This paper explains 6 mistakes that Wholesale Distributors make that impact their bottom lines and how to address these mistakes. Content provided by Jason Bader, Owner and Senior Consultant at The Distribution Team. Jason brings over 30 years of experience working in the distribution field.
1. Understand Who your Most Profitable Customers Are:
When we look at the breadth of our customer base, are they really all equal? I love it when I hear an order desk guy say that every customer is the same or I treat them all special. Really? Then why do we have different prices for some? The fact of the matter is that not all customers are the same. Some are more valuable to us than others. If we can all assume that this is basically true, how do we differentiate the good ones from the bad ones?
Here is a great exercise to do with your team. Gather everyone together and ask them to list the company's top ten customers on a sheet of paper. More often than not, volume will be the criteria used to determine status on the list. Some will go the extra mile and rank the customers by gross profit dollars. It is good to know where the mindset is currently. A couple of weeks later gather everyone again and ask them to list the top ten most profitable customers. There may be a few raised eyebrows and whispered suggestions that your memory isn't too sharp. Many people will think that you just asked them the same question and their list will be identical. If this is the case, it may be time for a quick discussion about the relationship between sales and net profit
If you want to drive net profit improvement through the organization, then everyone needs to become part of the mission. By understanding who our most profitable customers are, the sales teams can make better decisions on how to allocate company resources. They don't have the authority to allocate company resources? I beg to differ. When a customer requests an item that needs to be transferred in from another location, the order taker is about to make a decision. The outcome of that decision can directly affect your bottom line. Is this customer worthy of the transfer? Are they a positive contributor to the bottom line, or do they string us out on payment? Chances are we have not armed our order taker with the customer information necessary to make a good net profit decision.
2. Balancing Inventory Turns with Customer Service:
When I work with clients, one of their greatest concerns is the turning of inventory. This seems to be the prevailing metric associated with a healthy organization. The conventional wisdom appears to say that the faster you turn the inventory, the better you are. In fact, many organizations have developed incentives based solely on turning the product. While turns should be part of a compensation strategy, it can't be the only thing we measure.
If my compensation was based solely on inventory turns, I could easily achieve the goal. The fastest way to increase inventory turns is to reduce the average inventory value. If you want to reduce inventory, quit cutting purchase orders. Believe me, you would bring that average down in short order. Unfortunately, it would also have severe consequences on your sales figures – but that isn't what we are measuring. Can anyone see the danger? I am very concerned that distributors may be leaning toward a wholesale slashing of inventory values in order to preserve the cash. Things like buying budgets and buying after the 25th of the month might be coming out of the closet. Folks, these are dangerous practices that focus on short term gains and create long term problems.
If you want to reduce inventory value, take a hard look at the dead and dying inventory. Get rid of the inventory that no one seems to be interested in. Be very cautious when a supplier suggests that you need to carry the whole breadth of the line. Look at your safety stock levels on the least popular items. Breadth of line is ok, but don't allow depth in the less popular items. As I mentioned earlier, the wholesale reduction of purchase orders will have negative consequences. Without inventory on hand, your customers will see you as an unreliable supplier. This is why we must measure our customer service level in conjunction with the inventory turns. It is not good enough to just put inventory in our warehouse. We need to bring in the products our customers want. More importantly, we need to bring the products in when our customers want them. Meeting our customer needs is what the customer service metric is all about.
3. Skipping Cash Discounts:
Don't you just love running across some information that supports a practice you have always just assumed to be true? I found myself in this position recently. One of the best pieces of advice I ever received was, 'if you ever want to get your point across, prove it mathematically.' Numbers don't lie. Now some folks apply numbers in a way that is far from the truth; but, that isn't the numbers fault. Up until recently, I have always just accepted the general theory that it is a good idea to take cash discounts, when possible, when you pay your suppliers. In my experience, most distributors take cash discounts in times of strong revenues and solid cash flow; but when the business starts slowing down we tend to opt for extended dating. What recently hit me like a 2 x 4 across the backside of the noggin was this: If we don't take advantage of the cash discounts presented by our suppliers, we are essentially borrowing money at the highest interest rate most of us will ever experience.
