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CGN'TROL OF GROCER‘E’ éN‘!EN?0REES
W W}? F005 CHAENS

Thais 55: the: Dog?» of M. A.
MICHIGAN STATE UHNERSETY
Charles R. Craguo
1958

155523

LIBRARY

Michigan Stats
University

 

CONTROL OF GPOCEPY INVENTOPIES IN THE FOOD CHAINS

by 3

Charles P. Crague

A THESIS

Submitted to the College of Business and Public Service of
Michigan State University of Agriculture and Applied
Science in partial fulfillment of the
requirements for the degree of

MASTER OF APTS

Department of General Business
Curriculum in Food Distribution

1958

"/
U,97a

'\ ‘—

Q\ ‘1‘

CV

ACKNOWLEDGMENTS

The writer wishes to express his appreciation to
Messers. J. D. Wiesen, T. T. Oyler, C. L. Arnold, G. E. Rowe,
and all other people of The Kroger Co. who made the writer's
attendance at Michigan State University possible.

The writer is also indebted to the Illinois Canning
Company for their scholarship support during the past year.

Grateful acknowledgmentis extended to Mr. Fuel C.
Kahler for his interests and untiring efforts in guiding
the preparation of this study and to Dr. E. A. Brand,
Director of the Food Distribution Curriculum at Michigan
State University, for his guidance during the school year.

The writer wishes to acknowledge the wholehearted
cooperation he received from the various people he inter-
viewed. He is especially indebted to Messrs. A. E. Bain,

H. V. List, F. J. Kocar, E. C. Schull, L. C. Woerner, J. D.
Melrose, J. B. Commons, S. H. Kamp, and 0. Parsons for the
information they contributed to this study.

The writer's indebtedness to his wife is immeasurable.
Her patience and understanding have been a constant source
of inspiration for the writer since his undergraduate years
at college. It is to her and our four sons, Busty, Ricky,

Bandy, and Ronnie, that this thesis is dedicated.

”The Food Distribution program at Michigan State
University is under the sponsorship of the National
Association of Food Chains."

TABLE OF CONTENTS

CHAPTER PAGE

I. AN APPROACH TO THE STUDY OF GROCERY INVENTORY

CONTROL IN THE FOOD CHAINS. . . . . . . 1
Introduction . . . . . . . . . . . 1
Need for the study 2
The purpose of the study . . . . . . 3
Limitations of the study 4
Methodology. 5
The nature and purpose of control 5
Inventory control defined . . . . . . . 9
Accounting control . . . . . . . . lO
Merchandising control . . . . . . . 11
II. EFFECTS OF POLICIES AND ORGANIZATIONAL
STRUCTURE ON INVENTORY CONTROL . . . . . 1A
Effects of policies and methods . . . . . 1A
General policies . . . . . . . . . 14
Brand policies. . . . . . . . . . 15
Quantity versus turnover . . . . . . 17
Deal packs . . . . . . . . . . . 19
Distribution policies and methods . . . 23
Effects of organizational structure. . . . 21

Description of the district manager type

organization. . . . . .. . . . . 23

CHAPTER

Description of the zone type organization.

Comparison of the two organizational
structures

Summary and conclusions.

III. INVENTORY CONTROL SYSTEMS, RECORDS, AND

REPORTS

The evolution of billing systems.

Requirements of a billing system.

Controlling accuracy of in-put information
used in billing systems.

Purchase order control
Cost and retail information control.

Billing systems
The tub-file method
The batch system
Screened and non-screened billing
Perpetual physical inventory reconcil-

iation.

Reports derived from billing and accounting
Commodity group analysis report
Pre-shipping reports.

Out-of—stock reports and scratch lists.
Other reports
Summary and conclusions.
IV. UTILIZATION OF CONTROL DATA

Introduction

PAGE

[U
DO

24

28
28
31

43
AA
45
45
as
as
as
as
as

 

 

l[l[{{{s[-E i.[|.|1vlr[.ll

CHAPTER

V.

The stock record system.

Information contained

Up-dating stock record cards
Objectives of reordering
Fundamentals of reordering.

Basic systems

Mechanics of reordering.

Judgment factors in reordering

Common fallacies in reordering
Routine and automatic reorder systems

Routine reorder system used by the

Columbus division of The Kroger Co..

Utilizing special reports
Out-of-stocks and/or scratch lists
Pre-shipping reports.
Commodity group analysis report
Grocery merchandising results report

Summary and conclusions.

CONTROL OF VARIETY

Introduction

The importance of new items to future sales
Number of items presented to food chains

The possible affects of too much variety

Organization for buying new products

New item buying procedure

vi
PAGE
A8
A8
53
51
53
53
5A
56

58

61
63
6A

66
67
69
72
72
73
75
76
77
79

vii

CHAPTER PAGE
The salesman's presentation. . . . . 79

The screening process. . . . . . . 80

Presentation to the committee . . . . 8A

Committee action . . . . . . . . 8A

Follow-up of committee action . . . . 86

Summary and conclusions . . . . . . . 86

v1. SUMIVIARY AND cow-:1 SIGNS. . . . . . . . 89

BIBLIOGRAPHY . . . . . . . . . . . . . . 98

TABLE

I.

HOW IMPORTANT

LIST OF TABLES

IS VARIETY OF ASSORTMENT?

CHAPTER I

AN APPROACH TO THE STUDY OF GROCERY INVENTORY

CONTROL IN THE FOOD CHAINS

Introduction

 

Since King Kullen opened the doors of his first super-
market, the food industry has been characterized by high
volume, low margin selling.“ Emphasis is increasingly being
placed on attaining high rates of stock turnover so the com-
panies can operate on less capital, lowered interest charge
on inventory, maintain fresher stocks, reduce expenses,’
reduce the loss from spoilage, and meet market changes and
thereby reduce risk.1

The efforts of the food chains to constantly increase
stock turnover have focused additional attention on the
problem of inventory control. Several recent studies have
been made at store level concerning the rates at which

items are selling.2

These studies have disproved the pop-
ular conception that most of the items carried by the food

chains are fast movers. In addition, these studies have

 

 

 

lNorris A. Brisco, Principles of Retailing (New York:
Prentice-Hall, Inc., 1929), p. 148.

2The studies specifically referred to are "The Food-
town Study" published by Progressive Grocer in 1955 and
"The Super Valu Study" that is currently being published by
Progressive Grocer.

 

 

caused many questions to be raised concerning the control
of inventories from the standpoint of the variety and

quantity needed to maintain selling efficiency.

Need for the study. When one considers that retail

 

shrink cost The Kroger Co. an estimated $7,300,000.00 during
the operating year of 1957, the problems of inventory con-
trol became very significant. This means the company lost
nearly $20,000.00 in merchandise per day.3 Of course,
this figure is the combined results of factors inherent in
both the operating and accounting control of inventories.
Nevertheless, it does point out the importance of the
problem.
The importance of operating control of inventories
is summed up in the following statement by Mr. Leonard C.
Hobert, assistant comptroller of Gimbel Brothers, Incor-
porated:
Retail stocks represent one of the largest single
assets in a retail store and therefore, it is im—
portant that they be kept at a minimum and yet be
adequate to maintain the planned sales volume.“
Retailing probably feels the impact of good or poor
inventory control more directly than any other type of

business. A study of the du Pont Company's chart, "Rela-

tionship of Factors Affecting Return on Investment," reveals

 

3Personal interview with Mr. Albert E. Rain, Director
of Grocery Merchandising, The Kroger Co., Cincinnati, Ohio,
April 23, 1958.

“Leonard C. Hobert, "Merchandise Planning and Control,
Readings in Cost Accounting, Budgeting, and Control, William
E. Thomas Jr. (ed.) (Cincinnati: South-Western Publishing
Co.. 19555, p. 659.

H

that there are two basic factors affecting this return:
stock turnover and earnings as a per cent of sales.5 Since
the food chains have relatively small permanent investments
in relation to sales, inventory control becomes a prominent
factor affecting return on investment. Furthermore, good
inventory control measures will also affect the earnings as

a per cent of sales.

The purpose of the study. The purpose of this study

 

is to determine the methods used to control grocery inven-
tories. The basic objective of inventory control is to
maximize return on inventory investment.6 Achieving this
objective requires that the component factors of quantity,
gross margins, and variety be controlled.

The quantity of inventory necessary to maintain sales
is generally considered the most important facet of inven-
tory control. Of particular interest in this area of inven-
tory control is the possible trend toward automatic
reordering for both the warehouses and the stores.

The department stores have long recognized the impor-
tance of variety as a factor of inventory control. However,
the food industry has been less inclined to consider this

factor as important. This is due in part to the myth that

 

5Ibid., p. 755.

6Personal interview with Mr. Rain.

all grocery items are fast movers, and the fact that there
has been a tremendous increase in the number of items
carried during the past fifteen years. The food chains are
placing more emphasis on variety today than in the past.
One of the trends noted in 1957 by food retailers was that
items and brands need reappraisal to determine if the

variety of present inventories is adequate.7

\ 8 study lends insight into the factors-affegting

\ ___.___, ...

inventory control_and some of the methods and systems used

 

to control quantity, variety, and gross margins.

Limitations of the study. A complete study of inven—

 

tory control in the food chains would cover the control
exercised from the time merchandise is bought and placed in
the warehouse until it is sold at the retail store. How-
ever, this scope is too wide to be handled in this study.
The major emphasis of the study is placed on the buying and
merchandising control of grocery inventories warehoused by
the food chains. Such areas as physical control, store
level control, direct store delivery control, et cetera,

have been deleted from this study. Many specific areas of

 

7
"Ten Trends Noted by Food Retailers in 1957,"
Progressive Grocer, April, 1958, p. 12.

 

\Yl

this total problem have been researched or are being

8

researched currently.

Methodology. The specific control systems described

 

are those utilized by various divisions of The Kroger Co.
Information concerning procedures and objectives is based
on material obtained through personal interviews and .
letters and the writer's personal experience as an assis—
tant grocery buyer. The theoretical background material
as well as some information concerning other systems was

obtained from numerous secondary sources in the library.

The Nature and Purpose of Control

The word control, as used in the business sense, has
a dual meaning. It is commonly used interchangeably to
describe both the systems and function of control; therefore,
a short discussion and definition of control as used in
this study is needed.

The following statement, written by Henri Fayol, is
one of the most frequently quoted definitions of control.

The control of an undertaking consists of seeing
that everything is being carried out in accordance

 

8Some of the studies that have been made in this area
are: Lawrence Milton Berry, ”Pilferage Control Within A
Retail Food Chain Supermarket" (unpublished Master's thesis,
Michigan State University, 1953); Woodrow Harrison Joyner,
”Inventory Control In the Retail Operation of A Grocery
Chain Store" (unpublished Master‘s thesis, Michigan State
University, 1953); and Frank Wordley Tuppeny, ”Inventory
Control Techniques for A Grocery Warehouse” (unpublished
Master's thesis, Michigan State University, 1952).

with the plan that has been adopted, the orders
which have been given, and the principles laid down.
Its object is to point out mistakes in order that
they may be rectified and prevented from occurring
again.

E. F. Fitzmaurice, director of method planning,
General Foods Corporation, wrote an article entitled, "The
Essence of Control.” In this article he draws an example
of a one-man operation that grows into a two-man operation.
The conclusion reached in the article is that "the moment
he [the owner] hires someone to help him, he must start

I."10 The main theme of this article

some means of contro
is that assigned responsibility must be controlled and the
essence of control is controlling the performance of people.
In reality the man (he was producing, selling, and deliv-
ering) had to exercise control when he was performing all
.three functions himself. In some manner it was necessary
that he control the amount he produced, the quality of the
product, the cost of the product, the delivery cost, et
cetera. The only difference being that he set the standards
and exercised the control on himself.
Ralph C. Davis defines control as,

the function of constraining and regulating business

activities in accordance with the requirements of a

business plan so that the final objectives of a

business project may be achieved with the maximum
practicable economy and effectiveness.

 

l0
9Thomas, Jr., op. cit., p. 8A. Ibid., pp. 82-89.

llRalph Currier Davis, Industrial Organization and
Management (New York: Harper and Brothers, 19H07, p. 106.

 

 

There are two points of significance in this defi-
nition of control. This definition conceives control as a
method to regulate a phase of business as well as people.
Secondly, there is a degree of flexibility present in this
concept. Provision is made for changes needed to compen-
sate for various situations that might occur that would
affect the profit of the activity.

"While establishing standards is not a function of
control, it tends to precede the development of control."12
In order to have meaningful control measures, there must be
some standards established by a basis of judgment. This
does not mean, however, that these standards are necessarily
used to judge human performance. For instance, for control
purposes it may be decided that a new product must yield a
certain sales volume on a test to be approved as a regular
item.

Wherever there are business activities that require
control, their constraint and regulation require the per-
formance of eight organic functions of control: routine
planning, scheduling, preparation, dispatching, direction,

supervision, comparison, and corrective action.13 Mr.

Davis defines these functions as follows:

 

12Ibid., p. 121.

13Ra1pn Currier Davis, The Fundamentals 23 Top
Management (New Y rk: Harper and Brothers, 1951), pp. 647-
652.

 

 

‘II[[I[ {rail-1
I!
1;.II

Routine planning. The routine provision of infor-
mation concerning the particular plan that is to be
executed. -

 

Scheduling. To determine when or at what rate the
principal phases of the plan must be completed to
meet the final time objective of the project.

 

Preparation._ The function of assuring that the
factors and conditions required for the execution
of the plan will be available as needed.

 

Dispatching. The function of assuring proper co-
ordination through controlling the release of
authority to act.

 

Direction. The function of instruction concerning
the requirements for proper execution of the plan.

 

Supervision. The function of assuring that execution
is taking place in accordance with plans and
instructions.

 

Comparison. The function of determining the degree
of agreement between actual and planned results.

 

Corrective action. The function of promptly
removing any interferences with planned efiecution
and of restoring effective coordination.1

 

The first four of these functions (routine planning,
scheduling, preparation, and dispatching) tend to be per-
formed in advance of the execution of a particular action.
These functions are descriptive of a mechanical type of
control in which a specific system is initiated and there
is little or no deviation desirable. Such systems as
billing and cost control depend largely upon the execution
of these functions.

The latter functions are known as concurrent functions

because they occur while a particular action is in progress}5

 

lulbid. l51pm.

These functions provide for the changes needed to achieve
the final objectives of the company.

