The small stuff: Inventory shrink

Shane Soule

Profit is not consistently easy to come by in our industry. The very best companies can surpass double digits, but the vast majority of LBM players happily accept 3-5% return. Whenever I have the opportunity to ask, “What is your goal for improving your profitability?” I’m standardly met with an initiative to increase sales or margin. I rarely hear about attempts to focus on the inefficiencies that siphon profits away from the bottom line.

Earlier this year while doing a facility walk through at a lumberyard, I noticed a variety of concerning indicators with respect to inventory. Making my way through the cabinet area, I saw more cabinets than I’ve ever seen in one place in my whole career, and I estimated they must be selling tens of millions of dollars in cabinets. When I asked about sales totals, the two leaders I was with paused and asked one another if either “remembered” the sales totals. After an uncomfortable amount of time, one of them offered an estimate of “between 2-3 million.” They may have been able to see me physically register pain at that answer. A second warning indicator I recognized was the high percentage of boxes with large amounts of dust on top.

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As I got to know this company more, I realized they were doing many things very well. They manufactured multiple products and created a “direct” experience for their customers that no one else in their market was supplying. However, their profit levels weren’t where they should have been based on the strong value proposition they offered. While inventory management wasn’t the only reason for this, it was a strong contributor.

Inventory shrink is one of the easiest areas to register an immediately positive ROI and create quick process improvements. Here are a few specific areas to look at in your internal processes.

Cycle counts. How many times per year do you count your inventory? I would venture to say that over 50% of companies count their entire inventory only once per year, and usually at the end of the year. When large variances pop up, which tends to happen when you only count once a year, it’s nearly impossible to find out how it happened and backtrack to work on actual improvements. Therefore, nothing improves. Consider counting your entire inventory at least every 6-8 weeks and preferably every 4 weeks. This is easily done—and best done— through cycle counts scheduled through your ERP software.

Cycle count variance investigation. I tend to be a broken record as I promote the concept of identifying root cause/corrective action. Without this type of investigation, you’ll never fix your errors, and you’ll be doomed to repeat them over and over. Set up a process where you require a 24-hour root cause/corrective action on variances over $200. You can set up your ERP system to alert your manager of the variances, and then hold them accountable.

Special order management. Create a report of any special orders older than 30 days. Confirm that they are all live, meaning are they still wanted by the customer at the full price they paid. If it’s not live, require a root cause/ corrective action from the sales rep on how the issue happened. Holding this product in your inventory at full value is just kicking your problem down the curb. Put it in your discount center, advertise it, and move it quickly. If you can get 50% on these, you are money ahead of lying to yourself and having it sit in your inventory for months…or years.

Creating a culture of requiring answers to problems, in and of itself, results in improved behaviors due to increased accountability. Turn some of your 2021 focus from revenue and margin growth and put it into systemizing your inventory management. If you choose to budget a loss for inventory shrink, don’t tell your team it’s acceptable. Create a culture where all loss is unacceptable and considered a problem deserving the search for a solution. Culture and expectation are led from the top. It’s not about blame, but it is about continuous improvement. What you accept will always be read as the first chapter of what you teach.

 

Shane Soule consults with LBM and component companies to increase productivity and profits, and improve the experience for both customers and team members. Reach Shane at shane@shanesoule.com

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