August 1, 2023 • 37 mins
Massively Increase Your Net Operating Income™ with The TCO Method™.
Andy discusses inventory management and ordering controls, standards, and the need to streamline and simplify operations to create transparency and collect good data to help you make money down the road.
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Episode Transcript
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[Music]
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Welcome to the TCO Method, the only show focused on helping you massively increase your net operating income.
I am Andy McQuade and thank you so much for tuning in to this Tuesday edition of the show.
I apologize for last week.
Not only was my Tuesday episode out on Wednesday, but the Thursday episode never happened.
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So, oops, got busy. Is what it is? We're going to move on. Today, I want to talk about something that
actually sucked up a lot of my time over the last couple days and it's inventory control.
So, this is going to be less valid and less important for those of you who are
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smaller, self-run operators where you don't really have inventory,
but for anybody with an apartment building or complex that has a shop,
a maintenance shop, a maintenance storage site, whether it's a basement, a garage,
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a little shed that you buy from Home Depot as a kitten set up on the property somewhere.
It is an important thing for you to make sure that you have things in place to control your inventory.
There's a few reasons.
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One is you need inventory controls to make sure your guys or gals, your maintenance employees,
maybe even subcontractors if you provide materials are able to get material from that shop
without having to go buy it. When shield time is a huge sink in efficiency,
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costs you more money than you probably realize. The unfortunate reality is that
a vast majority of property managers and owners that are out there have a shop
think that it's stocked properly and that there's controls in place to keep people from spending
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windshield time to get product that doesn't happen to be there that they need. The other issue is
that they don't have controls in place to make sure that the product that's being taken
is being recorded to specific units in the property and specific jobs.
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It's pretty easy to tell when you have a bunch of flappers for toilets
when they get used it's going to be used to fix a leak, right? It's going to cost you money.
What's not easy to tell is when you have things that can be used in any number of ways
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in any number of different places, you have no way to categorize that so you can keep track of your
expenses. It's also really not good when capital expenditures are being tapped and using materials
out of the maintenance shop because they should be two totally separate segregated line items
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because they're two totally separate different types of expenditures.
One's budgeted and one's not for one, right? You can have a capex budget but it's not an N-O-I number.
It's an after N-O-I below N-O-I expense. So it works a little bit differently in how you do your
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accounting in your books and it should be segregated. But you need to make sure that you have an
expectation that you have a process on your site. If you're going to have inventory and it's going to
work for you to the best of its ability to help you avoid costs and make more net operating income.
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It needs to be operated in a way that reflects that. Now what do I mean?
By it needs to be operated in a way that reflects it. Number one, you need to make sure that your inventory
is the right product. You don't want to have a bunch of stuff sitting down there tying up dollars
in your budget, right? Because it's cash flow. You don't want to have a bunch of money tied up
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that isn't going to get used. There's no point to having it if it doesn't serve a purpose.
If it's just taking up space. There's a few different things you need to look at
when you're considering higher managing inventory. First and foremost, you really need to understand
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what the product is. Have one product for multiple different uses. Standardize, right?
Anybody who's got older electrical pre-decora electrical on a property. You've got switches,
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two way switches, three way switches. You've got outlets. You've got outlet covers. You've got
a different one for GFI that is Decora. You've got maybe USB outlets that are also Decora. You've got
maybe double light switches. Top over under light switches.
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Single outlets, 20 amp outlets for air conditioners. If they're running on 240,
you have all these different things. And while having those five or six items
isn't necessarily a big deal, when you start having to inventory all of the wall plates
for all of those items, right? You've got one with a switch and two sockets. You've got another one
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that has two switches and a socket. You've got a bunch that are like three switches, four switches.
You have all these different options that you have to account for as opposed to just having a
rectangular hole that you can put a filler plate into making a blank that you can put switches
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next to outlets next to USB chargers next to whatever in any way, shape or form that you want to do it
any configuration and you don't need anything extra. So having things in inventory is great.
But only if they're the right things. How much pre capital, how much money are you tying up
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by having stuff that you don't use or don't use frequently enough to justify keeping?
In my opinion, if it's on the property somewhere,
if you're really prepared for the lowest common denominator of tenant,
we're talking commercial multifamily right now or just regular multifamily or single family
rentals or whatever it may be, you want to have it in inventory because eventually somebody's
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going to break it. So you need two, number one, have standards, have specifications.
If you're doing a value add on a property, you should be moving to simpler,
more streamlined standards that are readily available, resilient. So they last and they take
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abuse and wear and tear and so that they are readily available for multiple different vendors
and they all look enough alike where your tenant isn't going to be like, "Oh, why do I have
four different light fixtures in my unit?" And all four of them are different for
two bathrooms and the sink faucets are different or a bathroom faucet that doesn't match the
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shower tub faucet, right? Some properties that's not going to matter. Other properties tenants are
going to be like, "What is this?" So standards matter. Your standards should be resilient. They should
also be simple. Complexity is the enemy of execution, not just in starting the process and making it
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happen successfully but maintaining it over time. Remove opportunities for failure.
So we're talking about inventory management. The first thing you need to do is understand
what you're going to use and why. If you're going to have flooring in your inventory or repairs,
number one, hopefully it's a type of flooring that takes repairs very well that you can actually fix
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if it's required. Sheet vinyl is not that. You're not cutting out a piece of sheet vinyl in the middle
of a room and replacing it without replacing the entire piece of sheet vinyl. We've already talked
about why sheet vinyl in itself is a terrible idea but people still use it. It's still sold. I have no
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idea why but they do. You want standard. You want simplification. For two reasons. One is you're moving
a point of failure. The second one is you can leverage your buying power more. You're reducing
the number of skews but maybe you're increasing the quantity of one skew. Therefore you can buy in bulk.
