For this post, we’re going to do another trip down the rabbit hole and talk about a problem for a specific set of customers. If you rent non-garment items like shop towels, bath towels, napkins and the like – items with rotating inventories – this is for you. We want to pull back the curtain a bit on how those inventories are determined, how they turn and how some imaginary numbers create an invoice that is difficult to audit.
When your provider sets up your account, they’re going to do an assessment of your business to determine inventory levels. For the sake of this post, let’s use shop towels as the item. Your provider determines you need 1,000 shop towels on inventory – so all examples below will use these parameters. Let’s break down the moving pieces.
SOMETHING SIMPLE MADE COMPLEX
Inventory management can be a complex endeavor when there are dozens or more contributing factors. But you’re just trying to make sense of a single location with a single inventory value – 1,000 shop towels. Simple, right? It should be, but our recurring nagging theme of bad service design has a hand here. Let’s cover some basic concepts of lingo around non-garment inventory. When you’re hearing a sales pitch and they quote you at $0.10 a unit, get clarity on the billing percent. Not the minimum billing percent – we’ll get to that in a second – just the rental billing percent. It’s usually 50% or 100%, with the industry moving more and more toward 100% in order to have parity in perception of pricing.
If they quote you 50% at $0.10, it means they’ll bill you $0.10 per piece for half the inventory. Which means they’ll bill you $0.10 per piece for the OTHER half of the inventory as well. Did you catch that? Sometimes, they’ll use the quoting process to mask the total cost of the entire inventory. Calculating 500 pieces at $0.10/per is only half the actual price, but they may let you perform half the math and let you think that’s it. Don’t let it slide – do ALL the math.
DETAILS, DETAILS, DETAILS
Next – the minimum billing percent. This determines how much you can be billed – at a minimum – if they deliver less than X amount. For example, if your minimum percent is 35% and they deliver less than 350, you’ll still get billed for 350. If they deliver 500, you’ll get billed for 500. More often than not, you’ll find providers move away from minimum billing and push you into 100% billing. Minimum billing at 50% or lower generally only applies to very large, multi-location accounts. Any method STILL does not address your actual usage, though.
Finally, replacement rates and automatic replacement ratios. The replacement rate is what you pay per piece for anything you ruin or lose. The automatic replacement ratio is the percent of inventory you pay automatically – every week – because there is the assumption that you lose X% every week. If you have a 6% ratio with a $.50 replacement rate, you’re paying $30.00 every week to pay for replacing lost inventory. That’s $1,560 a year for 3,120 shop towels.
Are you really losing that many? And did you know you could buy 12,500 shop towels online for the same price? Of course, we know you’re paying for a service for convenience – you don’t want to source towels and deal with cleaning, etc. We’re just trying to make the point that… maybe some of these numbers are inflated because they’re so difficult to interpret and calculate.
DELIVERY QUANTITY AND USAGE
Now for the real issue at hand. The most common billing method is to charge 100% of your inventory based on a simple unit rate. But what portion of that inventory are you actually using? Is there a delivery quantity on your invoice? Go look – we’ll wait… Oh, there’s not? Is that accidental? Or by design? Did they sell you shop towels “as a service?” How can you be sure that your inventory is appropriate if you have no idea how much you’re using? This visibility gap forces you to accept what the provider says. They may claim your inventory to be a highly calculated and rationalized number. Our advice – make them prove it. Especially if you have a high automatic replacement ratio and unit replacement rate.
Once in a while, simply make your driver do a count of the clean items being delivered and the dirty items being picked up. There will be some items still in use in your facility that you can’t count – your provider might call it the “float” – but it’s not important yet. The key here is to direct the driver to count inventories in front of you. And not just one week – you need at least two weeks in a row in order to start seeing how the math works. It can be time-consuming, but doing it once every six months should be sufficient to set the tone, and to get the inventory level correct. If you find that you’re at least 25% over-inventoried, then you’d be an average customer. That’s how it’s designed.
IS IT WORTH YOUR TIME TO TRY AND FIGURE THIS OUT?
Like previous posts, we sometimes go into geeked-out, excruciating detail in order to illustrate a simple point: it’s NOT worth your time. The design of these services makes it very difficult to cost-effectively decipher the problems. You may catch some issues, but you’re not catching them all. So, just throw your hands up in the air and wave off the problem as impenetrable – just not worth your time. Bigger fish to fry. After all, if you don’t know how much money you’re losing, then maybe you’re losing none. Or, you could just ask us to help you. There’s always that.