Pillar Three - Getting the Factory-built Home Inventory Right

by Chad Carr

Chad Carr photo Editor's Note: This article is part of an on-going series that we began publishing earlier this year on the Four Pillars of Retailing. In this series Chad Carr, President of Rainmaker Consulting, shares some of the fundamental principles of successful Retail Management that his company has gathered during their 33 years of working with independent retailers. For previous Articles in this series, click here.

Inventory Management is a key activity for anyone in the retail business. From the consumer's point of view, it is the reason your company exists – to provide the market place with the products you have in inventory.

All retailers, big and small, owe a large part of their success or failure to their ability to manage their inventory. The conventional wisdom about inventory is that during good times you need to have a lot…and during bad times you need to have a little. While this maxim is simple, neat and easy to remember, it is largely false.

Inventory Management, "Getting the Inventory Right," is about having the right inventory at the right time. That is, having the products your consumers want to buy when they want to buy them. Having too much of the wrong product is always bad. Having too little of the right product is also always bad.

In the best dealerships, you will find the Owner is focused on inventory management constantly. Retail giants like Wal-Mart, Nordstrom's or Kroger have teams of people that look at reports, consumer studies and purchase trends. They make inventory adjustments throughout each day.

There aren't any Manufactured Housing Retailers who are big enough to require that type of full-time inventory management. But even the smallest retailers need to be looking at and adjusting their inventory regularly. Here are the four skill sets you must pay attention to when managing your inventory:

Market Strategy
Margin Strategy
Merchandising
Bold Adjustments

Before we get into exploring each of these, let's step back for an important clarification.

When thinking about your inventory, you need to start by focusing on your customers. It doesn't really matter to the consumer that we have just the right amount of what we want to sell (inventory focus). What matters to the consumer is that we have what they want to buy (consumer focus).

This may sound like a subtle difference, but it is not. The customer focus in inventory management is a game changer. Ask yourself this: As you decide what you are going to stock for your spring selling season, who are you most likely to talk to – your manufacturers or your customers?

If you said your manufacturers, don't feel bad. Most dealers rely on their manufacturers to tell them what is new and "hot" in the marketplace. As a retailer, it is easy to imagine the manufacturer is doing market research and focus groups to get their finger on the pulse of the buyers. After all, the manufacturers are much bigger than retailers and have a lot more resources to help them understand what the customers are craving, right?

Wrong. With very few exceptions, manufacturers follow trends that are started when someone gets lucky and builds just the thing customers are looking for. I'm not trying to be overly critical of this industry; this is true all over the business landscape. Just drive by your local car dealership. The vehicles they have on the lot are not the ones everyone wants; they are the ones very few people wanted. If everyone wanted them, they wouldn't be on the lot.

Shift your focus from the factory-built houses (what you have to sell) to the consumer (what they want to buy). With that in mind, let's start with our first skill set.

1 – Manufactured Housing Market Strategy

Who is your target customer and what needs of theirs do you want to fill? In the factory-built housing market, there is a huge spectrum of market niches you could fill. As I talk to dealers around the country, I am amazed at the variety of Market Strategies being employed. Dealers can be selling anything from FEMA houses for a few thousand dollars all the way up to customized modular homes with prices that can range into hundred of thousands of dollars.

Your market strategy needs to be specific about who your customers are and how they will use your product. It should also include how you are going to get those customers in front of your sales people.

If you are a retailer, you already have a de-facto market strategy because you are currently selling something to someone. However, you should thoroughly develop this strategy to make sure you are working your market properly. You need to put your Market Strategy in writing and then test it with numbers to make sure it is the right strategy.

If you don't know your market, learn it. It is going to be much less expensive to do some research up-front than it will be to just throw ideas at the market to see which ones take off. Talk with people who use your product and find out how they use it, what they would like to see improved, what they appreciate about it, etc.

Your written marketing strategy should include the results of your research to show the different types of factory-built houses that your consumers want, the different price points they are looking for, what level of service they expect, etc.

You can use your past sales to help you determine your market strategy. Identify those HUD Code houses that sell well and then find out who is buying them and why. Identify those that haven't been selling well and try to figure out why not.

Be careful not to miss market segments. The factory-built housing market has changed and will continue to change. I know dealers all over the country whose sales are way down in part because the refuse to return to the basic shelter market of low-end HUD Code homes.