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Potential savings. Not always but potentially. The other thing is that you go from having to inventory
like perfect example is the electrical thing. You go from having to inventory 15 or 16 different
configurations of wall plates to four with a blank filler plate accessory. You have one rectangle
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plate that's one gang wide. You have a two gang wide, a three gang wide, and a four gang wide.
It's a little filler plate to make a blank that goes on the inside and you go from inventorying
16 skews to inventorying now five. Simplification. Do they cost more? Yes. How often are you really
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going to replace them? During a value add? During a refresh or when they're damaged? Simplify. Simplify.
Simplify. That's the most extreme example but you can really get into the cop job that a lot of
these properties have seen over the decades. Five different thermostats. 17 different brands of
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smoke detector and different configurations that take different wall plates. Dozens of different
light fixtures, different vanity fixtures, different bath fans. You can get into all sorts of craziness
when it comes to bath fixtures and plumbing. Plumbing repair. All this one's a pro press. This one is
pecs barb. This one is shark bite. This one's copper. This one's pecs. This one's C-P-V-C. This one's A-B-S.
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There's tons of different options out there. You need to have a standard. Yes, you need to be
able to account for those things but just because it's there doesn't mean it's right. And then you
need to make sure that your staff is trained to use it. But again, if you convert to one system and
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you have adapters that'll allow you to shift from type A to type whatever you decide on,
all of a sudden your inventory again becomes simpler. So standards are the first part of any good
inventory management process. Anything that's on the shelves in storage for maintenance
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needs to be current. Just because it's there doesn't mean you need to keep using it.
If you replace all the thermostats on a property except for like five,
do you need to have the old type of thermostat anymore? Or should you have the new one so that
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when one of those old ones dies you have replacement? That's new. Same thing with the existing ones if for
some reason a brand new thermostat dies, replace it with the type that's everywhere else. Universal you
can buy in bulk. You can stock it. Cash flow wise, having simplified skews means that you don't need
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as many number one that frees up cash flow to do other things that's opportunity cost. It should have
a track record, the performance record. So you're dealing with some risk management stuff there.
You know the thing is good, the quality is okay. You can kind of predict what the failure rate is
going to be after a while after you purchase the property. So you can make sure that you're aware of
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upcoming expenditures that might need to be addressed. It's a transparency thing but you only need to
inventory what it's going to take for the period of time you order. So you need an order cycle.
If you know that you're going to use 15 of widget A in a month and those products have a two
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week lead time to me that tells me that every six weeks I'm using like a little over 20 of those things.
If I place one order a month my on shelf quantity that I want to refill to is going to be like 21
or 22 pieces because it's going to a lot for the downtime between place in the order on day 30
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and when it arrives a week or two later I'm not running out because what happens when I run out
I run to the store. I ordered online. I send a guide at the store. I'm losing time creating
more repeat instances where we have to go back into a unit to complete a job. My time to repair is
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extending. My operating costs and overhead are extending for that maintenance call that repair
and things are just going sideways. Small costs balloon quickly when they start to add up when
you really start to look at it. So back to an inventory system if you have an inventory system
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and the accounting for it is being done correctly and you have a system in place
to assign parts and pieces to specific work orders to justify the cost you're going to do two things.
One is you're going to build data. You're going to build transparency to
what's being used when, why, and how so you can maybe find an alternate later that will reduce those calls.
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Right. Data is your friend. Gather as much as you can because you never know where useful data is
going to come from and how much of a impact on your bottom line that's going to have. Number two,
with that data you can establish ordering cadences. You can automate some stuff.
I'm not saying you need an inventory management system like a store has. That would be cool if it was
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cheap to manage and didn't take a ton of labor. But generally speaking that's not realistic.
You want to make sure that you've got the right mix that's going to minimize your windshield time,
minimize your labor time, minimize the hands in the cookie jar,
minimize the number of skews so you're freeing up cash flow.
But you're also accounting for when things are failing. So you can predict it. There's some stuff that's
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seasonal. Some of it's based on leasing season, some of it's based on actual weather.
So you can reduce the quantities you have on hand in the summertime and raise them back up in the
fall before you spike or vice versa. That way you're not tying up too much cash flow from your
budget to operate your maintenance. The worst thing you can do is to combingle your maintenance
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and your capital expenditures. Capital is usually unplanned, right? Emergency stuff. That's too expensive
for maintenance to include in their budget. Or it's pre-planned stuff like rehabs, like turns,
like rentals, like roof replacements, that type of stuff, where hopefully you've done enough
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preventive maintenance where there's nothing deferred and you're not tripling your price of doing
repair, but you shouldn't be taking stuff out of the maintenance shop to address your cat-backs
unless your system has a way to account for that and break it off into a separate line item.
Because it is a separate type of expenditure with a separate right-off schedule on your property.
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When you do your taxes. That's important for two reasons. One is if you're combing,
Ling, you don't have a real, you don't really know number one, what your maintenance is costing,
number two, what your cat-backs is costing because you're taking stuff from one budget line item
and putting it in another. If you're itemizing it by door, by unit, by building, by property, by
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block, however it is you have it broken down in your systems, you're introducing garbage that will
produce garbage data, garbage in, garbage out. You need to make sure that you're collecting the
right information for what you're doing and make sure it's going to the right line item.
It's not the end of the world if it's not, but your data is going to be bad.
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Because if you have anything automated, you have anything set up on a schedule,
you know you need 15 of these to last you a month, but capital comes in and they take four of them,
or five of them, you run out in three weeks and then you're getting a car and driving to the store
to buy it one at a time until your next bulk maintenance order comes if you're ordering every 30 days.
