Branch Inventory Management Begins with Branch Management Compensation
By Jason Bader
Managing Partner – The Distribution Team
Most distributors have faced the question of expansion sometime in their career. Should
I remain a single location and concentrate my efforts regionally, or do I make the plunge
into expansion and head down the branch path? Some distributors opt for the acquisition
route; others prefer the homegrown method of opening new locations in another
geographic region. From a marketing perspective, branching can be a great way to pick
up the additional sales afforded to local stocking facilities. Your organization may have a
substantial base of existing sales in a particular region. It is currently being served by a
local sales representative, and a long range delivery route or common carrier. This isn’t
necessarily a bad formula from an operational perspective. The local sales person may
have another opinion on this matter.
In most distributorships, sales has a very loud voice. Arguments to pick an incremental
percentage of sales growth in a region steamroll the voices of operational reason and net
profitability. Let’s face it, some of us add locations to look and feel bigger than we really
are. I have been told that in some cultures, the number of branches one possesses is a
sign of virility. Ok, I made that one up. I have witnessed, and been party to, a certain
chest puffing at national conventions. “We are having a really great year, we opened 3
new locations.” This also tends to excite our vendor partners. More outlets means more
sales opportunities. Who cares if they are profitable? We do.
Owners care about profitable locations. I would not suggest that they are immune to the
excitement surrounding the prospect of a new location; but, the financial performance
becomes a real factor in measuring the success of a branch location. Branch locations
need to be highly profitable in order to offset the management headaches that they
provide. It is a well known fact that the further away you get from the mother ship, the
branch becomes more difficult to manage. The physical visits to the sites, the data
equipment necessary to communicate and the logistics of transferring product all play
into the hassle factor associated with branch locations. For those of you considering
opening your first branch, become really familiar with the term “transfer”. This word,
more than any other, will dominate more future operational meetings in your
organization.
In order to make managing a branch more practical, we look to employ an individual who
will manage the daily functions of the branch so that we don’t have to. Hiring the right
branch manager has more to do with the eventual success of the location than you think.
While their first responsibility is to increase sales, they must also be charged with
managing the financial assets located in their four walls. This is the most overlooked
area in branch management. In many cases, our branch inventory asset is very poorly
managed. Branches become havens for dead inventory, surplus inventory, items way
outside of your core competency and general inventory inaccuracy. Unfortunately, we
tend to pick our branch management from one particular job title – sales.
Branch inventory management begins with branch management compensation. I recently
worked with a company that was having trouble with too much overall inventory. They
are a multi branch organization that enjoys a strong revenue stream in most of their
locations. Over the years, inventory had crept up due to a lack of attention paid to the
increase. Strong sales revenue tends to mask a lot of operational neglect. The
management found itself in a position where the board of directors was demanding that
the inventory levels be reduced company wide. In order to make this happen, each
location was going to have to contribute to the overall reduction. Here is where we found
the problem. Branch managers were given bonuses based on the sales performance of
their location. There was no consideration for the management of assets, particularly
inventory levels. If your compensation was based on sales, wouldn’t you want as much
inventory as possible to meet any potential customer demand?
In the situation, we decided to introduce the concept of inventory control to the branch
managers in a subtle way. As I mentioned earlier, this company was enjoying a good
stream of revenue. As a result of their prosperity, they were able to give out an annual
bonus based on the profitability of the organization. We decided to use the bonus as a
motivator to reduce overall inventory levels. Our first step was to establish a
companywide goal to reduce the level of inventory by 1 million dollars in 12 months.
Each location was given a goal based upon their relative size. The plan was very simple,
if you reduced your inventory by the goal, all of the members of your team received
100% of their bonus. If you only made 80% of goal, your team would receive 80% of
their bonus. In addition, we modified the payout of the bonus. In order for incentives to
be meaningful, they need to be based on shorter increments. Rather than paying an
annual bonus, we modified the payout to quarterly. This brings constant attention to the
initiative. If you want people to be serious about goals, they need to be tied to
compensation. The days of people doing things “for the good of the company” are gone.
In this organization, we were able to utilize an existing bonus structure to create a
program for meeting the company’s inventory reduction goals. This approach works
really well for meeting a short term initiative. Our goal here was to reduce overall
inventory by a million dollars. So what happens in year two? This is where we need to
look at a more comprehensive plan designed to maintain inventory asset responsibility for
the long haul. I am not advocating that we do away with the sales component of our
branch management compensation. We sell things for a living. I am simply suggesting
that we add some inventory management components to the overall compensation
picture. Here are some suggestions:
1. Inventory Turns – At a base level, you want the branch to do as well as the
company average. Since branches often have the ability to pull from a central
warehouse, they should be able to carry less inventory. Push branches to have at
least 2 more turns than the company average.
