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Real Issues. Real Answers. Inventory levels and buying smart

The pandemic has thrown a wrench into the LBM distribution channel. Instead of relying on projected business and forecasts, dealers and distributors are unsure which products and materials to purchase and in what quantities, and how to strategically manage inventory levels. That’s why the topic of this month’s Real Issues survey, which was posed by multiple readers, is about inventory levels and buying smart.

How would you advise this dealer?

“One of our biggest challenges is knowing how much material to buy and when to buy. With some mills shutting down due to the pandemic, supplies are tight and material prices are rising, giving us a two- and sometimes three-tier market. We used to base purchases on projected business and forecasts. Now we’re trying to figure out where business is headed, and how to be smart about our buying and our inventory levels. How are other dealers dealing with this situation?”

Dealer and distributor responses

“On items that have been tough to get we are buying everything that comes our way. I would rather be overstocked than trying to sell from an empty cart.”

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“We are still trying to buy as needed/ projected and allowing for price increases and shipping delays.”

“We have decided to buy conservatively. If it means buying more often, we at least have a tighter grip on the reigns to not overbuy in anticipation of ‘hopeful’ sales.”

“We’re running into the same thing. My advice is to talk to as many people as possible. Expand your network to include real estate professionals and other trades, not just those in the building material business. Reach out to your colleagues both locally and nationally to see what they’re hearing. We were experiencing a shortage of a certain product recently, so I went to LinkedIn and searched for fellow alumni from my college who work for that manufacturer. I found five people and I had answers within 24 hours (not necessarily the ones I wanted, but at least I knew what to expect). Communicate with your customers about potential shortages early and often so it isn’t unexpected when something doesn’t show up.”

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“This seems to be an industry-wide issue from what we can see. Knowing when and where to buy is so tricky right now due to the volatility of the market. We’ve worked really closely with our pro guys to try and figure out their future purchases with us, so we can make better decisions for our purchases.”

“Maintaining reasonable levels of items that we know will move day-in and day-out. Ordering slow movers and special-order items as needed. Sourcing some items from secondary sources that can ship quicker at a higher cost, which we sell at slightly lower margins.”

“We buy as much as we can afford. Costs are only going to increase.”

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“I’m relying on my major contractor accounts to tell me how many confirmed jobs they have. After I cover those materials, I monitor the buying strengths of my walk-in cash business. Neither of those have really slowed for me, so my tactic is to guard my inventory and buy conservatively in the rising market to make sure I don’t have too much inventory when prices begin to fall. With mills controlling the supply chain, I do my best to be transparent and keep customers informed. I’m also talking with my main lumber suppliers at least twice a week to keep informed. In the end, the best advice is to take care of your loyal customers and hang on tight!”

“It all comes down to cash-flow. What are your accounts receivable (AR), accounts payable (AP) plus operation costs? If you have good current AR and AP, load-up on materials if the market is low, but if AR is slow and AP is lagging, watch your cash-flow. And it is very important to talk with your customers and see what they have in the pipeline for upcoming projects. Are they busy  or do they see a slowdown? A 10% GM on sales of 500/m is better than 10% on 300/m.”

“Buy what you need short term, with no speculative purchases. Limit your quote exposure to two weeks (easier said than done).”

“We were poised to deal with this and have been always ready for this type of situation. We work strongly with and are committed to the livelihood of our vendors. We are true partners. So, when inventory is scarce, we are still able to obtain it because we have never paid a bill late in our 86 years, we treat our vendors as family, and we work at these relationships. They are just as vital as customers to our well-being.”

“We make an educated guess at the items that we think will always be in demand, then take an optimistic guess of what the demand for those items will be, make the required purchases, then pray the ‘wheels don’t fall off’ and we end up with a decent market. It sounds simple but it’s really just gambling.”

“In a market like this, we don’t speculate. We only buy what we need. It’s like trying to time the stock market. Leave that to the pros.”

“Stick with your purchase history, get feedback from your suppliers about anticipated supply chain issues and make your decision from there.”

“We have been fortunate in that business has been quite good through this entire stretch. Buying has been challenging due to reduced availability, but now is when relationships built with our suppliers and an excellent pay history pays dividends. Where business is going from here is the most difficult part of the equation, and we are as unsure as everyone else.”

“Don’t buy any more than you can absorb within 30 days. When this market turns, and it will, it’s going to fall hard and fast.”

“We are keeping six weeks of lumber and panels on the ground or in the pipeline due to lead times and shortages. The reason for this strategy is that we are very busy at present and business looks promising at least for the next quarter or so.”

“Still trying to produce turns with just-in-time ordering when possible. Also trying to keep levels low to prepare for the price correction that is to come at some point. However, recognizing when we get the opportunity to buy hard-to-get items such as finger-jointed or Yellow pine, you need to make a buy to keep your customers going. We find our customers are more willing to pay the higher price than not have material at all.”

“We are members of NRLA, EBMDA, HBA and NARI. We lean on other group members to see what their thoughts are. We also use our membership in those industry groups to challenge legislators.”

