Now ask a consultant – someone who can be more objective.

The consultant’s answer will likely be “yes, there’s too much inventory” but that’s only because most companies do have too much inventory – or at least too much of the wrong kinds of inventory while they may not have enough of the right kind.

Most companies don’t give inventory a lot of thought other than “we need to reduce or at least control inventory level”. If they take the time and effort to understand the purpose of each kind of inventory and use their knowledge of the business and the data in their systems to figure out how much they really need, they would be able to determine whether the current amount is too much or too little.

Inventory serves two purposes: to act as a decoupling point between supply and demand, and to provide a buffer to compensate against variability. As a decoupler, inventory compensates for timing and order quantity differences – buy a component item 1,000 at a time, once a month, but use them at the rate of 50 per day; produce a product in lots of 50 and sell 3 or 4 on an average day. The buffer role compensates for late receipts, unusable parts, rework and scrap, inventory and bill of material errors, etc.

Each type of inventory should be managed in the context of its purpose and how much is needed to satisfy that purpose. And remember that the underlying math applies to each item or group of items according to their specific demand and supply characteristics (lead time, lot quantity, variability) so that there may be different policies and different “right” stock levels for each item or group.

The real key to success here is to determine the right amount of inventory given today’s conditions. Reach and maintain that level of inventory. Then change the underlying conditions so that you can reduce inventory without increasing shortages. That means better synchronizing supply and demand, usually through lead time reduction and lot size reduction, and by reducing variation through better supplier management, more stable production schedules, higher quality, and more accurate information (primarily inventory and bill of material accuracy).

So, do you have too much inventory? The answer is probably “yes, overall”, but it is likely that there is too much of some items and not enough of others. Take a good look at inventory needs by item or group of items and then ask the questions: “How much inventory should I have (of each item or group) today?” And “What can I do to reduce the need for inventory so I can lower that number without increasing shortage risk?”

Location, Location, Location

If your business allows it, save unnecessary commutes to the office by encouraging your field technicians to begin and end their days with their work vehicles at home. Use computer aided dispatch to keep track of your field service reps productive radius so that you can assign them jobs in their geographical area. Since the customer expects quick service at the best price, don’t waste time or money sending your team from one side of town to the other; let your dispatching software do the work for you!

Know Your Team’s Skills

Along with knowing where your team is, you can increase your effectiveness by knowing where their expertise lies. Field service technicians have a wide range of skills and abilities, and they can be more adept at certain business intricacies than others. Keep track of this with your dispatching software. The best way to go above and beyond is to deliver exactly what your customers want in less time than they expected. Assigning the right resources to the job from the beginning will increase your customer satisfaction.

Job’s Done? Take Notes NOW

Reduce customer frustrations by having field service technicians make all the necessary comments about the work completed immediately onsite. Mobile devices and field laptops that have access to your business’ mobile field service software makes this easy for your reps. Have the notes sync in real-time so if the customer calls up right after the job, whoever opens the customer entry will know the details without having to call the rep.

Utilize Field Service Software in Your Business Today!

Your resources are better spent on doing what you do best, not wasting time figuring out how to manage your crew. Improve your bottom line and customer satisfaction by using field service software to route the right field service representative to the right job.

Let us know how you are using field service software to better your business in the comments. We’re always happy to hear back from you!

Security of Cloud Solutions

A breach in security is often feared because the business’ information is stored online and is therefore thought to be easier to access by unwelcome hackers. The reality that many businesses do not take into consideration is that on-premise applications residing on a server are also connected to the internet, albeit indirectly, and can be hacked by those that have the skill and the desire. What your business needs to consider is what kind of resources you can allocate to the protection of your data, whether it be stored in a cloud solution or not. If your IT department is in charge of fixing printers, resetting passwords and answering questions about MS Office how much time can they devote to keeping your on-premise data safe? Cloud technology providers are acutely aware of security concerns and because of the shared service model they are able to dedicate security teams to keeping your data safe. Remember this; their businesses are based solely on:

1. Service
2. Security
3. Up-Time

To mitigate your risk, clarify your concerns with the cloud software’s sales representatives before you make any decisions.

