Balancing act: the days of out-of-sight, out-of-mind inventory control are over. To survive, today's dealers need to juggle the goods in the larger context of overall financial performance

Prosales, Feb, 2003 by Jay Holtzman

In the "good ol' days," inventory management tended to be a fairly casual business affair. "We thought about [inventory] turns [multiplied by] gross margin, and that kind of gave us a number," one dealer explains. "What we really did was walk out into the yard [and look around]. If there was wood there, you didn't have to order any more, and if there was more than you needed, you just tried to work it down."

It doesn't work that way anymore. Today inventory management is paramount because the value of stock has soared, and there's a lot of profit at stake. A flood of new products, industry consolidation, attrition of suppliers, market interventions (such as quotas), and dumping all complicate inventory management still further. And while computerization offers a means for better control, it can threaten to overwhelm management with data overload--and the consequences can be grave if the information in the system is wrong.

Successful dealers industry-wide are tackling inventory management in many ways, often using similar tools and techniques, even when their individual business approaches and markets differ. Moreover, those who manage inventory for the greatest return tend to view it in the broader context of overall financial performance.

Pieces of the Puzzle

"We need to keep telling ourselves that inventory is part of the larger puzzle of asset management so that we don't fail to consider how it affects other parts of that larger issue," says Clutch Holtvluwer, president of Standale Lumber Co., a diversified dealer based in Grandville, Mich., with annual volume of some $40 million. "Ten years ago all we talked about was turns. Now, we've gained a greater appreciation of how turns affect GMROI [gross margin return on investment," he says.

"We also apply the concept of opportunity costs: that every dollar or square foot or unit of time that we apply in one area can't be applied elsewhere," Holtvluwer explains, referring to the importance of carefully allocating resources. "We realize that inventory management is a big part of the picture, but it isn't the only part. And we try to remember that we are a sales-driven company, not a purchasing- or manufacturing- or marketing-driven company," he adds.

At Ganahl Lumber Co. in Anaheim, Calif., they manage inventory within the larger business context, too, explains Michael Seeds, vice president of merchandising, purchasing, and advertising. The company is "focused on managing inventory as a financial investment and we use GMROI as the measure of performance here," he says.

GMROI is a general productivity measure that tells you how much you get in return for each dollar you spent on goods. It can be calculated in dollars or as a percentage, which serves as a convenient benchmark. It's a simple formula: GMROI (in percentage) equals gross margin percent times annual sales.

In California's Napa Valley, GMROI is the "base point" at Central Valley Builders Supply, according to Dave Runyan, general manager of the $75 million, four-unit operation. "We started using that in the last decade. There are no secrets to it. It's very reliable, and it never changes as it relates to the information you use. It's a good base to measure how good a job you do on inventory management," he explains.

Managing inventory as a financial asset led Central Valley to a just-in-time inventory approach a few years ago, as inflation fell from mid-1990s levels. Flat or declining commodities markets, "made it very difficult on buyers," Runyan says. "In the past they could buy fairly confidently in the winter knowing prices would go up in the spring, stay up through the summer, and taper off in the fall."

That annual bell curve has changed considerably in the past five years or so. "We saw the writing on the wall. Until something changes, we can no longer depend on the inflationary value of commodities," Runyan states.

Prioritize for Profit

Whatever approach you're taking, an inventory management program must be given priority status if it is to make a positive, measurable impact on the bottom line. At Ganahl, for example, that translates into cross-departmental control. Unlike most companies, "where the inventory people have nothing to do with costing and pricing," Seeds says, Ganahl is structured for integrated product management. Product managers are responsible for purchasing, for costing--much of the business is bid-based construction--and pricing for over-the-counter business. They're in a position to oversee the overall internal supply chain of a product, Seeds says. "If they make a purchase that allows us to get a better cost, and therefore a better gross margin--[even if] it costs us some turns--Financially the company is in a better position," he says.

Tight inventory control throughout the company also pays off for Williams Bros. Lumber Co. in Duluth, Ga. The company does 15.3 inventory turns today vs. five when the dealer was bought by its present owners in 1990. "We stress inventory big time around here; our owner Sonny Calhoun has really preached it to us and taught us the value and how important it is to our success," says Jon Dasher, vice president of sales and operations for the company's northern region. Dasher manages seven of the firm's 14 locations in the Atlanta area. Last year sales were $190 million compared to some $20 million in 1990.