Consultant says inventory is cash, so manage it by looking for the little things that steal your money, not the big game you've already bagged

March 1, 2010
COMPANIES should tear down signs that say WAREHOUSE and put up signs that say VAULT. Vault, as in, bank vault. Why? Because inventory is just cash in

COMPANIES should tear down signs that say WAREHOUSE and put up signs that say VAULT. Vault, as in, bank vault.

Why? Because inventory is just cash in another form, according to Jason Bader, speaker, author, and managing partner of The Distribution Team Inc, which specializes in inventory-management training, business-operations consulting, and technology utilization to the wholesale distribution industry.

In “Finding Cash In Your Business,” Bader said if business owners saw their inventory as cash, they would want to know exactly how much they had in there at the end of each day.

“So, do you know how much inventory, or cash, is sitting in your warehouse?” he asked. “No, we haven't made that mental leap. So how do we help the people who work with us and for us to do that as well? If inventory is cash, do you think there are people we wouldn't want wandering amid that cash? In general, your customers are going to be browsing. Who else? The competition. What are they looking for? What we are selling. How about our salesmen? What are our sales people really doing when they're wandering amongst our cash in our warehouses. They're pulling samples.

“We don't have good in-and-out procedures for where our cash is going. So let's be careful. I don't have a problem with samples. I just have a problem with how they're tracked. This is murder when we allow salesmen to take samples.

“What about sales reps? I have nothing against sales reps, but what are they really doing? They're checking whose cash we're really storing. Is that information we want to let out? We have to view it as cash. We have to lock down our organization.

“What about delivery drivers? What's the first thing a delivery driver wants to do when he pulls up to your dock? Use the bathroom. Since when did we become a rest stop for the trucking community? I have nothing against delivery drivers. I was one for many years. But you have some attractive things sitting around in your warehouse that can go away quickly.”

They're cash handlers

He said conversations should be broached with warehouse employees to let them know they're really cash handlers, and the mindset has to be changed so that they know they must lock down the vault.

“Kill some roaches,” he said. “We are looking for the roaches inside our business that steal cash from us each and every day. Don't go looking for big game. You already killed it. Let's go looking for the little things that steal your money.”

He said when the income statement of a typical distribution company shows the net profit going to zero, “everyone feels the pinch”: people are laid off, and investment isn't made in new product lines or software upgrades.

“It's the responsibility of all of us, not just the owner,” Bader said. “When there is more net profit, owners in this industry are more likely to distribute it. They tend to over-distribute. They take care of workers more than other industries I've seen. So for everyone in the organization from material handling to customer service to accounts receivable, get them on board and have them help you in your hunt for cash.”

He said a product-movement analysis is necessary. A “hits report” is basically an item-popularity contest. He said a “hit” is a transaction in a 12-month period in a sales order.

“It's the number of transactions,” he said. “Quantity sold is not considered. It's how many times your customer said, ‘I want that.’ This is a 12-month analysis. Do not subject new items to this analysis. This is for things that have been with you and have been producing income.

“Anything with less than four hits a year is a candidate for non-stick status. Salesmen might say, ‘Hold on. You can't get rid of my items here.’ But is that money I could invest elsewhere? The items at the top of the list are ones we never want to run out of. Customers expect us to have those items. It's not what items are most popular in the eyes of the manufacturers you represent or the eyes of your sales people.

“Look for dead and slow inventory. Dead stock is a problem. Don't you wish dead stock would stink? Wouldn't that make it so much easier to find? The hits report will show you where dead stock lives. This is a wonderful way to prevent writing checks for DOA inventory. Some great exceptions are if this is a repair part for a larger unit you sell or if it's a high-gross-profit item for a customer you don't want to lose.”

Next Page: A balance needs to be found

Bader said most wholesale distributors carry surplus inventory — 25% more inventory than they would ever need to satisfy customers.

With a velocity-based layout, more popular items are placed closer to the shipping door to eliminate foot traffic. Items that are not popular should be placed in a quarantine area.

