SUMMER 2016

114
THE DISTRIBUTOR’S LINK
ROBERT FOOTLIK TAKING ANOTHER LOOK AT INVENTORY from page 32
Barring war or a global upheaval, basic commodities
will not be a factor for at least five years. Between
environmental considerations and capital availability for
massive new development, everything moves relatively
slowly and often lags well behind demand, but this should
not produce shortages until the older sources are fully
operational or depleted.
So the answer to the safety stock question is to
watch the commodity markets and news while data mining
resupply timing yourself.
What About “The I Word?”
For those who remember the OPEC war of the mid-
1970’s when gas prices increased (remember those
lines) and inflation increased faster than pricing a new
paradigm developed virtually overnight. Materials that
were sold for $1.00 at retail suddenly cost $2.00 to
replace at wholesale. Even worse, the cost of the goods
changed between the time when the order was placed
and the arrival of the product. Sales promises became
meaningless because vendor pricing emulated fish on a
restaurant’s menu, “Today’s market price.”
If (or when) this happens sales prices will need to
change rapidly so that long term margins will not be
negatively impacted. For example, if a current item that
is sitting on the shelf cost $1.00 and would be sold today
for $1.40 the 40% gross margin looks just fine, especially
if you neglect the 4% or so per month that it has cost you
to hold the inventory. Now if the market value moves to
$1.60 it makes your margin look even better…until you
go to replace this stock at a price of $1.40. This puts
tremendous pressure on the office to price the materials
according to replacement, not the more traditional initial
cost accounting.
Operationally there are several new considerations.
The customers paid $1.40 last year and now you are
charging almost $2.00 for the same stuff with the same
profit margin. Charging more than ever before is even
less palatable when the materials are dusty, dirty and
worn dues to poor housekeeping. Stopping to clean up
the grime as the item is picked is not much better. A fast
wipe with a damp paper towel makes mud and this looks
even worse. The best answer is to keep the warehouse
clean, maintain the products in perfect shape and practice
“first in-first out” picking techniques. This means training
and dedication so that every warehouse employee is
an inspector, cleaner and quality expert. Pickers and
Stockers need additional training to reliably rotate the
stock.
New “replacement inventory” should be stocked
in a back up location first, then moved into the prime
picking spot. Pulling the order directly from incoming
materials, even with a rigorous check in process, while
highly efficient, should be avoided. The new paradigm is
to never cross dock when there is stock in house.
It is also vital that the inventory and stock locations
must match at all times. If an item is stored in a specific
location, in a known quantity, this must be 100% reliable
information. Every piece must be in easily found, salable
conditions. Get in the habit of looking for misplaced
inventory now and teach this diligently to every individual
who will be passing through the warehouse. This takes
“spot checking” or statistical sampling to a much higher
level and emphasizes that the oldest piece must always
go out first.
Do this now, before inflation eats up all the money
that you are working so hard to generate. Putting systems
in place to react after inflation sets is will be too little too
late. Anticipation beats inaction every time. Inflation is
like lightening. Statistically the longer it doesn’t strike the
more likely it will hit the top of a hill.
Ok, If Prices Are Going To Rise, Why Not Lay
In More Inventory Now?
Good question, with an obvious answer that inventory
eats both capital and space. Of course if you have a
surplus of both commodities go right ahead and take a
chance. The rest of us can watch from a safe distance.
Volatile pricing is a way of life in many industries.
Copper wire and tubing are a good example of products
that are essentially raw materials with minimal “value
added.” Plumbing and Electrical Supply Houses have
attempted to play the commodity market for years; usually
with limited success. This is often due to the difference
between rumors and reality. For example, a miner’s strike
in Peru can drive up the prices over night and if someone
purchases a large quantity ahead of the strike they can
beat the spike in pricing for this commodity. That sounds
really good unless the strike is settled immediately. Then
overnight the price collapses from this good news; plus
the oversupply generated by copper producers, pipe and
wire manufacturers and various middle men who run out
of space and money dumping a massive quantity on the
market. Net result: large on hand stocks of relatively
high priced materials in a declining market. Just look at
oil pricing for another example.
CONTINUED ON PAGE 148