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It's not unusual to see that because of the exorbitant shipping fees that are buried into
certain vendors, relationships with multifamily housing providers. These guys all either bake,
delivery fees into the cost of the products when you order them, or you have to get to a certain
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threshold from a volume standpoint and buy enough to get the free delivery. What kills me is when I
see people just ordering stuff they don't need and mask quantities because they don't want to deal
with it. There's always going to be that maintenance manager, that shop tech that wants to place the order,
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it wants to just buy a bunch of stuff so he's got enough on the shelf to last him for a whole year.
Budgets and cash flow and and opportunity cost and and putting capital to work in other places be
damned. That's not his problem. He wants to do his little work as possible so he just wants to
get everything done. That's where the automation comes in and helps but you need controls in place.
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So I'm talking about this because I spent a couple days last week fixing other people's messes.
I walked into a shop on a property that I helped create the standards. I set the spec. I eliminated a
ton of skews, streamlined the ordering process, streamlined the quantities that were there. Todd
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everybody had to do it and then somewhere some new people were hired and the processes didn't carry
forward. So when I was walking and doing an audit all of a sudden I get into the shop and there's
stuff everywhere, everywhere. Boxes ripped open, stuff taken out, brand new faucets like four of them
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opened up parts and pieces they needed to repair old faucets yanked out of them which I don't even know
how that works because most of the faucets on a property aren't even this new faucet. And now you've
got four faucet bodies, kitchen faucet bodies that are relatively expensive because they're deltas
and you can't use any of the four of them because if you need to replace a faucet all the parts
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aren't there. So these maintenance guys went and took a $20 problem and made it into a $100 problem
five times over instead of just taking the entire fixture that they had in stock and just
taking the extra five minutes to instead of replace a valve stem replace the whole faucet.
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I can't even imagine what the actual long-term impact of that is going to be because you're going from
taking an old thing with something that failed that probably has other old things that will fail soon
and instead of just eliminating all the points of failure and replacing it outright
they replaced a piece of it. While I understand somewhat that there could be like budget concerns
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normally because there were no stems in inventory instead of ordering those stems they just
threw $500 with the faucets in the garbage essential essentially. And those are collecting dust.
I saw the same thing with the tub rebuild kits cutting them open and taking a knob taking
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a diverter valve taking a valve stem instead of taking the whole kit and just refreshing that
unit and spending the extra 10 minutes it would take to replace all three instead of just one.
You're already turning off the water you're already opening up the wall.
You're already taking the shiny parts off to access the stuff that needs to be fixed.
Is it really a stretch to spend the extra labor to the extra 15 minutes?
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Two future proof problems down the road by just replacing all three of them.
You're already in there you're already doing the labor. The water is already off
but no instead we cut the thing open and we just leave a bunch of parts in there and we never
look at it again and eventually we throw it away. This is why people have problems with having
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inventory on ground in some of these apartments that's why there's owners out there who don't like
having inventory. They've number one they've never done the math to see how much the downtime
and windshield time and order time and lack of pre-planned purchasing costs them just on the material side
not even on the labor side. The lack of standards costs a ton of money on the material side.
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The lack of planning and operational standards being in place and expectations being set and
trust but verify right? Train your people verify the training is working.
If you're going to change a process you cannot allow them to fall back into old habits.
Process only pays for itself and only helps your business flourish if you follow it.
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So having the standards is super important using them way more important.
You can have all the standards you want you can have a big standard party out in the parking lot and
have everybody come and have hot thugs hamburgers and have a great woohoo we got all these standards.
You train them all once and then you never check to make sure those standards are being used
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and those operational things are being put in place or you check for a while and then you get busy
and you start working in your business instead of on your business and all the guys just do whatever
they want after a while again and go back into their old-world habits of just cutting stuff open
taking what they need and throwing the rest on the ground or putting it on a shelf somewhere in a
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pile to collect dust for 25 years. Well that all costs you money. Your inventory should look like
the inventory at a store when you walk in and no not like a home depot where there's piles of
stuff everywhere and the aisles are all clogged and you can never find anybody. No you should be able
to walk in and look at a shelf have everything in order grouped by type find where the shelf is labeled
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and there should be parts there and it should be just as many parts as you need to get you by until
your next order cycle. That's like inventory management 101. Your parts should be consistent your parts
should be universal you should have one answer for every problem if you have old electrical on the
property with the 22 different wall plates or whatever I was talking about you should have the
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decorus stuff on hand and only the decorus stuff on hand if something goes wrong you just replace it.