The objectives of the organization are defined
broadly in the company policies. The need for control is
derived both from the need to meet these_objectives and
from the assignment of responsibility for the activities.
The standards are derived in part from company policy and
in part from historical data. The purpose of control then
becomes twofold: (l) to judge the performance of an
activity, and (2) furnish information by which the direction
of the activity can be changed to achieve the desired or
improved results. The purpose of a particular control will
determine the nature of the control in that the purpose
will indicate the degree of control necessary. Some of the
factors involved in determining the degree of control will
be: flexibility needed, working capital available,person-

l6

nel involved, and the existing organizational structure.

Inventory Control Defined

 

The problem of inventory control contains two separate
and distinct components: (1) accounting control of inven—
tories, and (2) operating or merchandising control of in-

ventories.l7 Each of these components is equally important.

 

16William E. Ritchie, Production and Inventory Control

(New York: The Ronald Press Co., 1951), pp. 7-20.

17David R. Anderson, Practical Controllership
(Chicago: Richard D. Irwin, Inc., l95lT, pp. 325-337.

 

IO

If either component is neglected, it may cost the retailer

many thousands of dollars.

Accounting control. The accounting phases of inven-
tory control entail those measures taken to account for
and report on the existing status of inventories.r These
include the physical inventory, the perpetual inventory,
methods of cross checking invoices and purchase orders, and
the interim records and reports that accounting can make
available concerning inventories.

Until quite recently, the food industry has been more
concerned with the accounting control than with the oper-
ating control of inventories. This has been manifest in
many ways. Inventory control measures in the food industry
have been used primarily to protect investments and as a
standard for judging human performance. The performance of
store managers has been, and to a large extent still is,
judged mainly on their ability to control retail inventory
shrink. The grocery merchandiser is judged by sales per-
formance and by the mark-up the grocery department maintains
on merchandise moving out of the warehouse. Most of the
records and reports concerning inventories have been
designed to measure human performance.

*The end result of accounting control is the interim
records and reports that accounting can make available con-
cerning inventory status. Accounting control is an organ-

ized method of obtaining, recording, and interpreting

ll
desired merchandising facts and information. However, this
alone does not constitute control, but rather is the basis

18

for control.

Merchandising control. Very little has been done to

 

use inventory control as a merchandising tool. "The Food-
town Study" and "The Super Valu Study" were fore runners of
this application of inventory control. Even though these
studies were conducted primarily for purposes of space
allocation at store level, they have had a considerable
impact on other phases of the total problem of inventory
control.

Only recently, as a result of the tight money market
and rapid expansion, has considerable effort been placed
on controlling the level of inventories. The Kroger Co.
now charges interest to the divisions at the rate of four
per cent on the excess of a budgeted inventory level. This
interest charge is passed on to the stores. The objective
of this charge is to control the level of inventories. As
a result, the divisions are making a more conscious effort
to control inventory levels and are more critical of the
items carried by the stores.19

Merchandising control is defined in part as "the

maintaining of inventories, at the optimum level,considering

 

18Ibid. 19Personal interview with Mr. Rain.

 

12

’7‘.

o o O ‘ 1 1
operating requirements.”C These levels snoulo be deter—
mined consistent with the firm's objectives to:

Render service to the customers.

Make effective use of capital.

Minimize loss as a result of mark-downs.
Maximize sales efficiency by having items
available when needed and replaced before
out-of-stocks occur.

5. Maximize economy in purchasing by making

the most effective use of quantity buying
and still maintain a favorable position in
regard to stock turn-ver and price declines.

SWEDH

21

Merchandising control of inventories is the action
taken by management as a result of analysis and interpre-
tation of pertinent data available.

Control measures may be used to protect capital
investment, judge the performance of individuals, as a mer-
chandising tool, or may encompass all three. The nature of
the inventory control system will be determined by manage—
ment's appraisal of which control usage is the most impor-
tant.

The entire function of inventory control is an attempt
to correlate and coordinate several actions. It is not
possible to perceive inventory control as a static system.
Instead, there is a constant state of flux in which interim
results are measured and evaluated and changes made in order

to meet the basic objectives. While the emphasis in the

 

EO ‘
Anderson, op. cit., pp. 325-337.

21Ibid.

past has been on the accounting control of inventories,
future emphasis will probably be placed on merchandising
control as well. Therefore, using these concepts of con-
trol and control systems, inventory control is defined as:
Any action taken by management, based on policy, to co-
ordinate and correlate all activities concerning inventory
to achieve the company's objectives. This action can be
divided into two broad spheres: accounting action and

merchandising action.

CHAPTER II

EFFECTS OF POLICIES AND ORGANIZATIONAL STRUCTURE

ON INVENTORY CONTROL

Effects of Policies and Methods
There must be an objective for each business enter-
prize from which a philosophy of business is derived,
based on the theory of trusteeship. This business
philosophy is necessary to guide the course of
operations.

The supermarket philosophy of high volume sales and
low margins of gross profit, along with good inventory
control measures, has enabled food chain operators to
achieve very high stock turnover rates. This does not mean
that achieving high rates of stock turns is an end objective

in itself. It is only a part of an over-all objective of

the food chains to maximize return on inventory investment.

General policies. In order to achieve the end

 

objective of maximum return on investment, certain basic
policies pertaining to buying and merchandising must be
established. One definition of policy is, ”an established
guiding cannon premised on objective, devised to govern the
activities of business and from which the basic precepts

1 '| 2
of conduct are derived."

 

1John G. Glover, Fundamentals of Professional Manage-
ment (New York: Republic Book Co., Inc., 195E), p. 56.

2Ibid., p. 57.

 

15
.The buying and inventory policy outlines for the
Kroger Co. are:

1. To buy merchandise that meets established
Kroger standards, measures up to quality in
terms of established grades, and at competitive
prices or below.

2. To accomplish the fastest possible turn rate,
short of causing out—of-stocks on available
merchandise.

U0

Considering such factors as extra trucking,
outside storage costs, rehandling, and extra
investment, to buy in the most economical
quantities.

A. To avoid forced distribution of merchandise
to the stores.

These policies outline very broadly the objectives
of the company to buy quality merchandise; maintain minimum,
but adequate stocks; and to buy as advantageously as
possible. These are the general objectives of food chains.
Attaining these objectives is not a simple matter for there
are several opposing factors which must be resolved.
Because of these factors, policies on the division level
are stated in broad terms that allow freedom for discretion-
ary action on the part of the operating executives. As a
result of such freedom of action, a balance between

seemingly opposite alternatives is achieved.

Brand policies. The brand policies that an organi-

 

zation pursues will have some effect on inventory control.

 

3The Grocery Buyer's Manual (Cincinnati: The Kroger

Co., 193371 (Mimeographed.)‘

 

There is considerable evidence that national brands do
attain higher rates of stock turns for the retailer than
distributor brands. Both Publix Markets and Thorofare
Markets, who carry national brands exclusively, achieve
much higher stock-turn rates than their competitors who
carry both distributor and national brands. In fact,
Publix Markets achieved almost twice the number of stock-
turns during 1956 as the average.food chain.u
The retailer carrying distributor brands often has
an opportunity to enjoy higher gross margins on these
products. In addition, he may be able to avoid a certain
amount of direct price competition and build some repeat
patronage for his stores because of these exclusive brands.
In return he may expect to have higher promotional costs
and to perform the quality control function.5
Distributor brands do not require large inventory
investments for the operating divisions of a large food
chain. Distributor brand merchandise carried by the various
divisions of Kroger is ordered on the same turnover basis
as the manufacturer brands; therefore, there is no penalty

imposed on the division as a result of having the distri-

butor brand.

 

4"Publix Rides the National Bandwagon,” Super Market
Merchandising, October, 1957, pp. 69-85.

 

 

5E. A. Brand,_et a1, Functional Analysis of Food
Distribution (East Lansing, Michigan: Campus Book Store,
I958I7 pp. 38-44.

 

 

17

Some heavily promoted distributor brands may out sell
their national brand counterparts. For example, during
1957, Spotlight instant coffee totaled 38.7 per cent of the
total instant coffee sales in the Kroger stores as compared
with 29.1 per cent of total instant coffee sales for all
sizes of the largest selling national brand of instant
coffee.6 The total grocery sales for the Kroger Company
during 1957 was made up as follows: 43.9 per cent distri-
butor brand merchandise, 3A.9 per cent advertised brands,
and 21.2 per cent packer label merchandise. This can only
mean that in the Kroger stores, the distributor brands far
out sell their national brand competitors.

Distributor brands ordinarily do not carry floor stock
protection against declines in market prices.7 The signifi-
cance of this factor with respect to inventory control is
that the retailer must absorb any and all price declines,
thereby running the risk of losing his profit in the event

of a price decline.

Quantity versus turn over. Buyers today are not as

 

prone to adhere to strict turnover policies as in the past.
Mr. L. C. Woerner, buyer for the Columbus division of Kroger

stated that:

 

6Personal interview with Mr. Albert E. Rain, Director
of Grocery Merchandising, The Kroger Co., May 23, 1958.

7Brand, et ai, op. cit., p. 40.

18
There are times when it is necessary to buy into the
market in order to protect your competitive position.
An example of this is the recent freeze in Florida.
The price of frozen orange juice was certain to ad-
vance. We must be able to hold our retail price
down as long as possible; therefore, it was necessary
to buy larger than normal quantities. This is
especially true if our competitors gave bought up
large quantities at the lower cost.

There are times when the difference between truck-
load and carload prices is very substantial. Mr. Woerner
cited another example where he bought a carload of paper
plates, although he knew this would necessitate carrying
heavier stocks for approximately thirty days. However, the
difference in quantity discounts was more than enough to
offset the additional cost of carrying the inventory.

Canners frequently offer early buying allowances as
an inducement for retailers to buy heavily early in the
season.9 The Campbell Soup Company's offer on tomato soup
is the most outstanding example of this practice. While
the pack is in progress, Campbell offers tomato soup at a

substantial discount if delivery on the merchandise is

taken immediately.

 

8Personal interview with Mr. L. C. Woerner, Grocery
Buyer, Columbus Division, The Kroger Co., April 23, 1958.

9This is commonly called a seasonal allowance. For
a discussion of various terms and discounts in buying, see
Brand, et ai, Functional Analysis of Food Distrubition,
op. citTT pp. 13-20.

 

 

l9

Quite often manufacturers advise buyers when the cost
of merchandise is scheduled to increase and allow orders to
be placed at the old cost. These cost increases are pub-
lished; therefore, the buyer is protecting the competitive
position of the company by taking advantage of the offer
to buy at the lower cost.

In analyzing any of these opportunities to buy in
larger than normal quantities at lower prices, the buyer
must consider many different factors such as the competitive
situation, the possibility of price declines, and the cost

of carrying the inventory. A rule of thumb used by the

Kroger Co. is that it costs at least one per cent per
month to carry an inventory.10

Deal packs.ll Retailers generally object to deal

 

pack merchandise since it may duplicate stocks and cause
heavier inventories. This objection is made on the premise
that large quantities of deal pack merchandise are bought
each time. If this is true, and the deal pack is handled
as a separate item, stocks will be duplicated. The regular
merchandise remains in the warehouse until all the deal
pack is sold. If the chain follows a policy of buying deal

packs only when needed to replenish regular stocks and bills

 

1“The Grocery Buyer's Manual, loc. cit.

 

 

llDeal packs include any manufacturer's promotional
deals such as off-labels, special packs, etc. that generally
require special handling for accounting and/or merchandising
purposes.

2)
deal packs on the same code number as regular merchandise,
then the effects on inventory level will be negligible.12
This indicates that deal pack policies will affect inven-

tory levels.

Distribution policies and methods. Some chains use
forced distribution as a means for allocating promotional
merchandise. While this policy may tend to ease the prob-
lem of quantity at the warehouse level, it may complicate
the inventory problem at the store level. The buyer who
knows that all promotional merchandise bought will be sent
to the stores may be less aware of promotional failures and
resultant overstocked conditions in the stores. If a
promotion fails during one week, the stores have little or
no opportunity to adjust the following week's orders and
thereby control inventory levels. As many as four to six
weeks may elapse before adjustments are made.

Conversely, allowing stores complete freedom of
ordering places pressure on the buyer to estimate the
amount of merchandise needed for promotions. However, an
overstock in a central location is easier to handle than
an overstock spread among the stores, because the merchan-
diser can reschedule a promotion at a later date, advertise

the item, and move the merchandise. If an overstock is

 

12This is the policy followed and the results achieved
by the Indianapolis division of The Kroger Co.

21
spread among the stores, the merchandiser does not know how
much merchandise is available or if a subsequent promotion
can be successfully scheduled.

Increasing the frequency of store orders can, but does
not necessarily, decrease the amount of inventory carried and
increase the rate of stock turnover by improving the flow
of merchandise through the distribution center to the
stores. Hillman's Incorporated deliver to all stores on a
daily basis and have been able to effect substantial de-
creases in inventory with resultant increase in stock turn-
over. Since 1951, grocery sales volume has doubled, but
warehouse inventory is down fourteen per cent. Reserve
stocks generally carried by the stores have been reduced

substantially.l3

Effects of Organizational Structure

 

Most retail organizations are divided into two logical
spheres of activity: operations and merchandising. At the
store level it is difficult to distinguish between operating
and merchandising responsibilities. The operations depart-
ment of the organization is responsible for the actual oper-
ations in the stores, including sales and profits. As such
they have a responsibility for implementing the merchan-

dising plans and a definite interest in merchandising results.

 

l3Gardner H. Stern, Jr., "Absolute Minimum Stockroom
Inventories Is Our Answer," Super Market Merchandising,
March, 1958, p. 6A.

 

22
Both the buying and selling functions fall under the
general heading of merchandising. While there is still
some distinction between these functions at division level,
in ninety—three per cent of the large companies (thirty

stores or more), the merchandiser supervises the buying

14 The merchandiser has on his staff buyers who

function.
are specialists in their field of buying, sales promotion
specialists, and in some cases retail store merchandising
assistants. Through his staff, the merchandiser is able

to exercise control over the buying, promotion, and merchan-
dising of goods in the stores. Because he is in a position
to coordinate the efforts of these functions, inventory con-
trol may be affected by organizational structure.

The most common type of supervisory structure in the
food chains from division to store level consists of either
the single or dual line structure. A third and newer type
of organizational structure is beginning to evolve as a
result of decentralization of management by the larger com-
panies. Although there is no formal name for the newer type
organizational structure, it is best described as a func-
tional type organization. For purposes of discussion, the
single and dual line organizations will be called district

manager type organizations and the functional type a zone

manager type organization.

 

lb’"The Merchandiser. . . Wizard of Promotion,’

Super
Market Merchandising, January, 1958, p. A6.

 

2

UL)

Description of the district manager type organization.

