Junior Year: Advanced Purchasing and Reducing Stock Outs
In the prior examples, we looked at increasing turns by vendor and department by being more accurate in the volumes of goods we need. This alone will help you reduce inventory. However, one of the problems with running this system is that you may run out of materials. You could place a floor on every one of your thousands of products, but this usually requires manual input by the inventory manager, yielding scant rewards for much labor.
There is a little-known alternative you may not have considered. Imagine, if you will, you are at at intersection and see the stoplight. As we all know, red means stop, yellow means caution, and green means go. In my example, yellow will mean that you will run out of product in 14 days and red means that you will run out of product in seven days. Green? We don’t care about green. Green is good.
You can create a report (see www.prosalesmagazine.com/redreport for an example) that shows products that you are out of now or will be out of in the next seven or 14 days. Each week, the purchasing manager should review both reports and notify management of steps being taken to receive product prior to running out. There are times when you run out of product and you have no choice but wait to receive the product from the vendor. At least this way, you and your team will be aware of this issue.
There are a few things in business that really take you back into an unorganized state. Being out of inventory and not knowing you’re in that state is high on the list. How can your customers meet their construction schedule if you are out of product? Worse, they may purchase from your competitor. You need to avoid this action. I have seen salespeople drive over to competitors to purchase product in an effort to keep their builder customer out of the competitor’s facility.
Senior Year: Vendor Management
I am a big fan of partnering with vendors. I feel that in addition to writing thank-you letters to customers, you should also write these letters to vendors. Without vendors, we would not have product to sell and we would be out of business.
A truly efficient purchasing department will have vendor reviews on a quarterly or annual basis. This is a time when you discuss with your vendor your strategy for the next year, review their performance, and look at some Key Performance Indicators (KPIs) that give a sense of how your relationship is faring. These KPIs include volumes shipped in full; days late or days early; damaged goods as a percentage of total shipped; and percentage of items billed accurately. In some cases you also should review your product sales from the vendor and margin from that vendor.
If you are truly in a partnership with a high level of trust, you must share this information. If you do not have a healthy business relationship, do not share your sales and margins and focus mainly on the vendor performance. (Actually, if you do not have a healthy relationship, you need to find another vendor.)
Why am I suggesting you get granular with your vendors?
Let me take you back to my early days when I was representing a vendor at a customer meeting. The builder wanted to purchase more products from the vendor because the vendor had accurate pricing. The vendor’s competitor was known for multiple headache-inducing price adjustments. The builder customer’s account payable department almost couldn’t keep up with the inaccuracies of the competitor. Guess who got the job?
In addition, vendors are like lumber dealers in that they are in business to make a profit. They would like to raise your price as much as they can without losing the business. You can counter by finding mis-ships, pricing errors, and late shipments by the vendor and then use this against them when they say they have to raise prices. They say costs are rising, but if you work with them to improve their KPIs, the vendors’ costs should decrease.
Just as very few dealers send cover letters with quotes, very few review KPIs with their vendors. Make this a habit as we continue to pull cost out of the pipeline.
