Taking stock

Mastering the art of inventory management can mean the difference between profit and loss for any distributor handling fast-moving IT products. Fresh from leading a workshop on the subject at last month’s DISTREE XXL event, distribution guru and principal consultant at CapitalSteps, Guy Whitcroft, sat down with Channel Middle East to reveal the secrets of good stock management.

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Taking stock
By  Andrew Seymour Published  March 10, 2010 Channel Middle East Logo

Has the downturn led to the rules of inventory management changing?

In general, the rules of inventory management haven’t changed — you just need to be more focused on all of your areas of capital utilisation. When cash is tight you have got to manage it more accurately and carefully, but the fundamentals will always be the same in any market. I see four pillars of inventory management — you can call it ‘ABCD’. A is accurate forecasting, B is for being dispassionate, C is for clear ageing inventory and D is for direct link to pay.

Let’s talk about forecasting first. How often should distributors be looking at purchasing and sell-out trends?

Many people look at monthly patterns for inventory but in the PC and peripheral market that is much too long because the product life-cycles are so short. You need to look at weekly cycles — those are where you will see the trend lines occurring.

Would you say it is better to be conservative, rather than aggressive, when ordering new products?

Yes, people fall in love with their products and they over-order; they believe that the new model will immediately result in huge sales. No matter how popular the new product becomes, there is a ramp-up period so build that into your orders and your forecasting. Don’t anticipate that you will go from zero to a zillion units in two weeks, it just never happens. The other thing on that is taking out the buffer. Most people order a buffer stock, just in case they get more sales. Take those out, be accurate in your forecasting and you don’t need the buffer. The buffer is there for lazy stock management.

What is potentially more damaging to a distie — over-forecasting or under-forecasting on inventory?

It depends on the scale, quite honestly, because both can be damaging. If you are known as constantly being out of stock then customers are only going to come to you as a last resort, so you will order less because fewer customers are coming to you and then get into a downward spiral. But if you are constantly over-stocked you are going to run out of money very quickly. So, in fact, both are equally bad for different reasons, but I would rather occasionally be under-stocked than occasionally be severely over-stocked. Apart from the monetary issues, the problem with occasional over-stocking is where do you store the stuff? It creates physical constraints.

What are the hidden costs associated with bad stock management?

Too much inventory costs you money, that’s clear. It costs you money in terms of both tying up more working capital and space to store it. Your insurance costs go up and your staff costs go up because you need more people to manage this inventory. Your opportunity costs are in there as well, which people often forget about. Your opportunity cost is the cost that you lose or gain turning inventory back into cash to buy more inventory to make a profit on that. The quicker you do that, the better.

Let’s return to your ‘ABCD’ pillars and the part about being dispassionate. What is that about?

It is really about standing back from your brand or your product and saying, ‘am I making money out of it?’ Don’t be afraid to cut products where you don’t make money, no matter how big the brand. The only caveat is if it is a very big traffic generator you could afford to have a much lower level of profitability or perhaps even break-even level by viewing it as a marketing cost. But never allow a product to lose money. Don’t do the ‘help a friend’ thing just because your vendor sales rep suddenly needs help making that quarter’s numbers. You cannot afford to do that because just as that person is your friend when they need help, when it comes round to the next quarter and you need their help in clearing all this stuff, suddenly that friendship is forgotten.

Speaking of which, how much of an issue is channel stuffing these days?

From speaking to distributors at DISTREE XXL, I have to say that the level of channel stuffing last year was probably at an all-time high in terms of percentage of sales because few of the vendors made appropriate adjustments to their targets. One or two did, but most didn’t. And so they just said to their sales people, ‘we don’t care that the forecast is for 10% lower sales, you are going to make the number or else.’ As a result, there was serious channel stuffing. There is probably a lot of inventory buried in the channel that still needs to flush through so I think the first two quarters of this year could see some of that flushing out. I certainly hope they can flush it out otherwise you are going to see some disties in trouble.

What about the ‘C’ — clearing ageing inventory. How important is that?

PCs have a very short shelf life and you have got to keep them moving through. Your values are not going to increase as you hold the stock longer because of the life-cycle of the models. If any of your PCs are more than 60 days old you should be clearing them out very quickly. And if you have to clear them below cost, do it, because it is going to be cheaper than holding them.

And finally, the ‘D’ — direct link to pay. Tell us how that works.

Provisions must be linked to the gross profit of the division so the product managers feel it, the general managers feel it and even the executive managers feel it. That keeps everybody focused on getting the inventory moving at all times. Also, you should link total inventory levels to pay in the same way by giving people a maximum level to operate within. Anything over that, they feel the cost of money and any other costs that are appropriate against the profitability of their business.

How rigorously should that policy be enforced by distributors?

I am not saying that you necessarily penalise people from dollar one of the provisions. You will always have some stocks over because you may have bought products in specifically for a project that has been delayed but you know the customer is going to take them. So do allow some leeway before the penalisation kicks in, but ensure the provisions are clear, unambiguous and fixed — a couple of percent of the ‘allowable’ maximum stock value. Don’t tie it to the ‘actual’ stock value because people will just over-order to reduce the apparent level of provisions in percentage terms.

2778 days ago
Mita

It is indeed a good article. Guy is also presenting at specific channel workshops on this and other topics. Details are on the LinkedIn Group - Channel Buzz if anyone is interested

2806 days ago
Peter Gamsjaeger

This article is really worth to read and to follow. A proper stock management in the distribution channel will avoid a lot of trouble and cost

2807 days ago
othman

this is one of the best said about Product/Stock management. if any disti apply 50% of this, that disti will be fine at any point of time no matter what. looking forward to see this every where as this will reflect on vendors and the result will be a healthy business for all, Vendor-Disti-Channel.

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