 

The district manager in the typical chain organization will
have approximately fifteen stores to supervise the oper-
ations and merchandising of the grocery, produce, and (de-

15

pending if single or dual line) the meat department. In
his role as supervisor, the district manager is expected to
supervise all phases of the operations and merchandising of
these stores. In this type of organization, the merchan-
diser must depend upon the district manager to insure that
important merchandising plans such as space allocation and
over-all control of store inventories are being followed.
Because of the size of some operating divisions, it is

impossible for the merchandiser to visit stores frequently;

yet he is responsible for merchandising in the stores.

Description of the zone type organization. This type

 

of organizational structure is more common to the smaller
regional type chains that the larger chains. Such companies

as Marsh Foodliners of Yorktown, Indiana have been using

this type of organizational structure for a long time.16 In

 

15In the dual line organization there are two super-
visors for each store: one for the grocery and produce de-
partment and one for the meat department. However, the
supervisors in this type organization are responsible for
both the operations and merchandising of the departments.

leash Simpson, ”Merchandising Through the Organi-
zation,” Super Market Merchandising, January, 1958, p. 53.

 

2A
this type of organizational structure there are field sales
managers in addition to the zone manager.

The zone manager is the line executive in the organ-
ization, i.e. he has line authority over the store manager.
He is responsible for the over-all operations of the store;
however, his main area of interest is controlling the store
operating expenses. The zone manner cannot, however, dis—
regard merchandising because operating budgets are built
around expected merchandising results. Because he is re-

1

sponsible for both sales and profits in the stores, the
zone manager must have more than a passive interest in
merchandising plans and results.

Each of the field sales manager sorks directly under

in

the respective merchandisers of grocery, produce, and me ts,
and has no outside interests such as administration. The
field sales manager is the functional merchandising arm of

the merchandiser and maintains constant contact with the

stores in the division.

Y'

Comparison of the two organizational structures. .f

 

there is one phrase in the food industry that gets constant
use, it is "follow through." This phrase marks the real
distinction between the district and zone type organiza-
tional structures. The grocery merchandiser can devise
some of the best sales and merchandising plans, but without
proper follow through at the store level, these plans are

worthless. Because of his many and varied duties, the

district manager is unable to give his full attention to
all departments. Quite often he is buried with a maze of
operational problems and has very little time to deyote

to the merchan‘ising problems of the stores. On the other
hand, the main responsibility of the field sales manager is
to see that the stores are properly merchandised. The field
sales manager is able to maintain close contact with the
stores and insure that follow-through is being achieved at
the store level for the various merchandising plans. In
addition, the grocery merchandiser receives reports through
the field sales managers from nearly every store within a
division and is, therefore, in a better position to know
the merchandising needs of the stores.

There are several ways in which this direct store
contact aids the merchandiser in maintaining better control
of inventories. In some cases the field sales manager may
be a part of the new item buying committee and, therefore,
be able to provide first hand knowledge of store conditions.
Important merchandising plans such as space allocation are
more closely supervised with the result that over-all
division results can be improved. The merchandiser is able
to extend his authority directly to the store level through

the field sales manager.

Summary and Conclusions

 

The general policies of the food chains form the basis

for inventory control by providing the objectives and the

I]

 

general direction for action by the operating executives.
At the division level policies are stated in broad terms
that allow considerable freedom for discretionary action on
4 _
the part of the operating executives. This freedom of.
action is necessary in order that opposing alternatives
. -,.A
concerning brands, quantity versus turnover, and deal packs.
can be resolved to the best advantage at the given time.

Buyers today are less prone to adhere to strict turn-
over policies as in the past. The buyer is constantly
faced with opposing alternatives which he must resolve. A
few years ago, buying on the expectation of a price increase
was uncommon; however, today it is an accepted part of the
buyer‘s job to determine if such action is needed. The
ultimate objective to maximize return on investment will be
the buyer's primary consideration in selecting an alter-
native action.

Distribution policies have direct effects on inventory
levels. By making frequent store deliveries it is possible
to improve the flow of merchandise to the stores and thereby
decrease the amount of inventory carried at both the store
and warehouse levels. Forced distribution may improve the
flow of merchandise out of the distribution center, but
complicate the problem at the store level.

The buying function in the food chains is either sub-

ordinated to the merchandising function or integrated with

it. Very fey organizations still maintain a separation of

 

these two functions. In addition, the merchandiser in
today's food chain organization is responsible for the
inventory from the time it is bought until it is ultimately
sold.

The type of supervision the merchandiser is able to
maintain over the stores also affects inventory control.
With the district manager type organization, the merchan-
diser is unable to extend direct control over the stores,
whereas the zone organization does offer this opportunity.
The merchandising plans of an organization are only as

good as the follow-through achieved at the store level.

 

CHAPTEP II:

INVENTORY CONTPOL SYSTEMS, PECOPDS, AND PEPOPTS

Profitable operation of a chain organization has
always been greatly influenced by the methods used to con-

trol inventory, bill shipments, and furnish management with

‘

 

1' w o 'v o a
necessary facts. Billing merchandise to the stores and !

maintaining a perpetual inventory of stocks currently in

g- .4 navy“... -.

the distribution center have been and still are major prob-

lems for the food chains.

The Evolution of Billing Systems

 

There have been many mechanical improvements in
billing systems since the days of the hand written invoices.
One of the first was the combination of the hand written
invoice with the use of mechanical computors to tabulate the
total amounts of merchandise shipped and to determine the
new balance of stocks in the warehouse.

The use of tabulating machines in the food industry

dates back to the 1923's. These machines utilize punched

 

1”BAMAC for the Chain and Wholesale industry,
Featuring In-line Data Processing" (New York: IBM Corpor-
ation, n.d.), p. 3.

2Personal interview with Mr. Orland Parsons, Tab-
ulating Supervisor, Cndianapolis Division, The Kroger Co.,
March 25, l958.

cards as a source of information for printing invoices and
then use the same cards to calculate and print an inventory
report. The use of various types of tabulating equipment
has spread rapidly, until today most organizations classi-
fied as chains use some type of tabulating equipment for
inventory control purposes.3'
There have been no major changes in these processes
until quite recenth. These recent changes can be divided
into two categories: (l; changes in store order systems,
and (2) changes in methods of data processing. Pecently
some companies began using mark-sense cards for store
ordering purposes. When used with a card-order converter,
this eliminates the need for manually punching information
into the cards used in the billing system}l The Denver
division of Safeway Stores has begun experimental use of
a teletype order system that accomplishes the same advan-
tage as the mark-sense system.5

The tub-file billing system was one of the first

punched card methods for billing store shipments and

 

3Stephen A. Nasser, "A Study of Selected Tabulating
Machine Procedures in the Chain Supermarket Field" (unpub-
lished Master's thesis, Michigan State University, East

Lansing, Michigan, 1956), p. 5.

‘ u"Card Order Plan with the IBM Card Order Converter”
(New York: IBM Corporation, 1955), pp. l-13.

5”Communications the Fastest Way,” Super Market Mer-
chandising, January, 1957, pp. th-lOS.

 

 

 

U"

inventory control introduced into the food chains. Using
this method for billing orders, each store's order is
processed separately.' The batch billing system was devised
to obtain more and more timely reports for management.
However, at a recent conference of Kroger division comp-
trollers, the tub-file system was preferred to the batch
system. In fact, some divisions are considering converting
back to the tub-file system.6
International Business Machines Corporation (IBM)
recently introduced PAMAC,7 a system which supposedly com-
bines the advantages of both the tub—file and the batch
billing systems and Pemington Band has introduced the file
computer process. To-date, the installations of these
systems are so new that valid conclusions regarding their
value cannot be drawn. However, The Kroger Co. has plans

to equip four divisions with PAMAC installations and one

PAMAC is already in operation.

 

6Personal interview with Mr. Herbert v. List, Manager,
Retail Store Accounting, The Kroger Co., May 23, 1958. It
should also be noted that the batch billing system requires
more equipment (higher rentals) and more technically trained
personnel (higher wage costs) then the tub-file billing
system.

7This is the trade-mark name for Random Access Machine
Accounting development by the IBM Corporation. This system
utilizes electronic data processing and requires a special
accounting machine called BAMAC. Remington Band and others
have similar electronic data processing systems.

Requirements of a Billing System

 

Regardless of the method or type of equipment utilized,
the following basic operations need to be performed by a
billing system:

I. an invoice must be printed for the stores,

2. a perpetual inventory of warehouse stocks main-
tained, and

3. the billing information summarized into reports
required by the buyers and merchandisers for
control purposes.

To perform these operations a billing system must
provide a means for adding receipts and deducting shipments
from the existing inventory, summarizing this information,
and converting it to dollar figures.

Generally speaking, food chain buyers and merchan-
disers are more concerned with unit control than with
dollar control. Dollar control becomes important in the
analysis of operating results which are considered in a
later chapter of this thesis.

There are several reasons why the food chains utilize
unit control systems in preference to dollar control
systems. For day to day buying and merchan‘ising, unit
control offers the following advantages over dollar control?

1. Aids in maintaining balanced stocks. Many items

 

ordered by the buyer are ordered by manufacturer's lines

 

8For a detailed discussion of unit control versus
dollar control, see Herman Fiske Bell, Retail Merchandise
Accounting (N w York: The Ronald Press Co., 1955), pp. 163-
168.

 

 

“.7

‘ afi~..o."._ln

32
such as Gerber baby foods.9 Unit control records reveal
the approximate number of cases of each item on hand, and/
or in transit, and the number of cases of each item required
to build stocks back to desired levels.

2. Reveals movement of merchandise. The buyer may

 

know that the total movement of a manufacturer's line totals
a carload each week. With unit figures he is able to ascer-
tain which particular items account for the total movement.
Within a particular product line such as peaches, the buyer
can compare unit movement figures and readily determine
which brands and sizes are the fastest sellers. Slow moving
items can be detected and eliminated from the line if nec-
essary. This same type analysis can be made for any manu-
facturer's,comodity, or product line within the total
inventory. This can also indicate customer buying habits
and consequently, the group of items on which out-of-stocks
must be rigidly controlled.

A

’2

J 0

id in selection of_promotional items. If part

 

of the unit control system is the notation of items promoted,
the buyer has a ready reference concerning the results of
previous promotions and the sale price of the item. Because
the buyer can detect the items which are fast sellers, he

has an idea which items in a line should be promoted.

 

9The word lines as used in this thesis will refer to
various types of merchandise lines. There are three: manu-
facturer‘s lines--merchandise manufactured by an individual
manufacturer, the items may or may not be related; comodity
line-~includes all items in a broad groupsing such as vege-
tables, fruits, juices,etc.; and product lines--includes nar-
row categories such as peaches, corn, peas, et cetera.

33
Over a period of time the sales history of each item
will reveal when the item attains peak seasonal sales.
This type of information can be helpful in indicating when
an item can be most successfully promoted.
In addition to the above advantages, unit control
figures can be easily converted into dollar figures when

the need arises.

Controlling Accuracy of In-Put Information Used in Billing
Systems
The billing system is the basic information source

for quantity control systems and, consequently, the basis of
many important merchandising and buying reports. Like all
merchandise control systems, unit control can only supply
the information upon which judgment may be based; therefore,
the information made available should be accurate and per-

tinent.lO

In order to insure accuracy in the system, it
is necessary to control the basic types of information used
in the system which are: costs, retails, and quantities of

merchandise.

1 1 l l 1 ‘I o 1
Purcnase order control. The purchase order is the

 

basic form utilized to control both the quantity and cost
information used in the billing system. This form orig-

inates in the purchasing department.

 

lOBell, op. cit., p. 165.

11System used by the Indianapolis division, The
Kroger Co.

 

I,

LU

The purchase order specifies the general description,
size, pack, cost, quantity, discounts, and buying terms of
the merchandise to be shipped. At the time a purchase order
is prepared, two receiver copies are sent to the warehouse.12
These copies show no quantity or pack; only the description
and size of the merchandise. This requires the receiving
clerk to write in the quantity and pack of merchandise as
it is received; thereby reducing the possibility of his
assuming the amount shipped is correct. When merchandise
is received, the receiving clerk prepares the receiver in
duplicate; sending one copy to the purchasing department
and one copy to the billing department.

The copy sent to the billing department is matched
with an invoice, the specifications checked, and the
quantity (and cost change, if any) recorded on the master
card. The master card is then sent to the key punch where
the information is punched into cards for use in the billing
system.

The copy sent to the purchasing department may or may
not be posted to purchasing department records; according to
the system used. If a tub-file billing system is used, it
isgenerally necessary for the purchasing department to post

receivers, if for no other purpose than to note which orders

 

1 2 w o y 1 o "I
Receiver, as used in this tneSis, reiers to a

written notice prepared by the warehouse receiving clerk
that is used to notify billing and purchasing that a ship-
ment of merchandise is physically present in the warehouse.

35
are still in transit. Posting by the purchasing department
is not necessary if the batch billing system is utilized
since this information is available on the perpetual inven-

tory report.

Cost and retail information control. Since the pur-

 

chasing department deals with suppliers daily, it is natural
that cost information w uld originate in this department.
Retail prices of merchandise are established in the pur-
chasing or merchandising department3therefore, this infor-
mation also originates outside the billing department.

Information on changing costs is secured from one of
three sources: brokers or sales representatives, direct
letter from suppliers, or invoices. The first two sources
are known as market changes; the latter being a cost change.
The distinction between the two is that a change in a pub-
lished list cost is called a market change. Upon receipt
of merchandise at a different cost, the cost information
in the billing system is changed and retail prices are
reviewed; hence, the term, cost change.

Because of the many items handled and the nature of
food prices, there can be a large number of both market
changes and cost changes daily; therefore, it is necessary
that some type of system for controlling the accuracy of
cost and retail information be utilized. A general system

of control may function as follows:

k U

1. Market changes are recorded on stock record
cards for all items as they occur.

2. When a cost does change, i.e. merchandise is
received at a cost different from the cost
currently used in the billing system, the pur-
chase order will so state. This is the authority
for the billing department to change the cost
information upon receipt of the merchandise.

3. Should merchandise be invoiced by supplier at a
cost other than that shown on the purchase order,
the invoice and purchase order are checked
against purchasing department records. A cost
is not changed until verified. This may require
a telephone call to the broker or representative;

Co-ordinated with the cost control system is a cost
and retail relationship control system. Whenever an item
has a cost change, the information is recorded on a cost

and retail history card. The card is then sent to the

person responsible for establishing retail prices. The card

is reviewed and, if necessary, a new retail price is estab-
lished and a notice sent to the billing department. Re-
gardless of the amount of the cost change, the card is
reviewed to be sure than an item does not have two or three
minor cost changes without some thought of a retail change.
Records in the purchasing department will be changed to
note the new cost and/or retail price. The new cost infor-

mation will then be used on future purchase orders.