Yes it doesn't match for your tenant that's there now they melted it that's their problem when
the time comes to turn that unit you've already got one done that'll save you a little bit of time
is it worth breaking the bank over no but little things like that add up minutes add up to hours add
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up to weeks add up to months and the more places you build efficiency the faster your money is going
to scale the downside is the more places you lack efficiency and the less attention you pay the more
it's going to cost you there's risk management things there's compliance things there's just
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cash flow things there's a lot of parts that go into managing that and you will get the results
that your lowest common denominator employee puts into it okay the lowest common denominator
employee mr. owner doesn't give a shit about your budget how much money they're costing you
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or how much harder they're making somebody else's job down the road
their concern unless you structure their incentives and their payroll around it
is putting band aids on whatever they're supposed to do in the fastest cheapest way possible
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so it's on time in budget and paying attention to the metrics you assign back to the race to the bottom
you need to change the incentives and change the metrics on how you pay your people if you bonus them
not based off of the cheapest fix possible not based off the race to the bottom you need to base it
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off of the things that are important to maintain the standards you put in place
that means that order quantities monthly ordering stocking things you need a system to manage all that
you need to make sure that you're not spending more time doing things then those things are
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worse to the business in profit i can guarantee you that your guys driving to lows in home depot and
local hardware stores and local lumber yards a couple times a week is going to cost you
more money than having inventory in your shop that you need when you need it
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now if you have theft problems if you have honesty problems if you have accounting and bookkeeping
problems if you have stuff disappearing those are internal issues that need to be fixed as well
but hopefully while we're talking about creating this system you're creating a level of transparency
in your bookkeeping that will flag those things over time you will find dishonest people because
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numbers won't make sense hey we had a leaky toilet in this unit according to the books and according
to our inventory that leaky toilet took a flapper and a fill valve which is fine but why did it take a
light fixture to smoke detectors three pieces of flooring 22 electrical sockets and a whole bunch
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of wall plates wasn't a turn it was a leaky toilet so why don't you tell me where the rest of that
stuff went uh data builds transparency transparency builds honesty there is trusting your people
and then there's trust but verify take points of failure out of the system if people know that
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every single item is being babysat and watched they are much less likely to give into temptation
of doing something they shouldn't you simplify things so that nobody accidentally grabs
a plain old smoke detector and puts it where a CEO is required because if there's a fire or there's
an accident somebody dies you have the wrong thing there that's going to be on you that's not going
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to be on the tenant that's not going to be on the tenants wife son daughter kid missing batteries
isn't going to be on the tenant if somebody dies in the unit it's going to be on the landlord
whether or not it's required by law by code whatever public opinion is going to go against you
public opinion gets really expensive really fast especially when lawyers see deep pockets
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and they see the opportunity for them to get paid or a very litigious society now especially
with the negative press that landlords property managers property owners real estate investors have
been getting for the last five or ten years don't leave the door open cost avoidance risk management
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compliance all these things need to be taken into account when you're building your specifications
when you're building your inventory list when you're building your standards and your operational
practices there's a lot of points of failure that can happen your job is to eliminate as many of them
as possible train your people trust the verify build processes hold them accountable
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incentivize them with money to do the job better yes it means you're going to have to I don't know learn
something new worry HR professionals you're going to have to adapt and figure out how to pay people
outside of the industry norms if you want to drive this performance I understand that that's a
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hard thing for HR to do because HR has been doing basically the same thing since the dawn of time
innovation is not exactly their strong suit holding people accountable probably really isn't
their strong suit anymore either let's be honest so it comes down to incentivizing people to
hold themselves accountable your HR partners whoever they happen to be love them hate them
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however you look at it the reality is when you look at fortune 500 company leadership when you
look at successful startups when you look at people who are moving the needle and consistently performing
that move up to the C suite that move up to be CEO CEO oh oh move up to be the people who steer the
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company's direction how many of those people came from HR
I'll wait you think of any
even HR companies don't have people from HR leading the HR company
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so maybe we should stop listening to what's been done and find ways to do it to drive results
saying something needs to be done a certain way is great but only if it works only if it can deliver
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what you're looking for it to deliver so when you're talking inventory management when you're
talking standards and processes when you're talking maintenance you should be looking at what you
can eliminate that costs you money you should be looking at maxing out your cash flow you should be
looking at making it as simple and hands-off as possible to deliver the best results that means
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automation tracking automatic assignments having a system built in when they go to a maintenance job
they can just check off the four or five items that they have on their little iPad iPhone whatever
right automate everything we talked about it a couple episodes ago they can just check it all
off the list and it automatically books it to the correct expense lines and it automatically
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deducts it from the tallies in the automated ordering system for your maintenance now everybody's not
gonna have that system everybody's not gonna have the ability to do that but there becomes a point
when if you want to scale you need that type of control in place you need to have that type of
transparency because you need to be able to track trends you need to see what's going on you need
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to be able to understand your business in a granular way when you need to but you also need to be able
to look at it from 10,000 feet so you can say we're doing pretty damn good or wow why did we just
hemorrhage 10 million dollars in the last year what happened nine times out of 10
expecting the least
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will get you the least if you expect more and hold people accountable you'll get that level of
performance I understand that labor standards of change I understand people don't want to go to work
I understand that blue collar jobs are hard to fill I get it all so again complexity is the
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enemy of execution make it as stupid simple as possible so that the low hanging fruit gets plucked
regularly because that's where you're going to spend the most money it's the pyramid is broader at
the bottom than it is at the top right there's more things that can go wrong and more ways you're
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going to lose money at scale at the bottom of the pyramid than at the top fixing incentivize the
bottom and the money will flow to the top and that's the whole reason I picked the pyramid for my
company logo there's no easy way you have to make a decision you have to do something
standardizing the process holding people accountable measuring success all those things are super
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super important if you're ever going to succeed in scale if you okay with just lighting money on
fire and performing in a mediocre fashion like 50% of the country does every day cool good for you
that's not how I do business that's not how my customers do business there's a reason why they
bring me in because I'm if I'm not one of the best in the industry I'm at least in the top third I hope
(36:29):
maybe I don't know send me an email podcast tco method dot com am I a moron am I just talking
out my ass do I not know what I'm talking about I could be I don't think so but maybe my own personal
experience tells me otherwise I'm out of time please like subscribe hit the bell on youtube
please if you're on Spotify Apple podcasts wherever you're listening to this podcast subscribe like it
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feedback thank you so much great good day
[MUSIC]
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[MUSIC]
[Music]
(00:23):
Welcome to the TCO Method, the only show focused on helping you massively increase your net operating income.
I am Andy McQuade and thank you so much for tuning in to this Tuesday edition of the show.
I apologize for last week.
Not only was my Tuesday episode out on Wednesday, but the Thursday episode never happened.
(00:45):
So, oops, got busy. Is what it is? We're going to move on. Today, I want to talk about something that
actually sucked up a lot of my time over the last couple days and it's inventory control.