“Buy as needed with an inventory level high enough to sustain larger than normal demand, but not too great to be hurt by falling prices.”

“If supply is there, buy now!”

“If you have many years in the business, go with your instincts. If you’re not a member of a buying co-op, join one that fits your business. I’m a member of LMC. The commodity buyers are knowledgeable and are talking to mills every day. Good resource to use when also dealing with wholesale or office brokers. I base my buying on business expectations and buy heavier when we see shortages.”

“Lots of communication with our sales staff and our customer base. This situation is something we’ve never had to deal with, so constant communication is a must. We had conference calls every week to evaluate the pulse of the business. What we’ve found out is that having the inventory to supply our customers is huge. Price or the competition was not in the equation.”

“We are constantly talking with our contractors to see how they are doing, what’s coming up, and what their year is looking like. We also can somewhat gauge our demand by the quote volume at our truss plant. We are using a guarded approach with projections, as much of that is now unknown.”

“We are using the same forecasting models we always have and are adjusting our lead times on getting the product to us on a daily basis. Just staying in tune with lead times is a full-time job, but necessary in today’s market.”

“There is a pent-up market. We are forecasting a boom economy. Buy, buy, buy. Cause you’re going to need it to sell.”

“Any product is getting tough to find, regardless of price. Even nails and screws. Take what you find when and where you find it. You may not get it later.”

“We are covering about 50% of our order file as we believe it is at risk of shipping late or not at all.”

“In the current environment, I would keep a low basic level of inventory, cover longer projects, and buy hand-to-mouth.”

“We are maintaining our inventory levels at the same level as before COVID-19. Our biggest issue is the huge fluctuation in lead times. We are having to buy our project work two- to four-weeks out over normal times.”

“Let your customers know that inventory is a serious issue and they need to plan ahead.”

“Stock up. The food chain is getting tight.”

“Our business has not yet dropped significantly, so we continue to buy, and our inventory levels are at maximum. I think the building industry will pick back up, and I would place my bets on having the inventory in stock to be prepared for the uptick, especially as some supplies are tight with prices ascending.”

“Simple, you need to get your sales staff together and request they get the next 90 days (at least) of ‘sold’ business written up and allocating your inventory. We’re often contracted for projects that will take months to build out and don’t always have the entire project committing our inventory. In times like these, it’s critical you see what’s ahead of you. Beyond what’s sold you need to anticipate seasonal swings and hope for the best. Until crystal balls are commonplace, there’s a little bit of speculation on your part as a buyer.”

“Use your best judgement. Get as much information from the sales team and try your best to match inventory needs for at least six weeks. This is not the time to go deep with speculative purchasing. If you have to quote several months out, make sure to add enough margin to help lower the risk.”

“I have personally called our large builders and communicated the supply chain issue.”

“Try to stay a month ahead.”

“Buy as much as they can early. Dealers are aware of paying the higher price, but they are continuing to pay the higher cost and passing it to the contractor or end-user.”

“Transparency. We are communicating with clients and potential clients— especially those with  larger  projects in planning. All of our customers know what’s going on with COVID and now the protests. They understand when we tell them about supply chain disruptions, delays, and cost surprises, and advise them to allow for schedule and budget variables—just in case. Their clients have also been understanding. For that matter, if a consumer or contractor is not understanding, that’s a red flag for us of potential difficulty and to tread carefully with them—and to quote accordingly.”

“You need to have enough on hand to be able to ship jobs. Today’s prices are so high, you don’t want to buy too much and be caught with high priced inventory if the market comes down. We had a big inventory (90 days) on hand before the shutdowns, so we are only buying enough to keep going for 30 or so days.”

“We have been as transparent and honest with our customers as possible. There is no sugar-coating reality with ‘maybe,’ or ‘I think,’ or ‘probably.’ We order what the customer needs if we don’t have it in stock, make sure they know the date we are expecting it, and let them know that there is a chance of delay. We make sure to tell our customers to prepare for long-lead times and plan for it. We immediately let our customers know of any delay and work for a better time every time. That’s all we can do.”

“Our bigger issue is that sales are well above plan and we are tasked to stay in stock. Not panic buying, but controlled chaos. We have had to be in the three-tiered market every day on the buy side. On the sell side, we are still maintaining our price strategy as competition may or may not be pricing on current market. We do not want to be perceived as gouging in any way, yet close to or even upside down on selling at market and buying fill-in.”

“You can’t second guess the market. You can try, but it won’t work. Continue to do what you have always done with projected business and forecasts. Steady as she goes!”

“Keep enough basic lumber to fill frame orders. Watch your good movers for good pricing from mills. Mix trucks of spruce & yellow pine for best inventory coverage.”

We are a young business that is experiencing double-digit growth year-after-year, which makes it hard to forecast sales and plan purchases. But I take solace in the fact that the LBM industry cannot be easily digitized or done from home. The supply chain has been disrupted, which makes our jobs even harder, but demand is very high in our part of the country, so we are working to increase our inventory levels.”

“We have good data showing our ‘normal’ rate of sales from the past and we know the same data on future commitments from our bids, and after that we add our best guess.”

