How SPC beats the pipeline squeeze.

Keeping track of boxes, manuals, and disks has never been a particularly glamorous part of the software business. But in the last year, big distributor shakeouts and belt-tightening in the retail channel have begun to squeeze inventory pipelines throughout the whole industry-often with disastrous consequences for sales and profits. "Across the board, there's probably less than half as much inventory in the channel now as there was six months ago," says Jim Heffernan, Software Publishing corp.'s chief financial officer.

Heffernan argues that "very, very tight margins" in the reseller channel are beginning to force distributors and retailers to run leaner back room operations; in turn, resellers are now less willing to soak up excess inventory in return for a few extra discount points. "The channel finally figured out that paying 1-1/2% a month to carry unsold inventory is no bargain," says Heffernan.

The recent pipeline squeeze caught many publishers by surprise, Heffernan points out, but his own company felt "almost no impact" because of a long tradition of careful inventory management. (When we last analyzed inventory ratios (Soft-letter, 8/20/87), SPC ranked as the clear leader among all public software companies.)

We recently asked Heffernan about SPC's strategies for keeping inventory under control. His answers:

Treat resellers as inventory partners. "We don't think of dealers and distributors as our customers," says Heffernan. "They're really our remote inventory sites." if a dealer's inventory isn't moving, SPC offers stock balancing and other help. In return, however, the company requires all its distributors and direct dealer accounts to turn in monthly inventory status reports. "We don't know what's on the shelf of every last Mom and Pop store, but we do know what's happening in about 80% of the channel."

Keep turnover ratios in line. Heffernan says he tracks inventory movement with several key indicators. SPC tries to keep about a month's worth of physical product in the reseller channel, equal to 12 inventory turns a year. Internally, he calculates turnover as a ratio of the dollar value of inventory compared to SPC's cost of sales, which generally yields about nine turns a year. Finally, Heffernan watches his receivables ratios--currently at 42 days--to see how fast inventory turns into actual cash.

Don't run too lean. Very high turnover ratios look good on paper, Heffernan says, but they may be a "red flag" that not enough product is on retail shelves. Recently, Heffernan found that SPC's Harvard Graphics product was turning over every 3-4 weeks. "When we checked, we found that many customers were experiencing stock-outs when they tried to buy the product."

Match out for dubious data. "Monitoring sales on a monthly basis is not a trivial issue," Heffernan points out. most of SPC's distributors and large dealers are still "in the sliderule era," he says, so SPC doesn't always get an accurate picture of how much product is in the channel. To backstop reseller data, SPC also monitors registration cards and support calls. "If no registration cards are coming back, it's a good sign that inventory is building up on the shelves of second-tier resellers."

Stay out of the manufacturing business. SPC carries virtually no work-in-progress inventory, says Heffernan; instead, the company farms out all its production and assembly work to subcontractors. 'We don't even own a disk duplicator," he notes. Even large software companies rarely achieve the same economies of scale as turnkey manufacturers, he adds. "unless you run non-stop shifts, there's too much unabsorbed overhead in doing your own manufacturing."