“Velocity” inventory management can help dealers operate more profitably through tight yard space, working capital limitations and volatile pricing.
“Velocity” inventory management can help dealers operate more profitably through tight yard space, working capital limitations and volatile pricing.

Dating back to the Civil War, the US Army built an “iron mountain” to supply troops. Quartermasters supplied equipment to different locations by stockpiling large amounts of material in central locations. During the close-out of Operation Desert Storm in 1990, Army leaders recognized that the large quantity of unopened containers and stockpiled materials required an overhaul of their logistics approach. In 1995, the Army adopted a new supply chain paradigm – Velocity management (VM) – replacing mass with velocity. This VM effort resulted in far fewer stock-outs without increasing total inventory.

Today, in many markets, the pace of construction labor shortages and technological advancements are highlighting the importance of velocity as a strategy for LBM dealers. “Pile it high, watch it fly” is becoming increasingly difficult for dealers to manage with tight yard space, working capital limitations and volatile prices. When evaluating suppliers, purchasing managers should look beyond the initial price page to understand supply chain differences among vendors. A key question is whether inventories must rise with increased sales, or if suppliers’ policies provide logistics benefits saving money and reducing risk.

In the engineered lumber category, some dealers purchase I-joists, beams, etc. from multiple mill locations. A dealer purchasing $1.5 million of engineered lumber annually from a manufacturer offering mixed product loads will have working capital requirements and yard space requirements that are around 40% less* than for the same size dealer buying single products from three different mills. So dealers can better deploy their working capital and yard space to expand into new lines without impacting EWP sales.

For example, a New England dealer purchasing several different products from the closest mill could easily wait up to five weeks for railcar delivery. This will require substantially greater capital, order quantities, average annual inventory levels and higher interest on that inventory. Add in variables like seasonality and demand fluctuations, and waiting five+ weeks could be extremely costly.

The time from order placement to delivery has a significant impact on inventory turns and managing the risk of running out of material. It is easier to forecast product needs ten days out vs. forecasting several months in the future. Additionally, dealers should consider how local distributors can support supply chain strategy. In markets where a local distributor provides fill-in services, dealers can accept a higher stock-out risk without disappointing customers. Dealers promoting a brand with low market share in a geographic area may discover that their closest distributor doesn’t have adequate scale to provide back-up.

One supplier offering new ways for dealers to make the most of tight yard space, limited working capital and volatile pricing is Boise Cascade, with manufacturing and distribution arms working together to help their dealers reduce inventory costs. This simple online tool could help you decide if this works for you. The speed of business is increasing: Dealers that understand the potential to increase profitability by increasing velocity will grow and operate more profitably.

*Analysis based on simulation runs using Boise Cascade’s Time is Money Calculator.