During ASA’s NETWORK2022 in Chicago this past November, a member-led panel discussion focused on the much-talked about supply chain woes and inflationary conditions.
During the one-hour discussion, the conversation turned to how inflation and all that comes with it may be skewing the bottom line.
One distributor on the panel provided a boots-on-ground example. This particular distributor noted that in 2020 their shop held close to $40 million in inventory. Fast-forward to 2022 and that number ballooned to well over $50 million.
“I wouldn’t say we are stocking more or that much more than we would have in 2020,” the distributor said. “A lot of that has gone away where you have balloon amounts of certain products because of delivery times. If you try and strip away at that, maybe you could cut $3 million and then after that it would be a struggle. Our branch managers and sales reps might have seen it as profit. ‘It was a profitable year.’ If I took every dollar we made, we rolled it right back in to buy the same amount. If I used to stock 100 I still need 100, but if that 100 costs $200,000, where does it come from? There is a false sense of, ‘Oh, we’re doing great. Things are great.’ If you are doing it right, you are probably rolling it right back in. The only way it becomes profitable is if you used to stock 100, maybe you only stock 80, and if that’s the way you run your business, more power to you, but that’s not how we run our business.
“Inflation has had huge impact on our business — how we run it, how we manage it. One of the biggest fears I have is a deflationary period that could be so painful for all of us and how you manage that could be just as hard as how we manage no inventory. Inflation has had a real impact on our business as far as just day to day and cash flows and everything like that.”
Another distributor mentioned getting a proper handle on true inflation numbers by measuring unitary sales. The distributor brought up an example of a branch manager who might say sales were up 12% last year and then inquire about adding more employees because of the perceived uptick.
“If you look under the covers, dollars are up 12, but you have actually handled 3 percent less material,” the distributor explained. “As owners of companies, for various reasons, we really need to know, are we selling more stuff?”
This particular distributor noted they have taken 40-50 products per month and measured the cost of those basket of goods they think is representative of what they sell in the company each month.
“We price that basket at cost and then we price that same basket a year ago,” the distributor noted. “We do that every month. At the end of the month, we multiply it by the sales volume we just did. We end up getting a weighted inflation. You just have to pick a representative basket of products that is proportionately correct. If you did this exercise at home, you will see inflation at somewhere around 14-18 percent for most of us in the room. If your sales are not up, say, 16 percent, you probably sold less material than you did a year ago.”
The distributor added their company tries to pick 12-14 product categories and mentioned faucets, water heaters, malleables and valves as a few examples. “Strategically pick a dozen or so product groups and measure the pieces sold. OK, we sold 683,000 pieces this year and we sold this amount last year. We found out that we sold about 4-6% less stuff even though sales are up double digits. It’s something to dig into at your company.”