Downtime

Putting faith into a cloud CRM, PLM, ERP or marketing solution, which is the backbone of your business can be scary, especially when you think about how much money you could lose if the cloud solution goes down. Many cloud software vendors are aware that this kind of bad press is detrimental to their business, so often times you’ll find a guarantee that the cloud technology will be up 99% of the time or more. The main thing you have to worry about is how transparent the cloud solution retailer is about their policies. Often they will disclose the compensation policy if an outage were to occur; it goes without saying that it’s in the vendors best interest to be up and running 100% of the time.

Embrace Cloud Software for your Business

Don’t let change scare you! Cloud technology is one of the fastest growing markets today and for good reason. There are many advantages to the cloud solutions so do your research on the issues that concern you most, and you’ll soon discover that your fears are unwarranted.
Do you have other concerns when it comes to the cloud? Please share them with us in the comments and we’ll address them in another blog post.

1. We don’t track customer profitability so do we don’t know who they are.
2. We designate our smallest customers as house accounts.
3. We figure out why the orders are unprofitable and take corrective action.

We suggest that our distributor clients let us divide their customers into two groups, larger accounts and smaller accounts. We then subdivide the two size groupings into two subgroups, customers that place profitable orders and customers that place unprofitable orders. Using a size/profit matrix with four boxes, we put each customer into one of the boxes: larger profitable customers, larger unprofitable customers, smaller profitable customers and smaller unprofitable customers. The four boxes are “big winners”, “big losers”, “small winners” and “small losers”.

Dividing customers into size and profit segments is fairly simple. Some large customers aren’t profitable. Distributors risk losing lots of money doing business with a big loser. On the other hand, selling to large customers can be very profitable. These are the distributor’s most valuable customers: the big winners must be nurtured and protected at all costs. Smaller customers present somewhat of a dilemma. Individually, they don’t “move the needle” very much. As a group, though, the losses from dealing with small losers must be turned around.

Smaller customers who routinely place money-losing orders are a management challenge. Distributors who don’t track customer size or profitability aren’t aware of who their small losers are. Knowing where these profit leaks are coming from is a call to action. Some of these no-profit small accounts can be developed into profitable accounts. Order profitability can be reached by building order size, raising prices and by reducing cost to serve. Either way, money losing accounts can’t be ignored.

This letter will review three critical steps that distributors can take to manage small losers: grow the customer, build customer profitability or be prepared to let them go. These three actions steps determine how profitable – or unprofitable – your small customers will be.

Grow the customer

After identifying a small account as a money-loser, the first step is literally “sizing up” the customer.

• Is the customer capable of placing orders large enough for your company to turn a profit? Some accounts just don’t use that much of what you have to sell. They may need to combine all of their orders for months at a time to be profitable for you.
• Reclassifying these small customers as house accounts will reduce sales costs but it won’t make the small order problem go away if the customers are too small for your business model.
• If a small customer does use a critical mass of your products, but spreads their business around resulting in small orders for you, the sales rep has a job to do. Consolidating orders for all of your product categories could turn a small money-losing account into a larger profitable one.

The key to turning around many small money-losing customers is to persuade them to consolidate their purchases with one supplier: you. You will find some accounts that simply don’t use enough of your products to be profitable for you.

Build customer profitability

If the customer uses an adequate quantity of your products, the second step is the build on the customer-supplier relationship. The three goals are to optimize margin, grow order size and reduce cost to serve.

• Order size is a profound indicator of profitability. The root cause of lack of profit from most smaller customers is order size. The sales reps must sell the full line, all the time, to small customers. “Do you want fries with that?”
• The small order problem is sometimes solved simply by combining orders and reducing the number of deliveries. The sales rep can help the customer get organized.
• Pricing outliers, items sold to a customer at prices below what similar customers pay (below market price) must be corrected ASAP for money-losing small accounts.
• Cost to serve for money-losing customers must be managed aggressively. There is no room for slow-moving special inventory. Credit card charges must be passed along. Freight costs need to be turned into a source of profit (marked up).

Unprofitable small customers must be managed as group. It isn’t possible to manage them  and handle them individually. Distributor sales policies have to be in line with profit goals. A culture of accountability is important.

