By Diane M. Calabrese / Published November 2023
Inventory is for everyone. To restock efficiently, one must know what’s needed. An owner-operator might glide along without strict inventory control, but it’s a bad idea.
A contractor with an excellent memory can usually do fine when resupplying. But should the contractor be audited or asked to document assets for an insurer or creditor, memory will not serve.
Moreover, at some juncture many business owners decide to sell. A much better sale can be made if the owner has kept meticulous records of every component category of the business, from real estate to HVAC systems.
Savvy prospective buyers like to get a visual image of the way a business has changed over the years. By being able to offer decades of inventory records, an owner can illustrate the way things progressed and changed.
In short, manufacturers, distributors, and contractors—businesses of every kind—must maintain an itemized list of goods and property. It’s the only way to plan.
We checked with some members of our industry in late summer 2023 to inquire about how they were planning for 2024 inventory. Their responses give us valuable insight into how solid businesses approach planning.
Jeff Theis, president and CEO of ProPulse, a Schieffer Company in Peosta, IA, shares some good logistical news that has simplified approaches to inventory in 2024. Basically, disruptions synonymous with the most recent years have eased.
The fundamental consideration when planning currently has been “plugging shorter lead times into the calculations due to ample supplier capacity and less pressure on transport,” explains Theis. That’s a bright economic point for everyone.
“During the pandemic lead times for key components consistently exceeded one year,” says Theis. “But now, they are less than two months.”
Businesses compensated for the vagaries of the quarantine years by perhaps holding more inventory than they would have otherwise done. In some cases, it was by choice, and in others it was because there were periods of sluggish demand.
Now, businesses can adjust their holdings. “We anticipate that 2024 will offer us an opportunity to continue an inventory reduction that started in earnest this year,” says Theis.
A business owner does not want to hold more inventory than necessary. Excess stores take space, gather dust (and must be cleaned and moved), and tie up capital.
But in order to be ready to serve customers during the difficult start to this decade, businesses did hold more goods. Concepts such as “just in time” were replaced with “get and hold in case it’s needed.”
Now, as Theis notes, re-equilibration is in process. With it, there’s discernable optimism tempered a bit by caution.
Members of our industry, as they readjust and move toward equilibrium, would never say it’s entirely over or could not happen again. So, as they plan 2024 inventory, they incorporate what they learned across some complex years. They are resolute.
“For the size and function of our business, we don’t plan that far ahead for most of our inventory,” says Dennis Black, president of McHenry Pressure Cleaning Systems Inc. in Frederick, MD. That worked well until the global unsettling began in spring 2020.
Now, more must be considered. “When we do planning now, my thoughts at this time are to continue with the changes the last few years have brought or forced us to implement,” explains Black.
“The Covid years changed our inventory requirements and practices drastically,” says Black. “Shortages and long lead times forced us to order more and stock more of what we could get.”
Black takes a realistic look at what happened with inventory control and planning. It became a sort of catch-can.
“Manufacturers encouraged us to order at regular intervals to maintain a regular inventory volume,” explains Black. “Unfortunately, at least in some cases, instead of shipping or spreading out shipments, we would receive large quantity orders at one time.”
The inevitable happened. “We experienced large swings in our inventory,” says Black. “I guess desperate measures breed desperate results.”
It’s not clear sailing yet. “We are still dealing with the effects and changes” wrought by the pandemic, explains Black.
Lead times are still much longer than before 2020, says Black. “This is caused partially by remaining component shortages, but a higher percentage appears to be due to workforce shortages.”
The issues with long lead times and shortages have cascaded into others, particularly “higher costs and drastic inflation of finished goods and parts,” says Black. “I am concerned this problem may be even more lasting and detrimental.”
Black explains why the escalation in costs has become an immediate business concern. “Our customers and buying market are not accepting this high rate of price increases. This creates selling at lower margins while dealing with higher costs for everything—a formula that will not equal promising results.”
“Things have changed,” says Black, adding, “The ‘as-needed’ ordering that could be done prior to 2020 no longer works, requiring larger inventory investments.”
But maintenance of a bigger inventory comes at a cost. “Higher interest rates make borrowing to buy inventory less appealing and manufacturers less willing to provide floor plan or delayed payments,” explains Black.
Of course, the only thing to do is carry on. “At this point, we are still working with a variety of situations,” says Black, “attempting to adjust inventory levels and price increases.”