2. Dead Stock – Set a company goal for branch locations. 3-5% is a good starting
place. Allow locations to move dead inventory back to hub locations a couple of
times annually.
3. Inventory Accuracy – This is where cycle counting is critical. Inventory accuracy
is critical if you are using a central purchasing scheme. All purchasing decisions
are based on what the system says we have on the floor.
4. Service Levels – This is commonly known as fill rate. Service level is measured
by how many times you were able to fill a line item 100%. For example, if you
had an order with 10 line items, and you were able to fill 8 lines complete with the
other 2 as partials, your service level percentage on that order would be 80%.
Either you satisfied the request or you did not. Shoot for a 90-95% service level.
A 98% service level would indicate that you are carrying too much inventory.
5. Surplus Stock – This is not dead stock. It is good turning inventory that you
happen to have too much of. Be a stickler here. This is where sales people feel
that carrying more is justified. Keep it below 1% of total inventory.
This list should get you started. I should note that all of these measurement components,
with the exception of inventory accuracy, should be reserved for locations with at least 2
years of history. It will take you a solid 2 years to figure out what you should be stocking
in order to satisfy the local market. There are several other asset management
components that you can get your branch managers involved in; but I have a word of
caution – make compensation plans easy to understand. It may take a couple of years to
get all your components into a plan. This is the time to be patient. Educating your
branch managers on the importance of inventory management will go a long way toward
achieving your net profitability goals.
Jason Bader is the managing partner of The Distribution Team. The Distribution Team specializes
in providing inventory management training, business operations consulting and technology
utilization to the wholesale distribution industry. Jason brings over 20 years of experience working
in the distribution field. He can be reached at 503-282-2333, Jason@distributionteam.com, or at
www.thedistributionteam.com.
This document was created with Win2PDF available at http://www.win2pdf.com.
The unregistered version of Win2PDF is for evaluation or non-commercial use only.
This page will not be added after purchasing Win2PDF.
By Jason Bader
Managing Partner – The Distribution Team
Most distributors have faced the question of expansion sometime in their career. Should
I remain a single location and concentrate my efforts regionally, or do I make the plunge
into expansion and head down the branch path? Some distributors opt for the acquisition
route; others prefer the homegrown method of opening new locations in another
geographic region. From a marketing perspective, branching can be a great way to pick
up the additional sales afforded to local stocking facilities. Your organization may have a
substantial base of existing sales in a particular region. It is currently being served by a
local sales representative, and a long range delivery route or common carrier. This isn’t
necessarily a bad formula from an operational perspective. The local sales person may
have another opinion on this matter.
In most distributorships, sales has a very loud voice. Arguments to pick an incremental
percentage of sales growth in a region steamroll the voices of operational reason and net
profitability. Let’s face it, some of us add locations to look and feel bigger than we really
are. I have been told that in some cultures, the number of branches one possesses is a
sign of virility. Ok, I made that one up. I have witnessed, and been party to, a certain
chest puffing at national conventions. “We are having a really great year, we opened 3
new locations.” This also tends to excite our vendor partners. More outlets means more
sales opportunities. Who cares if they are profitable? We do.
Owners care about profitable locations. I would not suggest that they are immune to the
excitement surrounding the prospect of a new location; but, the financial performance
becomes a real factor in measuring the success of a branch location. Branch locations
need to be highly profitable in order to offset the management headaches that they
provide. It is a well known fact that the further away you get from the mother ship, the
branch becomes more difficult to manage. The physical visits to the sites, the data
equipment necessary to communicate and the logistics of transferring product all play
into the hassle factor associated with branch locations. For those of you considering
opening your first branch, become really familiar with the term “transfer”. This word,
more than any other, will dominate more future operational meetings in your
organization.
In order to make managing a branch more practical, we look to employ an individual who
will manage the daily functions of the branch so that we don’t have to. Hiring the right
branch manager has more to do with the eventual success of the location than you think.
While their first responsibility is to increase sales, they must also be charged with
managing the financial assets located in their four walls. This is the most overlooked
area in branch management. In many cases, our branch inventory asset is very poorly
managed. Branches become havens for dead inventory, surplus inventory, items way
outside of your core competency and general inventory inaccuracy. Unfortunately, we
tend to pick our branch management from one particular job title – sales.
