Which is Better, Margin or Turnover?

Recently I was fishing with a friend who is CFO of a significant ski industry company. He mentioned he’d been looking at their retail operations wondering if it’s better to make more margin or have higher turnover. After significant study, he concluded that turnover wins every time. Then our guide, who owns one of the leading outfitters in the region, chimed in and agreed that turnover is the key to success.

Many companies focus on improving margin, but if inventory sits on the shelf, what difference does margin make? The key is to move the product, even at a lower margin, achieving a turnover that produces revenue. Considering that holding inventory can cost 2 to 3% per month (or more if your industry is seasonal) and lack of movement means holding things until next season, turnover is the obvious choice. Clearly selling at a loss isn’t productive, but holding inventory to squeeze out a few more points of margin is a recipe for failure.

Are you turning your inventory quickly? If you aren’t achieving six to eight turns or more, call me.

© 2017 – Rick Pay – All Rights Reserved

Which is Better, Margin or Turnover?

Last week I was fishing with a friend who is CFO of a significant ski industry company. He mentioned he’d been looking at their retail operations wondering if it’s better to make more margin or have higher turnover. After significant study, he concluded that turnover wins every time. Then our guide, who owns one of the leading outfitters in the region, chimed in and agreed that turnover is the key to success.

Many companies focus on improving margin, but if inventory sits on the shelf, what difference does margin make? The key is to move the product, even at a lower margin, achieving a turnover that produces revenue. Considering that holding inventory can cost 2 to 3% per month (or more if your industry is seasonal) and lack of movement means holding things until next season, turnover is the obvious choice. Clearly selling at a loss isn’t productive, but holding inventory to squeeze out a few more points of margin is a recipe for failure.

Are you turning your inventory quickly? If you aren’t achieving six to eight turns or more, call me.

© 2015 – Rick Pay – All Rights Reserved

Maximize Profit Through Smart Pricing Choices

To raise profits, many companies turn to across the board price increases. They analyze the business’s performance, decide that profits aren’t high enough, and then implement a price increase to produce higher returns. The problem is, all products don’t perform the same, and this kind of price increase can actually reduce profits by driving away business, and reducing total return on your best products.

Examine the Data

In order to maximize profits, seek first to understand. One of the most powerful tools I use to help understand materials and product flow is the “Turn and Earn Report.” This report lists revenue, cost, inventory levels, turns, margins and several other key metrics by stock keeping unit (SKU) or part number. It’s used mostly in wholesale distribution environments, but it can also benefit manufacturing companies to help assess return on products.

Increase or Decrease?

First, look at which products comprise the top 10% of total profits and those that yield the bottom 20% of profits. Often you’ll find that the bottom items actually have negative margins. When you adjust prices, you might actually try reducing prices on the top items, as it may cause them to sell even faster, raising the total profit produced.

Raise prices on the lower profit items, which will either raise profits, or drive demand from the lower demand items to the higher demand items that have better margins. Then you might be able to eliminate the lower items, which will reduce costs and create even more profit.

Don’t just take the easy way out. Examining the data can help you make smart choices about pricing and increase your profit without increasing prices on every item.

© 2014 – Rick Pay – All Rights Reserved.

Is Inventory Devouring Your Cash?

A few days ago I spoke with a CEO about his company’s inventory. He has quite a lot, and inventory turns of less than two. That means it’s turning over less than twice per year or, put another way, he has over 180 days of inventory. I asked if he was concerned about the amount of money that was tied up and he said, “no, it isn’t my money; it’s financed.”

This is a very bright person who is running a successful company and apparently doesn’t understand the covenants with the bank. Most banks will lend only around 50% on the value of the inventory in the bank line of credit, so in his case 50% of the money is in fact his. The bank loan 50% is accumulating interest at 4%, which, in his case, is over $100,000 per year. His money (the other 50%) is accruing 0% return on assets. What a deal!