Billing Systems

 

The ultimate requirements of a billing system are not

changed by the methods utilized by a particular chain. The

 

lijstem used by the Indianapolis diViSion, The Kroger

Co.

 

37
differences lie in the timing and ease of obtaining various
reports needed by management. Consequently, these differ-
ences may affect inventory control and are, therefore, more
important than the differences in procedures for each

method.14

The tub-file method. The tub-file billing system is

 

one of the oldest and simplest billing systems utilized by
the chains. The system operates in the manner suggested
by the name. A card known as a detail card is filed in a
cabinet under the proper code for each unit of merchandise
in the warehouse.
The tub-file is the heart of the IBM accounting plan
for inventory control in the grocery industry. It
constitutesearniniature warehouse from which a general
stock condition can be determined at a glance, or a 1
specific stock condition can be obtained in a moment. 5
An essential feature of this system is that there is a card
for each unit of merchandise.
In order to build the inventory when merchandise is
received, a card is punched and placed in the file for each
shipping unit received; regardless of the source of the

receipt. Store orders are prepared for billing by selecting

the proper detail card for each unit of merchandise ordered

 

1“For discussion of details of procedures for each

system see Wasser, op. cit.

15”IBM Accounting, Warehousing Control for the Grocery
Industry” (New York: IBM Corp., l9u9), p. 7.

38
by the store. This automatically reduces the inventory on
hand and the cards remaining in the file represent the stock
that will be left in the distribution center when the order
is shipped to the store. Regardless of whether merchandise
is shipped to the stores or back to vendors, a card is
removed from the file to represent each unit of merchandise
being moved out of the distribution center.

Unit control tub-files show inventory position at a
glance, simply and without processing. (However, a printed
inventory record is more difficult to obtain, especially
if dollar information as well as quantity is required.16

The following are some systems recommended by IBM:

1. Read card numbers in the tub-file and manually
record inventory count on a stock record cards.

2. Pull highest numbered card (sequence number
punched as well as end printed) for each item
from the tub-file. (Optional-~combine with
previous balance cards and receipts cards to
obtain sales.)

3. Periodically total all sales, receipts, and

previous balance cards, by item, summary
punching new inventory balance card.1

The batch system. Because of a need for more timely

 

and better reports, the batch billing system was devised.
This system can be best described by pointing out the

essential features contrasted with a tub-file system.

 

lO"An Analysis of 'Batch‘ vs. ‘Tub-File' Billing in
the Grocery Distribution Industry” (New York: IBM Corp.,
n.d.), p. 2.

17ibid., p. 3.

 

UL)
KO

1. There is no tub-file with its mass of detail
cards.

2. Each card in the system can represent any
number of units of merchandise.

3. Inventory balances are maintained and deter-
mined by means of a master inventory card,
line summary cards, and receiver cards. This
information is processed through a calculating
machine and a new inventory card derived. This
is usually done as each batch is processed.

4. Processing is done in batches. All store orders
for a particular day are processed together in a
single batch; therefore,the total day‘s activity
on a particular code number can be summarized on
one card.

5. Supplemental reports and records can be easily
obtained. Daily inventory reports can be pre-
pared quickly and simply from the old and/or
new inventory master cards. Current inventory
position is always available, quantity and/or
dollar valuation. Unlimited modification of
inventory reporting and control is possible.
This can include such features as:

a. signalling of re-order points

b. control of on-order amounts

0. control of available stock

d. reporting on damaged merchandise

e. reporting on returns to vendors

f. reporting on accumulated sales for any
desired period

. reporting on inventory adjustments

. control of size of store order, rationing,

allocation, quotas, etc.

i. handle price variagces which depend upon
quantity ordered.*

While the batch billing system is much more flexible
in regard to inventory reports, it does require that a more
rigid schedule of store ordering be maintained. Because
all orders for a particular day are processed together in a
single batch, flexibility in the processing of store orders

is reduced.

 

._J
O)

H
O;
H c
Q;

 

A0

Screened and non-screened billing. Both the tub-file

 

and the batch billing system can be modified to use a
screened or a non-screened technique. The main difference
between the two techniques is the point at which out-of-
stocks are noted. Using the screened technique, store
orders are checked against the perpetual inventory to deter-
mine if merchandise is available in the warehouse.

Because the cards in the file represent units of
merchandise in the warehouse, the screened technique is
quite simple with the tub-file system. If there are enough
cards in the file to fill the order, there should be enough
merchandise in the warehouse to fill the order. If an item
is out—of-stock, it will not be printed on the store's
invoice.

With a batch billing system the screened technique is
more complicated. The calculator tests to see if the inven-
tory is sufficient to ship what is ordered, if so, a control
hole is punched to note the filled orders and the pertinent
information is punched into each store order card. Should
an item be out-of—stock in the warehouse, the calculator
suppresses calculation on all store order cards and punches
zeros for units shipped, weight, cost, retail, and profit.
It does not punch the control hole for filled orders. At
the end of this process the new inventory card will contain
all the pertinent information concerning the item as a

single summary. A printed inventory report, unit or dollars

Al
can be obtained by processing these cards through a printer
to print the information. Further calculation is not nec-
essary.19

The non-screened technique disregards warehouse stocks
and all items ordered are invoiced by the billing depart-
ment. When the order is being picked in the warehouse, the
order picker marks those items not filled and copy of the
invoice or a stub is returned to the billing department.
Those items not shipped are billed on a credit invoice
and the summaries are added back into the inventory in
order to adjust the inventory balance back to zero.

The non-screening technique with the tub-file system
is well described and evaluated in the following letter
received from the comptroller of the St. Louis division of
The Kroger Co.

Cards are prepunched on a basis of estimated require-
ments each day, with no control as to relationship of
units in the warehouse. Cards are reused when prices
are stable. They are used as an indicator on the
order for the warehouse to ship, and for perpetual
control; whereas, under a screened principle, the
cards in the tubs are the perpetual inventory.

After the day's billing, he cards are sorted and

run for a line analysis.2 The sum total of each
line then is the relief to the perpetual. It is

as simple as this-~beginning inventory each week +

receipts for the week, less weekly line analysis
for ending inventory.

 

19"Warehouse Inventory Control for Chain Grocery
Companies" (New York: IBM Corp., n.d.), p. A.

20The word line as used in this letter refers to an
individual item code number. The analysis consists of sum-
marizing the units shipped, total cost and retail values,
etc. for various accounting and inventory reports.

42

Control procedures under the non-screening principle
from a realistic viewpoint, are not as desirable as
the screened principle.

We run the perpetual weekly under non-screening,
since we feel this achieves our purpose. However,
compared with the screened principle, we do not know
where we stand each day. Theoretically, of course,
we could arrive at our perpetual under non-screening
each day, but the clerical effort is not Justified.

We are not completely satisfied that non-screening is
a solution. Theoretically, merchandising-wise, it
appears advantageous, since we bill today everything
the stores order, disregarding physical position. If
merchandise is temporarily out at the time of billing
and it arrives before warehouse selection, the store
receives the merchandise. Under screening method,
the store would be scratched at billing level, since
cards representing the physical are exhausted. There-
fore, the store does not receive merchandise, even if
the merchandise is received in the warehouse between
billing and selection time.

There is considerable card handling under non-screening.
From a control point of View, this leaves something to
be desfired, since there are many more possibilities of
error.

The non-screening technique with the batch billing

system eliminates the step in which the store orders are

tested against the inventory to see if there is enough

merchandise to fill the order.22 All items ordered by the

stores are invoiced. The perpetual inventory shown at a

particular time is not necessarily accurate because credit

summaries are not added back to the inventory until the

orders are picked in the warehouse.

 

21Personal letter from Mr. F. J. Kocar, Comptroller,
Louis division, The Kroger Co., dated May 2, 1958.

22Personal interview with Mr. C. Parsons.

A3

Most merchandisers and buyers favor the non-screening
technique because it eliminates the lag between the time
merchandise is physically received in the distribution
center and the time it begins moving to the stores.23 For
instance, using the screened technique, information con-
cerning receipts is not placed in the billing system until
the merchandise is physically present in the distribution
center. A minimum of one day, and-more than likely two
to three days, is required to receive merchandise in the
warehouse, write a receiver, process the information in the
billing department, and begin invoicing the merchandise on
store orders. Another day or two may elapse before the
merchandise is stocked on the store shelving.

Using a non-screening technique, merchandise may be
in the warehouse only a matter of minutes before it begins
moving to the stores. As a general rule, non—screening
will eliminate failure to ship merchandise on store orders
that is physically present in the distribution center.
However, the true physical position is more difficult to
ascertainznwithere is more possibility for errors with this

technique.

Perpetual-physical inventory reconciliation. Physical

 

inventories of warehouse stocks are generally taken once or

twice each year. The purpose of this inventory is to

 

23Personal interview with Mr. Rain.

an
correct any errors that have been made in recording the
perpetual inventory. (Corrections are known as inventory
adjustments.) The billing department prints a perpetual
inventory report and proceeds to check the actual inventory
'against what is shown on the perpetual records. A list of
code numbers of the items to be corrected along with the
number of units to be added or subtracted from existing
perpetual figures is made. A copy of this report is sent
to the purchasing department to up-date their record. The
physical inventory process is not complete until all major
discrepancies are reconciled. Generally, merchandise is
not shipped from the warehouse while physical inventories

are in progress.

Reports Derived from Billing and Accounting

 

The foregoing pages have dealt mainly with the billing
systems and the information used therein. While the primary
purpose of the system is to prepare invoices and maintain a
perpetual inventory, there are numerous types of reports and
records that can be summarized to aid the buyers and mer-
chandisers.2u These reports are in addition to the perpet-
ual inventory report which is the basis for reordering
merchandise.

This section is concerned with a description of the

various reports available to management. The following

 

24The number and kind of analyses is virtually un-
limited. Time and cost are generally the limiting factors.

chapter will be devoted to the use of these reports and

records as buying and merchandising tools.

Commodity group analysis report. Perhaps the most

 

important supplemental report is the sales and profit
analysis that is made by product groups. This report sum-
marizes the following information for each product group:
the total sales at cost and retail, the average gross
profit percentage, and sales of the product group as a per
cent of the total sales. The number of categories used
in this report is generally determined by the desires of
management; however, as the number of categories increase,
the machine time required to produce the report also
increases. As a general rule this report is issued on a
weekly basis.

This report also summarizes the combined total of all
sales at cost and retail and shows the average gross margin

for merchandise moving to the storesf5

Pre-shipping reports. In many cases it is possible

 

for the billing department to bill merchandise in advance
and send the purchasing department a summary of the billing.
The actual movement may not occur for from twelve hours up
to a week. If movement does not occur during the same week,
the report is often compiled manually with the aid of a

comptometer.

 

i M Accounting, Warehousing Control for the Grocery
industry, loc. cit., p. lt.

146

Out-of-stocks reports and scratch lists. Both of

 

these reports are notices of merchandise not shipped to
the stores. Items on a scratch list may or may not be
out-of-stock, according to how efficiently the warehouse
operates. The billing department does not generally dif-

ferentiate between an out-of-stock and a warehouse scratch.

Other reports. As was indicated during the discussion

 

of batch billing systems, the billing department can produce
nearly any type of analysis that management may require.

In requesting various type analyses from the billing de-
partment, management must consider the value of the report
in View of the time and cost required to produce the desired
information.

In addition to these reports derived from the machine
billing process, there are special accounting reports that
are prepared for purposes of analyzing buying and merchan-
dising results. These reports will be discussed and

described in the following chapter.

Summary and Conclusions

 

The billing operation is the basic information source
for quantity control systems and, consequently, the basis
of many important merchandising and buying reports. The
ultimate requirements of a billing system are not'changed
by the methods utilized by a particular chain. Basically

these requirements are to print invoices for the stores,

maintain a perpetual inventory of warehouse stocks, and to
summarize records and reports needed by the buyers and/or
merchandiser for control purposes.

A screened or non-screened technique can be used with
either the tub-file or the batch billing system. While the
use of the non-screened technique eliminates scratching
merchandise that is physically present in the warehouse,
the true physical position is more difficult to ascertain.

The ease with which reports can be derived is the
basic difference between the tub-file and the batch billing
systems. Either system is capable of producing the reports
needed by management for control purposes. The principal
concern of the billing system is to produce accurate

reports that fit management's needs for control purposes.

\1

CHAPTER IV

UTILIZATION OF CONTROL DAT

Introduction

 

The preceding chapter dealt with the sources of
information available to the buyer. The billing depart-
ment renders several unit control reports which are, in
effect, raw data. "At the very best, control reports can
facilitate the exercise of human judgment . . . but never

serve as a substitute for it."1

In order to utilize the data, the purchasing depart—
ment organizes the information into a unit stock control
system and summarizes this data on a single card known as

a stock record card. Although supplemental reports are
available. this system is the basic source of buying infor-
mation. Because of the vast amount of information these

cards contain, the unit control system is often the center

of purchasing department activities.

The Stock Becord System

 

Information contained. A well organized method of

 

unit control provides the buyer withfactual information

 

lClare Wright Baker, Ira D. Anderson, and J. Donald
Butterworth, Principles of Betailing (New York: McGraw-
Hill Book Company, Inc., 1956l, p. 38H.

 

 

A9
upon which buying decision can be based.2 While the
specific information recorded on these cards may vary from
company to company,the following information is recorded by
.The Kroger Co.:

buyer's code number

item description, size, and pack

item cost (f.o.b. factory and delivered)

gross margin per cent

market changes

inventory on hand

item retail

movement

outstanding orders

movement history by periods for previous years
manufacturer‘s name and/or broker and represen-
tatives name and address

12. quantity discount schedule

13. terms of purchase

1A. store unit

15. vendor's shipping unit

16. store code number

17. freight rates for delivery

18. price protection (if any)

19. case weight

l-‘UKOCDNONUTJI'WIUH

Hi—J

In addition to the above listed information, the buyer
may include many supplemental notes regarding the specific
item. The supplemental information is generally of an ex-
planatory nature such as pending promotions, special case
allowances, and the amount stores ordered on past or future
promotions.3

While all the information recorded is necessary, the

historical information is often of particular value for

 

2John G. McLean, "Better Reports for Better Control,”
Harvard Business Review, Vol. 35, No. 3 (May—June, 1957),lOA.

 

3Information concerning future promotions is posted
to the stock record cards from the pre-shipping reports.
This information may be recorded as much as two to three
weeks in advance of the actual movement.