So, this is going to be less valid and less important for those of you who are
(01:10):
smaller, self-run operators where you don't really have inventory,
but for anybody with an apartment building or complex that has a shop,
a maintenance shop, a maintenance storage site, whether it's a basement, a garage,
(01:30):
a little shed that you buy from Home Depot as a kitten set up on the property somewhere.
It is an important thing for you to make sure that you have things in place to control your inventory.
There's a few reasons.
(01:51):
One is you need inventory controls to make sure your guys or gals, your maintenance employees,
maybe even subcontractors if you provide materials are able to get material from that shop
without having to go buy it. When shield time is a huge sink in efficiency,
(02:15):
costs you more money than you probably realize. The unfortunate reality is that
a vast majority of property managers and owners that are out there have a shop
think that it's stocked properly and that there's controls in place to keep people from spending
(02:40):
windshield time to get product that doesn't happen to be there that they need. The other issue is
that they don't have controls in place to make sure that the product that's being taken
is being recorded to specific units in the property and specific jobs.
(03:04):
It's pretty easy to tell when you have a bunch of flappers for toilets
when they get used it's going to be used to fix a leak, right? It's going to cost you money.
What's not easy to tell is when you have things that can be used in any number of ways
(03:27):
in any number of different places, you have no way to categorize that so you can keep track of your
expenses. It's also really not good when capital expenditures are being tapped and using materials
out of the maintenance shop because they should be two totally separate segregated line items
(03:47):
because they're two totally separate different types of expenditures.
One's budgeted and one's not for one, right? You can have a capex budget but it's not an N-O-I number.
It's an after N-O-I below N-O-I expense. So it works a little bit differently in how you do your
(04:11):
accounting in your books and it should be segregated. But you need to make sure that you have an
expectation that you have a process on your site. If you're going to have inventory and it's going to
work for you to the best of its ability to help you avoid costs and make more net operating income.
(04:36):
It needs to be operated in a way that reflects that. Now what do I mean?
By it needs to be operated in a way that reflects it. Number one, you need to make sure that your inventory
is the right product. You don't want to have a bunch of stuff sitting down there tying up dollars
in your budget, right? Because it's cash flow. You don't want to have a bunch of money tied up
(05:03):
that isn't going to get used. There's no point to having it if it doesn't serve a purpose.
If it's just taking up space. There's a few different things you need to look at
when you're considering higher managing inventory. First and foremost, you really need to understand
(05:26):
what the product is. Have one product for multiple different uses. Standardize, right?
Anybody who's got older electrical pre-decora electrical on a property. You've got switches,
(05:46):
two way switches, three way switches. You've got outlets. You've got outlet covers. You've got
a different one for GFI that is Decora. You've got maybe USB outlets that are also Decora. You've got
maybe double light switches. Top over under light switches.
(06:07):
Single outlets, 20 amp outlets for air conditioners. If they're running on 240,
you have all these different things. And while having those five or six items
isn't necessarily a big deal, when you start having to inventory all of the wall plates
for all of those items, right? You've got one with a switch and two sockets. You've got another one
(06:29):
that has two switches and a socket. You've got a bunch that are like three switches, four switches.
You have all these different options that you have to account for as opposed to just having a
rectangular hole that you can put a filler plate into making a blank that you can put switches
(06:50):
next to outlets next to USB chargers next to whatever in any way, shape or form that you want to do it
any configuration and you don't need anything extra. So having things in inventory is great.
But only if they're the right things. How much pre capital, how much money are you tying up
(07:12):
by having stuff that you don't use or don't use frequently enough to justify keeping?
In my opinion, if it's on the property somewhere,
if you're really prepared for the lowest common denominator of tenant,
we're talking commercial multifamily right now or just regular multifamily or single family
rentals or whatever it may be, you want to have it in inventory because eventually somebody's
(07:38):
going to break it. So you need two, number one, have standards, have specifications.
If you're doing a value add on a property, you should be moving to simpler,
more streamlined standards that are readily available, resilient. So they last and they take
(08:02):
abuse and wear and tear and so that they are readily available for multiple different vendors
and they all look enough alike where your tenant isn't going to be like, "Oh, why do I have
four different light fixtures in my unit?" And all four of them are different for
two bathrooms and the sink faucets are different or a bathroom faucet that doesn't match the
(08:28):
shower tub faucet, right? Some properties that's not going to matter. Other properties tenants are
going to be like, "What is this?" So standards matter. Your standards should be resilient. They should
also be simple. Complexity is the enemy of execution, not just in starting the process and making it
(08:49):
happen successfully but maintaining it over time. Remove opportunities for failure.
So we're talking about inventory management. The first thing you need to do is understand
what you're going to use and why. If you're going to have flooring in your inventory or repairs,
number one, hopefully it's a type of flooring that takes repairs very well that you can actually fix
(09:15):
if it's required. Sheet vinyl is not that. You're not cutting out a piece of sheet vinyl in the middle
of a room and replacing it without replacing the entire piece of sheet vinyl. We've already talked
about why sheet vinyl in itself is a terrible idea but people still use it. It's still sold. I have no
(09:37):
idea why but they do. You want standard. You want simplification. For two reasons. One is you're moving
a point of failure. The second one is you can leverage your buying power more. You're reducing
the number of skews but maybe you're increasing the quantity of one skew. Therefore you can buy in bulk.
(10:02):
Potential savings. Not always but potentially. The other thing is that you go from having to inventory
like perfect example is the electrical thing. You go from having to inventory 15 or 16 different
configurations of wall plates to four with a blank filler plate accessory. You have one rectangle
(10:29):
plate that's one gang wide. You have a two gang wide, a three gang wide, and a four gang wide.
It's a little filler plate to make a blank that goes on the inside and you go from inventorying
16 skews to inventorying now five. Simplification. Do they cost more? Yes. How often are you really
(10:51):
going to replace them? During a value add? During a refresh or when they're damaged? Simplify. Simplify.
