Study of inventory and its effects on business has reams of content in businesses producing and selling goods. Often the service industry does not deal with inventory or even consider using some of those concepts in managing the service delivery operations. Why not think of customers as inventory? It throws up a lot of interesting perspectives for service operations especially with regards to cost of servicing a client.
Firstly, let me start with my views on why customers are not considered as inventory. The only reason I could think of is that the number of customers does not appear as an entry in the balance sheet or the profit and loss statement. Most businesses including services think of and treat customers as a means to an end which is revenue.
Now, let me make the case for treating customers as inventory for a services business. The production and consumption of services happen simultaneously and hence it is not possible to stock up haircuts or counselling sessions. However, the trigger for any service is a customer walking into the salon or counsellor’s office, in that sense customer is the basic supply required for services business.
A proper definition of customer inventory would be a list of customers who had transacted with the services business and has the potential to be served again in a reasonably short period ( less than a year). When defined like this there are striking similarities between material inventory and customer inventory.
- Material inventory has a procurement cost which is the cost of carrying out the procurement process and customer inventory has the customer acquisition cost
- When we hold material inventory we incur holding cost which is the interest rate on capital blocked. Incase of customer list, we do not have holding cost but we incur a remarketing like email marketing, content marketing etc..
- Material inventory has obsolescence risk, perishability risk and general loss of value when kept unused for a long time. A list of customers also go the same way if we do not manage to trigger periodic transactions with them. A customer who is not reached over a very long period is least likely to transact with the business and we will lose the customer acquisition cost spent on acquiring the customer.
The similarities does not end in just the nature of costs in maintaining an inventory of material and customers. There are parallels that help us look at some of the servicing costs as investment instead of expense.
Material inventory is classified as non moving, slow, medium and fast moving depending on the rate of consumption. Similarly the customer inventory can be classified as dead, irregular, regular and frequent customer depending on the frequency of transactions. This classification can help us target the promotion effort and activity in moving the customers from the lower frequency transaction bucket to the higher frequency transaction bucket.
Similar to flushing out obsolete inventory, we should continue to prune the customer list to weed out dead customer bases in order to save promotion efforts. Retailers run special discount sales to push velocity of slow moving material, in services it makes sense to provide targeted discounts to make irregular customers into regular customers. The incremental cost of converting an irregular customer to a regular customer is always way less than the new customer acquisition cost.
Service industry can also mimic the way retailers manage fast moving items while managing frequent customers. Inventory managers focus on keeping the fast moving items in stock with frequent restocks in order to keep the costs low. A similar approach in managing the inventory of frequent transacting customers would be to ensure they are always served first with no wait time. It even makes sense to have a green channel for the frequent buyers, this will keep the costs low and ensure growth of frequent transacting customers.
A good inventory manager will keep the value locked in slow moving and low moving items to 20-30% of the total inventory. A good services company should also keep the infrequent and occasional transacting customers to a 20-30%. The product inventory manager achieves this by adjusting the procurement process to reduce the count of slow moving and non moving items. Similarly a service business can reduce the irregular or occasional transacting customers by profiling them and removing those profiles from the marketing TG definition.
I urge service business managers to study some of the common inventory management practice and apply the same to their list of customers in order to improve the quality of customer base and keep them active to derive the maximum business from the marketing dollars.