53
interpreting trends in movement, seasonality, et cetera.
Furthermore, information for other merchandising purposes
can be obtained. For example, the merchandiser may decide
to compare gross profit dollars as well as percentage.
Information for previous operating periods would have to
be calculated by using information from the stock record

cards.

Up-dating stock record cards. This voluminous amount

 

of information requires considerable clerical work in order
to keep the system accurate and current. Of the items
listed, inventory balance, orders, cost, and retail prices
are the only factors that change frequently. The remaining
items are either historical or are seldom, if ever, changed.

Inventory balances and receivers are the most fre-
quently posted items on the buyer's cards. The receivers
are posted as they are obtained from the receiving clerk
or the information is copied from the perpetual inventory
report. The purchasing department generally posts receivers
only if the billing department is unable to print the in-
formation on the inventory report; although some buyers may
desire a cross-check for accuracy.

Inventory balances are obtained from the perpetual
inventory report received from the billing department. This
report may contain any or all of the following information
for each item:

1. current inventory balance
2. movement for the past week

51
3. merchandise shipped other than to the stores

A. merchandise received A
5. average movement for a certain period

Objectives of Reordering

 

In many respects the routine reorder of merchandise
for the warehouse is very much like reordering merchandise
for a store. The major differences lie in the time element,
transportation, and the source of supply. Whereas the store
can replenish its stocks on a single order sent to a central
location, and the orders delivered by company controlled
trucks_on a definite schedule; the buyer must replenish his
stocks with numerous orders sent to wide-spread vendors.

He must rely on many modes of transportation for delivery,
without the benefit of specified delivery schedules.5

Regardless of the specific type of reorder system
utilized, certain basic factors should be considered.
Special situations may influence reordering of merchandise

from time to time; however, the main considerations in

reordering are:

 

1. To minimize out-of-stocks. Unlike many industrial
firms which calculate a certain percentage of out-of-stocks
the buyers in the food industry attempt to operate with no

out-of-stocks.

 

24Generally this information is one to three days old
by the time the buyer begins to reorder merchandise.

5Delivery times can be calculated; however, the buyer
has no assurance that the delivery time will be the same
every time he reorders merchandise.

52

2. To achieve maximum turnover. Typically the food

 

industry is a fast turnover business. While storage capa-
city is available in the distribution center, the objective
is to move merchandise through the center and to hold only
enough merchandise between shipments to satisfy store re-
quirements. The chains are not interested in speculating
in merchandise values by buying and warehousing merchandise
for long periods of time. A conscious effort is made to
maintain minimum, but adequate stocks at all times.

3. To order by pro-determined minimum quantities.

 

The objective of the buyer is to order in such quantities
that the highest possible quantity discount is obtained
consistent with turnover objectives. Several factors are
taken into account in determining the desired minimum
quantity to be ordered. The basic factors are similar to
the following list compiled by the National Association of
Purchasing Agents.

Storage costs

Obsolescence

Handling charges

Transportation charges

Investment costs

The cost of buy%ng
Quantity buying

fithWME—J

One of the improvements The Kroger Co. hopes to

achieve with the use of RAMAC is the determination of the

economic reorder quantity for each item.7

 

6N.A.P.A., Handbook 2E Purchasin Policies and Proce-
dures, Vol. I (New York: N.A.P.A., IQEQI, p. 319.

7Personal interview with Mr. Herbert V. List, Manager,
Retail Store Accounting, General Office, The Kroger Co.,

May 23, 1958.

A. To maintain balanced stocks. Most grocery items

 

are ordered by manufacturer's lines in predetermined minimum
quantities such as truck or carloads. A reorder may be
needed on all items in the line to obtain the predetermined
quantity requirements; therefore, the buyer should plan the
stock level for each item so that all items require re—
orders at the same time. In the event one or two items
require reorders before the other items in the line, the
buyer has three alternatives: (1) allow the item to run
out—of-stock, (2) order the item as a single shipment, or
(3) build all stocks in the line to the point where the
minimum order can be made. The results of the respective
aternatives will be lost sales, higher merchandise costs,
or heavier inventory stocks than necessary. In any event
the net result will be reduced return on investment from

the total inventory.

Fundamentals of Reordering

 

Basic systems. Basically there are two types of

 

reorder systems: the two-bin system and the ordering cycle.
The two-bin system utilizes two sets of stocks, a current
stock and a reserve stock. When the current stock is
depleted it is time to reorder the item. During the re-
plenishing period the reserve stocks are used. When an
order arrives, it becomes the reserve stock, et cetera.

The order cycle method utilizes a specific interval of time

\)1

between the placement of orders. Once during each cycle
orders are placed to bring the stocks up to a specified
control level.8

The large reserve stocks required by these systems
defeats the objective of the food chains to achieve maximum
stock turnover; therefore, these basic systems are modified
to reduce the reserve stocks required. The most common
among these is a variation of the two-bin system which
utilizes minimum stock level points. When the minimum
level is reached, a replenishing order is sent. Quite often
the maximum level will be less than the amount required
during the replenishing period.

Using a screened billing system it is possible to
establish minimum and maximum levels for merchandise. How-
ever, even with the establishment of these levels, buyers
tend to make reorders on a specific day of the week; there-

fore, losing some of the advantages of the system.

Mechanics of reordering. When merchandise is re-

 

ordered the buyer uses the following information from the
stock record cards: (1) movement for the previous weeks,
(2) present level of stock, and (3) orders that are out-

standing.9 With this information, the buyer can readily

 

8Thomas M. Whitin, The Theory of Inventory Management
(Princeton: Princeton University Press, 1957), pp. 15-22.

 

 

9Some systems may record an average weekly movement
also.

U'l
U1

determine the need for merchandise. Should stocks be low
and an order needed, the buyer can determine the amount to
reorder by:

l. calculating average movement,

2. determining the number of days' supply on and

and/or in transit, and

3. deducting (1) from the desired maximum supply

on hand and in transit.

After these steps are taken for each item, the total
amount ordered is calculated to determine if the order meets
the desired minimum. If so, the purchase order is sent
to the vendor. Using this procedure, all items ordered from
- a vendor should have the same number of days‘ supply on hand
and/or in transit. Should the order total less than the
minimum requirement, the buyer has the three alternatives
noted under maintaining balanced stocks.

In some cases it is possible to further simplify the
reorder process. The buyer knows the minimum order quantity
from information contained on the stock record card. By
calculating average movement for all items in a line, he
can determine the number of days' movement that will be
required to equal a minimum order.

For example, assume that five items are being ordered
from a vendor and that 903 cases are needed for a minimum

carload shipment. Average weekly movement for this group

is as follows:

Item Average Weekly Movement

 

 

1 cases
cases
cases
cases

cases

2

WUOUJP
MW‘Jflkfl
U‘HJUU‘IU

\J'I
L)
‘J

Total Ave. Movement cases

AN

Since a minimum of as cases is needed for a carload, mer-
chandise cannot be reordered on a weekly basis; therefore,
two weeks' movement is required to equal the desired mini-
mum shipment. Once the stocks are balanced and the buyer
calculates the safety margin required, he can reorder the
group of items bi-weekly by simply adding movement figures
and be reasonably sure that at least a minimum order can be
made. Theoretically stocks should remained balanced at all
times because the relative movement of items will remain
constant. Occasionally the buyer will have to recalculate
average movement in order to adjust for trends in movement.
Failure to periodically recalculate average movement will
result in safety margins being increased or decreased,
depending on the trends in movement.

If safety margins are reduced, this system can reduce
average inventory levels to an absolute minimum and minimize
out-of-stocks. Furthermore, the over-all procedure can be
reduced to a routine that could be handled by someone other

than a buyer. In any case, valuable time can be saved.

Judgment factors in reordering. Sound judgment is an

 

important part of successful buying, for control exists

U‘l
\]

only when the information contained in the stock record
system is interpreted and translated into action.10 The
routine calculation of any order is simple as long as
nothing unusual occurs. It is the unusual situation that
requires the close attention of the buyer. Mr. Woerner,
grocery buyer for the Columbus division of The Kroger Co.
summed the problem up as follows: "We buy on past experi—
ence, but not for past experience. We buy for the future

"11 While auditing the cards the buyer must be con-

sales.
stantly aware of the many factors that may influence move-
ment of merchandise. Such factors as promotional activities
of manufacturers, seasonality, and holidays may require ad-
justment of orders. In addition to these factors, the

buyer must exercise judgment in the interpretation and
analysis of past sales data, current or prospective general
business conditions, and any changes in conditions within

the organization:12

Common fallacies in reordering. There are several

 

common fallacies concerning the reorder of merchandise. The
two most common ones are that: (1) an increase in travel
time requires a proportionate increase in minimum stocks

necessary to supply expected demand during replenishment

 

13Delbert G. Duncan and Charles F. Phillips, Retailing
Principles and Methods (Chicago: Richard D. Irwin, Inc.,
1955), p. 305.

11Personal interview with Mr. Woerner.
l2

 

 

Baker, op. cit., pp. 32A-344.

58
periods, and (2) that frequent orders will lower warehouse
stocks.

Whitin illustrates the effects of travel time by
pointing out that if an item requires two years for deliv-
ery, it is unlikely that anyone would suggest that a minimum
stock of two years supply is necessary. "Although longer
replentishment periods do make larger safety allowances nec-
essary, the relationship between the two is not a simple
ratio."l3 .

The effects of order frequency were summed up by
Mr. E. C. Shull as follows:

Unless the safety margin carried in the warehouse is
decreased, frequency of orders will not reduce the

average inventory level. Many buyers unconsciouily
associate frequent orders with low inventories.l

Routine and Automatic Reorder Systems

 

Several factors are probably responsible for the fact
that the reordering of merchandise in the food chains has
remained a manual operation. Most buyers regard reordering
as one of their most important functions; and it may well
be. While performing this function, the buyer is affecting
the rate of turnover, cost paid for merchandise, and sales
volume. Furthermore, future ordering may be affected if

balanced stocks are not maintained.

13wnitin, op. cit., p. 29.

1LLPersonal interview with Mr. Shull.

Such factors as the promotional activities of the
chain and/or its competitors, weather, holidays, seasons,
pay dates, et cetera, may affect the movement of merchan-
dise. This is one reason given by buyers for maintaining

15

manual reorder systems. However,\these factors are
often the exceptions rather than the rule.

The time lag in getting information concerning inven-
tory status to the buyers is another important factor that
has discouraged the use of automatic reorder systems. How-
ever, the recent introduction of electronic data processing
has opened new possibilities. The organizations that have
utilized this type of equipment are improving their inven-
tory position. A reduction in inventory levels has been
attributed to reduced time lag in processing store orders
and getting information to the buyers.16

Industrial firms have been utilizing automatic re-
order systems for quite some time; however, these systems
are calculated mathematically to have a certain percentage
of out-of-stocks.17 The food industry has been categori-

cally opposed to tolerating out-of-stock conditions.

Articles such as ”Out-of-stocks = Out-of-sales" appear

 

15Personal interview with Mr. Albert Pain.

16"Electronic Ordering Starts In the Store," Chain
Store Age, May,l958, pp. 72-73.

 

17Howard Thompson Lewis and Wilbur B. England, Pro-
curement, Principles and Cases (Homewood, Illinois: Richard
D. Irwin, l957), p. 293.

 

63
18

frequently in food trade publications. Quite frequently
penalties such as higher costs of merchandise and/or higher
inventory levels are tolerated in preference to out-of-stock
conditions. A significant factor concerning out-of-stocks
is the relative importance of the item that is out-of-stock.
Certain items such as sugar should always be in stock; how-
ever, an occasional out-of-stock condition on an item such
as sardines is not serious. In defense of a no out—of-stock
policy, Mr. Albert Pain, director of grocery merchandising,
The Kroger Co. states that "the buyer's efforts to reduce
the day‘s supply on hand for fast moving items will compen-
sate for the heavier inventories needed on slower moving
items."19
Automatic reorder systems have several advantages to

offer, some of which are:

l. A substantial reduction in the number of purchase
orders issued.

2. Buyers have more time to devote to more important
aspects of buying.

3. Less follow-up action is necessary.

A. Helps to reduce out-of-stocks and resultant rush
orders with their attendant problems.

5. Because of greater efficiency, fewer employees
may be necessary.23

 

18"Out-of-Stocks = Out-of-Sales," Super Market Mer-
chandising, July, 1953, pp. 61-65.

 

 

19Personal interview with Mr. Rain.

23Lewis and England, opg'cit., p. 297.

61
Automatic reorder systems are by no means an answer
for all inventory control problems; however, indications

are that inventory control can be materially improved.

Routine reorder system used by the Columbus division

21

 

of The Kroger Co. The following system was devised by

 

Mr. E. C. Shull, comptroller of the Columbus division of
The Kroger Co. It was devised to be used with a screened
tub-file billing system. The purpose of the system is to
place the reorder process on a routine basis.

In developing the plan, the following assumptions
were made:

1. The movement of merchandise is relatively
constant.

2. The normal lead time for orders plus three
days' supply is the maximum amount needed
in the warehouse at one time. (If this does
not meet the desired minimum for discount
purposes, the cycle is lengthened.)

3. A reorder should be due the date a shipment
arrives.

A. It is not necessary to have more than one
shipment of merchandise from a single vendor
in the warehouse at any one time.

5. An order should begrepared only when needed,
but regardless of the day of the week needed.

A card is placed in the tub-file at the point repre-

senting a normal lead time plus three days' supply of

 

21Information concerning this plan was obtained by
personal interviews with Mr. Schull and his associates.
The plan is in an experimental stage, however, the number
of items being reordered has been increased from a single
group to the present total of five groups.

62

merchandise in the warehouse.22

As detail cards are pulled
to bill store orders and stocks are reduced to the reorder
point, the inventory card will appear. When it appears the
card-puller takes the card, records the current inventory
in the tub, and then proceeds to pull the inventory card
for all associate code numbers.23 When the current inven-
tory for all the associate items is recorded on the respec—
tive inventory cards, the cards are sent to the buyer. The
purchase quantity has already been calculated for each item;
therefore, the reorder procedure is simply a matter of
copying the reorder amount onto the purchase order. Period-
ically the inventory cards must be reviewed, the average
movement recalculated, and a new reorder quantity estab-
lished. The frequency of this review will depend upon the
fluctuations in the movement of the merchandise.

This system has worked very satisfactorily for over
a year. The following items are currently being reordered
by this system: Post Cereals, Gerber Baby Foods, Swift
Products, Maxwell House_Coffee, and Kraft Foods. These

items show a fairly constant movement and therefore lend

themselves to this type of reorder system.

 

22For purposes of presentation this card will be
called an inventory card.

23Associate items are all items ordered from the same
manufacturer in the same shipment.

