By Ron Coleman
We are in the business of making money. Ensuring that our resources are effectively utilized can help increase your profit margins. One resource that often goes to the bottom of this list is inventory management.
Making sure your business is in the best position has become increasingly complex. When it comes to inventory management, you need to get the right balance between having the least amount of inventory on hand, while ensuring that you are getting great prices and excellent on-time delivery.
There are several factors to consider when putting your inventory plan in place; don’t sweat the small stuff. Having too many items with a value of under $100 won’t break the bank and you don’t want your technicians to be running around spending time looking to buy small items. I would recommend following the A, B, and C rules.
A) Inventory is any and all of the equipment used for installations (furnaces, boilers, hot water tanks, bathtubs, etc). B) Inventory is the major items that are needed to install the equipment (motors, belts, sheet metal, hoses, filters etc); and C) Inventory is also the bits and pieces (clamps, connectors, supplies etc). Therefore, if you are installing a furnace, the furnace is Part A, the sheet metal and piping would be Part B, and the clamps, belts, and hoses are Part C. Spend most of the time managing Part A, a reasonable amount on Part B, and the least on Part C.
You do need to continuously monitor the equipment to ensure there is access to enough product; the industry has been plagued with a significant amount of supply material shortages. But, by keeping extra items from Part B and Part C, there shouldn’t be a need to do so much monitoring.
Focusing on the equipment
Your geographic area and how easy it is to get a product in a timely manner will determine how much equipment you will need to keep in stock. Likewise, it will determine how volume impacts your buying power. Ideally, you can commit to a quantity and stagger delivery and payment. Most plumbing and HVAC contractors do a very similar level of sales each year. Therefore, you should be able to commit to a supplier one or even two years in advance for equipment inventory. Here are some guidelines.
An inventory management guide for entrepreneurs. (Graphic provided by: Business Development Bank of Canada)Put someone in charge of managing the inventory. It is a great way of giving people more responsibility and evaluating their skills. It will also make your business run more smoothly and profitably.
Look at items that have been on the shelf too long and get rid of them. You only spend time sorting them and moving them around and they take up shelf space. Maybe you can free up some cash by unloading them. Are there any items that can be returned to suppliers, even at a discount?
Have your inventory manager give you a regular monthly report on the equipment inventory, quarterly on the major items and bi-annually on the bits and pieces (have minimum and maximum levels for all items).
With larger clients, you may be able to convince them to carry the inventory on their premises. It’s great for your cash flow and guarantees them that items will be available when needed. This is more likely for inventory such as filters, belts, motors, and faucets. This might also allow their maintenance people to do minor work that shows you care about their bottom line.
Helpful guidelines
You also need to know how much inventory to keep in your vehicles. Certainly, there should be lots of Part C and the most used Part B items—you can’t afford to have anyone rushing off to a wholesaler for a clamp. The equipment only goes in the van when a specific install is identified. You should also have a checklist of everything that is needed for the job. Not only all of the inventory items but the tools and workers needed as well.
An inventory management guide for entrepreneurs. (Graphic provided by: Business Development Bank of Canada)A lot of time gets wasted because of a lack of pre-planning. A good rule of thumb is that your inventory manager should be at least three days ahead of your install crews. That gives them time to ensure that everything is going to be available for a smooth install.
If you are short of storage space, place some inventory at your house and charge the company for the rental space. Make sure you have appropriate insurance in place.
In addition to forecasting your needs, you need to make it easy to find Parts B and C when needed. A well-organized storage area will pay dividends. Involve your technicians, dispatchers, and estimators when identifying the shortcomings of your current systems and what they would recommend for improving the process. It’s all about flow! If you can reduce the amount of inventory you need, you will save money in the following areas.
If these numbers represent your business, you would add $350,000 to your bottom line in about 10 years.
Ensure that you integrate your inventory management into your overall accounting information. It will improve control and simplify invoicing, making invoicing more accurate and speedier. If you are looking to update your software, ensure that it can handle your inventory needs. Also, check with your current software provider to see if there are enhancements available to you. The Business Development Bank of Canada is offering loans of up to $500,000, repayable over five years to assist with supply chain issues relating to inventory. Details and applications can be found on its website.