In past years, dealers focused on sales dollars and margins. At industry meetings, the buzz was, "My sales are up by 50% and my margins are up by 3 points." Then, as the housing industry crumbled, dealers began focusing on expenses. The buzz was, "I have reduced my expenses by 20% over last year." The recent underground buzz at industry meetings was, "My sales are down 40% and I am losing my pants."
If I had my way, you'd hear much different buzz at the next industry meeting, something like this: "I have reduced my inventory by 20%, increased my turns by one, and have limited my stock outs to 1% of overall sales. I have increased my cash position. And I will weather the storm."
Did you know that inventory is the largest liquid asset on the balance sheet? This means it is easily converted into cash. At the same time, mismanaged inventory means mismanaged cash. Ouch!
During the last few years, LBM dealers have hammered expenses and increased margins as sales declined. They focused on the profit and loss statement. But in most cases, LBM dealers did not drop inventory levels fast enough to supply the new sales normal.
Inventory replenishment techniques used in a rising market can be lax because increased sales make up for many mistakes. But in a falling sales market, the inventory becomes a greater percentage of sales, turns slow, and obsolete products become a larger part of the inventory dollar.
If you want to free up cash, reduce your inventory. Just as your high school math and English classes got more complicated each year, let's start with the basics and work our way through advanced inventory management concepts.
Freshman Class: Data Hygiene
Before you can better manage your inventory, you have to be able to analyze your inventory. This starts by having well-organized departments that break down your major categories of items. Each department will then have classes. For example, your dimensional lumber might be labeled Department 100 while you might have classes labeled Class 10, Class 20 and Class 30 that include 2X4, 2X6, 2X8, and other subcategories of lumber.
Think of this inventory department and class structure as your equivalent of the Dewey Decimal System that for decades was the standard way to organize libraries. How could you possibly find a book in a library without such a structure? Your company should follow the same policy when organizing inventory. Every item should be logically placed.
As your product mix probably has changed since the inception of your system, you may need to go back and scrub these departments and classes. Your department class structure must represent your current product categories so that your salespeople and purchasing people can easily locate items.
If you do not have a clean department and class structure, you will never be able to analyze your inventory effectively. Rather than being like the organized library, you'll resemble a going-out-of-business bookstore with pawed-over volumes strewn all over.
Once your labeling system is clean, you must focus on the products. Typically, the item numbers are alphanumeric for building supplies and numeric for in-store items, unless you are on a legacy system that has alpha constraints.
The building material numbers should be short and meaningful. For example, if you are using the SKU "248P" for a 2x4x8 pine stud, you will probably use 248T for 2x4x8 treated pine and 248SPF for 2x4x8 SPF.
Your SKUs must also be in a logical order. There is nothing better than viewing all of your products logically on a screen or printout. For example, if you are looking at dimensional lumber, you will want to see the shorter lengths first. This can be accomplished by using a sequence number or else choosing a stock number that will sort correctly.
Your descriptions must be crisp and exact; all of your lumber descriptions should be consistent. An example might include width, thickness, length, species, and grade, in that order, thus yielding "2x4x8 Pine #2." If you have inconsistencies, fix them.
Caution: When changing item numbers and descriptions, remember that although you may not be consistent because your inventory has grown over time, change can cause chaos. Think about your yard crews. They are typically looking at either descriptions or SKUs when pulling loads. If the SKU numbers and descriptions change, the yard staff will have to be notified in advance. This is probably the simplest change to communicate, yet it is a task often left undone.
Another item overlooked is duplicate SKUs. In the past, you might have changed hardware suppliers two or three times, and thus you have multiple stock numbers for the same product. You may have also uploaded an entire product file from a hardware vendor into your system but didn't update it when the vendor changed SKUs. As a result, the SKU that once applied to a 2x6 joist hanger now may belong to a can of plumber's putty. If you have made an acquisition and you converted the inventory from the company you bought, you may also have duplicate items.
Our industry is somewhat unique in that we have multiple units of measure for products. Some of the conversion units for the products may not be correct. For example, you might have purchased a roll of R-13 insulation from one manufacturer that covered 128.04 square feet. Today that same product may have a different square footage. Yet nobody changed the unit of measure in the computer, so your costs are misstated.
In addition to viewing items by departments and classes, you may want to view products by vendor. For example, you might purchase nails from a local wholesaler on a weekly basis. Being able to narrow your report to just the items purchased from this vendor will save time and improve ordering accuracy. On the other hand, this may not work for items like dimensional lumber that are purchased from different vendors.
If you have fewer than 1,000 SKUs, you can typically accomplish your data hygiene product within a couple of weeks. However, a typical pro dealer has between 7,500 and 15,000 SKUs. Unfortunately, there's no easy way out; you have to roll up your sleeves and look at each item individually.
Once your inventory is in order, we can move to purchasing.