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Many of us have heard the saying that the most expensive words in a company are “because that’s the way we have always done it.” Those of us charged with helping distributors improve net profit cringe when we come up against this utterance. Doing things the same way repeatedly, and expecting different results, is the sure definition of insanity. As I look at some of the companies I have worked with recently, I have run across a couple of other equally damning expressions guaranteed to wreak havoc on the best laid inventory management schemes.
The first of which is, “We want to be all things to all people.” Essentially, this is a sales side run riot. First of all, we can’t be all things. We can be several things, but all things? It demonstrates a lack of focus in a specific niche or market segment. It shows me that those leading the company really don’t know what they excel at; and, a shotgun approach, will allow them to hit enough targets to maintain revenue.
As you can expect, companies in this mindset have a tremendously difficult time getting their arms around an ever-expanding inventory asset. This sales team never has to get too deep in any vertical market. When they meet resistance, by someone more focused, they can switch directions and sell to a new audience. As you can imagine, this shifting sales focus causes fits for the inventory management folks.
By dabbling in several markets, it is very difficult to build enough volume with supply partners. This forces the inventory investor to purchase in less economical quantities and accumulate freight cost. Even if they are fortunate enough to make freight, the company is rarely able to qualify for the best discount level. The sales team chastises the investors for poor lazy negotiating when the whole problem was really created by an unfocused sales direction.
As you might imagine, companies that dip their toe into several markets often suffer diminished gross margin percentages compared to their focused competitors. By being so spread, it is often difficult to become experts in the diverse inventory offering. A lack of education is the number one cause of diminishing margins. When faced with a diminishing margin percentage, on a particular line of products, I often challenge audiences to ask themselves, “When was the last time we invited the manufacturer rep in for some product training?” When a sales team can’t sell the features and benefits, they drop the price to meet competition.
A further consequence of this shotgun approach is an overcrowding of warehouse space. In order to buy products in a reasonably economic quantity, the shelves will be loaded. When a material handing team is dealing with a very diverse product base, they are bound to have trouble receiving, stocking and pulling the product effectively. Technology solutions, such as warehouse management scanners, can help alleviate some of the identification problems; but overcrowding will still exist.
Dead stock will grow under this business philosophy. In order to keep up with the diversity of markets, the company will have to introduce a constant stream of new suppliers and items. For those of you who spend your time in inventory management, you are well aware that the number one cause of dead stock is brand new items. From vague customer commitments, to an “I can sell that” optimism, distributors are really bad at picking, turning and earning products. When posed with this question, most audience members suggest that less than 25 percent of the new products they introduce will ever bring a return on investment. It’s expensive to be an optimist.
The second proclamation that always makes me smile is, “We want to be the place people go when they can’t find it anywhere else in town.” Now if this isn’t a recipe for inventory aging, I don’t know what is. Perhaps there is a reason the item can’t be found anywhere else in town; no one is dumb enough to stock it. I don’t want to sound too harsh here, but I have run across this multiple times in my career. It is often followed by, “We are thinking about locating to a larger building.” You don’t need a larger building, friend, you just need to be able to say no.
I recently ran across this mentality when teaching a webinar on dead stock management. One of the participants asked how you reduce dead stock when you want to be the place where customers can find obscure items. I suggested that a “just in case” inventory philosophy was always going to produce dead and slow challenges. Then again, to these companies, is an item ever really dead?
I often see this problem manifest in multiple generation companies. The previous generations were so bent on developing sales, that inventory was an afterthought. These companies are often housed in large pre-war buildings with dust piled an inch thick. Many of these owners have the habit of buying out the inventory of competitors when those businesses failed. Essentially, they became hoarders.
Over time, the next generation thrived on this “always have it” reputation. A blind eye was turned to the proactive liquidation of this bargain inventory. Just so we are clear, bargain inventory doesn’t take up any less space than turning and earning inventory. Eventually, when banks start asking how the line of credit is collateralized, the blind eye might turn black around the edges. Banks do not take kindly to companies that collateralize their line of credit with “just in case” inventory. Trust me, I saw this happen first hand. A great third-generation company was taken out at the knees because they could not bring themselves to shed the aged inventory. Here’s a hint – when the manufacturer of the product has been out of business for the last decade, you might want to get its products off your shelves.
Let’s face it, old habits die hard. What built a company does not necessarily sustain a company into the next generation. The most successful distributors I have worked with are very focused about the markets they serve. They refuse to enter a market, or a product direction, until the current offering is self-sustaining. Don’t let yourself get spread too thin, and don’t let yourself get into the antiques business. As my grandfather, an antique dealer in retirement, once told me, “If you want to make a small fortune in the antiques business, start with a large one!”