The sad thing is that if he could reduce his inventory just one turn, even by selling it at a discount (but still at a profit) he would free up a great deal of cash to:

1) Pay down the line and recover some of the interest expense

2) Invest in the business

3) Return a dividend to the owners (in this case him)

As long as he communicated his actions to the bank, they wouldn’t be too concerned about the margin erosion so long as the company took action to prevent slow moving inventory from building up in the future. Slow moving inventory not only eats up cash that could be better spent elsewhere, but it grows bigger over time.

Do you have very slow moving inventory? Do you have a plan to prevent it from growing? Do you have a happy banker? Would you like more money to invest in your company’s growth? Visit my web site or contact me to discuss how to free up some capital and have a healthier company.

© 2014 – Rick Pay – All Rights Reserved

How Much Cash Is Sitting In Your Warehouse?

I once took a tour of a manufacturing company whose CEO had developed some leading edge techniques for process and productivity improvement. These efforts improved the building’s capacity by a factor of more than three, and reduced labor to about 9% of sales.

However, I noticed a lot of inventory. When I asked about it, the CEO told me their turns were between one and two, and that he didn’t want to improve it for fear that any change would hurt his ability to ship with short lead times.

What the CEO didn’t understand was that process improvement applies to materials as well as labor (and overhead, for that matter). For this company, simply improving inventory turns by one would free up $1 million in cash and probably add $100,000 to $150,000 to the bottom line.

In my experience, improving inventory turns will reduce sales order lead times. The CEO in this case was concerned that if he didn’t carry enough inventory and something happened to a raw materials shipment (damage, late, accident, etc.), he would miss orders and customers would leave. While this is certainly an important consideration, risk management is a key part of materials management, and it can be planned for, especially for items purchased off-shore.

When companies develop process improvement programs, they need to look at the full scope of processes in their companies. Labor, materials, overhead and even sales and engineering should be evaluated for improvement opportunities. You’ll often find the greatest return in areas you might never suspect.

© 2014 – Rick Pay – All Rights Reserved

Inventory Management vs. Inventory Control

Inventory management and inventory control are both vital to improved performance in manufacturing, wholesale distribution and retail operations. Unfortunately many companies confuse the two, resulting in excess inventory and higher operations costs.

Inventory management is the process of making sure the right materials are in the right place at the right time at the lowest possible cost. Good inventory management leads to high levels of customer service, high inventory turns, good use of assets and increased profitability.

Inventory control is the process of knowing how much inventory you have and where it is. Good control results in smoother operations and improved purchasing productivity because knowing what you have (and where it is) saves time from ordering materials you don’t need to order, and from running around looking for parts.

Without good inventory control, inventory management becomes very difficult. Without good inventory management, customer service and profitability suffer. Both are vital to breakthrough operations performance.

© 2013 – Rick Pay – All Rights Reserved

The First Step in Reducing Obsolete Inventory

Many companies have a hard time taking the first step to reduce obsolete inventory, so the problem just sits and gets worse over time. The first step is getting rid of the junk. Junk is the material that is way past its expiration date, damaged, or outdated from a design perspective. These items should be either thrown away or put out for employees or customers to take if they want to (e.g., at the will call desk). Only allow it to sit for a couple of weeks before disposal.

The bad news is that this method doesn’t generate cash and may result in a small financial hit for the value of the inventory on the books. If the company has been building a reserve for obsolescence, the write-off can be taken against that with no impact on the bottom line.

The good news is that now shelf space is available for more profitable parts, and it sends a message to employees that the company is serious about reducing obsolete inventory with even more efforts to come.

Do you have high levels of obsolete inventory? Have you been hesitant to start reducing it? This is a simple step toward higher inventory turns, better space utilization, and preventing obsolete inventory from building up in the first place.

© 2013 – Rick Pay – All Rights Reserved

The Two Deciding Factors for Successful Change Management

Recently two of my clients were working on very similar issues. Each wanted to improve inventory turns, cut materials costs and boost warehouse productivity. One client (we’ll call them Client A) made breathtakingly fast progress, while the other (Client B) limped along.

