Archive for the ‘Inventory management’ Category

Outsourcing Can Save Time And Increase Business Cash Flow

June 3, 2010

by Doug Smith, President, The Woodhaven Group

If your company is not considering outsourcing some of your everyday business  functions then you are missing out on a golden opportunity to increase your business cash flow.   

Most individuals outsource many of their personal activities and don’t think twice about it.  You can have someone else fill the cavities in your teeth, repair the engine in your car, or even make coffee for you every morning.  Hello Starbucks!  Think of the opportunities to outsource important daily functions in your company such as payroll, cleaning, accounting, IT, invoice billing and processing, human resources, areas of marketing such as public relations, web design, pay-per-click, SEO, media buying and even the call center.  One important area that has been getting outsourced for some time is the manufacturing of products and component parts.

Is it really worth considering for your company?

The benefits are many and the savings  bring more cash into the company to help drive marketshare of the all important core products.  Here are just a few of the benefits:

  1. Less space to rent or own.
  2. Can eliminate office furniture and work stations.
  3. Can reduce the number of computers, monitors and printers
  4. Forget the telephone on that desk that no longer exists.
  5. Less hiring, interviewing and training expenses and the time that goes with it.
  6. No employee benefit cost needed for outsourced employees.
  7. Fewer people problems for your top managers to deal with which means they have more time to focus on increasing sales to your best customers. 
  8. Savings can be channeled into testing new marketing strategies to bring on additional customers.
  9. The company will have flexibility to expand or contract an outsourced function as business conditions dictate. This is a critical benefit in these uncertain times.
  10. Speed of execution.  Having specialists who live the outsourced function daily should assure that what needs to get accomplished is done more efficiently and quickly than managing it inside the company.  When I outsourced manufacturing I found that we got the finished product to the end customer 7 days faster than before.  That dramatically increased customer satisfaction and improved cash flow.
  11. Your company can build a strategic alliance with your outsource partner.  This can allow you to stay more current on technology and new processes than if you went it alone.  The partner  may even introduce you to a new customer.
  12. Quality level  of the outsourced function improves.  We already mentioned speed but when you combine more speed with better quality the company gains a competitive edge when outsourcing.  This edge includes increased  reliability and credibility in the eyes of your customer which allows the company to ask a higher price for its products. The result is more sales and increased gross margin.
  13. Outsourcing allows your management team to concentrate more on all aspects of customer service.  While this area is outsourced in many companies, I prefer to take the savings from outsourcing other functions and improve this critical function into a core competency.
  14. It can reduce the fixed cost of equipment that has to be acquired to stay current with technology, especially in the area of manufacturing.    

Like everything else in your business, the management team must constantly measure the results of outsourcing a specific area or function to make sure the expected  return on investment is being realized.  Some owners and CEOs outsource a function and forget about it. It is important to understand that outsourcing becomes another area of the company that needs to be managed in order to assure success.

Has your company had success outsourcing?  I would like to hear about your experiences.

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Key Supplier Relationship Will Increase Cash Flow

May 3, 2010

by Doug Smith, President, The Woodhaven Group

The relationship between a key supplier and customer can be like family.

Executed correctly this relationship can profitably grow the sales and profit of both companies.

As you become more important to your supplier here are a few tips that can act as a guide to increase the amount of cash available for you to grow your business:

  1. Ask for and get extended terms on each invoice.  Once established you should not have to pay the same terms as a new customer of your supplier.  If 30 days is normal then ask for 60 day terms.
  2. If you have inventory make sure your supplier exchanges slow-moving inventory units for what is being used or sold the most.  This should be done a minimum once every 6 months, preferably once per quarter.  In some industries it makes sense to do it once per month.  Show future sales projections so your supplier can justify taking this action. 
  3. When the above inventory is returned make sure there is no restocking charge applied.
  4. If your business is seasonal, you may want to negotiate paying less during the slow months and more during the busy months.
  5. Have your supplier fund the purchase of a major capital item you need to buy to grow your marketshare. This may be a new piece of equipment needed in your manufacturing facility that will allow you to be more productive.  The payment can be spread over a multiyear term with a small amount added to each unit of inventory purchased from your supplier.
  6. Once you have become a major customer or “partner” of your supplier negotiate putting the key items being bought on consignment in your facility.  This inventory remains on the books of your supplier until you are ready to “pull” them for use in manufacturing.  Only then does the terms begin on your invoice.  If you combine consignment with extended terms then your cash flow really explodes.  To properly execute a program like this requires the use of security agreements and physical inventories but the cash savings is worth it.
  7. Negotiate additional advertising coop and simplify how it is processed.  Many companies offer a marketing rebate or credit to their best customers but then make it almost impossible to get due to extreme rules and regulations.  If possible, agree in advance on an advertising coop amount and deduct a fixed amount each month from invoices.  At the end of the year you can reconcile any differences.
  8. Ask for a price decrease.  You may be surprised how often a supplier will grant this wish to a major customer.  They realize the cost to acquire a new customer is high and realize your increased margin dollars over time will make up for a 2-3% drop in price.
  9. If you cannot get a price decrease, then get an agreement that the price either will not be increased or will be increased only by no more than a certain percent for a specific period of time.
  10. Regardless how great the relationship is and regardless how many concessions you are given, you need to still periodically compare prices in the market place.  If not locked down  prices can start creeping up.  There should be an understanding in a good relationship that you are always getting the best price possible.

Suppliers can be a great source of cash flow.  I have successfully used every one of the tips mentioned here.

A lot of the cash or money used to grow your business can come from well executed cash flow strategies.

