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Are bookkeeping systems ruining retailers’ ability to serve customers?
Retail transaction solutions adhere to the rules of accounting, as the name Merchandise Stock Ledger indicates. Even solutions such as enterprise data warehousing (EDW) need to tie to this “transactional system of records” to be considered accurate. The unintended consequences of this often inhibit retailers from supporting their omnichannel shoppers. The impacts range from the inconvenient to the absurd.
Start with BOPIS. For most, the sale is credited to online, although the inventory is relieved and journaled out of the fulfilling store. The most productive associate, in terms of sales per hour, is probably in-store picking/shipping for online. Stores wage expense, however, is based on direct store sales, so there are no hours available to support this function — without another workaround. That’s where things go from bad to worse.
Want to track what is bought online for curbside pickup? Easy. Set up virtual curbside numbers so the sale can be credited and inventory can be journaled between the website, the physical and virtual stores. Adding this creative workaround? That’s no problem, presuming all solutions can accommodate more store numbers, that the books will still close at month-end and that production reports don’t explode due to store-count doubling.
Things can similarly go sideways in the warehouse. Need to move inventory from online to a store? That inventory has been purchased, received and put into the stock (ledger) ownership of the online business. A creative workaround — send an RTV (return to vendor) to a phantom supplier, drive the boxes around the DC to a different door where a new order awaits the receipt, which can then be picked to a store. This is a real-life example. You just can’t make it up.
Most retailers have problems like this. Aged merchandise transaction systems will never keep up. Don’t even try. Use your data lake. Need to credit sales to two, maybe three channels? You can do it. Sell stuff from locations that never hold or book inventory if it makes the customer happy. Give yourself permission to add a non-accounting record to the lake. And lastly, reconnect your allocation/replenishment solutions to the data lake so you can actually send the right product to the right location on time. You deserve to be happy, too.
Discussion Questions
DISCUSSION QUESTIONS: Do you agree that accounting conventions have created a transactional mess that gets in the way of making the best decisions to serve omnichannel customers? Can you cite examples where actions have been taken to address these SNAFUs?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Ken Morris
Managing Partner Cambridge Retail Advisors
There is no doubt that omnichannel transactions have made accounting and accurate reporting a huge challenge for many retailers. The end result is often a misrepresented/inaccurate picture of the revenues and profitability of specific sales channels. Until retailers update their systems with a unified commerce platform, accurate reporting will continue to be a challenge.
There always has been multiple set of books – even in financial accounting. The tax set of books, the legal set of books and multiple sets of books for reporting. And of course management reporting is distinctly different from financial reporting for the same reason. Changing charts of accounts is complex and it can never keep up with the business landscape.
The reality is management and operational decisions cannot be run 100 percent from accounting systems. That certainly makes data-driven decisions harder, but smart businesses realize this. They invest in educating the rank and file on the metrics and how to track, compute, read and interpret them.
This is a tragicomic picture. The fact is that many of the KPIs need to be reassessed and replaced by simpler ones. For the purpose of analysis, it is advantageous to know in which channel sales are booked. For purposes of compensating associates, the rules have changed and, as in the old Wendy’s commercial, “sales is sales” no matter how or where they happen and all must share in the effort and the reward. For the purposes of keeping track of inventory, all businesses have to be able to track inventory in its physical, not its virtual, location. For measuring efficiency of each business function, technology needs to be able to capture and record each task, who executed the task, how long it took and how much – in currency or in units – the transaction entailed.
This doesn’t surprise me in the least. People do what they’re paid to do. Period.
However I think that retailers have been more flexible than the article sounds. There’s no doubt that a new set of “books” has to be created to compensate employees, and so far I’ve seen over half doing so.
Accounting conventions are just one example of how customers are not the primary decision driver for retail. While stores are scrambling to offer solutions shoppers want, process inertia inhibits real change and customer benefit is often last to be considered.
Yet another example of the silos of business functions within retail. While adhering to GAAP guidelines is standard practice, financial business processes can “account” for the bleeding of costs and revenues into other departments with the “flagging” of transactions to highlight newer areas that finances transact due to changing physical business practices. In some cases this may be a manual process initially, however as time goes on, we should be able to compare year-to-year performance as the newer processes become business as usual.
Absolutely!
Traditional accounting is designed to track and report on business units’ financial performance against established KPIs. Allocating costs and understanding the long-term impact of fixed, variable, and semi-variable costs are difficult and even misleading. This challenge has become exaggerated in an omnichannel environment where stores are distribution points, curbside is a pickup point, with websites and apps as storefronts. Flexibility in the system and network design have leapfrogged arcane accounting rules and thinking, which remain linked to compensation and incentives.
It’s not as bad as outlined – depending on the retailer. However smart retailers don’t use their accounting tools to manage inventory or track online vs. offline sales. Systems exist today that are designed for integrating easily with ledgers and the best retailers don’t use accounting as their master record when engaging customers.
Retailers will drive a secondary process for updating their ledgers, usually batch and on a daily basis – especially if sales are in multichannel. Exceptions abound, but the author’s suggestion about accounting being a limitation are found only in retailers that haven’t matured their financial processes or are new to commerce.
Thanks Ananda … wasn’t implying that retailers were using accounting systems as merchandising management tools, but rather that even the merch systems still use bookkeeping techniques at their heart. If you have a sale at a specific location, you have to relieve inventory at that same location. If you want to credit the sale to online, but take the inventory from a specific store (BOPIS) you have to do some back-end rebalancing to get the sales, margin and inventory positions squared away. The merch solution won’t allow “one sided” entries.
This is just another example of how scorekeeping wins over logic. It gets back to silos of people, process and technology. We need unified systems in real time, processes that make the customer the center of the universe and people to get the job done right across the channels. We have worked in a number of retailers where stores are credited with sales from their inventory. Because of a lack of real time inventory systems many of today’s buy online and ship from store orders have to be claimed by a sending store. If there is no incentive to credit the store with the sale there is little incentive to claim an order.
I’m not trained in accounting practices, but it seems clear to me from this discussion that an omnichannel enterprise needs to know where its inventory is, and how much, at every moment in time, from the supplier order to the moment of fulfillment.
Inventory is money, and managers who know where their cash is can make better decisions and ensure product availability.
Opaque workarounds that conform with outdated bookkeeping practices seem like bad business to me. Methods that enable decision makers to view and differentiate the demand signals from different points of purchase will be crucial. “Numbers are no substitute for clear definitions.” (William Bruce Cameron 1958)
I don’t doubt that online creates additional complexity in accounting, but to blame the systems for an inability to serve customers is bassackwards: a well run business creates good processes and then tailors its accounting to fit them … not the other way around.