Not easy, but one factor that helps buoy Black is his professional ties to others in the industry. “We have always found our membership in CETA to be a great asset in helping us with these types of things, ” he notes.
Dynamic forecasting went right alongside lean inventory models prior to 2020. A revived priority is reliable partners and reciprocity.
“Our major considerations at this point are focused on long-term supply chain relationships with our vendors,” says Jim O’Connell, CEO of Pacific Bay Equipment Sales and Service in Modesto, CA. “We are hoping that our vendors will be more proactive in communicating forecasts as well as backlogs that they see happening.”
New ties are being built, too. “We are focusing as well on alternative suppliers from outside our industry for non-OEM parts to help offset some of the delays we see in procuring parts,” says O’Connell. “In years past we tended to stay within our industry.”
O’Connell is also still working through situations. One of them is a first for his company. “The biggest challenge is both in the quantity and the quality of the parts and equipment we receive,” says O’Connell. “We are experiencing more out-of-the-box failures compared to prior years, so we not only cannot get items in a timely manner, but when we do, they may not work correctly, which obviously can be very frustrating and time consuming.”
Consultants abound in the business world. Many of them provide guidance on planning inventory. It’s an approach that might be useful with one proviso, says O’Connell.
“We have never used a consultant to plan for inventory, but it would be something I would consider,” explains O’Connell. “I would want to see what metrics a consultant would be looking at as well as what the ROI [return on investment] would be in order to make an informed decision.”
O’Connell adds to the summary of the explosion of difficult issues that followed the global shock in 2020. The enormous significance of lost opportunities is to be lamented.
“What has the supply chain interruption cost the average distributor in terms of lost opportunities as well as the amount of energy devoted to sourcing and correcting errors or quality issues?” asks Black. Adjusting is costly.
“We have increased our inventory by roughly 20 percent to offset lead times on parts and equipment,” explains O’Connell. “Our parts manager has devoted in excess of two to three hours per day to sourcing—an increase of 30 percent of his time.”
Sourcing is so time consuming because it’s not just ordering but “correcting errors and reordering when we receive incorrect items,” says O’Connell. Without the correct items in stock, pauses occur in service.
“We have seen a drop of roughly 10 percent in sales in all areas due to a lack of products and repair parts,” says O’Connell. Fortitude carries the day.
The Sunshine State ranks near the top for pandemic resilience, but Florida-based businesses were hit hard, too.
“Each year we look at inventory and try to plan at least six months out in order to meet the needs of our customers,” says Maxwell Baldwin, owner and director of operations at Whisper Wash in St. Petersburg, FL. The events of the last few years have informed the planning.
“I think that everyone can agree that 2020 and 2021 were so inconsistent and frustrating for supply and demand that we made big adjustments,” says Baldwin. Adjustments still must be made as necessary.
And “things have definitely changed overall,” explains Baldwin. “We take a much more conservative approach to our inventories and ensure that we can have multiple vendors supply us for every product.”
“The multiple-vendor strategy helps mitigate disruptions,” says Baldwin. “It just takes more time in research and vetting our suppliers. The extra time invested is well worth it when we can keep lead times short.”
In planning for 2024, his company confronts “the typical challenges, price increases, and lead times,” says Baldwin. “At times we are forced to purchase in large quantities in order to keep our price low, and that takes a level of planning—storage, budgeting, etc.”
Even with the eccentricities of this economy, solid, established procedures continue. “We look ahead and behind to accurately plan and prepare for proper inventory ratios,” says Baldwin. Previous sales and projected sales are factored in as part of the planning process.
“Fortunately for us we haven’t had many issues this year,” says Baldwin. “Our company is growing. At the end of the day, we are always innovating and researching new products and processes.”
Baldwin reminds us that each business must determine inventory frequency and be attentive to seasonal fluctuations. Each business must also identify a process that enables it to maintain accurate counts.
There’s plenty of software available to help. For instance, modern point of sale (POS) systems can link sales to inventory (as well as other business functions). Settling upon a level of integration between inventory and other systems requires care (e.g., a business probably wants to allow more access to items than to financials).
A business cannot use or sell what it does not have. Although it may not rival the “cash flow, cash flow, cash flow” refrain, the encapsulation “inventory, inventory, inventory” merits consideration.