Originally posted by Warren Tucker:
[QB] ...I can’t believe this turnover nonsense. Every time you sell a lite of glass, you’ve “turned over” a lite of glass whether it came in a case of 110 lites or you just bought one lite yesterday...
Nonsense? Inventory turnover is generally considered to be important. If it were nonsense, why not buy a hundred pallets of glass at a time, or a thousand? Gosh, you could probably save another 50% of the cost if you bring in a ten-year supply.
There is a point at which savings of price and acquisition costs justify a larger buy and a slower turnover of inventory dollars.
On the other hand, there is also a point at which money earns more in a savings account than it does in boxes of moulding or pallets of glass collecting dust on the floor.
As to efficiency, I really can’t understand your reasoning... there are different aspects of efficiency, but let’s consider two...
Let's consider a third efficiency; that of working capital. Buying a pallet of UV-filtering glass, I could save about 20% of the price I pay for it by the box. (I have checked.) The price of floor space and borrowed money to buy that quantity would nearly equal the savings, and then I would not have use of that money. Instead of borrowing to buy inventory, I take fast-pay discounts on negotiated-price, smaller buys and put my leftover capital in savings, where it earns more money. My efficiency is not the same as yours, but it puts more money in my pocket than your kind of efficiency, for my small business.
...How many complain that we
(small framers) simply can’t hope to compete with the big boxes?...I mentioned that not only could small shops compete in prices but that I was already doing it...
I agree that price is not the problem for a carefully operated frame shop, no matter how small. So, all of this stuff about inventory and efficiency may be moot to that issue.
Often the real issue is that the small shop can not match the marketing pull of larger competitors. That is, they can not get enough customers to come through their doors -- regardless of how favorably their prices actually compare.
...My point has always been that not stocking what we sell is inefficient...
Not necessarily. My local distributor pays a staff of pretty good framers to cut chops, and they have a fleet of trucks to bring them to me. They can do that work for me much more efficiently than I can do it for myself, even after I pay them a profit to do it.
You are saying that instead of paying my supplier a profit to stock the moulding & chop it for me, that I should rent a warehouse and pay another employee to do it all in-house. Nope. About half of the frames I sell do come from my stock, but I care not to stock the other half.
...that’s why big boxes can compete; they’re just a little more efficient than the small shops...Their edge in efficiency occurs because they’re vertically integrated:
they supply themselves.
Their efficiency works on their grand scale. It does not work on my scale, and I do not see my business growing to that point. Instead, I choose to operate efficiently on a smaller scale.
Embrace the greater efficiency and the market will reward you. Eventually, the market will punish you if you don’t. These are lead pipe corollaries in Economics.
No argument there, but there are different kinds of efficiency that result in profit for businesses of different sizes. The problem comes when a business fails to find some efficiency that works to earn and retain profit.
It really isn’t difficult to stock moulding.
Of course not. The difficult part is selling it.
Hardly anyone starts off big; businesses grow, and I strongly urge very small businesses to grow through expanding their market. You expand a given market by increasing the number of potential customers by offering lower prices.
If that works in your market, go for it. In my market, lower price is not the key to growth. My prices are competitive, but if my frames were half the price of my larger competitors, that would not bring more customers through my door. Consumers simply do not believe my little store could offer lower prices than the giant that advertises 50% off. Consumer perception is the issue, not price.
After a couple of decades in the distribution business, I learned a bit about the time-and-place value of inventory. If buying more inventory were the key to growing my business, I would have succeeded with that long ago. Sadly, it is not so.
On the other hand, I know a few framers who spent more on inventory and square footage than their revenue could support. They tried to fuel growth by buying, but their sales fell short. They failed.
Our cost of goods sold is less than 20% of sales and our inventory is less than 5%.
If your inventory is less than 5% of sales, that means your investment turnover is more than 20 times a year. I respectfully submit that you may be buying too little.
In a labor-intensive business like framing, inventory dollars should turn at least 6 times a year. At the average framer's 20% to 30% gross margin, with such slow moving inventory, the money would earn more in the bank. That is, a typical $200K frame shop should carry no more than $33K in inventory.
But if the inventory turns over more than once a month, then it may be profitable to negotiate a better deal and buy more. Even if the price advantage diminishes, lower administrative & acquisition costs also represent real savings. That is, if a $2Million business stocks less than $133K, then those extra dollars in the bank might be better spent to reduce order processing, accounting, and shipping/handling costs.
The point is, keeping a balance of inventory to other costs and revenue is important. Selling from an empty wagon is difficult. Pulling a wagon load of old inventory without sales to justify the investment is also difficult.