According to Mr. Shull, this reorder system has the
following advantages:

1. It has reduced out-of-stocks to a point where
they are practically non-existent.

2. It has made the job more routine; and therefore
can be delegated to someone other than the buyer.

3. The number of purchase orders, receivers, etc.
has been reduced.

4. The inventory information time lag has been
materially reduced.

Figures were not available concerning how much better,
if any, this system operates than the conventional system.
The only definite improvement is in the reduction of out-
of-stocks. While stock levels are heavier at times during
the cycle than with the conventional system, they are also
much lower just prior to receiving a shipment. The average
total inventory is probably reduced.

If all the items for the Columbus division were placed
on this system, it was estimated that the services of at
least one additional card puller would be required. How-
ever, the system would eliminate the necessity for a sched-
uled perpetual inventory report. A movement report for
historical purposes would be sufficient, but not absolutely

necessary.

Utilizing Special Reports

 

In addition to the inventory figures for reordering
merchandise, several special reports are issued that aid

in making other decisions regarding inventory. These

on
reports are generally designed to measure performance;
therefore, with the aid of these reports, the buyers and
merchandisers can make decisions that will improve the

net results.

Out-of-stocks and/or scratch lists. Since inventory

 

reports are posted weekly, some means is needed to advise
the buyers when items are out-of-stock and being scratched
on store orders. Some systems may even notify the buyer
when stocks reach a minimum stock level. Often out—of-
stocks may occur a day or two after an inventory report

is issued. If action were delayed until the next inventory
report date, and item could be out-of—stock as long as six
days before action would be taken.

Upon receipt of the out-of-stock report, the buyer
can determine why the item is being scratched and check to
see whether there is an outstanding order.2A Thetraffic
department can be notified of the items being scratched
along with the pertinent data needed to trace orders. By
spending a few minutes daily reviewing the out-of-stock
report, the buyer can have many shipments expedited and the
period of time during which items are scratched can be
materially reduced.

The report summarizes the following information: (1)

the total number of units and the total cost and retail

 

24Scratches can result from many reasons such as
out-of-stocks failure to ship, deal packs, etc.

O\
)‘1

value for each item, and (2) the total value at cost and
retail for all items that were scratched. The buyer's
superiors can not only determine at a glance if the number
of out-of-stocks is high, but also the probable effects
these scratches have had on sales. While the total dollar
scratch figure cannot be assumed to be lost sales, it does

serve as an indication of lost sales.

Pre-shipping reports. This type report is most com-

 

monly used for special promotion items and grocery
perishables. Because grocery perishables can generally be
bought and received on short notice, this report, along
with a current physical inventory enables the buyer to
maintain an absolute minimum, but adequate inventory on

these items.25

It is possible to turn stocks at least
once each week and sometimes more often.

Store orders for items being promoted by the chain
are often summarized and this information posted on the
buyer's cards. This report is generally available at least
one or two weeks before the promotion begins. Therefore,
the buyer usually has time to purchase more merchandise if
needed to fill all of the orders. Without such a report

the buyer must estimatethe amount the stores will need and

hope that he has bought enough, but not too much.

 

25Physical inventories of perishable items are often
taken on a daily basis.

At the same time that the store promotional orders
are summarized for the purchasing department, a copy is
furnished the merchandiser. From this report the total
sales at cost and retail for promotional merchandise can
be estimated. Since this report is available in advance
of the actual movement, the merchandiser knows whether or
not the promotional efforts for the week will raise or
lower the net results for the period. From previous experi-
ence he can determine whether or not these results will
balance out to his budgeted figure. While he probably
cannot take corrective action on the specific sales plan in
question, he can alter future actions to achieve the over-

all desired results.

Commodity group analysis report. The billing depart—

 

ment can furnish a weekly summary of movement of merchandise
to the stores by commodity groupings. This summary is made
in terms of sales at cost and retail. The groupings used
in this report are the same as those used on the "Grocery
Merchandising Results Report";26 therefore, the merchandiser
knows each week what the results should be on the final
report.

Using this method, the merchandiser can readily deter-
mine the results for any particular commodity group, the

combined results for all groups, and takeaction if the

 

25Title of the report used by The Kroger Co.

results arerot in line with the desired objectives. Some

of the alternative corrective action may be:

1. Adjust future sales promotion plans.

2. Examine individual retails for product groups
that need attention.

3. Insure that each discounts are received.

4. Determine if merchandise is being advantageously

bought to receive quantity discounts.

Store shrinkage reports and price change effects can
be reported separately. The only remaining unknown is the
actual dollar inventory figure and the days‘ supply of
inventory on hand. With these various reports, the merchan-
diser has at hand each week an approximation of the net

merchandising results.

Grocery merchandising results report. Most of the

 

reports and records the buyer utilizes are unit controls;
however, for purposes of analysis, it is necessary that
these figures be converted to dollars. The Kroger Co.
utilizes this type report to compare budgeted and actual
sales and to determine inventory results.

The particular report utilized by The Kroger Co. has
the following pertinent information for each of the forty-
seven commodity groupings:

per cent of deliveries to total at retail.
actual deliveries to stores at retail.

actual deliveries to stores at cost.

gross margin per cent.

gross margin dollars.

actual warehouse inventory in dollars.

number of days' supply on hand.

the net effects of price changes.

total stores' inventory losses (shrinkage).
grand total of all actual dollar sales, gross

k)\O CO\1(T\U‘| 1:"me

H

profit dollars, mark-up per cent, and ware-
house inventory.

11. grand total of budgeted sales, mark-up dollars,
mark-up per cent, and warehouse inventory.

This particular report is designed to be used by both
the buyer and the merchandiser. It serves to bridge the
gap between buying and merchandising. By analyzing this
report,the buyer can detect any weaknesses in his inventory
by commodity groups and thereby be able to know which com-
modity groups need attention to attain the desired results.

The buyers are particularly interested in analyzing
the number of days' supply on hand for each commodity group.
While the total inventory may average approximately thirteen
days' supply, it does not follow that all commodity groups
should have thirteen days‘ supply on hand. Some groups,
such as canned fruits may average twenty—six days‘ supply,
while tobacco products may average about six or seven days'
supply. These differences can beexplained by the distance
merchandise must travel, the difference in volume, the
number of items in the group, and the manner in which the
merchandise is shipped. Buyers generally have an informal
objective for each commodity group; however, this is flex-
ible and the objective may change from time to time
according to the circumstances.26

In order to justify the same number of days' supply

for all items, it is necessary to show that all items:

 

26Personal interview with Mr. John Commons, Grocery
Buyer, Indianapolis division, The Kroger Co., March 25,1958.

69

1. Have the same time lag (the sum of manufacturing
time, posting time, transport time, etc.).

2. Have the same variations in lag time.

UL)

Have the same expected demand variations.

4. Have the same cost of depletion (depreciation,
obsolescence, insurance, risk, storage, etc.).

Have the same cost involved in placing orders.

28

Have the same quantity discounts.

U1

Oh
.

For the merchandiser the grocery merchandising results
report reveals the net merchandising results for the period
including adjustments for price changes, store inventory
shrinkage, and a comparison between budgeted sales and
gross profit dollars and the actual results. An analysis
of this report reveals to the merchandiser how the net
results were derived and an indication as to how the results
may be improved. Each commodity group can be analayzed to
determine if the results are desirable. A comparison with
past performance will reveal if each group is contributing
the amount of sales and gross profits expected. After
analyzing this report, the merchandiser should be able to
determine if improvement is needed in buying, merchandising,
or store's handling of inventory, and the appropriate

action taken.

 

Summary and Conclusions
The buyer in the food industry has nearly every con-

ceivable kind of unit control data at his disposal when he

 

27wnitin, op. cit., p. 29.

7D
reorders merchandise. However, this wealth of information
only serves as a basis for judgment. The buyer has certain
reorder objectives, but these objectives are flexible and
may change from time to time. His interpretation and
analysis of past sales figures, rate of growth or decline,
and current business conditions may cause the buyer to
temporarily alter his actions.

The reorder function is important, because it is at
this point that the buyer‘s action will influence turnover
rate, the cost of merchandise, and possibly sales volume.
Several reasons can be advanced for not inaugarating more
routine or automatic type reorder systems. They can be
summed up as:

l. Reluctance on the part of buyers to relinquish
any part of the buying procedure.

2. Movement of merchandise is erratic.
3. Time-lag in getting information to the buyers.

4. Refusal of the chains to accept a certain percen-
tage of out-of-stock as necessary and desirable.

The two routine systems discussed in this chapter are
quite simple to operate. Both of them are based on the
assumption that while over-all sales and movement may fluct-
uate, the relative movement of a manufacturer's line is less
than the variation of individual items within the line. It
is this stability in total movement that allows routine
systems to function.

While out-of-stocks are common within the food

industry, management generally has been prone to attempt

71
no out-of-stock policies. There are certain staple fast-
moving items that should never be out-of-stock, but there
are many more items on which occasional outs may improve
net results.

Controlling quantity and gross margins can be summed
up as having two parts: the routine operations such as
reordering and the cost-retail control system and the action
taken as a result of interim reports. Both the buyer and
the merchandiser receive interim inventory reports that aid
in the evaluation of current results and facilitate decisions
regarding any changes in direction that might be needed.

It is the action taken as a result of these reports that
constitute the real control of this phase of grocery inven—

tories.

CHAPTER V

CONTROL OF VARIETY

Introduction

 

One of the difficult buying problems facing the food
chain operators today is the selection and control of var-
iety of merchandise needed in the stores today. ”Buying is
no longer a matter of just stocking the store with merchan-

" l The

dise and letting the customer take it or leave it.
wide variety of merchandise carried by the supermarket,
along with the phenomenal increase in the number of nev
items being introduced on the market compound the problem.
Twenty years ago the average food store carried only
a few hundred items. Today's supermarket carries thousands
of items. An actual supermarket opened in 195A with esti-
mated annual sales of two million dollars was initially
stocked with 1259 brands of items; a count which did not
include merchandise received in the store by drop shipment.
The food chain operator is faced with the dual prob-

lem of which new items to accept and which current items to

.__L

1Donald K. Beckley and John W. Ernest, Modern
Retailing (New York: The Gregg Publishing Co., 1950), p.113.

 

2M. M. Zimmerman, The Super Market (New York: McGraw-
Hill Book Co., Inc., 1955), pp. 207-212.

 

73
discontinue. Because of the many new items being presented
to the buyers, some chains are attempting to discontinue
items at the same rate that new items are accepted and
thereby maintain a consistent number of items carried in
the stores. Although an effort is made to maintain a
static position, the number of items carried by the food
chains is gradually increasing. According to a survey con-
ducted by McCall's magazine, the net increase of new items
in the stores studied over a two year period was fifteen

per cent.3

The importance of new items to future sales. In de-

 

termining new item policies and throughout the new item
buying procedure, the buyer needs to be cognizant of the
increasing importance of new items in the stores today.
The following facts substantiate the importance of these
new items:
1. Thirty-five per cent of General Foods sales
in its last fiscal year were from items intro-
duced since World War II.
2. Gerber Products Co. estimates that 40% of its

sales the last fiscal year were derived from
products developed in the last decade.

UL)

Campbell Soups, which offered only 29 products
in 19AO, has more than 80 products today.

 

3Survey cited in the article entitled, ”Slow Movers
Can Build Traffic,” Super Market Merchandising, February,

1957, p. 55.

u"Product Profusion," The Wall Street Journal, CLI,
No. 1 (January 2, 1958), 1—8.

 

 

7A
These figures are historical, however, Mr. A. C.
Nielsen, Jr., President of A. C. Nielsen Company states
that "if we continue the present pace of producing new pro-
ducts, then in 1O years from now more than 53% of grocery
product sales will come from products which are non-

n5

existent today. Mr. Nielsen is not the only one making
such predictions. Pillsbury Mills, Incorporated, expects to
be getting half of its profits in five to ten years from
products not yet on the market.6 Mr. Paul S. Willis,
president of GMA, predicted approximately the same situation
for manufacturers as a whole.7
Because manufacturers are attaching so much importance

to new items, it is unlikely that the number of items pre-
sented will decrease or that the decisions regarding which
items to buy will become easier. Mr. Robert A. Magowan,
President of Safeway Stores, summed the problem up as
follows:

Everyone with a product to sell derserves a hearing.

With the tremendous expansion of items of supply no

retailer can handle all lines. However, no food

managemen can afford to close their eyes to new
products.

 

5"Three Factors Held Necessary for New Products,"
Supermarket News, October 21, 1957, p. 57.

6!!

 

Product Profusion," loc. cit.

 

7Ibid.

 

8 o 1
”Safeway-Major Professor, Major Customer," Food
Processing, September, 1957, p. 30.

 

75
The effect that new products may have on old estab-
lished brands must be considered. An analysis by the A. C.
Nielsen Company showed that of the top brand leaders in 1940,
thirty—one per cent had lost their brand leadership by 1956.
Furthermore, seventy-seven per cent of those brands that
had lost leadership, and had lost leadership to new or

improved products.9

The number of items presented to food chains. There

 

have been several estimates, but no exact figures, regarding
the number of new items presented to buyers in the food in-
dustry each year. The National Association of Food Chains
estimates as many as 6030 items were offered to individual
buyers of food chains in 1956.13 Of this large number of
new items, a very small percentage is accepted by the chains.
A tabulation of the items presented to the Indiana-
polis division of The Kroger Co. during November 1957 shows
that a total of 233 items were presented to the buyers. Of
these, 87.2 per cent were screened out and rejected before
they reached the committee. Thirty items were presented to
the committee, of which eighteen were accepted; however,
this represents only 7.8 per cent of the total number of

items originally presented to the buyers. During the same

 

9"The Mid-Century of New, New Products,’
Merchandising, February, 1957, pp. 69-73.

Super Market

 

 

13
Ibid., p.69.

76

u.

period, twenty-three items were discontinued, none of which

. .. . 11
could be conSioereo seasonal items.

 

The possible affects of too much variety. There have
been several studies indicating that a wide variety of mer—
chandise may be costly and unnecessary. The "Foodtown
Study" revealed that in many product groupings a small
fraction of the total number of items carried account for
the majority of the sales for the group. The following

table is the results of their findings.