Other tips:

  • Determine safety stock levels

    “Safety stock is an insurance policy against the erratic demand of customers and erratic supply of what we buy. We should insure the items our customers expect to buy from us. Quit insuring the items they don't want. We could stop insuring 50% of our inventory.”

  • Set pricing strategy

    “Which items can we make more money on? Use the hits report so that on high-hit items, you will be competitive on things that are highly visible. As you move down the list, start raising gross margin.”

A balance needs to be found

Bader said it's important to find the balance. The essence of inventory management is to fulfill the customers' needs while satisfying the financial needs of the organization. If one is greater than the other, the company is off-kilter.

He called inventory turns “one of the most misunderstood metrics out there,” and yet everybody wants to hang their hat on it.”

“We tend to add a whole lot of stuff to inventory turns that isn't necessary,” he said. “The purpose is measuring our investment. So when we direct-ship from the supplier to customer, we're using the vendors' inventory, so it should not be included in ours. This is why I'm not a big proponent of industry benchmarking — because I don't know how the other guy did the math. It also should not include special orders or transfers.

“Everybody is so hyper-focused on turns, especially right now. If my compensation was based solely on inventory turns, what would I do to make them spin faster? Reduce the average inventory value. Quit writing checks, quit cutting Pos. Look for your slow and your dead if want to improve turns.

“But if I try to spin inventory too quickly, that can disrupt the sales side. I don't have enough on hand to meet the needs of customers. That's the balance.”

He said that in terms of the number of lines shipped complete versus the number of line items ordered, a company should shoot for between 92% and 95% overall.

“Would we ever want to get to a 100% customer-service level? No, the detriment would be that we couldn't afford it. We wouldn't have the facilities. If we hit 96% or 97%, our turns would go down. If I'm trying to spin inventory quickly, the customer-service percentage goes down because you have a lot of backorders. That's your balancing act.”

Bader said that although many executives teach customer-service employees that all customers are equal, they know that not all of them are, and they don't deserve to be treated equally.

He said that for most hard-goods wholesale distribution companies, 25% to 30% of the customers contribute to the net profit and 70% to 75% cost them money each and every time they do business with them.

He divides customers into three groups and philosophies:

  • Love your A-level customers, the “Cool Guys.”

  • Adjust your B-level customers, the “OK Dudes.”

  • Fire your C-level customers, the “Scumbags.”

“Firing a customer is not natural, but it can be liberating,” he said. “What the easiest way to fire them? Raise your prices.

“But there is a strong correlation between the people who cost you a lot of money to do business with and the people who don't pay you on a regular basis. If you just raise prices, accounts receivable would just go up. So you have to impose some other penalties there. First, make them COD customers. If they decide to stay, add a delivery charge and minimum-order requirement. No more special orders. They get what's on the shelves or they wait.

“This will terrify your sales people. But don't kid yourselves. These customers know what they're doing. If you wrote a letter to your very worst customer, do you think you'd be telling them anything they don't know? They know. These folks know how to run your business better than you know how to manage your business. Let them be somebody else's customer. Send them off to your nearest competitor.

“With the B group, I might not be as draconian with my measures to change the net-profit picture. The OK Dudes serve a purpose in our organization. They give us the ability to buy in volume. Some companies make four or five orders a day. You can try to reduce the number of transactions with them. If they're cutting a lot of Pos to you, they're cutting multiple checks. They're increasing accounting costs, and you have to send out more invoices. You can talk about it with them. Take a good, hard look at pricing. Go back and see if there's something you can do to increase profitability by raising prices. We're all terrified of doing that. We don't want to do it until our supplier does.”

And the A-level customers? Treasure them.

“There are so precious few of them that we have to be careful not to lose one,” he said. “Remind these folks how good you are or they will forget, and then you will be chasing them with price.”

About the Author

Rick Weber | Associate Editor

Rick Weber has been an associate editor for Trailer/Body Builders since February 2000. A national award-winning sportswriter, he covered the Miami Dolphins for the Fort Myers News-Press following service with publications in California and Australia. He is a graduate of Penn State University.