4. Making Picking a Scavenger Hunt:
You have heard many times that inventory accuracy is the key to managing a successful operation. There are many ways that we skirt the rules and create inventory inaccuracy. We do it by not issuing the proper documentation for products, we take things from stock for Will Call that never get picked up and we take items as samples that are never recorded. Unfortunately, there are many ways to increase our inventory inaccuracy. One thing we can control very easily is making sure our picking processes are done with a high degree of accuracy.
When you have a new warehouse (I call it a vault) person, there is always the dilemma of what to have them do in those early days. Should they just watch the more experienced personnel? Should they clean the place up? Should they receive product? The answer is simple THEY SHOULD PICK! The reason you want your new vault personnel to pick items is because you already have someone checking the order before it is shipped. You have a built in safety net for the new person. They will make mistakes just because they are new.
If you want to help your new vault personnel learn your products and system quicker, try sitting down with them every night for one week and go through the orders they picked that day. These are the ones that were corrected at the shipping table. You want to talk to them about why they picked the items they did and why some items were picked wrong. You are not grilling them for inaccuracy, but you are trying to determine why matching up the pick ticket with the product location and product did not go as smoothly as you might have imagined.
5. Choosing the Right Supplier:
Are you a buyer of product or an investor of company money? This is the question I invite all purchasing professionals to ask themselves. Those of you who are familiar with my inventory management philosophy know that I am constantly asking buyers to look beyond the clerical function of the job. We buy sophisticated computers to handle those mind numbing tasks. The fact that many distributors do not use their software to free up the buyers time is a whole other can of worms. When you make the move to investor of company money, don't be satisfied with price analysis alone. When did we develop this myopic view about the role of the inventory investor? If you are just focused on saving the net price nickels, you are missing the big dollars available in total return on inventory investment.
Total return on investment is achieved by working with suppliers who support your overall inventory replenishment goals. Do they ship complete? Do they have consistent lead times? Do you get the products you ordered? Do they help you manage your dead and slow moving inventory? When we choose suppliers that do not live up to these ideals, there is a cost. We invest money to cover up these substandard practices. This investment comes in the form of safety stock. Bear in mind, safety stock is an insurance policy designed to protect our customer service goals from poor performing suppliers. I sure hope our insurance premium is smaller than the percent we saved in net price. If you really go back and do the math, you will start to understand the value of those suppliers who give you a total return on investment.
6. Liquidating Dead Inventory:
I recently spent some time with a large distributor in Florida. The original reason for my visit was to assess the company's purchasing procedures and look for ways to improve the procurement process. After spending some time with the purchasing director, I happened to notice a report on his desk outlining the inventory turns for the last two years. Just like a good salesman, consultants learn to read upside down just in case there might be some important information residing on someone's desk. I asked about the report and indeed confirmed that it was a monthly turn's history. Over the last 6 months, the turns had been dropping at an alarming rate. To give you a context of alarming, the turns had dropped from around 3.6 to 3.1 turns.
Although I had not been originally hired to look at this trend specifically, it was apparent that this decline was causing more than its fair share of anxiety. This anxiety was compounded by the fact that my client, the purchasing manager, had just taken over the team 8 months ago. What had started out as a broad based task had now revealed a very specific goal: arrest the declining turns and reverse the trend. Like many other indicators in our businesses, turns is simply a comparative ratio. In the numerator, we look at the cost of goods sold from stock sales for the past 12 months. We are diligent to make sure that we exclude any sales that may not be from our local stock inventory: direct ships, transfers to fill a back order, etc.
Some software makes it difficult to filter out certain transactions, so we might have a little inflation in our numerator. But hey, we are bench marking against ourselves. As long as we keep measuring it the same way, progress can be measured. While we are talking about bench marking here, be sure to always measure against your own numbers. Be skeptical of the validity of 'industry standards'. I just mentioned a couple of ways that the ratio can be skewed. Besides, some of us tend to paint a slightly rosy picture when we respond to industry surveys. But I digress. The denominator of our turns ratio is the average inventory value. This is a far more stable value; but it can be slightly misleading due to the way our software calculates the average. By the way, the most pure way to find the average is to take 12 months of inventory values and divide by 12. Did I mention that consultants have a flare for stating the obvious; and then try to pass it off as something really profound?
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