Do you have a process to evaluate the productivity of your inventory?
Inventory decisions are at the heart of an ultimate Lumber Yard goal: getting the right product to the right customer at the right time—via the right channel—at the right price, while being profitable! With the New Year upon us, many lumber yards are taking physical inventories. If some of your inventory has had more than one birthday maybe it’s time for a new approach.
It’s easy to look at items or product categories of materials that you often special order for customers and decide to carry them as stocking items. Savvy vendors often offer incentives, such as free goods, extended terms, etc. to convince you to bring their line into your inventory…. But, when and how do you keep from becoming bloated with slow sellers? The challenge is to manage what we call ‘inventory creep”.
Here’s a suggested exercise we use: look back a few years and compare how many lines you carried and how many dollars you invested then versus what you ended 2017 with. Many will find they have experienced unintended “inventory creep”.
What to do? We recommend creating a few baseline metrics that will help take some of the opinion, or gut feeling out of the evaluation process. If your software provides inventory turns by category, that is a great way to get started.
Say your business turns its inventory overall 6 times, then start low, by looking at categories that turn two times or less… you will be surprised at what shows up. Once you have that list, an examination of the individual items within that line will be very revealing… some items haven’t sold at all, some surprisingly little. Exiting categories or items within categories, is the best way to free up inventory dollars to either deepen the quantities you carry of the best sellers, or to add a new category that you believe could be a winner.
Can’t easily measure turns by category? How about a simple Gross Margin Return on Investment evaluation (GMROI). Gross Margin dollars generated by an item, or preferably a line of items, divided by the dollars you have invested in the line, will reveal some big surprises, and lead to sound, and easy decisions. A good rule of thumb, for every $100.00 dollars you invest you want a minimum of $200.00 hundred dollars in return. Here is an example:
Gross Margin $ 80,000
Average Inventory $35,500
As you are doing your evaluation, if the inventory turn of an item or category is low, then then you want to have a higher GM$ contribution. If the inventory turn his high, you can afford a lower GM$ contribution. There are other ways to uncover the things that slow your turns and tie up capital unnecessarily, too.
It’s not just about dropping a lot of items from your stocking inventory… many other actions can be taken to try to improve the productivity of an item or line, which in turn just makes the overall business just that much better.