Simplify. That's the most extreme example but you can really get into the cop job that a lot of
these properties have seen over the decades. Five different thermostats. 17 different brands of
(11:13):
smoke detector and different configurations that take different wall plates. Dozens of different
light fixtures, different vanity fixtures, different bath fans. You can get into all sorts of craziness
when it comes to bath fixtures and plumbing. Plumbing repair. All this one's a pro press. This one is
pecs barb. This one is shark bite. This one's copper. This one's pecs. This one's C-P-V-C. This one's A-B-S.
(11:39):
There's tons of different options out there. You need to have a standard. Yes, you need to be
able to account for those things but just because it's there doesn't mean it's right. And then you
need to make sure that your staff is trained to use it. But again, if you convert to one system and
(11:59):
you have adapters that'll allow you to shift from type A to type whatever you decide on,
all of a sudden your inventory again becomes simpler. So standards are the first part of any good
inventory management process. Anything that's on the shelves in storage for maintenance
(12:22):
needs to be current. Just because it's there doesn't mean you need to keep using it.
If you replace all the thermostats on a property except for like five,
do you need to have the old type of thermostat anymore? Or should you have the new one so that
(12:46):
when one of those old ones dies you have replacement? That's new. Same thing with the existing ones if for
some reason a brand new thermostat dies, replace it with the type that's everywhere else. Universal you
can buy in bulk. You can stock it. Cash flow wise, having simplified skews means that you don't need
(13:13):
as many number one that frees up cash flow to do other things that's opportunity cost. It should have
a track record, the performance record. So you're dealing with some risk management stuff there.
You know the thing is good, the quality is okay. You can kind of predict what the failure rate is
going to be after a while after you purchase the property. So you can make sure that you're aware of
(13:38):
upcoming expenditures that might need to be addressed. It's a transparency thing but you only need to
inventory what it's going to take for the period of time you order. So you need an order cycle.
If you know that you're going to use 15 of widget A in a month and those products have a two
(14:04):
week lead time to me that tells me that every six weeks I'm using like a little over 20 of those things.
If I place one order a month my on shelf quantity that I want to refill to is going to be like 21
or 22 pieces because it's going to a lot for the downtime between place in the order on day 30
(14:29):
and when it arrives a week or two later I'm not running out because what happens when I run out
I run to the store. I ordered online. I send a guide at the store. I'm losing time creating
more repeat instances where we have to go back into a unit to complete a job. My time to repair is
(14:57):
extending. My operating costs and overhead are extending for that maintenance call that repair
and things are just going sideways. Small costs balloon quickly when they start to add up when
you really start to look at it. So back to an inventory system if you have an inventory system
(15:20):
and the accounting for it is being done correctly and you have a system in place
to assign parts and pieces to specific work orders to justify the cost you're going to do two things.
One is you're going to build data. You're going to build transparency to
what's being used when, why, and how so you can maybe find an alternate later that will reduce those calls.
(15:46):
Right. Data is your friend. Gather as much as you can because you never know where useful data is
going to come from and how much of a impact on your bottom line that's going to have. Number two,
with that data you can establish ordering cadences. You can automate some stuff.
I'm not saying you need an inventory management system like a store has. That would be cool if it was
(16:09):
cheap to manage and didn't take a ton of labor. But generally speaking that's not realistic.
You want to make sure that you've got the right mix that's going to minimize your windshield time,
minimize your labor time, minimize the hands in the cookie jar,
minimize the number of skews so you're freeing up cash flow.
But you're also accounting for when things are failing. So you can predict it. There's some stuff that's
(16:38):
seasonal. Some of it's based on leasing season, some of it's based on actual weather.
So you can reduce the quantities you have on hand in the summertime and raise them back up in the
fall before you spike or vice versa. That way you're not tying up too much cash flow from your
budget to operate your maintenance. The worst thing you can do is to combingle your maintenance
(17:04):
and your capital expenditures. Capital is usually unplanned, right? Emergency stuff. That's too expensive
for maintenance to include in their budget. Or it's pre-planned stuff like rehabs, like turns,
like rentals, like roof replacements, that type of stuff, where hopefully you've done enough
(17:26):
preventive maintenance where there's nothing deferred and you're not tripling your price of doing
repair, but you shouldn't be taking stuff out of the maintenance shop to address your cat-backs
unless your system has a way to account for that and break it off into a separate line item.
Because it is a separate type of expenditure with a separate right-off schedule on your property.
(17:47):
When you do your taxes. That's important for two reasons. One is if you're combing,
Ling, you don't have a real, you don't really know number one, what your maintenance is costing,
number two, what your cat-backs is costing because you're taking stuff from one budget line item
and putting it in another. If you're itemizing it by door, by unit, by building, by property, by
(18:10):
block, however it is you have it broken down in your systems, you're introducing garbage that will
produce garbage data, garbage in, garbage out. You need to make sure that you're collecting the
right information for what you're doing and make sure it's going to the right line item.
It's not the end of the world if it's not, but your data is going to be bad.
(18:34):
Because if you have anything automated, you have anything set up on a schedule,
you know you need 15 of these to last you a month, but capital comes in and they take four of them,
or five of them, you run out in three weeks and then you're getting a car and driving to the store
to buy it one at a time until your next bulk maintenance order comes if you're ordering every 30 days.
(18:57):
It's not unusual to see that because of the exorbitant shipping fees that are buried into
certain vendors, relationships with multifamily housing providers. These guys all either bake,
delivery fees into the cost of the products when you order them, or you have to get to a certain
(19:19):
threshold from a volume standpoint and buy enough to get the free delivery. What kills me is when I
see people just ordering stuff they don't need and mask quantities because they don't want to deal
with it. There's always going to be that maintenance manager, that shop tech that wants to place the order,
(19:40):
it wants to just buy a bunch of stuff so he's got enough on the shelf to last him for a whole year.
