When we do business valuations for owners who want to know what their business or someone else’s is worth, one of the criteria we measure is inventory efficiency. Why?
Because inefficient inventory will actually reduce the company or site’s value using any asset-based income model. But more than just reducing the market value, it is also a huge waste of cash and most times, easily fixable.
We find most operators think their inventory is just fine. It’s at a level that they’re used to seeing and that number becomes pretty comfortable. Unfortunately, comfortable isn’t always the right number.
So what is the right number? To get to that number, we begin by calculating days of inventory on hand. This is simply the inventory dollars on your last balance sheet divided by the average cost of goods sold for one day over the last month. That is the number of days of inventory you have on hand.
Next we compare that to what your inventory should be, which is 1.5 times your supplier frequency plus any lead time. For example, if you own a travel plaza and your grocery supplier comes weekly, take seven days times 1.5 and you get 11 days worth of inventory.
What about a repair or service shop? The same principle holds true just adding in any lead time you need. So for example, you need three days lead time and a seven-day delivery window. Take ten days times 1.5 and your maximum inventory should be 15 days on hand.
Here are the top five actions to reduce your inventory and increase the market value of your company:
- Reduce The Variety Of Products: Customers don’t need ten choices of everything. Figure out what your customers want and buy and get rid of the rest. Major research on retail purchases has shown that by giving customers less choice and reducing decision time, velocity increased resulting in more sales! Think about your snack offerings for example. How many different brands of salty snacks do you really need? Likely far less than you are offering.
- Reduce Multiple Sizes Of Same Products: This isn’t just about potato chips. It’s about anything that you carry in multiple sizes. And don’t always delete the midsize product. Study velocities in all sizes and reduce what makes sense.
- Add Non-Moving, Slow-Moving Automated Flags: The reason why inventory often grows and grows is that customer’s buying habits change, but the inventory stocking method often does not. With today’s software systems there is no reason you should not get a big red alert when any inventory item is not moving.
- Assign A Single Person Accountability With Performance Pay: We’ve noticed a simple trend—those companies with the best inventory levels have someone assigned and accountable to inventory while companies with the worst (highest) inventory have no one held accountable for inventory levels. Most people in charge of inventory are worried about run outs more than they are about your cash. You can change this. Do it first through education and then with improvement bonuses, which are self-funded through cash savings.
- Reduce Theft: Video surveillance has become extremely inexpensive. The other day I learned of cardlock fuel theft that eventually added up to over $12,000. That loss could have been prevented with a simple $250 camera. Theft also occurs in backrooms and front areas, both deliberately and inadvertently. Measuring, educating, internal reporting and bonusing can cure the majority of internal theft and get employees watching vendors and customers on your behalf. These five actions are not hard to do and they bring wonderful results. So just do your math on what your inventory level is currently, then what it should be to know how much cash you have sitting in inventory that ought to be in your bank account. My guess is that number will get you motivated.
Photo Credit: zimmytws/bigstock.com
This article originally ran in Stop Watch magazine. Stop Watch provides in-depth content to assist NATSO members in improving their travel plaza business operations and provides context on trends and news affecting the industry.
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