how2itg01.htm

Handling Defective Merchandise at the sales counter

Scenario: A customer buys a hat only to discover fifteen minutes later that it is defective because the headband size adjustment clasp doesn’t hold. He returns to the store, presents the defective hat to the clerk, who gives him another hat. What does the clerk do with the second transaction? The clerk, thinking logically, knows that the second hat must come out of inventory and decides to sell it at 100% discount, since no money exchanged hands. What the clerk doesn’t know is that by ringing up the second hat in this fashion, he’s killed your touch system’s calculated profit margin! And if you use a mill river type of pricing structure, you’re really in trouble!

Look at the effect this has based on different numbers of units sold out of a dozen, using a mill river pricing scheme. Let’s assume a stock of 12 hats, each hat costs $10.00 and your mill river margin is 15% over cost, making the mill river selling price $11.76 per hat. In this example the first row shows 6 hats at the normal mill river price. The second row shows what happens if a clerk rings up the seventh hat at 100% discount:

Now let’s imagine a near sell-through of the entire dozen hats, using the same pricing structure. The only difference is that 11 of the dozen were sold at the normal mill river price, and the 12^th hat was rung up at 100% discount:

In this example, by ringing up only one item out of the dozen at 100% discount (the same as giving it away or by theft or shrinkage), the overall profit margin decreases by more than 50%. Obviously, ringing up the sale at 100% discount to replace a customer’s defective merchandise is the wrong way to do it!

Similarly, when using a mill river pricing system, selling merchandise at less then mill river prices (as you might do with a typical blow-out sale) will result in reducing the overall profit margin from the expected mill river percentage to something less than that, even with a total sell-through of the merchandise. It’s important for management and owners to understand the effects of special sales, shrinkage and procedural errors when evaluating the success of a discount selling program (which mill river is).

In a simplistic sense, members generally understand a mill river program to use a set profit percentage, so therefore, at the end of the year (in their way of thinking), the margin ought to be that set percentage. When the percentage turns out to be less than expected, they’re confused. What members generally do not understand is how special sales and procedural errors can also affect the profit margin. Without this understanding, they have no alternative but to assume that somebody is stealing the merchandise, and at the top of their list of suspects lie the names of the staff.

InfoTouch customers have several ways to handle defective merchandise without harming the profit margin, and it’s important to select the manner which is easiest for your staff to use at your facility, especially if the members own the merchandise.

Procedures - Handling Defective Merchandise

In each case below, when the customer returns with the defective merchandise, simply give the customer a new item replace it and do not ring up the replacement sale at all. Then be sure to attach a note to the defective item to note the defect and later return it to the manufacturer for credit or replacement.

Method 1 - The RECEIVE INVENTORY method (you may be using this now)

1. Go to INVENTORY, ADJUST INVENTORY QUANTITIES, RECEIVE INVENTORY, and "receive" -1 quantity of the item which is defective. This reduces your inventory.
1. You return the defective item for credit. If the manufacturer replaces the item instead of issuing a credit, it’s a simple matter to use the ADD INVENTORY function to add the item back into inventory when it comes.
2. While the PHYSICAL INVENTORY feature can be used to modify inventory quantities, it should not be used here since it does not recalculate your inventory costs the way that receive inventory does.

Method 2 - The INVENTORY TRANSFER method

1. Go to the Register Manager Menu and "TRANSFER OUT" the quantity of the item which is defective. When asked for the destination, type DEFECTIVE. This reduces your inventory.
1. You return the defective item for credit. If the manufacturer replaces the item instead of issuing a credit, it’s a simple matter to use the "TRANSFER IN" function to add the item back into inventory when it comes.

Method 3 - The ADJUST INVENTORY method (InfoTouch version 7.5 or later)

1. Go to INVENTORY, ADJUST INVENTORY QUANTITIES, INVENTORY ADJUSTMENT, and enter -1 quantity of the item which is defective. Then type the reason: DEFECTIVE.
1. You return the defective item for credit. If the manufacturer replaces the item instead of issuing a credit, it’s a simple matter to use the INVENTORY ADJUSTMENT function again to add the item back into inventory when it comes.