Once you know to whom you want to sell and what they want to buy, you will want to create an Ideal Inventory Mix as part of your marketing strategy. This written Ideal Inventory Mix will list all of the different types, sizes and price points of housing your consumers are looking for. As you go down this list, you should be able to give a brief explanation of why you should stock each item on the list and you should have a good idea of how many of these you could sell in a given period of time.

Developing this Market Strategy is going to take some work, but if you are unwilling to do this, you are not likely to have the right mix of inventory. Consequently, you will not be able to achieve long-term profitability and financial stability.

>2 – Manufactored Housing Margin Strategy

When developing your Margin Strategy you are looking at the relationship between price and volume and figuring out where on that curve you want your sales to be. A big title for this kind of graph is the "Price-Volume Sensitivity Curve." If you are unfamiliar with this relatively straightforward concept, an example is available free of charge; just give me a call at (800) 336-0339.

Two different dealers, even in the same part of the country, can offer the exact same house for two very different prices and yet both can be profitable. Some dealers may have low margins, but make up for that by doing a higher volume. Low volume dealers may have a higher margin and justify that higher margin through more personal attention to the customer.

The rise of Internet Retailers gives us a stark example of how Margin Strategy fits into the inventory equation. A pure Internet Dealer may have very low margins and can "beat any price," but they may have to offer more limited services to the consumer and perhaps have no physical inventory (or location) in order to keep that margin low.

Many traditional retailers get very frustrated by these Internet Retailers. However, they are simply employing a different Margin Strategy than the traditional brick-and-mortar retailer who offers a wider range of services, personal attention and inventory and, therefore, must have a higher margin than the Internet Retailer to cover those expenses.

In developing your MH Margin Strategy, it is critical that you have the discipline to use the right numbers as you make your decisions. You need to focus not just on some arbitrary mark-up percentage, but on what we at Rainmaker call the Variable Gross Profit production of your individual sales.

You need to know exactly what you are going to make on each factory-built house at a certain price or margin. This needs to include the contribution you will get from add-on accessories and appliances, site-improvement work and F&I products. Rainmaker gave a detailed treatment to this number in our last article, "Getting the Deals Right." If you would like help understanding how to calculate this number, you can call my office at (800) 336-0339 and ask for our Sales Transaction Analysis form.

As you calculate the projected Variable Gross Profit that your Margin Strategy will produce, you need to also project the sales volume it will create. While it may be obvious that Higher Margins may reduce sales volume, it is important to actually chart how you think different margin levels will affect your sales volume. Again, the "Price-Volume Sensitivity Curve" is very helpful and will surprise you with what it tells you.

As the last step of perfecting your Margin Strategy, you must take your projected sales volumes and your projected Variable Gross Profits and compare them to your projected expenses to make sure your Margin Strategy can support the dealership and your family.

You may need to rerun these numbers several times (and frankly, you should revisit them frequently) to make sure you have something that works on paper. It is impossible for something that doesn't work on paper to work in real life. If you want to have a highly profitable and financially stable dealership, you must first figure out how to do that on paper.

As with your Market Strategy, your dealership probably already has settled into some de-facto Margin Strategy. A good place to start with the process of evaluating your strategy is to look at what you are currently doing. If you want some help, our company provides a service that will put numbers to your current Margin Strategy and guide you through the process of identifying and documenting your ideal Margin Strategy.

3 – Manufactured Housing Merchandising

Merchandising is all about how you present your product to the public. Your Merchandising approach needs to make sense to your consumer. If your Margin Strategy is to be the low cost dealer and your customer shows up to a paved lot with an environmental display and sales people running around in ties, they are going to be confused.

If you have a higher margin strategy and your customer shows up to find houses displayed in a sloppy arrangement on a muddy lot with no sales people in sight, they are also going to be confused.

If we look outside our industry, this relationship between Margin Strategy and Merchandising will be easy to understand. Think about Wal-Mart and how they present themselves to the public. What do their stores look like? What do their parking lots look like? How do their employees dress? Now think about their Margin strategy. It's easy to see they want to be perceived as having low prices right?

Now think of the retailer Target. Higher prices (probably not by much, but that is the perception). Now think about all the extras they deliver in their merchandising in order to support that higher margin.

Your approach to merchandising must take into account the appearance of your sales center, your offices, your staff, your trailers and more. You want your appearance to support both your Market and Margin Strategies.

Bold Adjustments

I used the word bold here very intentionally because it means that when it is time to make adjustment, you should not agonize over them; just make the adjustments and move on.