Be prepared to let them go

Distributors must be honest with themselves about how well they are set up to process small orders. Some distributors are extremely efficient with small transactions, others are not.

• What is your company’s cost to serve, i.e., how much does it cost to put a transaction through your system? What is your mix of costs that are a flat amount per order versus costs that vary based on order size? Is your overhead too high to profitably handle small orders?
• How is your sales force deployed and compensated for small customers? Do you reward your sellers for bringing in unprofitable orders?
• Do your information system and management team do a good enough job tracking and controlling operating costs? The seven basic cost categories for distributors are sales, sales support, office, administrative, handling, delivery and storage. Are you efficient and competitive in each category?
• Sometimes the root causes of profitability problems with a small customer (order size, pricing, and cost to serve) cannot be corrected. In those cases just accept the fact that your company isn’t designed to profitability handle all customers. If the small customer isn’t happy with your pricing and sales policies they will go elsewhere – and you will be better off.  Your people and resources will be freed up to focus on your profitable customers and new customer opportunities.

Do you have a flexible sales and service model enabling you to adjust your cost structure and service offering for smaller customers, or are you a “one size fits all” distributor?

A small customer problem is not the same as a small order problem. Small accounts that place profitable orders are a source of steady profits. Success with smaller customers depends on your willingness to actively manage them, as well as your commitment to a low-cost business model that supports smaller accounts.

Duties and Responsibilities: 
Perform moderately complex product design, systems analysis, and programming activities, which may require some research and analysis.  Perform design, implementation, and maintenance of single product modules/sub-systems.  Prepare technical documentation of product sub-systems.  Conduct the unit testing and integration testing for functionality and limits.  Perform moderately complex bug verification, release testing and beta support for assigned products.  Research any problems discovered by SQA or product support and develop solutions to the problems.  May assist in performing on-site client work on moderately complex applications.  Research and understands the marketing requirements for a product, including target environment, performance criteria and competitive issues.

Requirements:

• Proficient use of development tools and appropriate languages;
• Basic certifications;
• Ability to produce project deliverables (design, installation, documentation, reports, etc.) in accordance with I.B.I.S. Inc methodology;
• Ability to create and follow test plans;
• Ability to install and configure Modifications;
• Understanding of application and business related issues resolved by modification;
• Ability to delivery on time quality code which is well documented and well tested;
• Programmer/Analyst
• Knowledge of general systems integration methodologies.
• Skill in designing, implementing, documenting, and testing specific solutions in applications and applications development;
• Skill in verbal and written communication to analyze, interpret, and present customer needs and technical product and service information across a wider range of products;
• Skill in planning, organizing, and managing time across multiple projects;
• Ability to identify opportunities and support the sale of follow-on work to the client (i.e. additional consulting, education, etc.);
• Demonstrated ability to create an effective business case for justifying or rejecting the new process and technology;
• Define and document the ROI in undertaking the project;
• Gain deliverables/milestone signoff from client.  This includes effective communication of dependencies and / or critical requirements to ensure a stable and complete solution;
• Ability to identify opportunities and support the sale of follow-on work to the client (i.e. additional consulting, education, etc.);
• Ability to provide technical leadership and direction to others;
• Ability to effectively discuss portions of focus technology with customer’s executives;
• Manages client requirement analysis sessions;
• Fully certified or demonstrated industry expertise in focus technologies or industries;
• Oversee and manage the planning, design, and implementation of multiple consulting projects by interacting with customers and vendors;
• Develop and deliver executive level presentations to customers by outlining findings and recommendations.  Translates functional business objectives and critical success factors.  Provide insight into and illustrate methodologies and solutions to the unique technical strategy needs;
• Ensure the effective management of consultants on engagements by identifying and monitoring milestones, deliverables, and resource requirements by setting goals, delegating assignments, reviewing work, and motivating direct
  reports.  Mentors and assists in the educational and consulting knowledge of staff and team;
• Architect strategic business solutions aligned with multiple technologies, cross platform or business process expertise;
• Provides technical or business process mentoring;
• Proficient in Application and Web based development;
• Proficient DBA skills.