What was the X factor that rendered one company so successful while the other barely made progress? Actually, there are two factors…

Get Engaged

Client A’s top management was engaged in the process. They monitored progress, made minor directional changes and developed a dashboard for the leadership team to measure results. Even though the project sponsor was out of town a lot, he stayed in close touch and provided the resources to move things forward.

Client B was less fortunate. While the top leader met with the team to launch the project, he essentially disappeared after that meeting. Internal resource issues slowed things down, there were no mid-course corrections, and no data was forthcoming to measure results.

The Right People

The middle management of Client A is committed to the project and is driving it relentlessly forward. These managers see that successful change will make their jobs easier and more fulfilling, and that they’ll be the innovators in their region of the United States.

Client B’s managers see the project as an interruption.

To successfully drive change in an organization, the two deciding factors are 1) engaged leadership, and 2) the right people on the team. These two things combined can lead to breakthrough results in record time.

© 2013 – Rick Pay – All Rights Reserved

Getting to Great Requires Great Thinking

I am a member of a LinkedIn discussion group for APICS (American Production and Inventory Control Society). Recently there was a post about how to define the most effective inventory investment. Surprisingly, not one of all the industry professionals who responded was thinking “great.” They suggested looking at history, forecasts, customer needs, shifting materials to suppliers and other ideas, all of which are useful and would help their companies be “good,” but none of which will make a company a world-class performer.

Look for Breakthrough Results, Not Just Incremental Change

This means thinking differently about how you do things, not just slowly improving the current methods. To be “great,” companies should try to slash inventory throughout the supply chain. Companies can provide excellent customer service with very high inventory turns. When I benchmark industries, I find the top quartile of inventory turns will be 4x or more what that average is. For one client in particular, best in class is 136 turns. While my client doesn’t expect to get to that number, their old target was 8 turns, and now it is 26.

Doing It Differently
Thinking about breakthrough results creates a climate where people realize they need to do things differently. That is how many of the leading edge techniques came to be. For my client above, breakthrough thinking included:

  • Innovative partnerships with their suppliers
  • New approaches to warehouse productivity
  • Using Lean tools such as 5S
  • Engagement by the company leadership including both the CEO and CFO

Of course, it is important to consider the impact on the customer, but to enact dramatic change, you need to think well beyond your current methods. You need to use breakthrough thinking to be “great.”

© 2013 – Rick Pay – All Rights Reserved

More Than Just Weather: Types of Supply Chain Risk

There are several ways that a supply chain can be interrupted: hurricanes, earthquakes, and tornadoes have been in the news a lot this year, and we’re familiar with what they can do. But there are other factors that can cause interruptions as well. For example, if you have parts that come from the East Coast by truck and there’s a snowstorm in the Rockies, your supply chain gets interrupted. When I was in Colorado on my honeymoon in 1982, a hundred-year snowstorm shut down I-70 for a full week. If you’re like many of my clients who turn their inventory every two to three weeks, a one-week delay exposes you to stock outs.

People

People are another risk factor. A labor union strike has the power to shut down you or a key supplier. A client was once shut down because of a strike at a neighboring facility that stopped all traffic on the street for several days. They had to go to a judge to force the union to allow traffic to pass.

Health

Health issues also crop up, such as the SARS issue that affected major Asian ports for several weeks. Key people in your organization or at your suppliers could be taken ill and be unable to work. Design failures, like the Boeing 787, can delay getting a product to market. Delaying product rollout for months or even years can be devastating. A supplier going out of business can have clear implications for your supply chain.

Are You Ready?

According to an IndustryWeek survey of 580 companies (“Managing Risk in Global Manufacturing Enterprises,” A special research report by IndustryWeek, May 2011), 89% of respondents have only one supplier for key components, so if that one supplier goes down, parts are unavailable. 60% of the respondents have no contingency plans, which leaves them highly exposed. Does this mean that JIT is a bad idea? In my next post I’ll take a look at the real definition of JIT.

© 2011 – Rick Pay – All Rights Reserved