Making the Right Match
Smart inventory purchasing has always played a key role in HME, but in retail, it's even more important. What should providers consider?
- By David Kopf
- Apr 01, 2018
HME experts often position retail sales as the ultimate panacea to whatever ails an HME business. It makes sense: retail sales are free from the hassles of Medicare and private payer; they aren’t subject to capricious price cuts; they can expand a provider’s reach into all new markets.
However, there are a number of real world business issues associated with retail sales, as well. One of the most important is purchasing.
Why is managing purchasing so important? Well, let’s start with the basics: HME providers, whether retail, funded or both can trade in a lot of inventory. In fact, the typical HME provider carries so much overhead in their warehouses that their profit margins can quickly disappear faster than the Ark of the Covenant in the Federal storage facility at the end of the “Raiders of the Lost Ark” — and even the accounting version of Indiana Jones won’t be able to find it.
That problem is magnified even in the retail environment where cash-flow is king. The wrong inventory strategy can upend the bottom line.
Inventory Turn Times
Providers do not want to collect dust on expensive inventory, and this is particularly true of retail providers. The reason for this is inventory turn times. Inventory turn times are, in fact, a crucial retail metric, particularly for the HME industry.
The longer that expensive inventory sits on the shelf, the longer the capital spent to acquire that inventory is tied up in a kind of cancerous limbo that literally works against the provider’s cash flow. It is critical that the inventory get sold in a cash flow-intensive business such as retail sales. The faster expensive items move, the more profitability will almost exponentially increase.
And this is why monitoring inventory turn times is so important, particularly if the provider can drill down to turn times per inventory item. Then it can start to identify pricey items that are languishing in stock, as opposed to being sold. From there, the provider can start examining whether or not they can move those items faster, and how they might possibly move them faster, or they should replace those items with something that might sell better.
“If something is sitting there forever, your cash is tied up because of this item that is sucking up space that you can replace with something that’s going to sell faster,” says Maria Markusen, the director of Operations & Development for the VGM Retail of the VGM Group Inc., adding that the some big box retailers have gotten so sophisticated that they check inventory turns multiple times an hour, because it can let them promote a specific item that is suddenly moving for whatever reason (which, in turn, leads us to our next metric).
“We look at inventory turn times by vendor,” says Wayne Slavitt, Founder and CEO of retail-only mobility provider business Mobül, the Mobility Store, located in Long Beach, Calif. “It’s a tough road, because we have a large inventory, and when a customer comes in, we have to have what they need, but we also don’t have to have a lot of inventory sitting around waiting for that sale.”
“We have a very good relationship with our key vendors,” Slavitt continues. “… These guys are partners with us, so if some inventory isn’t moving, then it becomes part of the partnership to figure out how we can do a better job.”
Shaping a Purchasing Strategy
Optimizing inventory turn times starts with making the right purchasing decisions, and there are a variety of criteria that go into that process.
“I think both worlds — retail and funded — from an inventory stock standpoint are similar, but there are some differences,” says Rob Baumhover, director of VGM Retail. “I think the similarity comes from you’re always keeping or wanting to keep the amount of stock fit what your customers are looking for or what those customer patterns are. … Everyone’s obviously looking to keep their inventories in line with that piece.
“I think where you get some of the differences though from a retail perspective is when it comes down to seasonal trends or marketing efforts or specific sales or promotions that you have going on,” he says. “That’s obviously when that inventory number fluctuates a little bit in terms of having a little bit more stock than you probably typically would.”
That said, there is another prevailing element besides seasonal fluctuations, according to Baumhover. From a retail standpoint or an incremental product standpoint, providers want to pay close attention to the top 20 percent items that are really driving the business.
“You always want to keep anywhere from a month to two months’ worth of stock so you always, always have a backup plan if something were to go awry, such as a vendor being out of stock, weather-related shipping issues, or customer response in terms of, ‘Hey, for some particular reason, this week, we had a big increase in customer traffic looking for that product,’” he explains. “You build yourself that cushion to make sure that you provide excellent customer service..”
Of course, stocking two months’ supply can put providers that might be trading in more expensive inventory in a trickier position. But the scenario is a little more nuanced.