Branch inventory management begins with branch management compensation. I recently
worked with a company that was having trouble with too much overall inventory. They
are a multi branch organization that enjoys a strong revenue stream in most of their
locations. Over the years, inventory had crept up due to a lack of attention paid to the
increase. Strong sales revenue tends to mask a lot of operational neglect. The
management found itself in a position where the board of directors was demanding that
the inventory levels be reduced company wide. In order to make this happen, each
location was going to have to contribute to the overall reduction. Here is where we found
the problem. Branch managers were given bonuses based on the sales performance of
their location. There was no consideration for the management of assets, particularly
inventory levels. If your compensation was based on sales, wouldn’t you want as much
inventory as possible to meet any potential customer demand?
In the situation, we decided to introduce the concept of inventory control to the branch
managers in a subtle way. As I mentioned earlier, this company was enjoying a good
stream of revenue. As a result of their prosperity, they were able to give out an annual
bonus based on the profitability of the organization. We decided to use the bonus as a
motivator to reduce overall inventory levels. Our first step was to establish a
companywide goal to reduce the level of inventory by 1 million dollars in 12 months.
Each location was given a goal based upon their relative size. The plan was very simple,
if you reduced your inventory by the goal, all of the members of your team received
100% of their bonus. If you only made 80% of goal, your team would receive 80% of
their bonus. In addition, we modified the payout of the bonus. In order for incentives to
be meaningful, they need to be based on shorter increments. Rather than paying an
annual bonus, we modified the payout to quarterly. This brings constant attention to the
initiative. If you want people to be serious about goals, they need to be tied to
compensation. The days of people doing things “for the good of the company” are gone.
In this organization, we were able to utilize an existing bonus structure to create a
program for meeting the company’s inventory reduction goals. This approach works
really well for meeting a short term initiative. Our goal here was to reduce overall
inventory by a million dollars. So what happens in year two? This is where we need to
look at a more comprehensive plan designed to maintain inventory asset responsibility for
the long haul. I am not advocating that we do away with the sales component of our
branch management compensation. We sell things for a living. I am simply suggesting
that we add some inventory management components to the overall compensation
picture. Here are some suggestions:
1. Inventory Turns – At a base level, you want the branch to do as well as the
company average. Since branches often have the ability to pull from a central
warehouse, they should be able to carry less inventory. Push branches to have at
least 2 more turns than the company average.
2. Dead Stock – Set a company goal for branch locations. 3-5% is a good starting
place. Allow locations to move dead inventory back to hub locations a couple of
times annually.
3. Inventory Accuracy – This is where cycle counting is critical. Inventory accuracy
is critical if you are using a central purchasing scheme. All purchasing decisions
are based on what the system says we have on the floor.
4. Service Levels – This is commonly known as fill rate. Service level is measured
by how many times you were able to fill a line item 100%. For example, if you
had an order with 10 line items, and you were able to fill 8 lines complete with the
other 2 as partials, your service level percentage on that order would be 80%.
Either you satisfied the request or you did not. Shoot for a 90-95% service level.
A 98% service level would indicate that you are carrying too much inventory.
5. Surplus Stock – This is not dead stock. It is good turning inventory that you
happen to have too much of. Be a stickler here. This is where sales people feel
that carrying more is justified. Keep it below 1% of total inventory.
This list should get you started. I should note that all of these measurement components,
with the exception of inventory accuracy, should be reserved for locations with at least 2
years of history. It will take you a solid 2 years to figure out what you should be stocking
in order to satisfy the local market. There are several other asset management
components that you can get your branch managers involved in; but I have a word of
caution – make compensation plans easy to understand. It may take a couple of years to
get all your components into a plan. This is the time to be patient. Educating your
branch managers on the importance of inventory management will go a long way toward
achieving your net profitability goals.
Jason Bader is the managing partner of The Distribution Team. The Distribution Team specializes
in providing inventory management training, business operations consulting and technology
utilization to the wholesale distribution industry. Jason brings over 20 years of experience working
in the distribution field. He can be reached at 503-282-2333, Jason@distributionteam.com, or at
www.thedistributionteam.com.
This document was created with Win2PDF available at http://www.win2pdf.com.
The unregistered version of Win2PDF is for evaluation or non-commercial use only.
This page will not be added after purchasing Win2PDF.
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