Are You a Distributor or a Collector?
11 CVSN iNSiDER December 2009 iNVENTORy MANAGEMENT ARE yOU A DiSTRiBUTOR OR A COllECTOR? Never get emotionally attached to your inven-tory. It will not love you back. Recently, I had the opportunity to work with a client who has a significant dead stock challenge. Their chal-lenge is to convert some of this non-productive asset into working capital. If this doesn't happen, their financial partner will change the nature of the relationship. In other words, the bank threatened to pull their line of credit if things didn't change. Hence, I got the phone call. For most companies I work with, anything with zero sales in 12 months is considered dead stock. When we analyzed the inventory we found that out of about 60,000 items, with stock on hand, only about 10,000 of those items had a sale against them in the past 12 months. Now this may seem a little scary, but the plot thickens. During our discussion we formulated a plan to identify the dead items and coordinate them for liquidation. Feeling like we had made sig-nificant progress, I asked if there was any mis-cellaneous inventory that was not recorded in the system. This is a fairly common occurrence in distribution warehouses; I usually expect to find 50 or 60 items stashed in the corner. The main purchasing director smiled and nodded. I asked if he could estimate how many skus he was talking about. He figured around 25,000 give or take. Needless to say, I was stunned. In consultant school, we are taught to maintain composure at anything a client might reveal. My poker face was blown. How does an inventory get so far out of hand? What are the decisions that lead us to this kind of situation? Although this case may seem ex-treme, the decisions that lead to the problem are very common in distributors large and small. Many wholesale distribution companies are sales dominated versus sales oriented. In a sales dominated company, sales makes the pur-chasing decisions. New products are added to the system in rapid succession. Statistically, 7 out of 10 new items we add to our inventory are dead stock fodder. They are dead on arriv-al. Manufacturers are rarely held accountable for the success of a new product. In a sales dominated company, buy quantities are derived by the largest price break with no regard for carrying cost. Sales people speak in odd generalities. They tell us that if we bring some in our customers will buy some. Have you ever put some on a purchase order? Lookout, here comes a truckload. When a company is sales dominated, I often find a high degree of supplier redundancy. In the world I grew up in, we had the 31 flavors of safety glasses. Every customer wanted their special brand. Rather than selling the features and benefits of 1 or 2 quality brands, the sales team became a bunch of order takers. You can't sell out of an empty wagon. This is the sales dominated justification for every overstocked company I have encountered. I tend to find this mentality running rampant in branch locations. Distance from the head-quarters seems to have a direct correlation to inventory bloat. the distribution teaM Jason Bader Managing Partner