TABLE I

HOW IMPORTANT :S VARIETY OF ASSORTMENT

 

 

 

There can be no doubt that it is important to offer customers
a broad assortment of items from which to choose. It is poss-
ible, however, that assortments can be too broad, for in
virtually every product group, there are a certain few items
that do the bulk of the business.1

 

Product Group NO'OF -tems

 

 

 

 

Stocked DOLLAR
Canned Juices 86 YET l8 ZIEMS DO 53.2% of SALES
Cake and Cokkie
IAixes 53 " 8 n v1 5?,A% n ,,
Cigarettes 28 “ u H H 58.5% n v
Canned Pineapple 25 " 7 “ " 59-6% H u
Canned Tuna Fish g: " a n t 56.3% H u
Canned Peaches 23 " 6 H H 53_3% n n
Canned Corn 16 . “ a H n 56.1% n n
Canned Peas in " 3 H H 63.3% n n
Canned Tomatoes 14 ” 5 " H 65.8% n u
Canned Applesauce . ‘ .
and Apples ll " 2 " " 55.67 " n
Fruit Cocktail
and Fruit Salad 11 " 2 " H 56 3% n n
Canned Pears 11 ” 2 " ” 68 14 " "
LiQUid Detergents 6 ” g H n 73 as n H
1Source: "The Fo::t: o Stacy” (Reprintz, p 3
TIT} 3

,_)
("J
' J (J)
}_J
r4.)
()
r"
(4
I (.1
(D
i
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(l
a}
o
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)
:3
r
.o
C.
k
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(,‘
"(‘3
(14
(U
F‘f‘
(D
&)
F
(f
(D

\J

a

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.V‘ .
1

14'-

(f?
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J

77

This is not to say that all the items except those
that are fast movers should be eliminated. A certain number
of the slower moving products are needed to fill out the
product lines in order to offer the variety of merchandise
the consumers desire. The variety a particular chain
carries is dependent to a large extent on the particular
commodity group in question and the merchandising policies
of the chain. For example, the canned meat section does
not require as wide a variety in brands as the canned
vegetable and/or fruit sections. The merchandising policy
of a company may be to carry the unusual items as well as

the known items.

Organization for Buying New Products

 

While a few companies allow the buyers to be the sole
judge as to whether a new product should be accepted, the
buying committee is by far the most widely used system for
buying new products in the food chains.12 The number of
members and the composition of the committees are widely
varied. A short time ago it was not uncommon for all the
administrative personnel in a Kroger divisionsto be members
of the new item committee. Today most division utilize
only the grocery merchandiser and the buyers. According to

Super Market Merchandising, the typical committee for the

 

 

12"All About the Buying Committee," Super Market
Merchandising, February, 1957,-p. 65.

 

 

industry is composed of the following persons: buyer(s),
merchandising manager, ad manager, sales manager, and the
branch head.13

The strength of committee buying revolves around the
old adage that "two heads are better than one." This may
or may not be true. One grocery buyer cited the following
advantages for committee type buying: (1) helps to reduce
bias and prejudice on the part of the buyer, (2) relieves
the pressure on the buyer to accept or reject new items,
and (3’ the committee is not influenced directly by per-
suasive salesmen.lu

Lack of flexibility is one of the main criticisms of
the committee system. Quite often one to three weeks elapse
between the time an item is presented to buyers and the time
the item is approved by the committee. Another two or three
weeks may elapse before the item is available to the stores
due to the time required to order, receive, process, and
distribute the new item.

Since the buyers decide what items will be presented
to the committee, establish the general framework of cri-
teria for committee discussion of new items, do the research,

and make the presentations to the committee; the true effec-

tiveness of the committee system of buying can be challenged.

 

13ibid., p. 67.

1“Personal interview with Mr. John Commons, Grocery
Buyer, Indianapolis division, The Kroger Co., March 25,

1958.

79
The buying committee can be reduced to nothing more than a
rubber stamp type action when the buyer's actions are likely

to influence the decision of the committee members.

New Item Buying Procedure

 

Studies by students from various chains enrolled in
the curriculum in food distribution this year reveal that
there are very few, if any, significant differences in the

1

new item buying procedures from one chain to another. The
only significant difference was whether the final buying
decision was made by the individual buyer or a committee.
The procedure generally consists of the salesman's presen-
tation, a screening process by the buyer, committee presen-
tation, and committee action.

In addition to approving new items, the buying com-
mittee may review the sales record of various sections of
the grocery department for the purpose of discontinuing slow
moving items. In order to do this, the purchasing depart-
ment (or in some cases the billing department! tabulates the
sales of all items within a particular section such as
shortening or peaches. The committee reviews these sales
figures, discusses the need for discontinuing any items,
and votes as to the action needed. The objective is to

keep the variety consistent with company policy.

The salesman‘s presentation. Much of the buyer's time

 

in a food chain is spent interviewing salesmen. Most chains

83
have specific days and hours set aside for this purpose.
The presentation may vary from a simple statement of the
pertinent data by the salesman to a very elaborate presen-
tation with a fancy brochure and sales presentation.

R While most chains have some type of new item form
for both the buyer's and salesmen's use, the buyer usually
listens to the salesmen's presentation and jots down the
pertinent information on a pad of paper. He attaches these
notes to any printed material left by the salesman. The
buyer's objective is to get the information needed for
deciding to accept or reject the item. An example of the
information required on a new item form is shown on the
following sample form. This particular form is very com-

plete and detailed.

The screening process. The main concern of both the

 

buyer and the committee is to determine the ultimate sales

direction of a new item. The difficulty of this determin-

ation is revealed by the A. C. Nielsen studies of new item

sales performances. These performances can be divided into
four groups:

Group "A" Never get off the ground.

Group "B” Sales decline after initial introduction
and item continues to decline.

Group "C" Sales peak following introductory effort,
and subsequently level off.

Group "D" Spectacular growth over extended period
of time before leveling off.

It is group "B" that represents the greatest pitfall

to the buyer or committee.15

 

15A. C. Nielsen, Jr., "How Long Should You Live With A
New Product?," Super Market Merchandising, February,l957, p.

73.

 

81

NEW ITEM RECORD

 

BRAND NAME OF PRODUCT: DATE SUBMITTED:

 

DESCRIPTION:

 

ANUFACTURER'S NAME: ADDRESS:

 

 

MANUFACTURER'S DUN AND BRADSTREET RATING:

 

 

 

 

 

 

 

 

 

 

 

PRODUCT'S LIABILITY POLICY NO.: AMOUNT CARRIEDg____
PRESENTED BY: REPRESENTING:

CONTAINER: __s:zE: WEIGHT:

PACKING PER CASE: WEIGHT PER CASE:

COST PER CASE: PER DOZEN: TRADE DISCOUNT ____
NET COST EACH: MARKUP: RETAIL PRICE:
PROFIT:_____F.O.B._____IREIJHT:____SWELL ALLOW:__CASH DISC:_
LABEL ALLOW.: INTRODUCTORY OFFER:

 

 

DISTRIBUTION ALLOWANCE:

 

— ——-w—

PROMOTION ALLOWANCE: PERIOD:

 

 

ADVERTISING ALLOWANCE: NO. OF FEATURES:

 

 

GUARANTEED AGAINST PRICE DECLINE: PERIOD:

 

JUARANTEED SALE: PERIOD:

 

 

ARE GOODS GUARANTEED TO CONFORM TO FEDERAL FOOD & DRUG

 

 

 

STANDARDS:
START OF AD CAMPAIGN: COUPONS:_
RADIO: TELEVISION: NEWSPAPERS:

 

 

DISTRIBUTION OBTAINED TO DATE:

 

IS THE PRODUCT AND ANY DEALS, PROMOTIONS, OR ADVERTISING
ALLOWANCES IN CONNECTION THEREWITH, OFFERED TO COMPETING

COMPANIES ON PROPORTIONATELY SAME TERMS:

 

APPROVED: BUYER‘S COMMENTS:

Source: "60 Questions a Chain Buyer Asks About New Productsfl
Food_Business, February, 1956, p. 11.

 

1

 

82

Because of the large number of items presented to the

chain,

buyers screen the items presented. The committee

receives only those selected as the most promising. This

screening is generally based on the need for the item and

the buyer's experience. In making his decision as to

whether an item should be presented to the committee, the

buyer may have a set of general criteria on which to base

his decision. Those used by the Indianapolis division of

The Kroger Co. are represented by the following pertinent

points:

1.

Sales possibilities. Have we had experience with

 

this item before? What like items do we carry?
What are the manufacturer's promotion plans for
the item? How effective have this manufacturer's
promotions been in the past?

Distribution in the market. What competitors are

 

stocking the item in thiSTmarket? What kind of
distribution does the item have in other markets?

Duplication of advertised brands. Is this product
a duplication of a highly successful nationally
advertised product? If so, how much promotional
support will the product have? Will this support
be of long time duration?

 

Sales and profit potential to space re uired. The

 

space required to display an item or group of items
in the stores is considered. The sales possibi-
lities of the item may be good, but in relation to
the space required to display the item and the
expected gross profit return, the company may
better utilize the space to display other items.16

In the screening process, the above listed criteria

are the points generally considered in addition to the per-

tinent data listed on the new item form. Other criteria may

 

a
l”Personal interview with Mr. Commons.

83
on occasion be a causal factor in the elimination of items.
For example, on non-food items for special promotion, the

17 -The cost of the item

guaranteed sale may be important.
may be important when considering an addition to the ex-
isting line of vegetables or fruits carried.

In addition to these criteria, it may be wise for the
buyer to consider the manufacturer's reasons for introducing
new items. Two that are often listed are: (l) to meet an
old demand more effectively or to meet a new demand, and
(2) to compensate for a shift in the demand for products
currently being manufactured.18 Because only a minor per—
centage of the brand leaders in 1950 lost their leadership
by 1956 as a result of being out promoted, indications are
that when a new item is a success some Similar item cur-
rently being carried will probably decline in sales.19

Special allowances very seldom influence the decision
to accept or reject new items. Buyers are generally more
interested in the extended sales and profit potential of an

item rather than the short-run effects. The buyer is con-

stantly aware that profit is made only if the merchandise

 

l7Guaranteed sale refers to the right of the retailer
to return unsold merchandise that is in salable condition.

18Percival White and Matilda White, Development and
Marketing of New Products (New York: Market Research Com-

,—

pany of AmEFica, 19A8), p. 3.

 

 

 

I

19”The Mid—Century of New, New Products,‘ loc. cit.

is rung through the registers at the stores. Furthermore,
it costs money to accept slow movers that will eventually

have to be discontinued.

Presentation to the committee. After new items have

 

been screened, those remaining are presented to the buying
committee. In addition to the information supplied by the
salesman, the buyer supplies the committee with supplemental
information which may influence the committee's decision.
This information may include such things as a sales and
profit analysis of items currently carried, a summary of
general market conditions, or a short resume of the total
market potential for the particular type item being con-
sidered.

When presenting items to the committee, the buyer uses
much the same type presentation that the salesman used.
There are, however, two significant differences: the buyer
does not particularly express enthusiasm and the buyer has
generally made his own decision whether the item should be
accepted or rejected. This decision may affect his presen-

tation by affecting the forcefulness of the presentation.

Committee action. Basically, the buying committee

 

decides whether to accept or reject new items and which
items currently being carried should be discontinued. On
occasion the committee may decide to wait and see if demand

for the item develops, approve the item for certain stores

85
only, decide to sales test the item in specific stores. If
the committee decides to wait and see or sales test an item,
they will discuss the item again at a later date and either
accept or reject the item based on the additional infor-
mation obtained.

The stores are notified that the item is available
.and a standard initial distribution of the item is made.
Very few companies allow the store managers the discretion
of accepting or rejecting new items. The distribution of
promotional items may be decided by the committee at the
same time the item is accepted.

As noted earlier, most chains attempt to discontinue
items as new items are accepted. The ever-widening variety
of merchandise carried is evidence, however, that more items
have been added than the number dropped from the lines.

Quite often the supplemental information furnished
the committee for new items contains a sales analysis of
similar items stocked by the chain. Under this system the
current items are being reviewed for possible discontinu-
ence while the new item is being discussed for approval.

In addition to discontinuing items in this manner,
many companies periodically review the sales performance
of all items by groups for the specific purpose of discon-
tinuing the slow movers. On occasion a buyer may decide
while reviewing stock cards for reorders that a particular

item should be discontinued. If so, he may make a sales

86
analysis of the similar items and present the data to the
committee for approval. If an item is to be dropped from
the line, the buyer marks the card so the item is not re-
ordered and either allows the item to run out-of-stock or

forces distribution of the remaining stock.

Follow-up of committee action. After a certain action

 

is decided upon by the committee, the purchasing department
takes appropriate action. If an item has been accepted, an
order is placed with the vendor, the new item information
processed through the billing department, and the initial
distribution sent to the stores.
If any of the alternative actions are taken, i.e.

wait and see, sales test, et cetera, the purchasing depart-
ment advises the committee of any changes and may recommend

the final action that should be taken.

Summary and Conclusions

 

The control of variety of merchandise represents two
problems to the food chains: which new items should be
accepted, and which old items should be discontinued.
Although there is an attempt to discontinue items at the
same rate new items are bought, there has been a steady
increase in the number of items stocked by the food chains.
This increasing number of items poses two problems for the

buyer: an increased inventment in inventory with a possible

resultant decrease in over—all stock turns, and an

87
aggravation of an already acute space problem in the stores.
Although there are no figures to prove it, it seems logical
that as the retailer increases variety, the amount of stock
needed to maintain an inventory will increase. Therefore,
the number of stock turns may decrease.

Regardless of the problems involved, the importance
of new items to future sales and profits cannot be denied.
Both past records and future predictions indicate that the
buyer cannot afford to disregard new items. Furthermore,
whether new items are accepted or rejected by a particular
chain, the sales potential of current brand leaders may be
affected.

Relatively few items in each product group generally
do the bulk of the business; however, a certain amount of
variety must be offered in order to meet customer demands
effectively. Merchandising policies will generally deter-
mine how much variety will be carried.

Although the committee system for the selection of
new items is widely used the buyer still plays the most
critical role. Because the buyer screens new items and
makes the presentations to the committee, he is in a posi-
tion to influence committee decisions.

Except for the use of a single buyer instead of com-
mittee in some cases, the new item buying procedure is
about the same in all companies. However, specific criteria

for buying will vary from one company to another. Even

88
though a general set of criteria is used, the relative im-
portance of each criterion will vary according to the item
and the particular situation. Each new item must be viewed
in perspective because no two items have the same identical
advantages to offer the chain.

There is no set formula for determining how much
variety should be carried. If sales and profits were the
only factors involved, the problem would be relatively
simple. Many slower moving items must be carried because
they do create a certain amount of traffic; unfortunately,

the buyer is unable to know exactly where the point of

diminishing returns in variety begins.

CHAPTER VI
SUMMARY AND CONCLUSIONS

At the operating division level, inventory control
is defined as: Any action taken by management, based on
policy, to coordinate and correlate all activities con-
cerning inventories in order to achieve the company's
objectives. This action can be divided into two broad
spheres: accounting action and merchandising action.