Method 4 - The TRANSFER AND RECEIVE INVENTORY method (InfoTouch version 7.5 or later)

1. Go to the Register Manager Menu, TRANSFER AND RECEIVE, then RETURN INVENTORY. This puts InfoTouch into the return inventory mode – now ring up the item which is defective. When asked for the destination, type DEFECTIVE. This reduces your inventory.
1. You return the defective item for credit. If the manufacturer replaces the item instead of issuing a credit, it’s a simple matter to use the manager menu’s RECEIVE INVENTORY function to add the item back into inventory when it comes.

Why Creating a "Defective Inventory" customer to charge defective inventory against doesn’t work

1. You’re inflating your sales figures. You’re not "selling" the replacement item. You sold the first item, but the replacement item wasn’t a sale, and wasn’t an "exchange sale" either. It was a replacement.
1. You’re affecting your cost of goods sold if you "sell" a replacement item. The desired result is to get the defective item out of inventory without affecting either sales or costs. This is an inventory function, not a sales function.

Going Forward - What To Do Now That Your Margins Are Wacky

You need to be able to explain to the powers that be how your margins got to where they are. You also need to know how to get accurate margins from here on. Here are some helpful tips to understanding how the Touch system works and how to get accurate information.

1. Don’t cut corners. Sure, there are lots of ways to make things faster, such as going into the inventory editor (INVENTORY - CREATE/CHANGE module) and changing quantities, costs, prices, etc., but when you do this for existing inventory, the system cannot maintain an audit trail to help you figure out what’s happening. A good guideline to follow is: Never use the inventory editor to change the cost or quantities of items in stock. If you need to modify these items, use the other modules instead: adjust inventory quantities, or inside the register’s manager menu, the transfer in/transfer out or return/receive inventory modes.
2. Print out a Department Profit report every day and compare it against the previous day’s report. If a department has a drastic change, find out why. Except for startup systems for the first month or so, it’s fairly normal for the margins to change slightly, but normally in fractions of a percent, not in whole percentage points. (Note: a "blow-out sale" will likely change margins more than normal!)
3. Without fail, perform a monthly close out after the daily close out on the last day of the month. This wipes the slate clean for the daily, weekly and monthly margin totals and allows you to analyze your business more accurately than if you close out only once a year. If your profit margins are skewed now, it’s because of transactions which have been rung prior to this time. Starting with zeroed monthly totals at least allows you fix your operational procedures now and track their effect going forward from this point. Then use monthly margin totals instead of the year to date totals, since the monthly totals will reflect the current sales, not sales which are skewed by prior transactions. By averaging the monthly margin totals going forward (which you’ll have to do manually) you’ll be able to develop a composite margin for the bulk of your year’s sales. Write off your year to date margin totals because they’re bogus.
4. Close out at the end of the year. Believe it or not, some people forget this procedure until they’re well into the near year’s sales. Then it’s too late.
5. If you run a "clearance sale" in the off-season whereby you sell merchandise at really low prices, this will obviously skew your yearly sales totals. To eliminate this problem, after the sale is over, perform a yearly close out. Before you jump to this idea however, be aware that if you sell any current year inventory at non-discounted prices during the clearance sale, you’ll be skewing your clearance sale margins and eventually not reflecting your current year’s sales totals accurately, either. The bottom line is that if you run the clearance sale, remove current inventory from the sales floor so it can’t be accidentally sold during the clearance sale. Then after the sale when you do the yearly close out, you’ll not only have a good representation of the margins you made (lost?) during the sale, but accurate current year sales totals and margins as well.
6. If you write off old non-sellable inventory at the end of the year, you should do so before performing an end of year close out. To remove these items from inventory, use one of the methods described earlier for defective merchandise. If you use the "receive inventory" method, you can also use the received inventory audit trail report to generate a listing of the inventory you’re writing off. Afterward, you can delete it from your inventory database and finally, run the yearly close out.

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