Hunting for cash in the warehouse
Here are some simple ways to discover cash reserves right before your eyes
by Jason Bader
Everyone is talking about lean manufacturing, lean distribution, lean operations and a whole lot of other fancy terms designed to make the person discussing the subject look a whole lot smarter. But doesn't lean boil down to trimming the fat? I guess it doesn't sound as MBA when you say it that way.
Another way of looking at the lean concept is something we, at The Distribution Team, have been doing for almost 20 years – hunting for cash. I kind of like the ring of that. Sounds like an adventure. Let's face it, pouring over operating expenses and looking for areas to cut isn't going to get the troops excited. So let's put on the pith helmet, sling a rifle over our shoulder and drop a little lead in those cash eating critters running all over your company.
The inventory in the warehouse is a great place to start looking for cash. In this article, I will throw out a few ways to find money through some really simple reporting. Don't be surprised if you find yourself muttering, "Has this guy been sneaking around our place?"
Reduce the Number of Shelves
When we get a new warehouse, the first thing we want to do is load it with shelves. More shelves means more stuff, right? Distributors love to see a lot of stuff on the shelves. That is until someone enlightens them to the cost of carrying inventory; but that's just for those bean-counting folks to worry about. An empty warehouse feels counterintuitive. In a sales-dominated utopia, more stuff means more sales volume. Be honest, how many of your salespeople would like to see you get a smaller warehouse? Most distributors carry 25% to 30% more inventory than they need to satisfy their customers at a really high level.
The first step is to reduce the number of shelves to fill. This has a two-fold advantage. One, your inventory stocking decision-makers are going to have to start looking at product movement from a systems perspective and quit relying on their gut instincts. Two, reducing the number of shelves will open up the working space so that your operating teams can do their jobs right the first time. As distributors, we are really good at getting it right the second time – especially with a customer order – but man, does it kill our bottom line.
Reduce the Number of SKUs
In order to make the reduction of shelves possible, we are going to need to rid ourselves of some of the beloved stuff. Don't kid yourself, we get emotionally attached to inventory. This is especially apparent in the relationship between the owner of the company and the greatest thing since sliced bread they brought back from the trade show three years ago.
Attacking the problem from a non-emotional place begins with your distribution software. Some of you may recall me talking about my favorite inventory management report, the hits report. This report is simply a popularity contest for your SKUs. It asks the question, "How many times did this SKU, regardless of quantity sold, appear on a sales ticket in the last 12 months?" No emotion here. This is just the cold hard truth. If you need some help creating this report, contact me and I will give you all the assistance you can handle.
From this report, we can determine which items have fallen out of favor with our customer base. If the report shows zero hits in the last year, we may want to question our reasons for keeping it on the shelf. In fact, we might want to take a really hard look at anything with less than four hits in the last year. There may be some good
reasons to keep a handful of these SKUs, but "just-in-case inventory" is not part of a cash hunter's vocabulary.
Reducing the Quantity on Hand
Once we figure out what stays and what goes, we need to start looking at our quantity on hand. The hits report can help us in this phase of our hunt as well. When I go hunting for cash in a distributorship, I usually find a ton of opportunity in the slower moving inventory. I often discover that the SKUs in the bottom half of the hits ranking report are sold fewer than 10 times per year. This usually results in a shaking of the client's head and a slow, steely glare in the direction of the purchasing manager. After a few tense moments, I remind them of the opportunity. Now we know where to look.
In the hits report, the final column is "number of months on hand." This is where I want us to zero in. Is there any reason we should have more than 12 months of inventory on hand? I can't think of too many. Remember the golden rule about stocking inventory: more bad things than good things happen to anything we bring into stock. The one good thing that happens is we sell it. On the bad side, it leaves the building without documentation, we damage it, we lose it, it becomes obsolete, etc. Think of all the bad things we can do in a year. Use the "months on hand" column to look for stocking levels to lean out. This will generally require a change in your inventory replenishment parameters.
Choosing the Right Scope
Hunting for cash in your stocking inventory is all about choosing the right tool for the job. I am often surprised that more distributors don't analyze product movement the way I have described. Your distribution software is a very powerful tool. Some of us just stop at the ordering, buying and invoicing functions. There is a whole lot more under the hood. Take some time and learn how to extract the data your system collects on a daily basis. You will be bagging the big game in no time. Good luck with the hunt and please let me know if I can help get you started.
Jason Bader is the managing partner of The Distribution Team, which specializes in helping distributors become more profitable through operating efficiencies. The first 20 years of his career were spent working in distributor operations. Today, he is a regular speaker at industry events and spends much of his time working with individual distribution companies. For more information, call (503) 282-2333 or contact him by e-mail at Jason@Distributionteam.com. Also visit www.thedistributionteam.com.
This article originally appeared in the March/April. 2011 issue of Industrial Supply magazine. Copyright 2011, 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.
