Tuesday, April 13, 2010

Tips for Using Your Floor Covering Supply Chain to Reduce Your Inventory Investment

Recently Jim Gould wrote a post on this site about managing your floor covering inventory investment in Avoiding Cash Traps and the Recession Slows and Business Grows in which he talked about how inventory consumes a lot of business capital that could be available for other purposes. David Wootton also described inventory as “a big box of dollar bills” in his post that talked about methods for preparing your annual budgets. I could not agree more  - inventory is a cash trap - in fact, I always say that inventory should be the buyer's biggest client, meaning you have a bigger investment in inventory than any customer. With so much at stake you need to use innovative methods to manage your inventory investment.


One of the best way to reduce your inventory investment is to use the resources of your supply chain. In my experience, businesses put a lot of money and effort into sales and marketing but place less focus on the supply chain. Normally you have fewer suppliers than customers and focusing on the supplier relationships can yield incredible results. Today I want to share some of the methods I have used in the past to reduce the amount of cash tied up in inventory.

Realize that you and your suppliers have mutual interests in common and use those common interests as leverage.
  • Once a year create a budget with incentives and obligations for both sides based upon the market conditions. If markets change, amend the budgets and targets. 
  • Include a retroactive rebate – if your sales exceed "y" percent more than your target you receive a "z" percent retroactive rebate.
Most suppliers will be prepared to do this and it shows you are committed to the supplier relationship. I can tell you from my own experience that this is a very successful tool that can contribute more than imaginable in annual profits.

Improve delivery times and service. If the supplier informs you that he requires a 4-week delivery schedule this could mean you will have to increase your inventory on hand. That will trap your cash and place you at a disadvantage. To turn this around you should sit down with the supplier and discuss how to improve delivery and service levels so that you receive stock faster or more frequently.

One way to achieve this is to provide the supplier with your sales history and forecast for his product.
  • A sales history would typically include the average sales per month over a certain period (normally 104 months) and your forecast for the next 3-4 months.  A forecast is not binding and in practice the supplier may only see a percentage of your forecast in realized sales but your information, combined with that of other buyers of the same product, will help the supplier manage his production.
  • Guarantee that you will purchase a minimum amount of product but let the supplier keep the inventory and bill you as the orders are shipped. Most suppliers are prepared to do this. It helps them to manage production which is a benefit to them. If the supplier does not want to keep inventory on hand then the discussion should expand to keeping raw materials on hand so that production can happen quickly to fill your orders and shorten delivery times.  Of course, keeping both inventory and raw materials on hand for you is the best of both worlds, if that is applicable and possible.  Trims and moldings are a good example of products for which this scenario may apply.
  • Better terms should always be part of the discussion. A supplier is often prepared to give better terms for customers that order on a regular basis but this does not mean that you should agree to buy exclusively from that supplier. It is best in most cases to keep those options open.
Monitor the supplier agreement on a regular basis. While you are no doubt accustomed to suppliers monitoring your performance, you also need to monitor theirs. Review to ensure that all parameters are being met and systems are working as mutually agreed. An added benefit to creating a mutual agreement with your supplier is that it changes your leverage and puts your supplier on a different footing. They then begin to make similar arrangements with their suppliers, so the total supply-chain benefits.

Other areas where hidden costs are common: communications and travel. Always ask if travel is absolutely needed or whether you can you travel at another time in combination with another trip. Ask people to come to you. Use Skype for conferences. Skype is also available on the I-phone and Blackberry.

Take a look also at the way you communicate internally. Complicated internal communications (bureaucracy) do not generally contribute directly to success in sales or buying and can kill an organization over time. Shorter communication lines - from the top down and back up - mean a leaner organization. You need this, especially under the current market conditions, although if you follow the same principles when the market is good again, you will certainly see more improvement.

I hope this gives you some food for thought. In my next article I will write about "painless negotiations."

Please give your comments; I will greatly appreciate it.
Best regards,
Ruud  Steenvoorden

Ruud Steenvorden is president of Steenvorden Consultancy and a member of the Floor Covering Institute. 

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