No one would put their profits on shelves each year to sit and lose value, but that is what many contractors do by ordering and keeping unnecessary inventory. Overordering of inventory costs electrical contractors thousands of dollars a year in lost profits.
Most industries are reining in the expensive problem of inventory mismanagement; everyone from builders to manufacturers and retail chains are finding ways to slash their inventory handling expenses. But electrical contractors are lagging behind. The reasons are numerous. Electrical contractors are fragmented around the country without industry giants to lead the way, such as retailer Wal-Mart, which has been something of a symbol for cutting excess costs. In addition, most work done by electrical contractors comes through the bidding process, and when the job is awarded, contractors tend to order too much inventory.
Most contractors prefer to have everything they need on site before they even begin the job. But just sorting through the bulk of inventory ordered before a job begins can be a financial burden. According to Dr. Parviz (Perry) Daneshgari, president and founder of MCA Inc, as much as 40 percent of labor is tied into inventory handling, a cost that cuts directly into profits. There are plenty of options for contractors on various levels, he pointed out.
Daneshgari has been involved in a series of research projects aimed at improving the inventory-excess problem. His company offers services focused on implementing process and product development, waste reduction and labor productivity. Controlling what you buy and how you send it out on the job is one way to fix the problem. Another way to better monitor the flow of inventory is with a software system, preferably one designed specifically for electrical contractors.
One example of a software system that controls inventory is Wennsoft, a New Berlin, Wis., company. Typically, electrical contractors focus on basic functions of business. But controlling inventory can often slip through the cracks.
Purchasing officers are frequently overwhelmed with the ordering of materials and have little knowledge of what is traveling on the road each day in the electricians’ trucks. Software systems, such as the one offered by Wennsoft, track electrical contractor inventory and break ordering for large jobs into segments that keep excess inventory from sitting on the job site or in the warehouse.
Instead, with inventory-control software, the contractor can place orders shortly before the material is needed. Most distributors are learning to accept this new method, Wennsoft owner Jim Wenninger said.
On smaller jobs, software systems can track what kind of inventory is coming and going from the warehouse on a daily basis. If several trucks leave the warehouse with specific inventory, the office can track what went out, what was charged to customers and what is still on each truck. It will also locate discrepancies such as if electricians have returned from a job without specific equipment but failed to bill the customer for it.
While monitoring inventory is a good idea—and a real necessity to maintain profitability—contractors should use caution against swinging too far in the other direction. Having material released and reordered appropriately will cut expenses, but barcoding inventory or keeping too tight a control over it can do just the opposite. “No one is Amazon.com, there’s no reason for that,” Wenninger said. Instead, have the material released appropriately.
But when the year goes by and some inventory is collecting dust in the warehouse, there are other solutions as well. Smaller contractors must focus more on tracking their inventory as it comes in rather than controlling how long it stays on the shelf. Estimation is a TradePower solutions company that offers software to track purchasing and billing of equipment.
“Most contractors don’t want to invest money to track the little pieces,” explained Estimation western regional manager Stephen Bowman. Instead, he said, smaller contractors have to consider “how much money and time do you want to throw at this problem.”
Estimation software helps contractors keep account of what and how much material they use on each job. In addition, contractors can use the software to stabilize equipment costs from their vendors.
So, for example, instead of trying to keep track of how much the company paid for connectors last month compared with this month, this software tracks the details and alerts the contractor when the price is inconsistent with what they usually pay. This feature alone, Bowman said, saves contractors thousands each year. Liquidation.com offers an option to shed the excess or outdated inventory in auction.
Bill Angrick is chairman and CEO of Liquidation.com, a Washington, D.C.-based company that sells excess inventory in a variety of industries. Angrick says his company offers contractors a way to avoid “the administrative burden of working with something unrelated to immediate business.”
Liquidation.com takes material from contractors into its own warehouses, then breaks it down into appropriate sizes and displays the items for online marketing. People bid on the items through Internet auctions that, according to Angrick, draw as many as 120,000 buyers. The items sell at an average of 50 to 200 percent above what contractors could get if they tried to sell the items themselves.
Liquidation.com then ships the item to the buyer and remits money to the contractor. “We know when we take assets in, we will expose them to the right market and the auction maximizes competition.” Angrick said the items generally sell within two to five days.
GE Supply of Shelto, Conn., General Electric’s international electrical products distribution business, offers its own inventory management system known as OASIS Pro. OASIS Pro can help electrical contractors to reduce inventory costs, streamline replenishment and eliminate “out of stock” issues.
OASIS Pro is fully integrated with GE Supply’s internal ordering system (XPD). Using a personal digital assistant (PDA) and barcoded inventory, customers scan the material to be dispensed for use and sync the information back into the OASIS Pro system. This process is used to replenish, requisition, track, report and receive inventory. Whatever their choice, all contractors need to spend sometime in the warehouse considering what is tying up their assets.
They need to determine what represents “dead” inventory and then get rid of what is not moving. Contractors should do a physical inventory at least once a year, and return everything that hasn’t been sold. If you’re not sure just how much you are looking at, multiply your gross profit percent by what you can recover on returns, then you can determine the amount of reinvestment capital you have.
Contractors should monitor sales for profitability and remember that high sales volume doesn’t necessarily equate to high profitability. Unload everything that isn’t profitable. In addition to prices and quality of the actual products, it is also important to evaluate what services you can get from your supplier.
Find out what their return policies are. Ultimately, electrical contractors need to look at their inventory as a capital investment. If the return is not there, don’t make the investment. EC
SWEDBERG is a freelance writer based in western Washington. She can be reached at firstname.lastname@example.org.