Understanding Efficiency

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Operational Level 4 - Understanding Efficiency

For most stores, efficiency is an easy operational level to understand and achieve. But it can evoke anxious feelings at first: think of a pilot (or driver) letting go of the wheel after engaging autopilot for the first time. Achieving Level 4 - Efficiency is like "taking your hands off the wheel" and trusting your accuracy processes to stay the course. If your store is already on Level 4 and its accuracy processes (Shooting Outs, Variance Research, Accuracy Cadence) are in place, then it's time to give it a try. Remember, you will be continuously monitoring your accuracy metrics with the Inventory Accuracy Storecard and you will be taking care of impactful variances through your Count Sheets and Shooting Outs processes. It's time to join the hundreds of stores just like yours who spend less time counting inventory!

To understand how efficiency is computed we need to learn about its two underlying percentages: SKUs Counted and SKUs Changed.

1. SKUs Counted and SKUs Changed percentages

2. Why are the percentage goals set where they are?

Implementing focused counting, variance research, and routine accuracy processes in your store are necessary to achieve and sustain quantity-on-hand accuracy, dollar accuracy and shrink control. Widespread location-based counting can disrupt these efforts by introducing too much trivial, and difficult-to-research variance noise.

The Problem with counting too much - introduces too much noise which makes variance research hard, and diverts labor from root accuracy processes.

The Problem with changing too much - indicates an accuracy leak. a person or process is causing inaccuracy, variance research (not more counting) will find and help resolve the issue.

With over a decade of experience working with thousands of stores (and analyzing billions of data records), we have yet to find a correlation between how often a store counts inventory and its corresponding IRA. In fact, there is a slight negative correlation between how abundantly a store counts and its corresponding IRA.

Why counting alone doesn't work

SKUs Counted - 40%
Your goal is to maintain accuracy while counting 40% or less of your inventory. 40% allows for Count Sheet processing, weekly Shooting Outs, Back Stock Purges, and assortment counting after a reset. Stores Showing a SKUs Counted metric greater than 40% have an opportunity to reduce counting labor, and if the store's IRA is below 80% then the labor savings should be put into variance research and accuracy cadence processes. Believe it or not, 40% is a high threshold and many of Mango's most accurate stores count significantly less.

SKUs Changed - 15%
In a busy store, things happen: people steal things, cashiers mess up, your vendors have shortages and overages, and even your best inventory counters mess up an occasional count. The table below is an example of quantity-on-hand error introduction in a store.

Error Type	Description	SKUs per day	per week	per month	per year	% at 26,000 SKUs
Theft	On average, 2 SKUs are stolen per day	2	14	60	720	2.7%
Cashiering	5 errors per day	5	35	150	1800	6.9%
Vendor Errors	Vendor overages/shortages not caught	2	14	60	720	2.7%
Counting Errors		2	14	60	720	2.7%
Total		11	77	330	3960	15%

A typical store with good error control might see around 4,000 errors introduced per year or about 15% of its inventory SKUs. Note: your 15% SKUs Counted metric looks at the number of SKUs during the year which receive at least one variance. Errors corrected within the same month are not counted and SKUs with multiple variances are only counted once. Therefore, the 15% threshold is more generuous than it seems.

Stores changing over 15% of their SKUs on an annual basis are seeing a larger than normal rate of error intrusion. Their goal (with variance research) is to find the person or process introducing these errors, and resolve it at the root. Once resolved, accuracy will climb and variances will be reduced, which allows for more time to deveote to research. This is the upward spirial of inventory accuracy!

Upward Spiral - fix errors at the root -> subsequent variances go down -> accuracy goes up -> more time to research variances! (high efficiency)

Downward Spiral - root variance cause not found -> more abundant counts to "fix QOH" mask error intrusion -> overwhelming number of variances -> not nearly enough time to research and resolve root causes. (low efficiency)

3. Efficiency - putting it all together

Now that we know about the two underlying Efficiency gauges (SKUs Counted and SKUs Changed), let's see how they work together to make up your Level 4 - Efficiency metric.

SKUs Counted	Efficiency	SKUs Changed	Efficiency
35% or less	100%	10% or less	100%
36%	99%	11%	99%
37%	98%	12%	98%
38%	97%	13%	97%
39%	96%	14%	96%
40%	95%	15%	95%
41%	94%	16%	94%
42%	93%	17%	93%
and so on...		and so on...

The chart above shows 100% Efficiency for SKUs Counted starting at 35% and then going down as more SKUs are counted, where the maximum SKUs Counted percentage is 40% to pass Level 4 (95% Efficiency). SKUs Changed starts at 10% for 100% Efficiency and then goes down as more SKUs are changed, where the maximum SKUs Changed percentage is 15% to pass Level 4 (95% Efficiency). The lowest Efficiency percentage for the SKUs Counted and SKUs Changed percentages will be your Level 4 - Efficiency metric.

For example, if your SKUs Counted percentage is 35% (100% Efficiency) but your SKUs Changed was 17% (93%) then your Level 4 - Efficiency would be 93%.

My bank or auditor makes me perform an annual count

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