Mismanaged inventory costs the petroleum industry millions of dollars each year. How much is it costing your company?

Start with the fact that every $100,000 a company has invested in inventory has an annual holding cost of no less than $10,000. For companies that can use that capital for expansion into 15% return projects, that cost increases to $15,000 per $100,000!

Obviously you can’t run a company without inventory, but you can take steps to only carry the products that are selling and then carry only enough of those products to meet customer demand plus a small cushion to avoid an overstock situation.

When it comes to inventory management, there is nothing more important to cost reduction and cash flow than correct product mix. This product mix should be a direct function of customer demand. To accurately predict customer demand, a company must intimately know its customers and their needs and wants.

There are two distinct approaches to customer demand. The first, most common approach is to gather demographic data on customers within your geographic area. Using a “typical” profile, one can then match product offerings to the profile. This is the most common approach used by design firms and suppliers in c-store plan-o-grams. On a national basis, it is why we see the “cookie-cutter” store approach.

A different, highly successful approach to customer demand entails a company targeting a very specific customer group and then designing both facilities and product mix that will appeal to that target market. (See June 1999 MFA, Target Marketing, for more info on this strategy.) Without starting from scratch, you can evolve into target marketing by profiling your best customers, and then implementing an inventory plan that will best meet those customers’ needs.

Once you are clear on the exact products you need to carry, the next decision is marketing. Your marketing techniques and for stores, your shelf space strategy, will determine the amount of product you need to keep on hand in inventory. The exciting thing about this is that very sophisticated computer models are beginning to emerge thanks to data warehousing. Literally millions of dollars of research are going into capturing customer buying habits to more finely tune marketing strategies.

In fact, NACS just announced a new internet joint venture which is clearly aimed at getting and managing that data. The new company, called C-StoreMatrix, is a joint venture between NACS, i2, and Pointofsale, the latter being high tech data companies. Their vision is to create an open and competitive electronic marketplace that provides solutions to stores and vendors including hosted retail automation systems that would capture and manage customer trends. Depending upon the service level, initial pricing is in the $10 to $450 per store level. Watch for a full roll-out at the October meeting.

So we’ve brought you to the point where you know what you want to buy and how much of it. The next step is replenishment procedures. In the ideal environment, replenishment is automated with vendors linked on-line to inventory levels. This may seem far-fetched right now, but will likely be commonplace by 2005.

If you are still in a manual ordering system, it’s critical to look at the efficiency (or inefficiency) of your replenishment and monitoring process. Most importantly, how do you monitor for shifts in customer demand? This is the Achilles heel of most inventory systems. Its measurable by-product is slow-moving or non-moving product.

Your big challenge, therefore, is to create an inventory monitoring system that immediately detects changes (acceleration or deceleration) in customer purchase habits before you have obsoletion or out-of-stocks. Even with good computerization, this still takes manpower. Small petroleum companies may feel they cannot afford another person on payroll, but frankly, you can’t afford not to address inventory trends. If you end up with $50,000 of stuff you can’t sell, you’ll wish you had spent $25,000 on an employee to monitor inventory!

At this point you may be wondering what this type of system does to “special buys.” Interestingly enough, your customer demand trends will completely drive your buying. You will not be tempted into taking on inventory your shouldn’t, but conversely, you will begin to negotiate deals on your fast-moving high volume products. Does this sound like you have a purchasing specialist? The answer is yes!

To achieve highly effective and profitable inventory management, you will also need an astute buyer. This person may or may not be the same individual monitoring customer buying data. There are two key prerequisites for this person.

First, they should have prior vendor experience from the vendor side of the house. There is no one better to negotiate with vendors than someone who has been one! Second, they must have obtained superb negotiating skills. It wouldn’t hurt to send them to a negotiating skills seminar to fine-tune those skills. The most well-known negotiations training is done by Karrass.

With the right products, in the right amount obtained at the best price, the final component to inventory management is theft and shrinkage elimination. From vendor check-in through end-of-month physical counts, your physical systems should be automated as much as possible to reduce the opportunity for human error.

With effective systems in place, the answer to “What’s not selling?” is of course, nothing!

PetroAnswers What’s Not Selling