In recent deals we have seen a number of opportunities to generate cash from inventory reduction equal to one half to one full multiple of a deal’s value. As a result Caledonia’s work in this area has been on the rise. Our successes, in addition to manufacturing companies, have included category managers at Wal-Mart, as well as companies that source all their products in Asia. The following illustrates a recent success.

 In late 2010 we were engaged by US LBM Holdings, one of the nation’s top 10 distributors of building products to professional builders, to assess its inventory management systems and practices. We identified specific opportunities, detailed below, for cutting costs by $4-6 million, mainly by reducing inventory.

1. About half the company’s sales and virtually all its inventory were accounted for by the buffer stocks in some 21,000 SKUs for “standard” stocked items. Custom orders, which entailed no inventory, made up the remainder of sales. However, the company measured inventory turns based total sales and total inventory, which made inventory turns look far higher than they actually were. When the company focused solely on standard stocked SKU items, it was able to increase inventory turns dramatically.
2. Inventory management practices varied widely among the company’s purchasing agents. The targeted level of buffer stocks for each SKU did not differentiate among SKUs based on (1) the inherent variability unique to each SKU, (2) the varying lead times among vendors, and (3) the different delivery expectations among core and non-core products. Taking these factors into account, Caledonia developed a min-max system that tailored inventory levels to variability (less variability, less inventory), while improving service to customers.
3. Using Caledonia’s system, the company reduced inventory 22%, to $14 million from $18 million. It also greatly reduced the need to rely on the purchasing agent’s experience and judgment, both of which are time consuming and largely ineffective, especially given the company’s huge number of SKUs. Inventory goals were set by product lines to assist management in identifying imbalances.
4. The new inventory management systems and processes were tailored to integrate with the company’s new ERP/MRP system that was being implemented.
5. Caledonia identified high levels of excess and obsolete inventory, indicating that product life cycles weren’t being actively managed, and recommended periodic reviews to rationalize low volume product offerings.

“Caledonia used highly technical methods of inventory management to help our portfolio company better understand its baseline performance,” says Bryan Tolles, vice president of BlackEagle Partners LLC, a private equity firm with offices in Detroit and New York City. “We acquired US LBM in early 2010 from a leader in the industry known for its sophisticated systems; the results we’ve experienced in reducing inventory without any negative impact on margins or fill rates are impressive. Caledonia worked closely with the management team to understand the business and helped set goals that made sense.”

Caledonia Group Inc. specializes in due diligence and enterprise improvement for sponsor firms. For more information call Elizabeth Hyde at 313.647.5331 or visit us at www.caledoniagrp.com.