Inventory Reductions Create Opportunities

A recent Washington Post article focused on the declining inventory levels throughout the economy. And while this can be good for each company as everyone wants to reduce inventories to ensure that they carry what they are selling, it can also represent an opportunity for change in the industry.

It’s the rare distributor that hasn’t reduced their inventory over the past six months. This inventory reduction has been achieved by proactively seeking returns to reduce inventory, reducing dead / obsolete inventory and lowering reorder points (either in quantities or changing from six months history to something much less.)

While all product velocity levels have been affected, conversations with manufacturers indicate that C and D level products are more frequently being returned. Distriutors want to retain their A and B products as those turn much quicker, hence generating cash.

Additionally, manufacturers state that their C and D items are selling at a much slower rate than historical, and given the market, this is understandable. Of concern is that the manufacturers are being asked to drop ship these items to the end-user on behalf of the distributor (and manufacturers should harvest this end-user information), thereby increasing the manufacturer’s transactional cost (more frequent small orders … perhaps they should add a service fee?).

This change in inventory behavior can lead to opportunities or changing business models. Consider:

• If you have a deep and broad inventory, are you promoting it to your customers and your competitors’ customers?
• If your competitor is “living on your inventory”, why is it necessary to provide “courtesy pricing”? Aren’t they selling to someone who coudl be your customer? Don’t you still have all of your traditional costs to cover?
• Could master distributors develop to handle C and D items for manufacturers, or for a distributor, handling multiple lines? Could these be virtual companies that market to distributors? Market to end-users?
• Could a group of manufacturers come together, coordinate with a 3PL company, to handle C and D items to service distributors more cost-effectively?
• Should buying groups consider operating warehouses to support their members’ needs for C and D items? With IMARK representing 18% of industry revenue and 40% of distributors in the industry, should they offer this service to support their members and the manufacturers in the group?
• Should manufacturers work with a distributor in a geographic area to handle C and D’s to other distributors in that area?
• Could reps that have warehouses prosper on C and D items for distributors in their area? (and shouldn’t they make additional margin, or commission, on these items?)

If distributors get comfortable with reduced inventory levels, will that enable manufacturers to look at other options? WIll enterprising distributors see opportunities?

As we look at an industry that is expected to drop 25% and not return to 2007 levels for awhile, what other changes could occur? We suspect many based upon recent conversations with manufacturers!