Progressive Distributor - Inventory management in a slow economy

Inventory management in a slow economy

Like farmers during a drought, you can take advantage of a slow economy to begin planning how to cultivate higher inventory yields in the future.

by Scott Stratman

Whether you call it a slowdown or a recession, the economy in many parts of the United States is not roaring like it has in the past 10 years. Evidence is all over the newspapers, where companies announce huge layoffs and cutbacks. Additional proof is in your warehouse, where you likely have more inventory than you’d care to admit. Since inventory is one of your largest assets (if not the largest), now is a good time for prudent asset management.

You should always practice smart asset management, of course, but when things are “blowing and growing” it seems there’s never time. Hopefully, distributors planned for the days when the phones weren’t ringing off the hook, customers weren’t lined up at the counter and salespeople weren’t responding to quotes at the record-setting pace required three years ago. If you didn’t plan, your challenges are bigger still.

Cultivating your asset base is like cultivating a farm field. You want to make the strongest crops grow and turn under the weaker ones (and the weeds). During slow times, when inventory isn’t selling like you anticipated, and pre-season buys don’t move as quickly as before, you need to work your field (the vault/warehouse).

Begin by identifying products you could live without. Review the sales (hits) of stocked items, and begin to reduce stock levels and stock keeping units. Unfortunately, the process isn’t like taking a huge can of weed killer and spraying the entire field. You have to go row by row and begin to pluck the weeds.

First, look at your inventory — item by item, month by month and year by year — to help decide the magnitude of your action. Examine your crop (product) yields for at least the last two seasons. Break the data into monthly segments and look at the hits — by product, by month — over the last two to three years.

Look at the trends over the years — by quarters and then by month. Obviously, for seasonal items, you will see spikes and dips during certain times of year. Those are not your targets, unless you find an abundance of unharvested items from the preseason buy and the season is over. That is a different issue.

Compare the hits by items, looking for any downward trends. What caused that to happen? If you can’t identify the reason, or can’t attach it to a certain customer, you must take action. Cut your losses and start promoting those SKUs to get them out of your high-yielding crop. Package them with other products, or check which customers bought them in the past and offer them a special deal.

Plow those fields
Your next fields to harvest are those items with less than three hits in the current year (again, non-seasonal items). These are items you have in stock but have only sold three or fewer times this year. Look back to see what happened to those items last year. If your sales weren’t great then either, it is time to hit them with pesticide. These items will linger until you get after them with heavy-duty effort. Sure, you might lose a potential sale here and there, but why are you keeping these items in stock? If you must keep them in stock, convert them to special-order items or order-as-needed, but don’t let them live among your high-yielding crops.

Using a comparative hit report allows you to identify those items that once might have been a bumper crop (at least to the sales personnel), but now produce a low yield. This is simply cultivating your crops. Slower times require more creative selling. You will continue to move high-yield crops without problems; however, now it is time for some clean up.

A hit analysis can also point out a few startling facts. If you compare the current on-hand quantities to last year’s hits, you can calculate the number of month’s supply currently in stock. This simple comparison produces eye-opening results. You will find that you are holding a number of month’s supply in stock (you hope it is not a few year’s supply). What should you do now? Bring out the large combine and starting working the crops.

Reduce on-hand quantities using special pricing, special packaging or deals. Also, adjust your software package to make changes in the inventory master file. Change the ordering controls so that you lock down the products and take them out of the automatic replenishment cycle. Use the freeze codes to accomplish this, or manually identify these products for review before replenishment. The freeze code option is the best; it works even if you are tied up harvesting other fields.

Another option is to get into the system and begin to look at your safety allowance percentages. For items identified as slow-moving or moving on a downward trend, make sure the safety stock allowance is moved to zero. This means that every time you look at the product’s replenishment cycle and current stock level, you’re viewing the lowest level you could live with and still maintain the item in inventory.

The risk is that you might go in an out-of-stock position a few times on these items. However, offset that risk with the cost of maintaining the inventory in a slow moving period or downward spiral. Clearly, in the long run, you are better off not incurring the carrying cost. Remember, carrying costs add up no matter what the market does. Try to reduce that cost factor by maintaining the lowest on-hand levels as possible.

Cultivate growth
The other side of the risk scale is that you do nothing. By doing nothing and hoping for the best (rain after a long dry spell), you still chew up your bottom-line yield because of the carrying costs. Your goal during a drought is to make sure those items with the highest yield are still growing and you are taking them to market. The poor-producing fields need to be cultivated even more because they are the bigger burden. Similar to setting aside a field for a few growing seasons, focus your efforts on crops that will grow even during a drought.

Coming from the Midwest, I am familiar with droughts, downpours and set-asides. The good news is that if you work the set-aside field correctly, the harvest will come in the form of an abundance of pheasants and quail in hunting season. Letting those fields rot and hoping for the best only costs more money and agony when the economy is healthy, and you need to till the hard ground and prepare it for planting.

Tough times call for tough measures. Who knows when it’ll turn around? Waiting and doing a rain dance is not an option. You need to cultivate all your crops and put your hard-earned dollars toward those with the highest yield. You also need to make sure that you do preventive maintenance on your slower-moving items. This drought may last a long time even if the weatherman says rain is on the way.

Scott Stratman is president of The Distribution Team LLC, a distribution consulting firm in Colorado Springs. He can be reached at (719) 597-5978 or at www.thedistributionteam.com.