Because there is a direct relationship of sales,
gross margins, retail shrink, snd stock turns to return
on inventment; there is little question that inventory
control is one of the most important functions performed
by management in the food chains.

Policy can be pictured as the hub in the wheel of
control. Through policy a company provides the plan that
is adopted and lays down the principles to be followed in
achieving the plan. The over-all objectives of the food
chains with regard,to stock turnover, quality, variety,
gross margins, and physical safeguarding measures are a
part of company policy. I

At the operating division level, policies are stated
in broad terms that allow considerable freedom for discre-

tionary action on the part of the operating executives.

93
This freedom of action is necessary in order that the op—
posing alternatives, quantity versus turnover, can be
resolved to the best advantage at the given time. The
ultimate objective to maximize return on investment will
be the primary consideration in selecting alternative
actions.

Organizational structure has an effect on grocery
inventory control. This has come about in part because
there is a division of responsibility for control. Recently
there has been an effort on the part of some companies to
combine some of these divisions of responsibility under as
few persons as possible. Under this organizational struc-
ture the purchasing department is subordinated to the
merchandising function and the merchandiser becomes respon-
sible for both buying and selling.

Organizational structure has also been altered to
extend closer control over the stores. At the store level
it is difficult to distinguish between the operation de-
partment and the merchandising department responsibilities
for inventory control. The operations department of the
organization is responsible for the actual operations in
the stores, including sales and profits. Because operating
budgets are built around expected merchandising results,
the operations department maintains more than a passive

interest in merchandising plans and results.

91

The zone-type organizational structure affords the
merchandiser an opportunity to exercise closer control
over the stores than can be achieved through the district
manager type organizational structure. The constant con-
tact with stores maintained by the field sales managers
aids in effecting better follow through on such merchan-
dising plans as space allocation, romotion of seasonal
items, regular sales plans, and moving distress merchandise.
In addition, the merchandiser gains first hand knowledge of
store conditions through reports received from the field
sales managers.

The billing system is the basic information source
for quantity control purposes and, consequently, the basis
of many important merchandising and buying reports. In
order to insure accuracy in the system, the basic infor-
mation used in the system which is costs, retails, and
quantities of merchandise must be controlled.

The ultimate requirements of a billing system to
print invoices for thestores, maintain a perpetual inventory
of warehouse stocks, and to summarize records and reports
needed by the buyers and merchandiser are not changed by
the methods utilized by the food chain.

The tub-file method of billing is not as flexible for
rendering control reports as the batch billing system.
RAMAC, the latest advancement in this field is claimed to

be capable of rendering instantaneous information concerning

92
inventory status. Although indications are that the use
of RAMAC will allow reductions in total inventory levels,
positive conclusions cannot yet be stated. Basically the
frequency of reports and ease of obtaining reports repre-
sents the main difference between billing systems.

A screened or non—screened technique can be used with
either the tub-file or the batch billing system. While the
use of the non-screened technique eliminates scratching
merchandise that is physically present in the warehouse,
the true physical position is more difficult to ascertain
and the possibility for errors is increased.

From the billing system various reports are derived
to aid the buyers and merchandisers in the control of
quantity of inventory on hand and the gross margins on
merchandise moving out of the distribution center. The
buyer's inventory, out-of-stock reports, and billing sum-
maries of sales and profits are the principal reports used
for these purposes. In addition, the billing department
can produce nearly any specific type of report that manage-
ment may require. In requesting special reports from the
billing department, management must consider the value of
the reports in view of the time and cost required to produce
the desired information. In addition to the machine billing
reports, there are special accounting reports that are pre-
pared for purposes of analyzing buying and merchandising

results.

93

Using manual methods, the buyer audits the stock
record cards each week to determine the needs for merchan-
dise. High and low levels may or may not be used, according
to the desires of the buyers. The principal concern in
reordering merchandise is to: (l) insure that enough mer-
chandise is ordered each time to entitle the company to a
predetermined quantity discount, (2) insure that stocks are
properly balanced in order that one item generally ordered
in a carload does not run short before all items run short,
and (3) maximize sales efficiency by having items available
when needed and replaced before out-of-stock occur.

The reorder function is important, because it is at
this point that the buyer's action will influence the turn-
over rate, the cost of merchandise, and possibly sales
volume. The reordering process has remained a manual pro-
cedure in most of the food chains. Several reasons can be
advanced for not inaugurating more routine or automatic
type reorder systems. They can be summed up as:

l. Reluctance on the part of buyers to relinquish
_ any part of the buying procedure.

2. Movement of merchandise is irregular.
3. Time-lag in getting information to the buyers.

U. Refusal to accept a certain percentage of
out—of-stocks as necessary and desirable.

There has been a tendency for the food chains to
stress the exceptional situations as reasons for not

accepting routine systems for reordering merchandise.

9A
Buyers utilize trends in movement and average movement
figures as a basis for calculating reorder requirements,
yet they refuse to acknowledge that these same trends and
averages can be used to establish routine and/or automatic
systems.

The controversy arises over the frequency which
average movement should be calculated and the purpose of
routine systems. Most buyers believe that the status of
inventory levels and average movements should be reviewed
weekly whereas the writer believes that longer periods such
as six to eight weeks will suffice.

Routine systems probably cannot be successfully
devised for every manufacturer's line of merchandise; how—
ever, routine systems can be used for manufacturer's lines
such as Gerber Baby Foods, Maxwell House Coffee, and Cambell
Soups. The purpose of a routine system is not to replace
the human factor in the reorder process, but to supplement
it. The use of routine systems cannot only aid in improving
inventory results; but can also allow the buyer more time
to devote to other aspects of buying.

The merchandiser utilizes a cost and retail relation-
ship control system to insure that the desired gross profit
on merchandise moving out of the warehouse is achieved. The
sales and profit analysis and grocery merchandising results
report serve to indicate if a particular commodity grouping

needs detailed analysis to improve gross profit results.

95

The control of variety of merchandise poses two prob—
lems for the food chains: which new items should be
accepted, and which old items should be discontinued. The
steady increase in the number of items stocked by the food
chains tends to increase the total inventory investment
necessary, with a possible resultant decrease of stock
turnover rates.

A wide variety of merchandise is often considered
an advantage in the food industry; however, there is
evidence that such is not the case in all instances. One
of the major findings of the "Foodtown Study" was that a
relatively few items in each product group account for the
majority of the sales for the entire group. This indicates
that variety for variety‘s sake may be costly. However, a
certain amount of variety must be offered in order to meet
customer demands effectively.

Regardless of the problems involved, the importance
of new items to future sales and profits cannot be denied.
Both past records and future predictions indicate that the
buyer cannot afford to disregard new items. When consid-
ering the acceptance of a new item, the main concern of
both the buyer and the committee is to determine the ulti-
mate sales direction of the new item and the possible

effects the item may have on items that are currently

carried.

The organization and procedure for buying new items
is about the same in all food chains. Very few organi-
zations vest this authority in the hands of a single buyer.
Committee action is the most common method for approving
new items and discontinuing old items.

Since the buyers decide what items will be presented
to the committee, establish the general framework of
criteria for committee discussions of new items, do the
research, and make the presentations to the committee; the
true effectiveness of the committee system of buying can
be challenged.

Because the ultimate objective of inventory control
is to maximize return on investment, management must con-
trol the major components of this factor which are stock
turnover and gross margins. Since inventory levels are
closely related to stock turnover, management has concen-
trated on controlling this factor; however, other factors
such as variety of assortment are also being closely con—
trolled.

inventory controI cannot be viewed as a static system.
Instead, there is a constant state of flux. Management
is constantly faced with alternative actions. Part of the
control system provides management with_reports with which
to evaluate these various alternatives and aid in making
decisions. Other reports serve to measure the results of

the decisions that were made. As a result of interim

reports, management may decide to make changes to improve
operating results and achieve the ultimate objective of
maximum return on investment. 'In the final analysis, it

is the action taken by management that constitutes control.
Effective inventory control is dependent on timely infor—
mation translated into action as a result of sound judgment

on the part of management.

BIBL EOGEAPHY

BIBLIOGRAPHY

Books

 

Anderson, David R. Practical Controllership. Chicago:
Richard D. Irwin, Inc., 1951

 

Baker, Clare Wright, Ira K. Anderson, and J. Donald
Butterworth. Principles of Retailing. New York:
McGraw- Hill Book Company, Inc. 1955*

 

 

Beckley, Donald K. and John W. Ernest. Modern Retailing.
New Y rk: The Gregg Publishing Company, 1950.

 

Bell, Hermon Fiske. Retail Merchandise Accounting. New
York: The Ronald Press Co., 1956.

 

 

Brisco, Norris A. Principles of Retailing. New York:
Prentice-Hall, Inc., 1929.

 

 

Davis, Ralph Currier. Industrial Organization and Manage-
ment. New York: Harper & Brothers, 1933.

 

 

The Fundamentals of Top Management. New York:
Harper & Brothers, 1951.

 

 

 

 

Duncan, Delbert G. and Charles R. Phillips. Retailing
Principles and Methods. Chicago: Richard D. Irwin,
Inc., 1955.

 

 

Glover, John G. Fundamentals of Professional Management.
New York: Republic Book Co. , Inc. 195 L

 

 

Lewis, Howard Thompson and Wilber B. England. Procurement,
Principles and Cases. Homewood: Richard D. Irwin,
1957.

 

 

N.A.P.A. Handbook of Purchasing Policies and Procedures.

New York: N.ATP.A., 1939.

 

Ritchie, William E. Production and Inventory Control.
New York: The Ronald Press Co., 1951.

 

Thomas, William E., Jr. (ed.). Readings in Cost Accounting,

 

Budgeting, and Control. CincinnatiT_ South-Western
Publishing Co., 1955

 

 

133

White, Percival and Matilda White. Development and
Marketing of New Products. New York: Market Research
Company of America, 1948.

 

 

 

Whitin, Thomas M. The Theory of Inventory Management.
Princeton: Princeton University Press, 1957.

 

 

 

Zimmerman, M. M. The Super Market. New York: McGraw-Hill
Book Co., Inc., 1955.

 

Periodicals

 

Anon. "All About the Buying Committee,” Super Market
Merchandising, February, 1957, pp. oH-oV.

 

 

H

“Communications the Fastest Way, Super Market
Merchandising, January, 1957, pp. lOA-lOB.

 

 

 

. "Electronic Ordering Starts in the Store,"
Chain Store Age, May, 1958, pp. 72-73.

 

 

"Out-of—stocks = Out-of-sales,"

Merchandising, July, 1953, pp. u3-U9.

 

 

Super Market

 

"Publix Rides the National Band—Wagon,”
Super Market Merchandising, October, 1957, pp. 69-85.

 

 

"Safeway-~Major Processor, Major Customer,"
Food Processing, September, L957, pp. 29-33.

 

 

'"Ten Trends Noted by Food Retailers in 1957,"
Progressive Grocer, April, 1958, p. F.12.

 

 

"The Foodtown Study," Progressive Grocer,

1955. [Reprint] Part II, pp. 1-12.

 

 

"The Merchandiser. . . Wizard of Promotion,"
Super Market Merchandising, January, 1958, pp. AA-6A.

 

 

. "The Mid-Century of New, New Products,"
Super Market Merchandising, February, 1957, pp. 69-77.

 

 

"The Super Value Study,‘ Progressive Grocer,

 

 

January, 1958 to date.

'"60 Questions A Chain Buyer Asks About New
Products," Food Business, February, 1956, p. 11.

 

 

’"Slow Movers Can Build Traffic," Super Market
Merchandising, February, 1957, p. 55.

 

 

 

McLean, John G. "Better Reports for Better Control,”
Harvard Business Review, Vol. 35, No. 3 (May-June,

19575, 95-IOA.

Nielsen, A. C., Jr. ”How Long Should You Live With A New
Product,” Super Market Merchandising, Feb.,1957,pp.72-7A.

 

 

 

Simpson, Dan. "Merchandising Through the Organization,"
Super Market Merchandising, January, 1958, pp. 53—f5.

 

Stern, Gardner H., Jr. "Absolute Minimum Stockroom Inven-
tories Is Our Answer," Super Market Merchandising,
March, 1958, pp.6A-65.

 

 

Miscellaneous Material

 

"An Analysis of 'Batch' vs. 'Tub—File' Billing in the

Grocery Distribution Industry.” New Yor : IBM Corp.,
n.d.
”Card Order Plan With the IBM Card Order Converter." New

York: IBM Corp., 1955.

"IBM Accounting, Warehousing Control for the Grocery
Industry.” New York: IBM Corp., 1949.

"RAMAC for the Chain and Wholesale Industry, Featuring
In-Line Data Processing." New York: IBM Corp., n.d.

”Warehouse Inventory Control for Chain Grocery Companies."
New York: IBM Corp., n.d.

Personal Interviews

 

Mr. Albert E. Rain, Director of Grocery Merchandising, The
Kroger Co.

Mr. Herbert V. List, Manager, Retail Store Accounting, The
Kroger Co.

Mr. John Commons, Grocery Buyer, Indianapolis division, The
Kroger Co.

Mr. Orland Parsons, Tabulating Supervisor, Indianapolis
division, The Kroger Co.

Mr. E. C. Shull, Comptroller, Columbus division, The Kroger
Co.

Mr. L. C. Woerner, Grocery Buyer, Columbus division, The
Kroger Co.

Theses

Brand, E. A., et a1. Functional Analysis of Food Distri-
bution. ”East Lansing, Michigan: Campus Book Store,
T958. [Three Master's theses from Department of
General Business, Curriculum in Food Distribution.]

 

 

Berry, Milton Lawrence. HPilferage Control Within A Retail
Food Chain Supermarket." Unpublished Master's thesis,
Michigan State University, East Lansing, Michigan,
1953.

Joyner, Woodrow Harrison. ”Inventory Control In the Retail
Operation of A Grocery Chain Store." Unpublished
Master's thesis, Michigan State'University, East
Lansing, Michigan, 1953.

Tuppeny, Frank Wordley. "Inventory Control Techniques
for A Grocery Warehouse." Unpublished Master's thesis,
Michigan State University, East Lansing, Michigan,

1952.
Wasser, Stephen A. "A Study of Selected Tabulating Machine
Procedures In the Chain Supermarket Field." Unpub-

lished Master's thesis, Michigan State UUiversity,
East Lansing, Michigan, 1956.

Personal Letter

 

Personal letter from Mr. F. J. Kocar, comptroller, St. Louis
division, The Kroger Co., May 2, 1958.

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