At its core, the mission of distribution companies hasn’t changed over the years. It’s about buying inventory, stocking it, and then reselling it. But even if the basic principles remain the same, the distribution industry is changing:
- There are significant margin pressures, with distributors caught between manufacturers that want them to be more efficient, and retailers that want them to be more responsive.
- Disintermediation is an increasing threat, where suppliers provide customers direct access to a product, cutting out the need for a distributor.
- There is tougher competition with new e-commerce entrants, and with an aging workforce, a struggle to find a new generation of leaders.
However, there are many tools and options available to modern distributors which can help them survive challenging times, making them more productive, efficient and thereby more fiscally responsible.
Many of these tools focus on inventory that’s in the warehouse – making the business more cost-efficient and agile.
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Inventory management – think about the product mix
Inventory is the second largest asset to a company, so a lot of care must go into feeding it. Businesses should be using inventory management and control tools, which maintains the value of that asset on the books. This helps secure lines of credit, as well as establish value to the business.
For many distribution businesses, inventory is based on what they added from supplier lines to their product card. In many cases, the vendor has created a suggested starting inventory based on dollars, without thinking about the product mix.
However, inventory management should be much more than just classifying your A, B, C and D items. Product mix needs to be considered, with tools put in place to ensure that the distributor is supplying not just that vendor’s line and that the right item at the right price at the right time is available for your customers.
What should your distribution business do?
1) Add product to the inventory based on new product announcements or enhancements to the existing product lines
“New and improved” carry significant weight on being able to sell these items to your customer base.
2) Supply customers non-stock items from supplier catalogs to customers
In some distribution marketplaces, non-stock sales can be 50, 60, or even 70% greater than your stock sales from the same line. A great starting point is doing a quick analysis of non-stock versus stock sales, and getting a handle on just where your revenue is coming from. Armed with this information, distributors can start working on the lines where they can make the most impact.
3) Realistically age inventory
Back when distributors did a hard-core annual physical inventory count, it was easy to walk through a warehouse and note the items that colored stickers stuck to them. This visual clue gave a real clear sense of what items they stocked that nobody wants. The same can be done today with modern computing technology today. Inventory that you stock that hasn’t had a sale for more than two or three years might need to be replaced with non-stock items that were moving.
Let’s imagine you have $10,000 worth of inventory from your supplier. Looking at sales reports, you determine that this inventory is generating $15,000 in revenue. However, your total annual sales for this supplier total $40,000. This indicates you’re not making the most of your inventory investment – specifically due to issues in housing, moving and counting.
Next, look at which items are generating the $15,000 of sales from your inventory. Assuming 50% of the stock is being sold on a consistent basis, it could mean that 50% is sitting idle, while you are paying for it to loaf around. Start thinking of inventory as cash in your warehouse.
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What stock is making you money, and what stock is getting dirty and dusty?
- Carefully analyze which nonstock items you sell on a somewhat consistent basis and to which customers. This will give you a good indication of what products are in demand and from whom.
- Were these truly one-off sales where your customers manufacturing needs or product needs were highly specialized?
- Are these items that your customer will continue to be using for the foreseeable future?
Have conversations with your supplier
Don’t dump the 50% of your inventory that isn’t moving. But you might be able to replace it with items that ‘are’ moving.
- Negotiating a return for the products that don’t move makes great sense for a distributor and supplier. It will help the distributor provide better service to customers, and means there is sales data a supplier can use which helps them give updates what’s moving in your territory.
- Distributors should negotiate with multiple suppliers. What’s key is not losing inventory value, but rather making sure the inventory spending working them and customers, rather than collecting dust.
Inventory control should be at the top-of-mind for anybody in the wholesale distribution business. You need to understand what you have, what’s happening with your stock, and find ways to cut costs, and speed up fulfillment. It could be the difference between financial failure and success.