Are You a Distributor or a Collector?
December 2009 CVSN iNSiDER 12 iNVENTORy MANAGEMENT We have done it to ourselves. Most branch managers are compensated strictly on sales. If you were compensated on sales, why would you ever want to reduce your inventory? What is dead stock to this type of branch manager? It's just a potential sale down the line. These types are your eternal optimists. Unfortunately, we give them the incentive to practice just in case inventory management. In the case of my client and many family-held distribution companies, this problem had been handed down a couple of generations. Back in the early days of wholesale distribution, there was an incentive to carry larger local inventories. Logistics were not what they are today. You didn't have overnight shipments. Companies with a breadth of product won out. In previous generations, gross margins were generally higher than they are today. Margins have been squeezed over the years due to the abundance and ease of competitive sources. Many vertical markets had not reached matu-rity. Growth rates were measured in double digit percentages. Inventory values would generally appreciate. Who ever heard of prod-ucts going down in price? Many distributors in previous generations were fond of hunting out special deals. There was a special sense of pride when they picked up a deal. They picked up a lot of junk with the good stuff, but there was a warehouse to store it. When someone actually bought some of this miscellaneous inventory, it was like found money. The sport was in the buy while the sale was an afterthought. I have encountered several distributors who are in desperate need of space for their turn and earn inventory. Most distributors carry 25-30% more inventory than they really need. Can you imagine how much shelf space we could free up by just determining what inven-tory the customers quit buying last year? Let's just say that there would be fewer dollars in-vested in location expansion. Today, we need to make financially based inventory decisions. We no longer have the luxury of emotional based buying. We work on thinner margins and must think in terms of return on investment for every single product. There are no more sacred cows. If a line is not supported by the customer base, it should be eliminated. Duplicate lines need to be exam-ined for viability. Many of you may get the impression that I am anti-sales. That couldn't be further from the truth. Sales are the lifeblood of all wholesale distribution. I never want to lose sight of that. Sales dominated companies become emotion-ally tied to the products they buy. These are the collectors. On the contrary, sales oriented companies provide superior customer service through strategic inventory management. This is what it means to be a distributor. Good luck. Jason Bader is the managing partner of The Distribution Team. He spent the first 20 years of his career working in distributor op-erations. His firm specializes in helping distributors become more profitable through operating efficiencies. He is regular speaker at industry events and spends much if his time working with individual distribution companies. Contact: 503.282.2333 Jason@Distributionteam.com Website: www.thedistributionteam.com