This is one of them.

Look Up! Look Down! An Inventory Secret to Save Cash

April 24, 2010

by Doug Smith, President, The Woodhaven Group

The ability of a company to successfully manage levels of inventory of everything from raw materials to key component parts to everyday supplies can be the difference between a profitable and positive cash flow business versus a cash strapped company on the brink of going under.

There are many inventory management software packages and inventory management models to buy and keep inventories in alignment.

One of the oldest forms of inventory control is the Economic Order Quantity developed in the early 20th century.  Many other successful forms are in use today like ABC analysis and Vendor Managed Inventory.  The latter is often used by big box stores like Wal-Mart.  The automotive companies have been particularly successful over the years with Just In Time inventory management.  In my opinion, effective supply chain management has been one of the most important drivers of productivity and growth in America over the last 20 years.

The smaller business, however, has historically not been as sophisticated in assuring proper inventory levels are maintained regardless of the type of business. 

Most small and medium sized companies either have a home grown system or no system at all.  As a result I have seen a tendency for purchasing agents, buyers, and even owners to purchase a little extra of most inventory items so they are never out.  This mistake costs the business tremendous amounts of cash that should be used instead to drive sales or reduce debt.  On top of that many smaller businesses fail to calculate inventory turnover nor age their inventory.  As a result no action is taken on old obsolete inventory.

Will owners invest in some sort of inventory management software to free up valuable cash?  Often times the answer is no because the owner is satisfied with the “system” currently in use to buy inventory.

This tip is for these companies.

Most smaller companies I visit have stock rooms and inventory shelving filled with inventory ready to be used.  On the surface everything looks great.  However, when you look at top shelves and the lowest shelves and ask questions you will invariably find very old or even dead inventory.  The fast turning inventory is at eye level where it can be easily accessed.  The old and dead inventory is never touched.  In fact, sometimes there will be an inventory tag on this merchandise so if a physical inventory is taken in the future the count is already done!  All I see on these shelves is money not being used. 

Here is the solution for these companies.  Eliminate the top and bottom shelves.  Take them out.  Sounds crazy but it will work because now the purchasing agent will be forced to have a model inventory to fit the reduced space.  The luxury of overstocking is over.  Could the company error by having too little inventory.  I have not seen that occur. 

What does the business do with the old inventory?  Convert it to useable cash by returning it to vendors, having a Saturday garage sale, or selling to other companies.

Is this approach drastic and crazy?  Probably is, but I have seen it free up much needed cash.

Businesses run on cash.  Not on dead inventory.

Take Aggresive Retail Clearance Markdowns To Increase Cash Flow

April 20, 2010

by Doug Smith, President, The Woodhaven Group

Retailers every year take big risks and invest huge sums of cash in inventories in the hopes they have identified this season’s “hot” style wanted by consumers.  These “hot” styles may be in fashion apparel, home furnishings, accessories, electronics, or even shoes.

Regardless of product, all types of merchandise share a few common traits.  The inventory setting on the floor is usually paid for and at that point it is only worth what someone will pay the retailer for it.  The goal is to have fast inventory turnover and put the cash back to work with a flow of new fresh exciting styles for the next season.  The buyers who can correctly identify these trends are worth their weight in gold.  However, in spite of how good the buyers are, a fact of life is that most merchandise is marked down and not sold at full price.

If an item does not move at full price the goal is to find the “right” price point and convert the merchandise into cash.  The faster a retailer can do this the better will be their cash flow and overall return on investment.

There are 3 types of markdowns:

  1. Preseason promotions to beat competitors and, in some cases, to identify what the hot items will be.
  2. Promotional markdowns taken in season to support traditional store wide events or annual events like Christmas Sales.
  3. Clearance markdowns to liquidate remaining inventory  

This last type of markdown, the clearance markdown, is where many retailers hurt their cash flow the most.

The reasons for clearance markdowns can range from simply buying the wrong styles to buying too much of a good item to buying a hot trend as it is ending.

There are strategies that can minimize the cash flow and profit impact of clearance markdowns:

  1. Don’t fall in love with the item.  If you personally made the selection it is hard to admit you made a mistake and you possibly might be the only one who likes it.  Take the markdown and forget about your pride.
  2. Don’t wait until some pre-ordained period to take the markdown.  If you bought 10 of an item and not one sold after a reasonable period you need to get it marked down.  The customer has spoken.  The item will not get better.
  3. The first markdown is critical.  Get the item to a price that will likely move it out the door.  Some retailers have a fixed markdown pricing chart they follow.  I don’t agree with that.  Some items need to be priced deeper than what is on some chart.
  4. It is likely you have identified “magic” price points that move clearance items.  Group various original price point items into these clearance price points and you will see inventory sell quicker.
  5. Many retailers refuse to markdown an item below what they paid for it.  Forget that strategy.  Even if the amount you receive is small you will be able to take those dollars and immediately invest it in fresh new merchandise that may sell at full price. You can then reinvest these new dollars in even more merchandise that could again sell at full price.   However, none of this can happen if you stubbornly hold onto an item because you refuse to lower the price below cost.
  6. Remember this.  Even an item marked down that sells adds to your total sales column. Until that happens it is just inventory….. that is probably overstated in value on your financial statement.
  7. Finally, a clearance markdown sale is a chance to reward your loyal customers who pay full price with an opportunity to get a bargain from your mistakes.  It helps you and its a good deal for your customer.  It’s another reason to keep them coming back into your store.    

Don’t forget that buying mistakes will happen.  The only sin is not acting quickly enough to convert those mistakes back into cash to continue to grow your business.