Here are the next two ways to increase profitability
#14 – Eliminate Warehouse Supermarkets
I watched a technician walk into an unlocked parts room, choose the parts he wanted, and leave with an armful. He didn’t write down what he took. He didn’t let anyone know what he took. He just took the parts.
Were they replacements for parts used on service calls? Maybe.
Were they parts for “I think I might need these on a call?” Maybe.
Were they parts that he was stocking to start his own business? Maybe.
You don’t know what the intended use for those parts were.
Even worse, the supposedly locked parts room was unlocked!
You have a warehouse supermarket if you allow your field employees to walk around a warehouse or an unlocked parts room. They will take what they want; whether or not the materials/parts are necessary for their jobs.
Eliminate them and you will see profits and cash flow increase.
Lost parts, unaccounted for parts, and damaged parts go directly against your bottom line. The biggest surprises happen when there is a value on your balance sheet that doesn’t match the inventory in your warehouse and on your trucks.
For example, your balance sheet might say that you have $25,255 in inventory. When you count it you have $15,255 in inventory. The $10,000 difference goes directly to job cost and decreases your profits by $10,000.
And, if you don’t have inventory on your balance sheet, your profits are lower than they should be. Anything that is bought goes directly to cost of goods sold whether or not that part/material is actually being used for a job.
Inventory is a bet – you are buying it assuming that you can sell it.
How good have your bets been?
#15 – Know Your Inventory Days
Inventory days are the number of days, on average, from the time you buy a part/material to the time you use that part/material on a job. The lower the days the more efficient your use of inventory days.
Commercial contractors generally have 10 or less inventory days. Most residential contractors keep less than 30 days inventory. Of course, there are some parts that sit on the shelf or on a truck for more than 30 days. However, the average is less than 30 days.
To give you an idea how low inventory days can go, Dell Computers used to brag that their inventory days were two days. From the time the parts were received in the warehouse to the time they were used to build a computer was about two days.
To calculate inventory days:
First determine inventory turns: Annualized cost of goods sold divided by inventory
Inventory days: 365 divided by inventory turns.
I use cost of goods sold rather than the textbook definition which uses material expense because contractors can’t install a part without the labor to install it. We don’t sell parts. We sell the installation of those parts.
Next week: More ways to increase profitability.
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Books/Audios that could help your business and you.
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