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.

• Efficiency is derived by comparing two underlying metrics (SKUs Counted and SKUs Changed) to established benchmarks. These metrics can be found on your Inventory Accuracy Scorecard (middle section, top right) and detailed in your Shrink & Efficiency Trend page (we will cover these chart pages in the next training section monitoring efficiency).
  
  SKUs Counted Percentage - Goal 40% or less
  SKUs Counted measures the percentage of countable (active, non-excluded) SKUs that were counted over the past year. For example, if every countable SKU in your inventory file received a count within the last 12 months, then your SKUs Counted percentage would be 100%. With Mango, your goal is to count 40% (4 out of 10 SKUs) or less of your inventory SKUs each year. 

  SKUs Changed Percentage - Goal 15% or less
  SKUs Changed measures the percentage of countable (active, non-excluded) SKUs that have had at least one quantity-on-hand variance (change) over the last year. To be included, a SKU must cross the month with a net variance. For example, if a SKU's quantity-on-hand is adjusted down by 1 unit and then found during a recount and corrected back up 1 unit within the same month, then it will not be included in your SKUs Changed percentage. If a store carries 25,000 countable SKUs and 4,250 had at least one variance during the year then its SKUs Changed Percentage will be 17%. 

• 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.

  • Counting in a busy retail environment is hard. Our research shows that nearly 40% of all inventory variances are either an error or a correction. Counting correctly requires four laborious steps, where count quality diminishes as each step is skipped. As count quality diminishes it becomes hurtful to your store's accuracy efforts. 
    
    Steps to obtain a good count

    1. All product needs to be in the right spot; not an easy task when you consider the potential of similar-looking items being commingled in nearby hooks and bins. Additionally, back stock and multiple locations must be easily identifiable. Make sure your shelf maintenance (flossing) is taken care of before engaging in counting activities.
       
       
    2. A good initial count has to be taken. Even when your shelf maintenance is in good order, counting accurately SKU after SKU, hour after hour is difficult and not everyone is suited to this task! 
       
       
    3. Variances should be recounted, ideally with a second (and more experienced) set of eyes. 
       
       
    4. Variances left after recounts should be fully researched to determine the root cause; if not found and resolved then the variance will likely recur.
    Few stores can devote this kind of labor when counting every SKU in their store so steps are skipped. The result is an inaccurate physical inventory count where nearly as many errors are introduced as fixed, any accuracy gained will be temporary because the root cause was not resolved. In fact, the counting process may have masked a serious internal issue.
    
    Widespread counting where each SKU is counted devotes significant labor to low-risk, SKU-dense areas of your store like o-rings, faucet parts, v-belts and plumbing fittings. At the expense perpetually auditing high-risk SKUs such as top-dollar items, theft-for-cash candidates, obsolete SKUs and the other types found on your Count Sheets. 

  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 generous 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 devote to research. This is the upward spiral 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)

• 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%. 

• For some organizations, a bank, auditor or shareholder policy may dictate a full annual physical inventory, regardless of your store's Operational Level. If your store is at Operational Level 0 through Level 3 then it will be difficult to convince an auditor to skip a count, even though the process can inhibit your accuracy goals. 
  
  If your store is at Operational Level 4 or Level 5
  please let us know, we are happy to talk with you and your auditors/shareholders to help them feel comfortable with your store's accuracy. In most cases, auditors are satisfied with Mango's Inventory Accuracy Scorecard (sometimes auditors will want to do their own test counts, which is fine). for the purpose of inventory dollar value, your count sheet process is rigorous and a full store count typically yields nothing more than a lot of variance noise.
  
  If your only option is to do a full physical then please be careful as the process can cause huge inventory value swings. Please devote the labor necessary to get good, verified counts: organize your store, purge and label back stock items, and perform recounts on dollar variances +/- a preset threshold ($15 for example).