The silent killer
Bloated inventory levels can cripple an otherwise healthy distributor
by Joan Adams
Inventory is the very heart of any distribution business. Like the human heart, it stays healthy when you maintain a low-fat diet. If industrial distributors had diseases, bloated inventory would be known as the silent killer. So, why do so many distributors build up and maintain ridiculous amounts of inventory?
First, psychologically, inventory feels good. All you have to do is walk around the warehouse to get that good inventory feeling. Look at all that stuff we have!!! We are prepared for everything and anything. We have rows and rows of abrasive discs and cutting tools of every size imaginable. Inventory feels like a big, warm security blanket. It gives the owner certainty. He knows that whenever a customer places an order he will have that item, right there, in stock and in quantity! Unfortunately, this is a false sense of security. This “warm and fuzzy” blanket comes with some not so warm and fuzzy costs. Let’s talk about why industrial distributors, thanks to that false sense of security, get sucked into carrying way too much inventory.
CLASSIC EXAMPLE No. 1
A vendor drops in and offers you four pallets of valves at 50% off. You feel like you have won the lottery! These are expensive valves! He is dangling a very attractive
carrot in front of your nose and, sure enough, you want to buy them, no questions asked, no reflection on what you are going to do with them. Your instincts say, “Buy them now before he offers this deal to somebody else.”
Before you buy, stop and think: Why is this vendor selling high-priced valves at 50% off? (Hint: A sudden spell of irrational generosity probably isn’t the reason.) He knows something you don’t know. He took a look at the sales trend and saw that these valves are already on that brutal downward trajectory to becoming obsolete scrap. He wants to dump these valves and he wants to do it ASAP. The vendor’s goal is to get at least some money for them. In short, the vendor doesn’t want these valves on his shelf, on his books or even on his sales team’s mind. The vendor figures it is better to sell at half-price rather than hold on to them for another year or two, hoping for a few more full-price sales and ultimately having to scrap them. You should be thinking the same way. Still, the offer is hard to resist; high-value valves at half price! If this urge to buy is still there, ask yourself the following questions:
- How many of these valves do you already have? If you already have lots of them, you don’t need any more.
- How many did you sell in the last three months, six months, one year, two years?
Maybe you sold a lot some years ago. Maybe recently you had one large order. This is not regular demand. Your customers aren’t buying them month in and month out. So, in fact, these valves are not in demand, meaning it is very risky to buy them simply hoping for another big (anomalous) order. - To whom did you sell these valves in the past?
Do a quick reality check. Pick up the phone. Before buying more, find out if any of your customers have plans to buy these valves any time soon.
So, let’s dissect this “great deal.” You probably already have a bunch of these valves and they aren’t moving. You have checked with the customers and they won’t vouch for buying more. This urge to buy is exactly the false sense of security that will kill you. This is not some wonderful deal. The vendor could offer to give you these valves and it still wouldn’t be worth it. Just say no. Yes, even “free” inventory costs you.
Here’s how:
- You pay people to take it off the truck and to stock it in the warehouse.
- The IT guy has to create an inventory number and monitor it in the database.
- This “free” stock takes up shelf space – space you pay for every month – space where you should be stocking inventory that your customers actually want.
CLASSIC EXAMPLE No. 2
An important customer calls to place a big order for some kind of specialty fitting – and you don’t have it, you don’t even carry it. You get that horrible sinking feeling: I am going to lose this sale and maybe this customer. You get the purchasing guys on the phone calling vendors in a mad search. Somebody finds a source and you are determined not to get caught short again. So, not only do you buy enough to fulfill the order, you buy extra for stock, thus adding a new item to your inventory. So, what could possibly be wrong with this scenario?
There’s a reason why you don’t carry these fittings.
Historically, none of your customers has ever wanted one. It is a product that doesn’t fit with your customer demand profile or your sales expertise. There’s a good chance that this is a one-time order. Those extra fittings you ordered anticipating more sales may never move. They will take up space in your warehouse, in your database, in your sales force’s heads. The distribution house’s goal is to fulfill the customer’s order, not to add new items to inventory and immediately buy heaps of stock for every request. That urge, the fuzzy, warm inventory feeling, that desire to be ready for every possible order, causes warehouses to add new items to inventory that just don’t belong there. These new items are probably the biggest single source for dead (non-moving) inventory. The problem is adding new items to inventory is easy. Your first step should be to create a process by which it becomes somewhat difficult to add a new item to inventory. First, there should be some discussion about the new item:
- Find out if demand might grow.
- Poll some of your larger customers to find out the level of interest.
- When adding an item, develop a (very) short-term plan. If sales do not reach a given level by a certain time, drop the item and return the remaining inventory to the vendor.
Bloated inventory can do irreparable damage to your company. Get inventory levels down and restrict the number of new items added to inventory. Inventory is the heart of your business, so be good to your heart!
Joan S. Adams has consulted for industrial clients for more than 20 years. She operates Pierian, a consultancy that brings sustained and measurable success through operational excellence, customer focus and competitive market strategy. She has engineering degrees from the UW-Madison and MIT. E-mail her at adams@pierian.net.
This article originally appeared in the Mar./Apr. 2012 issue of Industrial Supply magazine. Copyright 2012, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