Qualifications:
To perform this job successfully, an individual must be able to perform each essential duty satisfactorily.  The requirements listed below are representative of the knowledge, skill, and/or ability required.  Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

Education and/or Experience:
Bachelor’s degree in business, software engineering, or computer science.  Minimum of 2 to 3 years of technical experience in software development environment.

Other skills and abilities:
Good technical knowledge in software development methodologies, design, and implementation.  Good analytical and design skills at single product level.  Good skills in research and analysis, project planning and implementation.  Good understanding of entire development process, including specification, documentation, and quality assurance.  Aware of business issues as they impact overall project plans.  Good communications and interpersonal skills.  Good PC skills, with working knowledge of Microsoft Dynamics GP, AX or CRM or other ERP or CRM applications.  Microsoft knowledge is desirable. Must possess ability to multi-task and work on deadline.

Work Environment: 
The work environment characteristics described here are representative of those an employee encounters while performing the essential functions of this job.  Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions. General office environment.  Some stress may occur.  Some to moderate travel required.

Physical Demands: 
The physical demands described here are representative of those that must be met by an employee to successfully perform the essential functions of this job.  Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

To Apply:
Send your resume to this link.

Here’s a breakdown of the BRL editions:

The BUSINESS ESSENTIALS EDITION is for customers who need core financial management and trade functionality, including:

• Basic Financial Management (for example, General Ledger, A/R, A/P, Fixed Assets)

• Basic Supply Chain Management (e.g. sales order processing, purchase order processing, inventory)

• Basic Business Intelligence and Reporting

• Basic Configuration and Design Tools

The ADVANCED MANAGEMENT EDITION is the preferred solution for growing, mid-market, or high functional needs customers who are looking for an adaptive solution with a broad set of functionality, including:

• All functionality included in the Business Essentials Edition

• Business Intelligence and Reporting

• Manufacturing

• Advanced Supply Chain management (e.g., Bill of Materials, requisition management)

• Advanced Financial Management (e.g. collection, cash management)

• Project Management

• Customer Relationship Management

ADDITIONAL COMPONENTS are also available a la carte for both editions.

Customers may find value in transitioning to Business Ready Licensing for several reasons:

Extend your solution.

Microsoft Dynamics offers a wide array of financials, distribution, manufacturing, field service, project accounting, business intelligence, and collaboration functionality. Business Ready Licensing delivers more of these capabilities to you so that you can automate new areasof your business to help increase efficiency and drive down costs.

Expand your Dynamics footprint.

Customers who are currently constrained by the10 user limit on the Standard Edition may find a transition to the unlimited user counts of BRL to be an excellent increase in flexibility and scale for a limited cost.

Protect your current System List Price.

Customers will transition to BRL at their current protected list price (PLP) value. The PLP for their Enhancement Plan will not change.  This means customers can add significant functionality without adding to the cost of their Microsoft annual Enhancement Plan.

To request a brochure with detailed information on modules included in each edition please email me at sguy@ibisinc.com.   Please contact your I.B.I.S. Customer Sales Manager for BRL transition pricing.

Kudos to I.B.I.S.’ book authors – Mark Polino, Microsoft MVP, who wrote a Packt Publishing 2011 best seller, Microsoft Dynamics GP 2010 Cookbook; and Chris Liley and David Duncan who co-authored the popular Microsoft Dynamics GP 2010 Reporting as both books sold-out at the Convergence bookstore!! Here’s a picture of the long line waiting for the book signing.

As a follow-up to Convergence, Microsoft is offering existing GP and AX clients a special offer – discounts on additional users and modules. Check out the details here.

Please let us know if there is anything you saw at Convergence that you would like to discuss further.

It was so good to see you in Houston!

How does your distributor management team track and account for service labor hours?

1. To us, service labor is a high-profit product that we manage diligently.
2. We do try to manage service labor hours but we’re not very good at it.
3. We don’t worry much about service labor hours. They are a cost of getting business.

One of our oldest clients was a radiology supplies distributor whose service technicians repaired diagnostic equipment. The supplies sales force traditionally provided free equipment service to large supplies customers. The service techs were little more than personal assistants to the sales team. The “free service culture” did not change until the service department was spun off into a separate division whose manager was paid based on service department profit. Service then became a large and lucrative business.