“We’re buying most anything that we can find that we will need over the next few months. With rising prices, strong demand, and short supply, we’re thinking that the company that has the inventory will make the sale.”

“Stay on top of market information, utilize all reports from industry pundits. Know what is going on around you and your area of business. Use this time as a learning tool to prevent getting caught up in the hype. If you have experience buying, use your knowledge and intuition. If you are behind the eight ball now, you waited too long. The key is to anticipate.”

“Since no one knows when the next shoe will drop, but as business is actually great, we buy for 2-3 weeks out max. If we miss buying at a low, we price it appropriately higher and accept the results. Being in stock is the chief goal, rather than finessing the market.”

“Using projected sales and availability, and not buying more than 3-4 weeks of inventory. No idea what the market or sales will be like. Who could have predicted the virus or how it was handled!”

“On materials that I’m confident I’ll move, it’s buying as usual, often looking/asking for any sort of deal the manufacturer or distributor may have. Never hurts to ask. On items that are a little more iffy, I will rely more on a 2-step model and again, seek out possible deals. I know I may have to pay a little more for an item and make a little less margin, but as long as it’s the exception and not the rule, things will work out.”

“We have increased our inventory stocking levels by 20% to accommodate longer lead times so we don’t run out of product. Can’t sell the product if you don’t have it. When the market becomes more stable, we will go back to our old stocking levels.”

“Since this is uncharted territory for everyone it is almost impossible to say. We have all seen shortages of products, with allotments and allocation over the years due to natural disasters, transportation issues, etc., but that is often more of a regional problem. This is a far broader issue, and I think there is no general answer that will work for everyone. Keeping a good line of open communication with your bigger customers may provide some guidance. What we have seen in our market, which is about 100 miles north of NYC, has been the flood of customers who are second homeowners doing a lot of outdoor projects. Now that construction is opening up again, we are all behind the eight ball, and supply chain issues are not going to get significantly better any time soon. I really think the only thing we can do is keep communicating with our customers and relying on our experience and gut feelings, and perhaps a prayer for some clarity of thinking to guide us to decisions that make the most sense.”

“We are in the same boat. Holding our breath that everything will return to normal soon and hoping for the best.”

“We have multiple suppliers and contact each to find out who has the product we need and keep up with the current prices. We are a small yard so we only stock one or two bundles of most lumber so that makes it harder.”

“First, I’m calling my customers to see what jobs they have coming up soon and what type the majority of material is. With everyone at home because of the COVID-19 situation, walk-in trade has doubled. I walk my yard every single day to check inventory and buy what I need and double my orders of the most popular material if I can find it. Prices are changing daily at the suppliers so I’m changing sell prices as needed.”

“Have 90 days of wood on the ground or rolling. The cost of money is incidental.”

“You don’t want to be the ‘out of stock guy.’ Your customers will stop checking with you if you never have enough product. Get with your salesmen and have them discuss things with their builders and see what they have coming up. That may give you an idea of where your stock levels will need to be over the next couple months.”

Wholesale distributor responses

“Buying just-in-time is temporarily suspended. Identify the A items and plan to buy narrow and deep. For the B and lower items, depend on local distribution.”

“Advice: For every product line, contact your best one or two suppliers and ask their advice. ‘What do we need to buy now so that we are not out in the next 3-6 months?’ Forget just-in-time delivery. Put as many dollars into inventory as you can. Partner with your banker for a low interest inventory loan if you don’t have enough internal cash.”

“We have made the decision to purchase at levels to support revenues pre-COVID. We are a wholesale distributor, so we supplement mill purchases for our dealer customers. We feel we will become more important in the supply chain to our dealer customers who buy JIT and keep stocking levels low.”

“Wise dealers should be working more closely with wholesale distributors, as we continue to carry inventory to bail everyone out when times are uncertain. However, when things are rolling along, we are soon forgotten! Bitter? Maybe a little, due to the lack of loyalty of some dealers. You know who you are!”

“As with all recessionary periods, ‘cash is king!’ Retailers reduce their inventories to free up credit lines and look to their local distributors to fill their needs. If you have a strong balance sheet, I would tend to invest it in specialty product inventories. Commodities are a different issue as prices will likely remain extremely volatile. We are already seeing signs that housing will likely stay strong through the downturn and interest rates will remain very low. Unlike the 2008 recession I believe that housing will lead us out of the current recession as there is plenty of demand. I say invest in inventory if you have the cash and credit line.”

Manufacturer and service provider responses

“Currently, we are keeping our inventory levels down. We may miss some opportunities but cash is king in uncertain times.”

“Buy what you can when you can. Put in a grocery list with your supplier and let them fill your bag with what they have in inventory and be willing to buy off-grade to fill in for the time being.”

“Rely on your wholesale distribution partners more for just-in-time delivery. You’ll pay a little more initially but as business picks up your inventory can adjust more quickly to activity levels.”

“We all need to work closely with our business partners. Try to get them to communicate what they will be needing moving forward. What commitments do they have in-hand? Same thing on the supply side. Talk to your vendors daily. We are much better when we all work together.”

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