Don’t Forget the Fundamentals

Best Practices | 5 min read | September 7, 2021

Things at work can get busy. Days are so jam-packed they go by in a blur. But do you throw your routines out the window when things get crazy? Or do you focus extra hard on some of the processes that are critical to daily operations?

If you do one new thing this month, let it be this: focus on your inventory fundamentals. If processes are always in place and followed, your business will thrive, even during change and disruption.

Let’s review some best practices for a few of your inventory processes, as a reminder of how important they are to the profitability of your business.

Best Practices for Purchase Orders (POs):

Review your PO process. Do you see over-ordering for warehouse and truck stock? Are stock levels above the current max per SKU? Centralize the purchasing and take purchasing out of your technicians’ hands. Consider putting these guidelines in place:

  • No purchases allowed without a PO.
  • Zero-priced POs are not allowed.
  • Inform vendors that an invoice without a PO will not be paid.
  • Ask vendors to have prices printed on invoices. (This allows for review of actual prices upon receiving vs. the PO price.)
  • Set the expectation with suppliers that backorders need to be communicated prior to delivery or pick-up, preferably directly when the order is picked.
  • Customer name and address must be on all POs.
  • POs given to technicians are for the materials needed for jobs only. Truck replenishment should follow your established process.
  • Only what is used daily should be replenished for install and service.
  • Your PO price per item and the distributor invoice price per item should match.

Best Practices for Receiving:

  • Materials and equipment should be verified for accuracy and checked for damage at time of delivery. The sooner, the better, as this allows for more time to deal with backorders, picking errors, and any refusal of damaged merchandise. Both quantity and accuracy for what was shipped is needed.
  • Employees receiving the delivery should always compare the PO with the delivery and note discrepancies. Any backorders that impact service or install need to be addressed at this point and procured.
  • Blind receiving is not allowed.

Best Practices for Distributor Invoice Reviews:

  • Accurate receiving is the first line of defense for making sure all invoices are billed correctly for what the company received.
  • Keep in mind that suppliers make mistakes on their invoices all the time. A review process helps to catch mistakes and get credits issued, when necessary.
  • Ensure packing lists from warehouse deliveries, job deliveries, and counter pick-ups are gathered and used in the invoice review process. Technicians can take pictures of the invoices and upload them into your software for real-time availability, or they can email a copy to the appropriate person in your office.
  • The goal is for 100% of invoices to be reviewed. Review, line-by-line, the vendor invoice against the packing-slip and purchase order for items billed, pricing, quantity, freight, and tax, when applicable.
  • Timeliness is critical for review and should be done daily or weekly to ensure you can request quantity and pricing credits quickly.

Best Practices for Purchasing Specials from Vendors:

We’ve all received that call from our suppliers, offering longer terms or deep discounts on bulk material and equipment purchases. Or that call saying a price increase is coming and it’s time to stock up. Calls like these can be extremely tempting, but are you making the best decision for the business?

Steps to take:

  • Always make sure to review materials and equipment usage. Use historical inventory usage to make a calculated decision.
  • Review your cash flow prior to making any purchases. Extended terms and discounts are enticing, but cash flow is more important.
  • Eventually the bill will be due, and if the bulk order is sitting in your warehouse for months, it’s better off staying on the vendor balance sheet, not yours.
  • If the product moves, the discount is deep enough, and your cash flow is strong, buying makes sense. If not, it’s best to pass.

Best Practices for Warranty Return Process:

  • Warranty in a residential service and replacement business is most likely your largest customer. Capturing all the credits, for both parts and labor, is critical.
  • Ensure your techs follow the process. Significant amounts of money can be lost in the dumpster because a technician did not follow the process to return a warranty part.
  • Techs should return 100% of parts back to the warehouse for credit, unless there is a direct swap at the supply house. The expectation must be set that techs will follow this process.
  • Continual training on process with the techs, warehouse, and office staff is important in order to make sure the process is followed. The expectation is 100% of eligible credit is received for all parts, equipment, and labor. No warranty parts are to be left at customers’ homes, or on service and install trucks, or in the dumpster!

Best Practices for the Return of Excess Materials:

  • The expectation is that all excess materials are either returned to your supplier for credit or put back into warehouse stock. If material is put back into warehouse stock, only bring stock levels to SKU max. Anything over the max levels should be returned to the supplier for credit. Managing this process is one of the best ways to impact your cost of goods sold for materials.
  • When excess materials are not managed, it can drive up your material expense, lower gross margin, clutter up your trucks, result in more damaged goods, decrease the inventory turns, and increase the amount of stock on the trucks, sucking up cash.

Best Practices for Warehouse Security:

  • Review the security of your warehouse. Who has access to stock and tools? Can techs pull their own parts? Are tools checked in and out? Controlling access is very important to controlling materials and tools.

If you renewed your focus on these items today, what impact could it have on your business by next quarter? Try it out – you’ll get great results if you zero in on your inventory fundamentals and processes.

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