Smart inventory control will help you save money - and boost profit.
If you think of your business as providing a service more than selling products to customers, you might not think about inventory very much. After all, that’s really an issue for retail stores — isn’t it?
Think again. Whatever service you provide — inspecting sewers, cleaning out clogged drains, pumping out septic tanks — you still have inventory to consider. A lot of your business will involve repairs of some kind, which means you have to stock spare parts. And then there are the tools of your trade — another sort of inventory you need to manage properly.
And you must manage it. If you store too much, that means you’ve spent money you didn’t have to in order to buy the stuff in the first place. Even the storage space is costing you something. And while some of your stock might keep on the shelves forever, there are other products — you know which ones, depending on the business you’re in — that will go “bad” over time.
(I once made the mistake of buying up a lot of ink cartridges for my computer printer because of a discount – only to learn the hard way that it can get “old” in the package. I had to throw out some unused cartridges, and now I only buy ink as I really need it.)
Too little inventory can hurt you, too. Suppose you’re unclogging a drain and discover a previously undetected leak demanding a new replacement drainpipe. Do you really want your customer to have to wait an extra day until you get the pipe? Not if you want to get called the next time.
Staying on top of inventory is critical to keeping your business healthy and your profits up. And it’s the same kind of problem Goldilocks had when she visited the empty home of those three bears. You want to avoid the extremes — not too much, not too little — and figure out what is just right.
For some suggestions, I called up Ted Angelo, executive vice president at Grunau Co., a large mechanical contractor based in the Milwaukee suburb of Oak Creek, that does business across the country.
“We’re unconventional when it comes to inventory,” Angelo says. Indeed, that’s true, and I’ll explain why, and what you can learn from that, in a moment. But first, a word or two about the basics.
Remember the 80-20 rule. That old formula fits your inventory supply just as it does so many other aspects of your business: Roughly 80 percent of what you do probably entails a pretty small selection of components. Angelo calls those the “bread-and-butter items” for the business, and Grunau maintains a master list of those. They are about 80 percent of what the company keeps in stock.
Keep a 30-day supply. For those bread-and-butter components, count how much you’ve used in the last year, then keep enough to last you 30 days. Set a trigger point for stocking up; don’t wait until you’re all out before you re-order.
But also, be sure that whoever is responsible for maintaining your supply isn’t replenishing it two or three times a month, which means wasted time.
And if your employees have specialized tasks, you may find that those regular items for one are quite different from what a co-worker may need to stock. Make sure you take those kinds of differences into account.
Don’t use it all up at once. When a big job comes along that will demand all, or even a significant portion, of your 30-day inventory of a particular part, don’t take it out of the regular inventory. “On that particular occasion, we’ll get a whole box to use on that job,” Angelo says. “We don’t want to use up our inventory on one job.” That way workers don’t run short on one of those high-demand items when they respond to routine customer needs.
The lean difference
Those are some pretty straightforward principles for managing inventory, however large or small your business. But what about the products you only use 20 percent of the time?
That can be where the biggest problem arises. Do you keep all of those products around, taking up space in a warehouse when you might hardly ever need any of them?
Grunau doesn’t do that anymore, says Angelo. And that’s where the company’s unconventional approach comes in.
The company has been pioneering the use of “lean” techniques in construction for several years. Lean is all about getting waste and inefficiency out of the system. It’s been the byword for manufacturing for more than a decade now, but it’s still a new concept in industries like construction. I got to know Ted a couple of years ago when I helped edit his book on the subject.
And part of thinking lean is rethinking inventory.
How do you do that? Here are some of the ideas that Grunau has put in place.
No warehouse. The bread-and-butter components are stocked right on the company’s service trucks, Angelo says. Those other products used only 20 percent of the time aren’t stocked. For the most part, they remain with Grunau’s suppliers. Instead of wasting space storing them, cash buying them in advance, and gas hauling them around, the company waits until it needs those components to buy them.
To make that work, suppliers must be able to meet your needs at a moment’s notice. Grunau has made sure every supplier can fulfill that expectation, and has lined up a diverse pool of suppliers to minimize the risk of lost time and wasted traveling when a component is needed.
Another important factor is to make sure the stock on the truck is easy to find. “I stress to our people over and over again, if the technician or his helper can’t go into his van and find something in 30 seconds, he hasn’t labeled it properly,” Angelo says. Regular audits check to make sure the techs keep that standard.
No annual count. Grunau decided taking days and days to count up every screwdriver, every piece of pipe, and every nut and bolt was a waste of time and money. Along with that, the company instituted another practice:
Push responsibility down. Every service technician is assigned a truck and is responsible for keeping it adequately supplied with those bread-and-butter items. At the beginning of the year, drivers stock up, and as needed, they restock when supplies are low, going directly to the supplier — remember, there’s no inventory in the shop. That way, there’s no time, energy or manpower spent double handling materials, Angelo says.
Sure, that means trusting the employees. It means being flexible — allowing the employee to exercise some freedom in exactly how much of an item will be kept on hand. But along with trusting, the company also verifies, conducting periodic audits to make sure technicians are using up stock at an appropriate rate.
You can learn more about Grunau’s lean strategies — which, although focused on construction, can be applied in a variety of similar contracting businesses — by visiting the company’s website devoted to the topic: www.grunau.com/lean-construction.php.
Some of these ideas may scare you. You should know the company didn’t get to where it is today overnight; instead it took things step by step, with a lot of trial and error.
But if inventory problems are costing you money — or costing you customers — it is almost certainly time to do something about it.
Getting inventory management wrong will cost you. Getting it right is money in the bank, and in your pocket.