“If you torture the data long enough it will confess.” – Ronald Coase
For most beer distributors, inventory is the biggest asset on the balance sheet. In this article we’ll look at the importance of keeping score of that big asset and review four key metrics to measure the efficiency of your inventory.
The metrics below should be understood and reviewed by all members of your inventory team. The score should be posted in the warehouse, in the office, in the lunchroom, wherever the team can see the numbers. Don’t hide the numbers on a spreadsheet on someone’s laptop. Share the score so that you can improve inventory and the bottom line on the income statement.
The Inventory Scoreboard: Four key metrics of inventory management
- Days On Hand
- Out of Stocks
- Out of Code
- Inventory Variances
Inventory Days on Hand (DOH)
Imagine your inventory as piles of cash stacked around the warehouse. Big piles of dollar bills, shrink-wrapped and stacked floor to ceiling on pallets. The goal is to keep only as much cash tied up in product as is necessary to satisfy market demand. The inventory days on hand metric measures how efficiently inventory is managed.
Too much inventory leads to problems – a drain on cash flow, using up premium warehouse space, and stale dated products. Inventory days on hand tells us how many days sales of inventory we have sitting in the warehouse.
For example, if we have 3,000 cases of Bud Light 30 pack cans and we forecast to sell 300 per day on average, then we have 10 days’ worth of product on hand (3000 cases on hand divided by 300 case sales per day = 10 days of inventory).
Inventory Days on Hand = Inventory divided by Forecasted Sales.
How much inventory is too much? Compare the days on hand number with how long it takes to get product from the supplier. Ideally, the days on hand will match up with the lead time to get new product. If the days on hand metric is significantly higher than the order lead time, you have too much.
Set a goal for your inventory days on hand and track your results against it. Below is an example of a DOH scorecard:
Out of Stocks (OOS)
Few things irritate on an owner or sales manager more than out of stock inventory. These are literally lost sales. “There is no reason we should be out of stock on XYZ product!” cries the sales manager. But of course, there’s always a reason.
Out of stocks occur in many ways. Below are four of the main causes:
- Sales forecast. Inventory is ordered based on projected sales. If sales greatly exceed the projection, we run out of product, and incur out of stocks.
- Supplier delivery. The amount delivered is less than what was ordered. It happens, particularly with high-demand products from craft breweries that can’t keep up. Think of Founders All Day, back in the day, or Dogfish 60 minute IPA, when they were having production issues.
- Inventory variances. The amount on the floor is less than what the computer says. The shortage is due to mispicks, theft, or unrecorded stale product.
- Communication. It’s key in any relationship, but particularly important between inventory manager and sales manager. Bad forecast, supplier shortages and inventory variances occur regularly and should be communicated. Poor communication leads to out of stocks, plain and simple.
Out of stocks are ‘part of doing business’, but when they occur they can be a damaging part of doing business. Measuring this key metric, sharing the information with the team, and tasking them with improving the number is a big piece of the inventory management plan.
Out of stocks can be measured and reported as a percentage of sales in dollars or cases. For example, if the sales goal for the month is $1,000,000 and the out of stock goal is 1/2 of 1%, the out of stock dollar goal is $5,000 ($1mm x 0.005). Each day, the amount of sales and out of stocks can be computed, turned into an out of stock percentage, and compared against the goal. The team will know the score, and will know where they stand in relation to the goal.
Out of Stock Goal = Total out of stocks ($) divided by Sales ($)
The out of stock score can be posted in the office, in the warehouse, and in the sales meeting room. This allows the team to be in a position to immediately respond and make changes if the score is coming up short. No need to wait until the end of the week, or end of the month to know where things stand.
Provide training on what the goal is, how to calculate it, and where to find the score. The important part is up to the team – identify where and why the score is falling short, and get it back on track.
Out of Code (OOC)
Out of code is the death of your inventory, and death is final. With the increased competition at retail, and increased quantities of inventory held in warehouses, distributors are seeing more out of code product than ever.
Preventing out of code product is the goal. This requires a good plan to manage product, including proper rotation and moving product from slow to faster moving retail accounts. Many distributors have detailed OOC prevention plans, and some use incentives to focus employees on reducing out of code product.
One calculation you can use to measure out of code, is to divide OOC product by the total sales during a month or quarter. This provides an out of code percentage in relation to total sales. For example, if you sell 100,000 cases in a month, and 400 cases go out of code, the percentage is 0.4%. 400 divided by 100,000 = 0.4%.
Remember, what gets measured gets managed. We measure so we can manage the out of code, improve on the number, and improve results on the income statement.
Out of Code product (cases) divided by Sales (cases) = OOC %
There are generally two flavors of out of code inventory: warehouse OOC and retail OOC. Each should be measured and have its own OOC prevention plan.
- Warehouse out of code. Product that never had a chance to fulfill its dream. It sits in the warehouse from birth to death and never gets delivered to retail.
- Retail out of code. Product that is out of sight, out of mind. Unless, of course, you have a good plan to manage this remote inventory.
Warehouse out of code. Product in the warehouse can be controlled through rotation, monitoring and communication to the sales team. Many warehouses have a close code section, where inventory is segregated, easily identified and can get special treatment – moving this out to a retailer that can sell the product quickly.
Retail out of code. All sales are not final. If the product goes out of code in the account it is usually the distributor’s responsibility to pick-up and credit the account. The sales and delivery teams are in and out of the retail account weekly and should monitor code dates.
Out of code product is an growing expense line on the income statement. Set up a regular measurement of out of code, communicate to the team, and work to reduce the number.
Inventory Variances
An inventory variance is the difference between inventory on the warehouse floor and the computer inventory. These variances are caused by a variety of things: mis-picked product, breakage that doesn’t get recorded, theft, errors from previous inventory counts, and so on.
Many small mistakes can add up to big dollars, and big variances in your inventory. Inventory variances have a corrosive effect on the entire distributor organization. Variances lead to out of stocks, poor customer service, and mistrust of inventory accuracy by employees.
To get a handle on inventory variances, start with a measurement of overall inventory accuracy. There are many ways to do this, but I’ve found the calculation below to be useful:
Inventory variance (cases) divided by total inventory on the floor (cases) = inventory variance %
When you conduct a count of inventory, simply divide the total variance by the total cases on the floor. For example, if the computer inventory indicates 100,000 cases of product, but the physical count shows only 99,000 cases, there is a 1,000 case difference. 1,000 cases divided by 100,000 cases = 1% inventory variance.
This variance percentage can be computed for the total inventory (as in the example above) or by individual SKU. For instance, if the computer inventory shows 1,000 cases of Bud Light 30 packs, but the count reveals only 990, there is a 10 case variance. 10 case variance divided by 1,000 cases = 1% inventory variance.
The Inventory Scoreboard
Inventory is the biggest asset on the balance sheet, so give it the time and attention it deserves. Download the Inventory Scoreboard template so that you can improve profitability in your beer distributorship.
- Days On Hand
- Out of Stocks
- Out of Code
- Inventory Variances
