Darling at Western: Think of Inventory as Money Off Your Bottom Line

John Wolz

If your inventory totals $700,000, the carrying cost is 30% and 10% of the inventory is excess, then the excess portion costs you $21,000 off your bottom line.
It would take 17% sales growth to cover that cost, Bruce Darling of Porteous Fastener Co. pointed out at a Western Association of Fastener Distributors autumn conference.
�That may well be the difference between profit and loss, or bonuses, or contribution to the retirement program for employees,� Darling observed.
�Let�s leave the office and walk out into the warehouse � the center of the warehouse and into the middle that houses all the inventory. Think of the kegs as $50 bills, cartons as $20, boxes as $5 and pieces as $1 bills.�
Usually the best indicator of what will be sold is what has been sold, Darling said. �Past history drives most reorder systems.
Consider usage in six-month, one-year and three-year blocks.
� If you use �large order screens,� consider throwing out the high and low months.
� How do you treat headquarters and branch totals? Is all usage generated by sales? There are pitfalls in allowing transfer usage to be used.�
� Do you reconcile customers� future order commitments with past usage?
�Since inventory is the largest asset, it must be cost controlled carefully to insure adequate cash to pay for its purchase,� Darling said.
Darling, who is in charge of purchasing and materials management and inventory for the 14 Porteous locations, suggested classifying excess stock in three categories:
� Lump � A �lump� is a good A or B item of which you have too much stock. �The excess, while it could be a large value, will likely sell within a year. Do not dump below the vendor�s lead time quantity.�
� Slow Moving is a stock item with sales, but the excess exceeds what would normally sell within a year. �Action needs to be taken on these items,� Darling said.
� Obsolete items are those with sales at a rate that would take several years to clear the stock and calls for �aggressive action.�
Questions to ask when evaluating inventory
How do you price lumps, slow-moving and obsolete items?
When do you sell for scrap?
�How do you handle the thought, �Oh well, they are already paid for and are costing nothing to hold them?��
Do you use surplus inventory firms?
How do you get your inside and outside salespeople to help?
Do you have a �10 Least Wanted Items� list?
Who are we selling them to?
� An important factor on adding stock is cash in the bank.
The �Open to Buy� program came from department stores. �There is a beginning balance each month either given to the inventory manager by the financial side of the company or generated by the inventory manager and submitted for approval by the financial people. Either way it is an amount that can be spent, and when it�s gone the P.O.�s are put in the drawer until next month.
Anything that adds to the inventory � such as transfer from another branch � is a reduction to the Open to Buy balance.
A sales increase can add to the balance. �If during the month the marketing people realize additional sales above the initial forecast can be achieved, it will create additional Open to Buy dollars,� Darling said. These sales must clearly be above forecast, and it is likely you�d add only a percentage to the balance, he added.
Open to Buy balances can be created for each location.
�Open to Buy programs are designed to force a reduction in inventory and as such are seriously used. When you are out of money, you are out.�

Editor�s Note: Bruce Darling can be contacted at Porteous Fastener Co.,1040 Watson Center Rd., Carson, CA 90745-4227. Tel: 310 549-9180 Fax 310 834-0871 \
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