“I think that’s where you obviously look at it from a top down view,” Baumhover notes. “Twenty percent of the items are doing 80 percent of your business. If you look at it that way, in some of these providers’ stores, you might only be looking at one or two items. When you build it that way, you’re not looking at a lot of money because you’re looking at maybe one or two items, depending on what that category is.
“For instance, if it’s bath safety, you might be looking at two or three items that are doing eighty percent of the business, and if you build just those three items, again, you won’t be having this huge array of stock sitting around, because you’re focusing from the top down, that 80/20 rule,” he explains.
The manufacturers and distributors that providers select as vendors play a role in smart purchasing. Baumhover says there are various purchasing considerations in that regard.
“When it comes to narrowing down who that vendor partner is, there are four or five big ones that you can look at,” he says. “What is their mix from a brand or a quality standpoint? Do they have one particular line, or they have a couple different lines? By that, then you can compare that to, what does your competition have? What’s your current customer base looking for?
You can obviously get a different line that obviously what the vendors have in stock,” he continues. “Do they have a good, better, best? I’m not necessarily saying you should carry a good, better best, but it gives you an option as a provider to take a look at something different than the competition maybe has in your area and be a little different.”
Pricing obviously is another important element in purchasing, but again, the consideration is more nuanced than it is obvious or routine.
“A lot of people bring up pricing,” Baumhover say. “But it’s not always about the cheapest pricing if you’re comparing apples to apples — a good line versus another good line. Does pricing come into play in terms of what you can turn around and sell that product for? Obviously, it’s one of the elements, but not the only element.”
Training is another important consideration, he says. Knowing what the vendor will do to ensure staff become experts on the product is important in retail HME, where consultative sales are important to ensuring customers make the purchase.
“I look at this as being a huge advantage,” Baumhover says. “It’s one thing to have a great product mix and great pricing, but what does the vendor offer you, the provider, in terms of training, to learn about the product, and more importantly, to be able to sell the product?
“There are many great vendor partners out there that have this element, either via their website, via onsite training, but a lot of great pieces there that you definitely want to take advantage of, obviously help not only you as the provider, but obviously your people be comfortable passing that experience and that knowledge on to the customers,” he adds.
A similar purchasing criteria is marketing support. Vendors often offer provider marketing assistance that can help a provider broaden their market reach and sales volume.
“Some have cold marketing dollars that they’re able to offer you, that gives you money to go out and do some different types of marketing,” Baumhover says. “Others have different marketing pieces that come with a purchase of their products — maybe a looping video, maybe some collateral that you can put on the shelves, and other pieces along that line that obviously can benefit you as the provider.
“Lastly, is the relationship, the feedback, and the assistance that you build with a particular vendor,” he adds. “Your vendors can be your best friend in terms of just helping you make a decision, and if they’re willing to do that in addition to a couple of those other points that I brought up, I think you found yourself a good partner to partner with and, obviously, do some good things long-term with them.”
The Products Themselves
In addition to the vendors, the are other elements of the products themselves that will obviously factor into a smart purchasing strategy. Having a good, better, best range is one factor. Financing options and warranties are others. If anything, making the right match to a provider’s customers is fundamental.
“Another big, big play from a product standpoint is what does your current customer base look like?” Baumhover explains. “ I think that obviously depicts what product or products you should be carrying.”
If the provider is unsure of that answer, it should start by looking at the top two or three categories in the store. Then think about other businesses serving the market
“What’s your competition carrying?” Baumhover says. “That is definitely one obviously that you’ve got to be taking a look at. What are they carrying versus what are they not carrying, and how you can combat that?
“Maybe they have some sort of return policy, as well,” he continues. “If something doesn’t work in a short amount of time or in X amount of time, customers are able to return the item and use that money for other product.”
If anything, product choices are based more on the market and market demand than anything else. The key, Baumhover advises, is to take in all these factors — the 80/20 rule, vendor capabilities, product features, the local market — and then the best purchasing options should start to come into focus.
“If you do your due diligence and you do your homework,” he says, “I think you’re going to find a nice partnership and some success by asking the right questions and really getting down to the nitty gritty with that particular vendor.”
This article originally appeared in the April 2018 issue of HME Business.