Editor’s Note: Gene Marks is a small business management columnist, author, and speaker who also owns and operates The Marks Group PC, a highly successful 10-person firm that provides technology and consulting services to small and medium sized businesses. The Marks Group PC, launched in 2004, has grown to help more than 500 companies and more than 2,000 individuals throughout the country. Gene writes weekly online columns for The New York Times and Forbes, as well as monthly and bi-weekly columns for Bloomberg Business Week and American City Business Journals. Intuit has, on several occasions, contracted Gene to provide marketing-related services.
“But I need to carry these items,” Sam whined to me one day. “What if a customer called and I didn’t have it in stock?”
Do you have customers who are distributors? Fine, then it’s their business to carry inventory. They’re the middle man. Inventory is their life. They’re being paid to make sure stuff is in stock so the manufacturer doesn’t have to.
But wait, you have customers who are not distributors? They manufacture? They provide services? Then you, as their banker, should say to this them: “What the HELL are you doing with extra inventory in your shop? Shame on you!”
Sam sells and services fire protection systems to restaurants and retail customers. He’s got inventory lying around all over the place. He’s got a warehouse with spare parts stacked up to the ceiling. He’s got a dozen trucks on the road with parts stuck in every crevice. Some of his techs keep materials in their own homes.
This surplus inventory is sucking out the cash. He’s leasing more warehouse space than he needs. He’s incurring utilities and other additional overhead costs. He’s losing production administering and accounting for missing parts. And he’s missing parts. Fifty bucks here, 50 bucks there. Sam’s company tosses out thousands of dollars each year on inventory mismanagement. It costs Sam MORE money just to keep a lot of this inventory then not.
“But,” he tells you, “what if a customer called and he didn’t have it in stock?”
Well, that depends on the customer! Sam wants to make sure he has stuff in-house so that if ANY customer calls he can get a replacement part right out to them. It’s not a great idea. If the customer is a high dollar, high turnover account then carrying inventory especially for them would make sense. But if it’s not, then other arrangements have to be made.
Tell him to dump that inventory. Sell it back to the manufacturer. Scrap it. Set it on fire. Whatever, just reduce it. Re-negotiate your lease for less space. Put a ping pong table in that newly created area so your people can have some fun on their lunch break. Or build a room there and move in your teenage son. There are a lot of great things you can do once you’ve relieved yourself of excess inventory.
It’s your job to help Sam re-think how he is servicing some of his customers. Can most parts be over-nighted from the manufacturer? If it’s going to be less expensive to pay that shipping cost, should he then carry the part in-house? Are the parts truly mission critical? Can they wait a day or two? Will Sam lose a significant amount of business because it takes an extra day to get that part in? Or is he losing more money on that account by keeping the part in stock?
By Gene Marks