One of the many challenges that LBM dealers face today is properly balancing inventory levels with demand and without sacrificing customer service. Sales have fallen so dramatically in some markets that they throw out the usefulness of any sales history. Other yards have been left hanging with inventory that was stocked specifically for certain customers that no longer exist.
Most CEOs and CFOs believe that their companies consistently carry 25% more inventory than necessary. This is right on target. Often, management is startled when it actually sees the items (and the corresponding dollar amounts) that are tied up in obsolete, slow-turning inventory. Control and purchasing staff receive far more negative reaction for "stocks outs" than they do for a little excess inventory. This situation often leads to inventory spiraling upward and out of control.
Frank Cicero, vice president of 84 Lumber, told me the company took on a very proactive inventory reduction program early this year. The results have been a more than 30% reduction, which equates to $100 million so far this year. 84 Lumber has a dedicated staff at the corporate office that works with store managers daily to monitor and maintain proper levels.
The process for reducing inventory can begin with relative ease. It should immediately help with cash flow and, if done correctly, not interrupt customer service. Your inventory levels should be based on the service level you expect to provide your customers. If you guarantee delivery today or tomorrow, that probably translates to higher inventory levels in your yard. You must measure inventory levels against your own history as well as industry benchmarks, and always push for improvements.
David Swift, president of Swift Supply with 10 locations in Alabama and Florida, said inventory reduction is a top priority at the company, already resulting in a 20% reduction. He has many operational initiatives under way to help reduce inventory further, but Swift does have a "never out" policy for key items its customers depend on being in stock.
Wiley McLane, purchasing director for Yoder's Building Supply in upstate South Carolina, said that although the company doesn't have a formalized program to reduce inventory, Yoder's is always working on maintaining proper levels for its customers. Both internal communication with sales staff and external communications with customers and vendors play a key role. Yoder's inventory has dropped significantly over the past two years to match the business climate.
A recent industry survey found these are some of the ideas and concepts LBMs are using today.
Rationalizing SKUs
Removing slow-turning and duplicate products can be difficult, time consuming and sometimes controversial. But it also can be a large part of an inventory reduction plan. Drilling down to the SKU level is important because slow-turning items often are buried in product categories that show decent turns as a whole group.
Reduce lead time for products
Buying from a local distributor or vendor with a shorter delivery cycle will let you reduce the safety stock in your yard. Be careful of the cost, and try to pay the same price.
Don't stock it
Consider joining a vendor stocking program, where the supplier commits to an extremely high level of delivery service for certain products. Special orders are already a large part of our business and, if handled sensibly, can be a profitable one.
Consider VMI(Vendor Managed Inventory) or consignment programs
Put the burden of ownership and inventory management on the vendor while maintaining the benefit of having the product in your yard.
Manage your purchase order book and train your staff
Management should have visibility to purchase orders as they are cut, and review open reports regularly. Often, the sales force or vendors pressure the purchasing staff to buy and stock certain items. Ensure that your staff is well trained to make wise decisions.
Transfer instead of purchase
Many multi-unit yards have set up a shuttle-truck system to balance overstocks and fill orders from nearby yards. Having a scheduled day and route for the shuttle is important so that staff can count on timely delivery of those goods.
Purchase minimums and order more often
The distributors are eager to help you manage your inventory. They have "value-creating" programs available to help you significantly reduce inventories, increase your working capital and improve your ROA(Return on Assets). Negotiate with vendors to get the direct truckload price for a pallet quantity. Vendors are hungry, too.
Forecast more accurately and watch for one-time demand spikes
This gives you reduced exposure to excess or obsolete stock by reducing safety stock levels.
Take a physical inventory
Accurate data is essential for your computer system to provide you with the reports and tools to monitor, maintain, and make wise decisions regarding your inventory levels.
Clear out the junk
Whether it is slow turning "D" items or damaged or obsolete goods, get it off the books and out the door. Donate it, sell it to salvage dealer, or just throw it away. Don't let it tie up cash or clutter up valuable space.
It takes time and a proactive approach to reach success in reducing and managing your inventory. Gene McKinney of Tennessee's multi-unit Tindell's Building Materials told me that it has cut inventory in half during the past two years by tightening controls and constant analysis. "Our IT department has provided us with excellent tools for evaluating our inventory and adjusting for changing times" McKinney said.
These strategies can get your staff motivated about the ways your organization can lower its inventory, and stimulate creative ideas that fit your business model. Some of these strategies and processes may seem challenging to implement, and they will be. If your staff needs a little help getting started, seek outside services to assist you in putting some strategies and initiatives to work at your company.
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 at [email protected]
