Tough Call: The expensive inventory blues

expensive inventory
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Your decision to stock up on commodity lumber and panels just before prices plunged has stuck you with a lot of expensive inventory. What would you do?

Having grown up in the LBM business, including owning your own company for the past 20 years, you’re no stranger to price spikes. When you deal with commodity products, prices are going to be fluid. But nothing you’d experienced—including the incredibly disruptive Great Recession—can compare to the insane price fluctuations of the past year. While you and your management team have successfully navigated most of the pandemic-related chaos, including hiring several next-gen pros, the big challenge you’re facing now is a yard filled with wildly expensive inventory.

Your salespeople, who were frustrated at months-long backorders of many products, urged you to maintain an inventory position in fundamental materials, but now they’re painfully aware of what happens when you roll the dice and the risk outplays the reward. “We’ve always sold on margin, but if we try to do that now, with the material we have on hand, our builder customers will likely shop elsewhere.” So, to keep the inventory moving and the trucks rolling, you’ve dropped the price to market levels.

Not only do you find yourself selling some material for less than it cost, which is painful enough. When you combine those losses with the commissions  your  salespeople earn on those sales, and each loaded truck that leaves your yard takes a bite out of your bottom line. Thanks to your recently updated computer system, your CFO can monitor sales and margins in real time, and she’s concerned. “As long as our salespeople keep selling higher margin millwork items along with the framing packages, we’re okay. Even then, by the time we sell through the high-priced products, our margins are going to be in the very low single digits.”

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You’ve made the tough decision to sell the expensive inventory at a loss, which you truly considered to be the only real option. Having been burned once by deciding to take an inventory position with a price-spiking commodity, this wild ride is far from over. The supply chain is less predictable than ever before, with container ships backlogged, labor shortages, and many of your key product categories difficult/impossible to source.

For you and your team, the Tough Call is deciding how to navigate market realities while managing to keep your builders supplied with the materials they need, when they need them, and at a price that they can earn a profit.

What would you do?

MINIMIZE INVENTORY. Looking back, stocking up on high-priced lumber was a mistake. Instead of taking the risk of overpaying, maintain minimal inventories of key goods. Better out of stock than to lose money on a sale.

STAY THE COURSE. As hard as it is to sell products at a loss, that’s better than not having what your customers need, when they need it. Maintaining healthy inventories is the smart long-term play.

SHARE THE SITUATION. Let your builder customers know about the pricing whiplash you’re experiencing and ask them to work with you as far in advance as possible when planning their material needs.

GET BUY-IN. Next time you’re faced with a high-stakes inventory decision, get commitments from your builders. That way, you’re sharing the risk.

What would you do?

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