Successful Service Department Management

Transcription

1 Successful Service Department Management Course 4: Controlling Inventories A Management Series for Supermarket Deli, Bakery and Cheese Department Managers

2 Course 4: Controlling Inventories Successful Service Department Management A management Series for Supermarket Deli, Bakery, and Cheese Department Managers PO Box 5528 Madison, WI education@iddba.org 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.

3 Successful Service Department Management Series About This Series The Successful Service Department Management series has been designed specifically for deli, bakery, and cheese department managers. Its purpose is to provide you with the information you need to manage your department successfully. Whether you are a newcomer to management or an experienced veteran, this educational series will help you gain knowledge of the workings of your department. This series is divided into seven courses: Course 1: Understanding the Concept of Profit Course 2: Sales and Merchandising Course 3: Increasing Gross Margins Course 4: Controlling Inventories Course 5: Managing Direct Expenses Course 6: Developing a Profit Center Team What You ll Learn: How to determine profit, 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 effective order for your department. To read a department profit & loss statement knowledgeably. To write a department schedule that maximizes customer service and profitability. How to build employee motivation through training and communication. 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 find: Exercises Skills Enrichment Activities Answer Keys PDF Links to FREE Job Guides at IDDBA s Web site How To Get The Best Results This Successful Service Department Management training series has been designed for you to take all six of the courses from start to finish or to choose course subjects based on your needs. To get the full benefit 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 International Dairy Deli Bakery Association i

4 Successful Service Department Management Skills Enrichment Activities The Skills Enrichment Activities are at the end of each course. They 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 profitability 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. After all, an inspired, motivated team is one of the best investments you can make in your pursuit to greater profitability and customer engagement. These free, downloadable IDDBA Job Guides cover topics like Understanding Profit, 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 Analysis B: Department Operating Report Understanding Profit 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 A: Generating Profit by Increasing Prices Course 3: Increasing Gross Margins B: Generating Profit by Promoting High-Margin, Slow-Moving Items C: Generating Profit by Determining Which Categories Should be Promoted Course 4: Controlling Inventories Course 5: Managing Direct Expenses Course 6: Developing a Profit Center Team Final Quiz A: Analyzing Ordering Methods B: Ordering for a Difficult Category C: Analyzing Mark-Downs D: Analyzing Other Sources of Shrink A: Tracking and Creating an Hourly Sales History B: Creating a Task List C: Creating a Daily Assignment Schedule A: Improving the Interviewing and Orientation Processes B: New-Hire Questionnaire C: On-Going Positive Feedback Challenge Reducing Shrink ii 2011 International Dairy Deli Bakery Association

5 Course 4: Controlling Inventories Shrink In the last course, we saw how improving profit margins can increase gross profit in your department. In this course, we ll look at how controlling inventories can reduce inventory shrink. In any department, actual sales fall short of expected sales. The difference 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, = $3,150 gross profit for the week. However, when the results are in, your department s profit was only $2,940 or a 42% gross margin. The difference, $3,150 $2,940 = $210, is shrink. What You ll Learn The Difference Between Known Shrink and Unknown Shrink How to Calculate Shrink Gathering Information for an Order Order Organization Controlling Product Loss Through Billing, Portioning, and Recipe/Formula Costing 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 discarded. 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 2011 International Dairy Deli Bakery Association 3

6 Successful Service Department Management E 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%. 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 environment, reducing shrink can have a far greater impact on profit than increasing sales. Keep in mind, however, that a perishable department must have some shrink. The 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 carries. Writing a good order is not easy. It is a delicate balance between: Ordering enough product to fill cases and special displays 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 profit for the department. Among the things you ll need to consider are: The 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 profit 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 seasonal trends is vital to avoiding costly ordering mistakes International Dairy Deli Bakery Association

7 Course 4: Controlling Inventories 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 affect 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 difficult to order the right quantities when you are under a deadline to finish the order. Gathering Information for the Order Another important part of writing an effective order is having the right information about product movement, space allocations, holiday sales, and the like. The 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 average 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 International Dairy Deli Bakery Association 5

