Stop Running A Warehouse Supermarket
Originally published: 08.01.08 by Ruth King
Follow procedures in slow and in busy times.
Inventory is a bet. When it’s busy make sure you pay as much attention to the bets you make as you would in the slower times of the year. Don’t let the “we’re too busy” excuse cost you thousands of dollars in wasted or damaged inventory.
Three simple actions can increase your cash and cut your inventory costs significantly. I continually see out-of-control warehouse operations. Technicians and installers have the run of the warehouse. They choose the parts they need for a job. They have a shopping cart with no cap on spending…they can fill it to their heart’s content. A mechanic says, “I think I may need this,” so off the shelf it goes. Or, “The drawings say I need 10 boots, I’d better take 12 just in case.” Or, “I’d better take an additional box of flex duct… just in case.” Does any of it ever come back? Rarely.
A technician says, “I used a motor, I’d better take two for my truck, just in case I need it this weekend.” When you inventory his truck (at the end of your fiscal year), there are thousands of dollars of inventory;
Do not give your employees run of the warehouse. It’s like giving them a blank check. They don’t even think twice about taking the materials and tools they “might need.” They don’t have to pay the bill and they think, “After all, you’re the owner and you can afford it!” Limit access to the warehouse. Lock it up with someone watching at all times. Have a materials list for jobs. Pull the materials for jobs from that list. Service parts should be restocked from the invoices showing that a technician used a part. It takes little time to reset procedures. You might encounter resistance from field labor who are used to having free reign.
If it takes a parts runner or a warehouse person to accomplish this, then hire that person. Many times you can find part-time help for this position. Lock up your warehouses. Lock up your parts rooms. Lock up your tools. It’s the best way to save your hard-earned cash that I know of.
With accurate financial statements, this calculation should take you five minutes:
First calculate your current ratio: Current Ratio = Current Assets ÷ Current Liabilities
Then calculate your acid test (also called quick ratio): Acid Test = Current Assets – Inventory ÷ Current Liabilities
Finally look at the ratio between the two numbers. Your Current Ratio should be less than twice your Acid Test. For example, if your Current Ratio is 2, your acid test should be 1 or higher. If your Current Ratio is 2 and your Acid Test is 1 or less, you have too much inventory.
Solution to too much inventory: Stop buying inventory for a week or more. Use what you have on your trucks and in your warehouse. Resist the urge to buy more. Of course, this rule does not apply to purchases of equipment and materials for jobs you have sold. These purchases are not bets. You’ve sold them. You’ll be surprised at the amount of cash you free up. You might think that your suppliers will be shocked. However, they would much rather you be able to pay for the parts and pieces you purchase and use them profitably on jobs. When it gets busy, warranty returns pile up.
Often I see thousands of dollars in warranty returns piling up in warehouses, stuck in corners of offices, or totally forgotten. Make the time to do the paper work necessary to get the credits. Your cash is tied up in warranty returns. Some times the labor allowances don’t cover the entire warranty labor cost. However, it covers a part of that labor and the warranty parts. Get your money back!
Inventory eats up your hard-earned cash. Keep your bets low and get the credits back you’ve earned.
Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written two books: The Ugly Truth About Small Business and The Ugly Truth About Managing People. Contact Ruth at firstname.lastname@example.org or 770.729.0258.
Articles by Ruth King
Understand Your P&L Statement: Gross Margin
Understand Your P&L Statement: Cost of Goods Sold
However you decide to categorize expenses in your P&L, it's important to be consistent.
Understand Your P&L Statement: Sales vs. Revenue
Sales are critical to survival — when revenue is actually generated is even more critical.
The 20 Percent Profit Myth
For a realistic goal, include owners’ compensation in the net profit equation.
Rethink Your Bonus Strategy
Enact a profit sharing program, rather than a bonus entitlement.