Let's face it, in most cases around the country, the LBM industry is bad. Actually, bad may not be a harsh-enough term. Catastrophic might better describe today's environment. This housing downturn is, by far, the worst that most industry executives have ever seen. It is such a swing from just three years ago, when housing starts were unbelievable-unbelievable and unsustainable.
Every business is unique in its ownership structure, variable operating expenses, fixed costs, and banking situation. No matter what form of financing your business has or how deep your pockets are, positive cash flow and working capital are the two most important operating criteria these days.
Cash flow is the lifeblood of any company. Without it, a company can't pay its payroll, suppliers, and most importantly the bankers. Lenders are pulling the credit lines on LBMs daily, and they are watching others like hawks. If you are one of the few lucky ones operating without heavy borrowing from a lender, count your blessings- but manage your cash closely.
Properly managing your inventory is one of the quickest and best ways to make an impact on your cash flow. In most of my discussions with LBMs, their same-store sales are down a wide range, from 30% to 70% over the past three years. Yet when I asked about inventory levels, managers admit they are down only 10% to 20%. With the deflation of commodity lumber and panel prices, in addition to the reduction in sales, your inventory should be down closer to 50%.
I understand you can't sell out of an empty wagon, but as they say in the Diet Pepsi Max commercial, "Wake up, people!" In my consulting business, I hear comments regarding overstocked items, such as "We have always kept about a truck of that," and "It was a little cheaper to buy a full truckload of it," or "The mill had several railcars of it to move." These excuses are poor justification for having too much inventory.
Wake up, people! We live in a different world than we did three years ago. Sales are way down, and expenses like insurance, fuel, and freight are way up. Cash is definitely tighter because most customers are paying slowly, if at all.
Here are 12 questions you should ask yourself today. If you don't like your answers, take corrective action immediately to increase your chances of survival.
1. Have you discussed with your employees what proper inventory levels should be? Do your managers have inventory budgets or target inventory turns?
2. Have you compared your inventory turns today to those over the past three to five years?
3. Have you adjusted the minimums and maximums of your inventory levels to reflect the current sales volume?
4. Are all of your employees properly trained on the inventory management functions of your computer system?
5. Have you discussed with your employees what slow-turning, excess inventory does to your cash flow?
6. Have you made it a priority to identify slow turning SKUs and taken action to reduce those "C" and "D" items?
7. Do you have policies and procedures to guide your employees to properly manage your inventory?
8. Does your management staff monitor the following daily?
a) Inventory dollars
b) Inventory receipt reports
c) Open POs
d) Open pending customers orders
e) Overstock reports
f) Customer credit returns transaction reports
9. Have you asked your vendors for extended payment terms without giving up your payment discount? Offer them some kind of crumb. If they want your business long term, they can get creative.
10. Are you regularly conducting cycle counts and a full inventory? Accuracy of inventory in the computer is essential for proper management.
11. Are you regularly liquidating damaged, defective, and obsolete inventory?
12. Do you have a special-order policy and a customer return policy? When a customer orders 50 squares of Smurf blue roofing, then has seven muddy squares left over that he wants credited to his account, what's your policy?
Taking immediate action on managing your most fluid-and typically largest-asset is imperative. Successful inventory management is vital to survival in bad times and key to prosperity in good times.
Blase Grady, a 30-year industry veteran, is a management consultant for the LBM industry who specializes in supply chain and inventory solutions. Visit his Web site at www.bmscc.com or e-mail him at firstname.lastname@example.org.