Budgets and cash flow and and opportunity cost and and putting capital to work in other places be
damned. That's not his problem. He wants to do his little work as possible so he just wants to
get everything done. That's where the automation comes in and helps but you need controls in place.
(20:06):
So I'm talking about this because I spent a couple days last week fixing other people's messes.
I walked into a shop on a property that I helped create the standards. I set the spec. I eliminated a
ton of skews, streamlined the ordering process, streamlined the quantities that were there. Todd
(20:28):
everybody had to do it and then somewhere some new people were hired and the processes didn't carry
forward. So when I was walking and doing an audit all of a sudden I get into the shop and there's
stuff everywhere, everywhere. Boxes ripped open, stuff taken out, brand new faucets like four of them
(20:50):
opened up parts and pieces they needed to repair old faucets yanked out of them which I don't even know
how that works because most of the faucets on a property aren't even this new faucet. And now you've
got four faucet bodies, kitchen faucet bodies that are relatively expensive because they're deltas
and you can't use any of the four of them because if you need to replace a faucet all the parts
(21:14):
aren't there. So these maintenance guys went and took a $20 problem and made it into a $100 problem
five times over instead of just taking the entire fixture that they had in stock and just
taking the extra five minutes to instead of replace a valve stem replace the whole faucet.
(21:38):
I can't even imagine what the actual long-term impact of that is going to be because you're going from
taking an old thing with something that failed that probably has other old things that will fail soon
and instead of just eliminating all the points of failure and replacing it outright
they replaced a piece of it. While I understand somewhat that there could be like budget concerns
(22:03):
normally because there were no stems in inventory instead of ordering those stems they just
threw $500 with the faucets in the garbage essential essentially. And those are collecting dust.
I saw the same thing with the tub rebuild kits cutting them open and taking a knob taking
(22:29):
a diverter valve taking a valve stem instead of taking the whole kit and just refreshing that
unit and spending the extra 10 minutes it would take to replace all three instead of just one.
You're already turning off the water you're already opening up the wall.
You're already taking the shiny parts off to access the stuff that needs to be fixed.
Is it really a stretch to spend the extra labor to the extra 15 minutes?
(22:58):
Two future proof problems down the road by just replacing all three of them.
You're already in there you're already doing the labor. The water is already off
but no instead we cut the thing open and we just leave a bunch of parts in there and we never
look at it again and eventually we throw it away. This is why people have problems with having
(23:21):
inventory on ground in some of these apartments that's why there's owners out there who don't like
having inventory. They've number one they've never done the math to see how much the downtime
and windshield time and order time and lack of pre-planned purchasing costs them just on the material side
not even on the labor side. The lack of standards costs a ton of money on the material side.
(23:45):
The lack of planning and operational standards being in place and expectations being set and
trust but verify right? Train your people verify the training is working.
If you're going to change a process you cannot allow them to fall back into old habits.
Process only pays for itself and only helps your business flourish if you follow it.
(24:12):
So having the standards is super important using them way more important.
You can have all the standards you want you can have a big standard party out in the parking lot and
have everybody come and have hot thugs hamburgers and have a great woohoo we got all these standards.
You train them all once and then you never check to make sure those standards are being used
(24:36):
and those operational things are being put in place or you check for a while and then you get busy
and you start working in your business instead of on your business and all the guys just do whatever
they want after a while again and go back into their old-world habits of just cutting stuff open
taking what they need and throwing the rest on the ground or putting it on a shelf somewhere in a
(24:57):
pile to collect dust for 25 years. Well that all costs you money. Your inventory should look like
the inventory at a store when you walk in and no not like a home depot where there's piles of
stuff everywhere and the aisles are all clogged and you can never find anybody. No you should be able
to walk in and look at a shelf have everything in order grouped by type find where the shelf is labeled
(25:22):
and there should be parts there and it should be just as many parts as you need to get you by until
your next order cycle. That's like inventory management 101. Your parts should be consistent your parts
should be universal you should have one answer for every problem if you have old electrical on the
property with the 22 different wall plates or whatever I was talking about you should have the
(25:48):
decorus stuff on hand and only the decorus stuff on hand if something goes wrong you just replace it.