8 Successful Service Department Management Order Organization The last part of writing an effective order is organization. Systematic ordering 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 information 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 first. When you start the order, first check your invoices and reorder any items shorted from the last order. They can be easily forgotten. Make out the order from the sales floor. When ordering, it is best to do the order in the department, not in an office 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 profit. 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 significant source of shrink. Refer to the markdown policy for each department. Skills Enrichment Activity A: Analyzing Ordering Methods International Dairy Deli Bakery Association

9 Course 4: Controlling Inventories 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 department, 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 International Dairy Deli Bakery Association 7

10 Successful Service Department Management 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 department 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 immediately. 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 first. 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 temperature 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. The sell-by dates of all stock in coolers, freezers, and cases must be checked often. For products nearing their pull date, creative merchandising can stimulate impulse sales and head off shrink. Deliveries should be visually inspected for signs of temperature 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. PDF Department Success: Reducing Shrink IDDBA.ORG/JOBGUIDES.ASPX Skills Enrichment Activity B: Ordering for a Difficult Category International Dairy Deli Bakery Association

11 Course 4: Controlling Inventories Markdowns. Excessive markdowns are a major source of shrink. To minimize loss from markdowns, a written policy is essential. And everyone in the department, including the closing shift, should understand it. The 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 The 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 following 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 merchandise 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 often 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 E X A M P L E 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. The vendor doesn t complete the paperwork, or The billing clerk doesn t process the paperwork, The credit won t be subtracted from your bill. Instead, it will be unaccounted for lost profit or shrink International Dairy Deli Bakery Association 9

12 Successful Service Department Management E X A M P L E 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 = 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 = $ per ounce $ = $ 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 $ = $ per ounce. At that price, actual gross margin is ($ $0.2031) $ = or 48.9% To minimize potential shrink from improper billing, it is important to check every item you receive on your load against the invoice. If you find 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, The amount of each transfer must be accurately recorded or it can become another part of overall shrink. Incorrect pricing is another obvious cause of department shrink. As you well know, the amount of gross profit you make depends on the prices charged. When an item is under-charged, it has the same effect as a markdown, lowering your overall gross profit 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 effect of reducing the amount of gross profit you make on those items. A five percent price increase on several high-volume items could mean several hundred dollars of lost profit, 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. The sale may be credited to another department or the price may be too low. To minimize the possibility, all keyentered items should be clearly marked with the price and the department. Skills Enrichment Activity C: Analyzing Mark-Downs International Dairy Deli Bakery Association

13 Course 4: Controlling Inventories Price Verification. When a price must be verified, it s very important that everyone in the department know how, and where, to find the correct 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 find 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 department 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 The fresh departments are different 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. The 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 specified amount is used, it causes another form of shrink in the department. E X A M P L E 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 = $ $0.53 = $3.18 Each box should cost $5.35, so expected margin is $4.64 $9.99 = 46.4% 7 $0.53 = $ $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 2011 International Dairy Deli Bakery Association 11

14 Successful Service Department Management Recipe/Formula Costing Along with portion control, another important factor in controlling cost and maintaining profit 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 after it is made. For example, here are the calculations for figuring 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 $ 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, figure the cost of the sandwich, in this case $2.00 per sandwich, and divide by the percent of profit margin, 50%, to get the retail price of the sandwich. $ % = $4.00 retail for the sandwich. You might price the sandwich at $ International Dairy Deli Bakery Association

15 Course 4: Controlling Inventories 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 often unwilling to tell their managers when they see other associates acting unethically, so make sure everyone is aware of the loss prevention measures present in your store and of the legal ramifications of being caught. Grazing When associates graze, they help themselves to products from the department 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: 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 Grazing is not appropriate. Grazing can lead to health risks because it usually involves associates eating on the sales floor or in food production areas. Grazing is a crime and is punishable with termination and/ or prosecution. Grazing is different 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 floor or in a food production area. Always eat in a designated break area. Wash hands after 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 termination 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 effect on the department s bottom line, so one person s actions can affect everyone in the department International Dairy Deli Bakery Association 13

