The increase in customers requesting just-in-time delivery increases pressure on small distributors to stock inventory for same-day or next-day delivery in order to compete with larger houses with more buying power. What is the best way to manage cash flow in such an environment?
– Bonnie Powers, President
Cornerstone Supply (Madison, AL)
Duncan Murphy: Smarter, faster, better. Welcome to our new marketplace. Larger distributors with greater buying power do not always become the preferred supplier. Distributors who identify their customers’ needs, plan for their satisfaction and then deliver results will win the business. Once this approach is taken, eliminate any inventory, staff or service that is not required. This will preserve cash. If a customer’s needs change or a new customer is added, go through the same process and determine any synergies with your current assets. The smarter, faster, better distributor will win.
Dave Reder: Make sure you have good measurements to be certain that your inventory is turning quickly and obsolescence is kept to a minimum. Internal systems need to be in place to make sure customers are billed timely. Another important measurement is the health of your accounts receivable. Stay close to your customers to make sure they are paying you within terms. If you have a good relationship with your bank, they will most likely loan you the cash you need to finance inventory that turns quickly and is sold profitably. They also will finance accounts receivable if you can demonstrate you are effectively managing your credit and collections.
Ken Shaw: Competing with the big boys is no easy task. The trick to providing a similar level of service is to creatively structure your business model and your relationship with vendors. To manage cash flow and stay competitive, try to implement a program that incorporates stringent inventory control and creative purchasing from your vendors. The inventory management should focus on how many times items turn and the investment for each SKU. The difficulty is in monitoring inventory levels, vendor lead times, and anticipating customer demand. Developing creative purchase agreements with your vendors can help. Talk to your key vendors about consignment inventory, extended terms or guaranteed lead times to avoid running out of inventory. If you work the system well enough, you may get paid for the items before you have to pay your vendor.
Stan Sewell: Cash flow return on investment is an important measurement of a company’s ability to create internal value. At the same time, we want to ensure we make the right capital investments that impact our ability to serve our customers in a profitable manner. In reality, the problem is not nearly as serious as it seems at first blush. If the small distributor ensures the inventory counts on the ‘cream’ inventory are accurate and always available without coverage gaps (zero stock days), then they are well-armed to compete. Even large dealers often emergency-order 35 percent or more of their volumes from OEMs. Some material handling brands see emergency volumes in the 40 percent to 45 percent range.
Small operations may have a coverage breadth gap, but in numerous studies it is the difference of having 60 percent and 70 percent. Complete large orders of 10 or more items are seldom fully filled by anyone except regional distribution hubs. Most emergency orders placed on distribution-level dealers are small, averaging 2.1 items per order. Hence, continuous uninterrupted stock of intended stock is key. Monitor how many adjustments are made to inventory values, whether during the running week or at periodic inventory counts. The golden zone of great service is to have less than 10 percent of the SKU counts adjusted per six-month cycle. Monitor your need to emergency-order stock material and you will better understand your parts investment, process and system health.
Jerry Weidmann: Companies that operate on a just-in-time inventory basis seek to have their suppliers replenish their stock on a short-term, demand-driven basis. A supplier in a just-in-time system is expected to be able to meet the replenishment demands of the customer. As a distributor of manufacturers’ products, the ability to maintain an adequate inventory of just-in-time products requires good relationships and supply chain information from the customer and the manufacturer. A clear understanding of customer demand allows the distributor to communicate requirements to manufacturers and to make certain the manufacturer has the systems and manufacturing capability to assure reliable supply to meet the customer demand. Effective material flow with the minimum volume of product in inventory and in the pipeline will control cash flow requirements. The more reliable and agile your manufacturer/ supplier, the lower the volume of inventory you need to maintain to meet your customers’ demands.
The customer and the vendor involved in a just-in-time process must be qualified and communication must be effective. Making certain the participants in the process are on the same page will maximize inventory turnover and minimize the required cash flow. Be selective in the customers you agree to support on a JIT basis and the manufacturers that you represent in such relationships.