that the sales person provides with the sales contract they want you to sign. If you see fees like ‘PCI Compliance’, ‘Annual Fees’ or other fees that were not on the initial comparison, this should provide a good indicator of whether this company can be trusted. Always remember, most merchant services companies are banking on not working with an ‘educated’ customer” says O’Leary.

“It goes without saying that you should seek a merchant services provider that offers competitive rates,” says Josh Lieberman, Senior Sales Executive for Cardknox/Fidelity Payments, a leading US-based Merchant Services Provider. “That’s why it’s important to look for a Merchant Services Provider that is transparent about rates and fees, so you don’t encounter any surprises along the way.”

Poor customer service can also impact your costs for processing card payments. If you call your merchant services provider for technical assistance and they immediately send you to your POS solution vendor without doing any diagnostics on their hardware device, you could end up with a bill for technical support to fix something that should have been handled by the Merchant Services Provider’s Help Desk. Lieberman agrees: “it’s important to find a merchant services provider that can provide outstanding customer service and tech support. Whether you’re experiencing a technical issue, or are looking for ways to maximize your existing setup, your merchant services provider should be on-hand 24/7 to answer your questions quickly and easily.”

So how can you tell if a Merchant Services Provider can give you the level of service you need so that you can minimize ongoing support costs? Try reading online review sites like Google reviews and the Better Business Bureau. Get personal references from existing customers and asks them what kind of service do they experience when they have a problem. Most importantly, talk to your POS solution vendor; they will know which Merchant Services Providers have well-trained Help Desk personnel – and which Providers continually deflect support calls, even when the problem is on their end.

So the next time you are thinking about switching Merchant Services Providers, contact us before you make any changes. We can recommend the best providers for your specific business and for the POS solution you are using. We can’t negotiate processing fees for you but we can certainly give you a sense of how reliable their card reading devices are and how responsive the service is from their Help Desk.