Professional services firms such as your accountants and attorneys regard labor hours as inventory. Each hour paid to professional staff is recorded and tracked by category, billable or non-billable, and further broken down by client, assignment and type of work. Each staff member including partners must submit a daily time record. Work in process becomes inventory that is ultimately billed to clients or written off.

I started my career at Arthur Andersen immediately after college. My starting salary of $875 per month (it was a long time ago) came to $10,500 per year or about $5 per hour. The firm set my billing rate at the seemingly outrageous amount of $22 per hour. Young CPAs today start out at close to $50,000 per year or about $25 per hour. Their billing rates are in excess of $100 per hour. I will explain why this is necessary and why you may not be charging enough for labor.

This letter will review three critical service labor functions that distributors must manage: service labor hourly rate, service labor utilization and service labor realization. These three factors determine how profitable – or unprofitable – your service department will be.

Service labor hourly rate

Distributors tend to be bashful about setting the hourly rates for their service employees. The pattern we see is that the standard rates are too low and that distributor sales reps try to discount the already low rates.

• The formula used by most professional firms is to multiply the base hourly pay rate (not including fringes or overtime) by a factor of 4.0 to 4.5. The billing rate for a technician whose base pay is $40,000 per year (about $20 per hour) would be in the range of $80 to $90.
• Following the above example, the burdened cost of the technician’s time is not less than twice the $20 hourly pay. The $40 burdened cost includes fringes benefits, supervision, equipment, training and other non-billable “down time”.
• The $40 burdened cost may be used for determining sales commission on labor. At a billing rate of $80 the gross margin is 50% of selling price based on a $40 cost.
• The billing rate must be competitive with other suppliers. The formula outlined above should be in line with competitors whose well-managed, capable technicians have a similar base pay, benefits program and overhead. Compare the $80-90 with rates charged by qualified professionals in your area for similar services.

Distributors must manage service labor hours as they do other expensive inventory. Like other products, labor most be sold both at a fair price and at a reasonable profit.

Service labor utilization

Your accounting or law firm sets budgets for and keeps careful track of “chargeable time”. Each professional is responsible for meeting goals for chargeable time. Incentive compensation is usually tied to the number of hours charged to clients versus non-chargeable time. In an extreme case one of my colleagues at Arthur Andersen worked 3300 hours of billable time in one year, about twice the average of 1500-1600 hours. The poor man worked seven days most weeks. His work was profitable for the firm but his schedule was not a healthy way to become a partner.

• Distributor service technicians should be able to generate at least 1500 chargeable hours per year.
• The starting point for measuring utilization is 2080 hours per year (52 weeks times 40 hours). Subtract holidays, vacations and other paid time off (generously 28 days or 224 hours), leaving 1856 hours not counting overtime. The service technician has only about 250-350 hours left for non-chargeable time such as training.
• Service technician time reports must account for chargeable time by customer, job or invoice number and task performed. The service tech needs a time realistic time budget for each task.

The time charged to jobs by service technicians is part of the distributor’s inventory. It must be managed meticulously.

Labor hour realization

The third component of service labor profitability is the realization rate. This rate is the percentage of the technician’s time charges ultimately billed out to customers. Time charges that are written off before billing reduce the realization rate.

• Distributors should be able to maintain a 90% realization rate. The unrealized portion, representing chargeable time that is not billable, usually results from technicians exceeding the time budget for their jobs.
• The write-off may be the fault of the estimator not the technician. Distributors often have problems with staff under quoting due to underestimating the labor needed to do the job.
• Low realization for a particular technician may indicate that the billing rate is too high relative to the person’s qualifications to do the work.

In this example, the combination of $80 billing rate, 1500-hour utilization and 90% realization yields $108,000 in annual billable revenue at an annual cost of  $83,200 (2080 hours paid @ $40). The gross margin is 23%.

Service labor hours are an expensive product that should be a good profit center for distributors. Labor hours must be managed conscientiously. This means setting the right hourly rates, tracking labor utilization and making sure proper realization is achieved.