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Excess InventoryIt Can Hurt Your Company's Bottom Line More Than You Realize! Part IWhy measure it? Why get rid of it? We already paid for it, what is it hurting? As distributors, we all know our number one objective is bottom line maximization. But there is another objective that in the long run may be even more important, and that is the customer service objective. We have to remember that maximizing the bottom line is king, but that good customer service is what allows us to do this as well as stay in business. We all know that if our customer base erodes away, our bottom line and therefore our company also erodes away. We often forget all the true keys to maximizing the bottom line, with the most important being stellar customer service. There are many things that define good customer service and what keeps our customers coming back time after time. Without a doubt, the number one of all of these, is inventory availability. As distributors, we are the inventory specialists. After all, that’s the root being of a distributor – inventory! What we strive for is a great bottom line and great customer service. So, what is surplus really doing? It is not only costing your company 15-25% per year in carrying costs, it is also stealing from the inventory you really need to deliver excellent service. I always hear, “We need better turns, we have to cut inventory.” And you know what gets cut most of the time, the inventory we need to support our customers rather than the inventory the customers do not want or need. All Inventory is not the SameDistributors as inventory specialists need to stop looking at all inventory in the same way. All inventory is not the same. Some is good and some not so good. Yet most distributors just look at the total inventory investment rather than the good and not so good. If they have 10 million in inventory, and 3 million is in excess/surplus, they still have 10 million in inventory. We have to start paying attention to it, if all 10 million was “not so good”, we would know we have a real problem. I have never gone into a distributor and asked how much inventory do you have and they have responded “well, we have 10 million, but 3 million of that is not so good.” I like to break “not so good” inventory into three areas: 1. Just too much, 2. Slow moving and 3. Dead or not moving at all. But I still call it all surplus or excess, because it all has one thing in common: it is stealing from your bottom line and your customer service. It may be “A” item inventory, but if no one wants or needs it for a year or more, your company does not need it right now. The question always comes up, “what would we carry instead." Look at your customer’s orders and what is backordered. Look at the lost business being logged (yes, you should definitely be tracking lost business, otherwise you are just guessing). Talk to your customer sales people and of course, your customers. I hear it all the time, we have low turns, bad customer service and too much inventory. We have to cut inventory – and where do we most often do it – in the good inventory!?! From a customer service objective, as well as adding in some good business common sense, this is crazy, yet I see it all the time! Regardless, whether it is good “A” inventory, inventory that is truly dead or somewhere in-between, if it is more than “X” months supply, it is still hurting both our bottom line and our customer service. Internal Surplus Vs. External SurplusMany systems we use will define surplus as any inventory above an item’s Max (in a min/max system) plus its Standard Order Quantity (SOQ). But as many of you already know, this definition really does not work for most products. Without getting into too much detail, let’s just say the Max plus SOQ method should be used internally when we need to get one branch out of a pinch. We “borrow” some inventory to avoid a poor service situation. I like to define this as the “Internal” surplus. Then there is the inventory that is just too much. It is hurting us so we need to sell it, return it, liquidate it – just get rid of it. This is what I like to call the “External” surplus and I normally think of it as inventory above “X” months or days supply. For most distributors, 12 months supply is a good place to start. If your company has more than 12 months supply then your company has too much and if your company has less than 12 months we will call it okay. I know 12 months in many cases is still too much, but many systems lend themselves to this plus we have to remember that there is a break even point of trying to get rid of it versus sitting on it until we need it. Besides, we have to start somewhere. If you eliminate the over 12-month excess, then you can redefine the number of months you consider surplus. Be careful, there are a few exceptions to the “X” months/days supply definition:
I do many sessions each year with multiple companies and it still amazes me when I ask how much surplus a company has and they do not know. Many distributors are sitting on 20% surplus or more and do not know it. My all time winner – 50% plus over 12 months supply. Let’s start with seeing how much surplus/excess your company really has and see how bad or good it is. As far as how bad it is, I normally give the following suggestions:
Today, we discussed what surplus/excess inventory is really doing to your company. We also have discussed a better definition of true “external” surplus and how to measure it as well as how much is too much. In the next article, we will discuss other keys to a successful excess/surplus program, including, setting proper excess/surplus disposition goals, the disposition of excess/surplus as well as the prevention of excess/surplus inventory. |
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