16 Successful Service Department Management There 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 The Manager s Guide ot Loss Prevention by Kenneth L. Marquis, J.D., associates usually steal for one or more of the following reasons: They think they deserve it (they think they are underpaid, overworked, or both). They have the opportunity. They don t think they will get caught. They have financial 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 difficult to prove that sweethearting is taking place because it can so easily be justified 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 gifts and kickbacks Know and follow your store s guidelines on gifts and kickbacks; often, they are forbidden. If a vendor offers a gift or kickback in exchange for more product facings or a larger order, it is generally offered to the department manager. Since the manager s behavior sets the tone for department associates, if you accept gifts, it may encourage some associates to be dishonest in other ways. Always be aware that you are the example your associates follow at work International Dairy Deli Bakery Association

17 Course 4: Controlling Inventories 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. However, 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 International Dairy Deli Bakery Association 15

18 Successful Service Department Management 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, , COST OF GOODS SOLD 9, , TOTAL GROSS PROFIT 9, ,132 DIRECT CONTROLLABLE WAGE 3, , VACATION PAY HOLIDAY PAY OPERATING SUP TOTAL 4, , DIRECT NON-CONTROLLABLE TOTAL CONTRIBUTION TO OVERHEAD 5, , ALLOCABLE EXPENSES PAYROLL TAXES GROUP INSURANCE BAL OF OPERATING 1, , TOTAL 1, , TOTAL OP EXPENSE 5, , OPERATING PROFIT 3, , NET OPERATING PFT 3, , Name three ways dishonesty can lead to department shrink International Dairy Deli Bakery Association

19 Course 4: Controlling Inventories 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. 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? Expected sales are $8, = $3,995 Actual sales are $8, = $3,570 The difference is $3,995 $3,570 = $ 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 after the holidays? What is average product movement? What information in the order guide, inventory records, and invoices 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 department, 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, profit is $2.79 $1.19 = $1.60 $ = $80 At $1.40, how much profit will you now make on the 50 units? For each item, profit is $1.40 $1.19 = $0.21 $ = $ International Dairy Deli Bakery Association 17

20 Successful Service Department Management Review of Course 4 1. Name five product handling procedures that are important to control shrink. (Any of the following) Proper receiving Merchandising slow-sellers Proper storage Handling markdowns properly Proper sanitation Reporting markdowns 2. What is the most common problem that causes shrink in inventory billing? Proper food preparation 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 changes Verifying prices in the book Price marking items Checking 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. However, 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 profit $7.59 $3.80 = $3.79 $3.79 profit per plate 160 = $ Actual profit is $7.59 $4.50 = $3.09 $3.09 profit per plate 160 = $ actual gross profit Lost profit potential: $ $ = $ shrink Shrink Sales = Shrink % $ $1, = Shrink: 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 figure 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 International Dairy Deli Bakery Association

21 Course 4: Controlling Inventories 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, , COST OF GOODS SOLD 9, , TOTAL GROSS PROFIT 9, , DIRECT CONTROLLABLE WAGE 3, , VACATION PAY HOLIDAY PAY OPERATING SUP TOTAL 4, , DIRECT NON-CONTROLLABLE TOTAL CONTRIBUTION TO OVERHEAD 5, , ALLOCABLE EXPENSES PAYROLL TAXES GROUP INSURANCE BAL OF OPERATING 1, , TOTAL 1, , TOTAL OP EXPENSE 5, , OPERATING PROFIT 3, , NET OPERATING PFT 3, , Name three ways dishonesty can lead to department shrink. (Any of the following) Grazing Organized theft of product or money Sweethearting Vendor gifts and kickbacks 2011 International Dairy Deli Bakery Association 19

22 Successful Service Department Management 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 International Dairy Deli Bakery Association

23 Course 4: Controlling Inventories 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 difficult 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? 2011 International Dairy Deli Bakery Association 21

24 Successful Service Department Management 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 International Dairy Deli Bakery Association

25 Course 4: Controlling Inventories 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 effective 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: 2011 International Dairy Deli Bakery Association 23

26 Successful Service Department Management 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 International Dairy Deli Bakery Association