Yes it doesn't match for your tenant that's there now they melted it that's their problem when
the time comes to turn that unit you've already got one done that'll save you a little bit of time
is it worth breaking the bank over no but little things like that add up minutes add up to hours add
(26:17):
up to weeks add up to months and the more places you build efficiency the faster your money is going
to scale the downside is the more places you lack efficiency and the less attention you pay the more
it's going to cost you there's risk management things there's compliance things there's just
(26:46):
cash flow things there's a lot of parts that go into managing that and you will get the results
that your lowest common denominator employee puts into it okay the lowest common denominator
employee mr. owner doesn't give a shit about your budget how much money they're costing you
(27:08):
or how much harder they're making somebody else's job down the road
their concern unless you structure their incentives and their payroll around it
is putting band aids on whatever they're supposed to do in the fastest cheapest way possible
(27:29):
so it's on time in budget and paying attention to the metrics you assign back to the race to the bottom
you need to change the incentives and change the metrics on how you pay your people if you bonus them
not based off of the cheapest fix possible not based off the race to the bottom you need to base it
(27:50):
off of the things that are important to maintain the standards you put in place
that means that order quantities monthly ordering stocking things you need a system to manage all that
you need to make sure that you're not spending more time doing things then those things are
(28:15):
worse to the business in profit i can guarantee you that your guys driving to lows in home depot and
local hardware stores and local lumber yards a couple times a week is going to cost you
more money than having inventory in your shop that you need when you need it
(28:37):
now if you have theft problems if you have honesty problems if you have accounting and bookkeeping
problems if you have stuff disappearing those are internal issues that need to be fixed as well
but hopefully while we're talking about creating this system you're creating a level of transparency
in your bookkeeping that will flag those things over time you will find dishonest people because
(29:04):
numbers won't make sense hey we had a leaky toilet in this unit according to the books and according
to our inventory that leaky toilet took a flapper and a fill valve which is fine but why did it take a
light fixture to smoke detectors three pieces of flooring 22 electrical sockets and a whole bunch
(29:30):
of wall plates wasn't a turn it was a leaky toilet so why don't you tell me where the rest of that
stuff went uh data builds transparency transparency builds honesty there is trusting your people
and then there's trust but verify take points of failure out of the system if people know that
(29:58):
every single item is being babysat and watched they are much less likely to give into temptation
of doing something they shouldn't you simplify things so that nobody accidentally grabs
a plain old smoke detector and puts it where a CEO is required because if there's a fire or there's
an accident somebody dies you have the wrong thing there that's going to be on you that's not going
(30:22):
to be on the tenant that's not going to be on the tenants wife son daughter kid missing batteries
isn't going to be on the tenant if somebody dies in the unit it's going to be on the landlord
whether or not it's required by law by code whatever public opinion is going to go against you
public opinion gets really expensive really fast especially when lawyers see deep pockets
(30:45):
and they see the opportunity for them to get paid or a very litigious society now especially
with the negative press that landlords property managers property owners real estate investors have
been getting for the last five or ten years don't leave the door open cost avoidance risk management
(31:06):
compliance all these things need to be taken into account when you're building your specifications
when you're building your inventory list when you're building your standards and your operational
practices there's a lot of points of failure that can happen your job is to eliminate as many of them
as possible train your people trust the verify build processes hold them accountable
(31:28):
incentivize them with money to do the job better yes it means you're going to have to I don't know learn
something new worry HR professionals you're going to have to adapt and figure out how to pay people
outside of the industry norms if you want to drive this performance I understand that that's a
(31:50):
hard thing for HR to do because HR has been doing basically the same thing since the dawn of time
innovation is not exactly their strong suit holding people accountable probably really isn't
their strong suit anymore either let's be honest so it comes down to incentivizing people to
hold themselves accountable your HR partners whoever they happen to be love them hate them
(32:16):
however you look at it the reality is when you look at fortune 500 company leadership when you
look at successful startups when you look at people who are moving the needle and consistently performing
that move up to the C suite that move up to be CEO CEO oh oh move up to be the people who steer the
(32:39):
company's direction how many of those people came from HR
I'll wait you think of any
even HR companies don't have people from HR leading the HR company
(33:00):
so maybe we should stop listening to what's been done and find ways to do it to drive results
saying something needs to be done a certain way is great but only if it works only if it can deliver
(33:23):
what you're looking for it to deliver so when you're talking inventory management when you're
talking standards and processes when you're talking maintenance you should be looking at what you
can eliminate that costs you money you should be looking at maxing out your cash flow you should be
looking at making it as simple and hands-off as possible to deliver the best results that means
(33:48):
automation tracking automatic assignments having a system built in when they go to a maintenance job
they can just check off the four or five items that they have on their little iPad iPhone whatever
right automate everything we talked about it a couple episodes ago they can just check it all
off the list and it automatically books it to the correct expense lines and it automatically
(34:10):
deducts it from the tallies in the automated ordering system for your maintenance now everybody's not
gonna have that system everybody's not gonna have the ability to do that but there becomes a point
when if you want to scale you need that type of control in place you need to have that type of
transparency because you need to be able to track trends you need to see what's going on you need
(34:31):
to be able to understand your business in a granular way when you need to but you also need to be able
to look at it from 10,000 feet so you can say we're doing pretty damn good or wow why did we just
hemorrhage 10 million dollars in the last year what happened nine times out of 10
expecting the least
(34:52):
will get you the least if you expect more and hold people accountable you'll get that level of
performance I understand that labor standards of change I understand people don't want to go to work
I understand that blue collar jobs are hard to fill I get it all so again complexity is the
(35:16):
enemy of execution make it as stupid simple as possible so that the low hanging fruit gets plucked
regularly because that's where you're going to spend the most money it's the pyramid is broader at
the bottom than it is at the top right there's more things that can go wrong and more ways you're
(35:40):
going to lose money at scale at the bottom of the pyramid than at the top fixing incentivize the
bottom and the money will flow to the top and that's the whole reason I picked the pyramid for my
company logo there's no easy way you have to make a decision you have to do something
standardizing the process holding people accountable measuring success all those things are super
(36:03):
super important if you're ever going to succeed in scale if you okay with just lighting money on
fire and performing in a mediocre fashion like 50% of the country does every day cool good for you
that's not how I do business that's not how my customers do business there's a reason why they
bring me in because I'm if I'm not one of the best in the industry I'm at least in the top third I hope
(36:29):
maybe I don't know send me an email podcast tco method dot com am I a moron am I just talking
out my ass do I not know what I'm talking about I could be I don't think so but maybe my own personal
experience tells me otherwise I'm out of time please like subscribe hit the bell on youtube
please if you're on Spotify Apple podcasts wherever you're listening to this podcast subscribe like it
(36:57):
leave a review leave a comment if you can on the episode on the show doesn't really matter that's
really the only way that podcasts and YouTube videos make it if you don't subscribe if you don't
comment you don't like the videos they don't go anywhere you're not helping anybody like if this is
(37:19):
adding value to you your contribution you can add value by taking a couple minutes to give some
feedback thank you so much great good day
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