Inventory Is Another Word For Cash
One Sunday afternoon John Jones ran down to the office to knock out a couple of small projects. His family was off doing their own things, and since no one else would be at work, and the phones wouldn't be ringing, he had a good feeling about being able to get some stuff done that eluded him last week.Walking behind his desk, John opened the middle drawer to select a writing tool. He was looking for a pencil.
"Hey, what's going on?!", he asked himself. The familiar view he was used to when he opens this drawer was not happening. "Where's my stuff?", John exclaimed, this time out loud.
What he saw, as he dropped into his chair, was over 20 different pieces of money flopping and sliding around as the drawer moved. A dozen quarters, six dollar bills, three fives, even a twenty.
"What's all this money doing lying around?!?!", John said, loud enough this time for any of his office employees to hear, if they were there.
As if being pulled along by some unseen force, John walked through his office looking at piles of ones, fives, and twenties on employees' desks, stacked in the corners, and under printer stands.
In a full-on daze, he stumbled into his warehouse to a sight that made him rub his eyes. Everywhere John looked there was folding money lying around. "My God, I can't believe this!" The echo of John's voice made him realize for the first time that he had been talking out loud. And for the first time, he was getting a little frightened.
Now John was seeing some big denominations: hundreds, even thousands, just lying there, as if no one cared. Some of the cash was loose, some of it was in boxes. Some of it was in big sheets - you know, like you see in those U.S. Mint documentaries.
Some of the boxes were crushed, and John could see the green stuff sticking out of the broken corners. One pile of cash was actually wet, and incredibly, another box of money was covered in mildew.
Almost every corner John looked into had a wad of dead presidents covered in dust, bugs, and spider webs. All of the bills were dirty, and some of them were actually torn.
"WHY IS ALL THIS CASH LYING AROUND? HAS EVERYONE LOST THEIR MINDS? I CAN'T BELIEVE THIS!!"
Plopping onto a dusty box of bucks, John got a sick feeling in the pit of his stomach. John Jones had just entered...The Inventory Zone!!! NENE, nene, NENE, nene...
The Inventory Zone
OK. Sit back and relax for a minute. Take a deep breath and let me tell you what has happened.
The Inventory Zone is a dimension where you see some of the stuff you have purchased in a different way. Don't be frightened. As scary as it seems, traveling to The Inventory Zone is actually a good thing.
Notice that I said "some" of the stuff you purchased. During John's time in The Inventory Zone, the cash he saw was not his good inventory. The clean, current, saleable inventory appears just as it does in the regular dimension. When you travel to The Inventory Zone, only the things that are damaged, lost, obsolete, in excess, etc., appear as cash.
I know what you're thinking, "If The Inventory Zone is a good place, why was John so scared?"
Well, it's scary because it was John's first trip there. Like never before, he got a picture of one of the ways his organization wastes money. Now that you know about The Inventory Zone, when you go there you will be calm, and you can make some notes about what you see.
Once again, I anticipate your thoughts, "When I go there?! I don't even know HOW to get there. What makes you think I WANT to go?"
Excellent question. There is only one way to get to The Inventory Zone: You get a round trip ticket for safe passage when you can see inventory as the state some of your cash is in until customers convert it back to cash for you. And when you can see wasted and idle inventory as wasted and idle cash.
Let's make a deal: If you promise to take a trip to The Inventory Zone, I promise I won't let you go there unarmed. Let me introduce you to a friend.
Steve Martin's Ten Strategies For Managing Inventory
A good friend of ours, and one of the Brain Trust members, Steve Martin is an expert on inventory management. As President of Business Solutions, Steve works with companies to help them maximize the cash they put into inventory, and he has joined us a number of times on the show to discuss this issue.
During one of our visits on the show Steve brought with him Ten Strategies For Managing Inventory. I believe that if you become familiar with these Strategies, you will be able to make frequent trips to The Inventory Zone, and instead of wasting cash, you will be able to create some. Here we go....
1. Train your people.
Let's say you just took out a line of credit against your inventory and receivables. Would you walk up to just anyone in your organization and hand them that money? I don't think so. But if the people who order pens, paper, power tools, packaging, and pallets of raw material aren't professionals at inventory management, that's just what you have done. Leaving inventory ordering and management to untrained employees is a sure way to make a scary trip to The Inventory Zone.
2. Include the real cost of inventory in your product and service profitability calculations.
Don't be fooled by looking at inventory only through your gross profit glasses. Steve says that inventory carrying costs can be as much as 29%. He doesn't mean the direct cost of inventory that shows up in cost-of-goods-sold and is reflected in the GP line on your P&L. Steve's talking about the carrying costs: interest, storage, damage, obsolescence, etc. Things that show up below GP in the expense lines, and slice profits right off of your bottom line.
3. Track inventory value.
Steve says use technology to track inventory. These days, it doesn't cost much to acquire inventory management software. And when you compare this investment to the cost of a bad trip to The Inventory Zone, you will see that a good inventory management software product will actually make you money.
4. Set goals for inventory turns.
In the old days, four turns a year was the norm. Today, with Just-In-Time inventory strategy (see below), you can improve profitability and cash flow by increasing your turns without increasing sales. But it won't happen if you don't have specific inventory turn goals.
5. Make conscious inventory decisions.
In other words, make productive trips to The Inventory Zone. Take notes and make decisions. Don't just let it happen, as Steve says, "willy nilly". The operative word here is "conscious".
6. Recognize and manage obsolescence and damage.
See your inventory for what it is, cash in another form. Then decide to keep, cut, adjust, purge, recycle, etc., etc.. This is where you go from a scary trip to The Inventory Zone, to one that actually doesn't look much different from a trip through your organization in the regular dimension.
7. Use Just-In-Time practices.
This is the inventory management coin-of-the-realm these days. If you're inventory strategy is just-in-case instead of Just-In-Time, you are costing yourself money, and probably putting yourself in an uncompetitive position. JIT is not a fad, and it really shouldn't be optional!
8. Reduce the number of inventory items.
Once upon a time, having thousands of stock keeping units (SKU) was a company's badge of honor. These days, it's a one way ticket to unprofitability. Find out what's selling, and don't stock anything else. Also, only stock as many of those best selling SKUs as it takes to last until you can get the next shipment in. Remember, the world is practicing JIT. It works. Use it.
9. Reduce your storage space.
When the Berlin Wall fell and took most of communism with it, it began an economic phenomenon called "The Peace Dividend". Through JIT practices and SKU reduction, you can knock some walls down (or at least not build any new ones) and benefit from what I think Steve would call, "The Inventory Reduction Dividend". Can you say, "found money"?
10. Leave nothing to chance.
Review your current practices with a jaundiced eye. Assume nothing is sacred. Don't let your inventory dollars be managed by the unqualified - which might even be you.
If you follow these steps, I believe your trips to The Inventory Zone will be less frightening, very productive, and less frequent - only about once a quarter.
Write this on a rock... Inventory is another word for cash. When this becomes ingrained in your organization, you will be able to live profitably in...The Inventory Zone. NENE, nene, NENE, nene...