Tremendous amounts of time, energy, and money are wasted by Dealers as they agonize over what to do with houses that aren't moving. A good client/friend of mine has a bit of rural Texas wisdom that goes like this: "If it acts like a skunk, looks like a skunk and smells like a skunk, it's a skunk."

If you have a house that won't move, it's a skunk. If it's a skunk today, it will be a skunk tomorrow and it will still be a skunk two months from now. Don't waste time screwing up your sales people and your customers by trying to convince them that it's not a skunk. Get rid of it and bring in something else that your customers want to buy.

This is often hard for dealers because they feel emotionally connected to those houses for two reasons: First, they made the decision to purchase the house and they don't like being wrong. Second, they worry about getting their money out of that bad decision instead of focusing on how much they are losing by showing their customers a skunk and trying to convince them it smells good.

Even your "best selling house of all time" will eventually be rejected by the market place. A model that sold like hot cakes last year may be a skunk next year. Your loyalty to these "aging beauties" will not serve you well. Pay attention to what is moving and what is not.

Most dealers start to think about their problem inventory when it has been on display for somewhere between three and six months and no deals have been written on that model. Having some sort of arbitrary date-related trigger is a good start. If a pre-owned home has been sitting for 60 days without an offer, it should be on your watch list. New models should go on this list after 120 days.

The watch list means that you need to start asking questions about that house. Who has looked at it, how is it priced, how is it merchandised and why isn't anyone buying it?

The date trigger for putting a unit onto this watch list should vary from one type of house to another. A better technique is to identify how many people have looked at a house and compare that to how many offers you have had on it. If you have 20 customers look at a house in a two-week period and no one makes an offer – it's a skunk. You don't have to wait another three and a half months to figure that out.

Once you identify units that are "skunks" or "aging beauties," you need to act – and act boldly – to adjust your inventory. Get the unwanted houses out and bring in new and more desirable models.

How do you do this? Well, everything will move at the right price. There is no piece of inventory that you have to be stuck with forever. Have you ever seen a big box retailer offer 70%, 80% or 90% off an item? They do it all the time. Aren't they losing money on those items? Of course they are. But they know that having skunks cluttering up their aisles is far more expensive in the long run than taking a loss in the short term because it frees up cash and space for better inventory.

You can "Wrestle-Out" or "Blow-Out" these problem units. Wrestling involves making small adjustments to price and merchandizing and investing more management attention to getting rid of the house while doing everything you can to hold onto some respectable profit. (This strategy is okay if you have lots of time and cash on hand to invest in this unit.)

"Blowing Out" the house means dropping the price quickly to whatever it takes to sell it, even if you lose money on it. While emotionally more difficult, this is often the right approach because it will free up cash and keep you from wasting time trying to convince good customers that skunks smell pretty.

Learning to make Bold Adjustments to your inventory is the culmination of the customer-focused Market Strategy that you put together in step one. After all, if you are truly focused on what the customer wants to buy, you will not hesitate to clear the lot of houses that you know consumers don't want.

Keeping your Inventory Right

In closing, "Getting your Inventory Right" is a process, not an event. Your market will change, your margin strategy may need to be adjusted and you may find there are holes in your Ideal Inventory Mix. Having good data available at your fingertips will help you reduce the amount of brute force it takes to go through the process of analyzing your inventory to find the problems and the opportunities.

There are several computer systems on the market now that can help you manage your inventory. Some will give you a simple list of what you have and how long you've had it; others will provide you with the kind of in-depth inventory analysis I have described in this article.

Even if you are just using spreadsheets, it is important to track more than just a list of what you have on the lot. You need to be able to see the profit and cash production of those houses, the number of turns you are getting, how many people have looked at those models, etc.

But most importantly, you need to know where you are on the Price-Volume Sensitivity Curve for each of your model lines. What has been the Variable Gross Profit produced by each model the last 30 days, 90 days, six months, etc.

It's not complicated. It's what professional inventory managers like department store buyers do for a living.

If you would like more information on how to build your Ideal Inventory or examples of the kinds of data you should be tracking, please feel free to give my office a call and mention this article. We will be glad to take some time to help you understand this critical Third Pillar of Retailing.

Rainmaker Software is a privately-held Retail Management Software and Consulting company that services the Trailer, RV and Housing markets. Chad Carr is the president of Rainmaker Software and is the second generation running this family-owned business.

Rainmaker works with retail businesses ranging in size from five to six people up to some of the biggest and most well-recognized names in the industry. For more information about their services, visit their web-site at getRain.com or contact Chad at (800) 336-0339 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .