Quit throwing away your investments

By: Henry F. Camp

 
Too much investment in inventory is wasted.  And, most of it is unnecessary.  If you need to stock inventory to protect sales or productivity, make sure you are getting a return on that investment.

One of Elucidate’s powerful benefits is reduced obsolescence.  It is a rare company indeed that doesn’t sometimes get stuck with dead inventory.  Stock that public companies have given up on is either sold for pennies on the dollar or written off – a frustrating annual ritual that points out just how much of net profits must be given back.  Private companies have more flexibility in the management their assets; it is more likely that their stagnant inventories will be retained for the dual reasons that they don’t want to admit to lenders their real profitability and they hope find a customer for it someday at full price or close to it.  The more time that passes between buying and discarding, the harder it is to make the connection between the pain and the choices that caused it.

I won’t cover when or why you should ditch inventory investments that have gone sour.  Instead, let’s think about how to avoid the problem in the first place.

At IDEA, we have a bias.  We protect availability first and maintain flow of inventory secondarily.  Availability is the cornerstone of the decisive competitive edge we help our clients build.  As long as a company has a decisive edge over their competition, growing profits faster than the rest is just a matter of figuring out how to market and sell the edge.

Nevertheless, reducing your inventory investment and keeping it working for you is powerful too.  The way to avoid stagnation and maintain flow is to be reactive – to replenish what is consumed and to adjust inventory buffers when they are no longer fit for a changed situation.  Elucidate does this.

Typically, for a reseller or a manufacturer holding raw materials, as soon as an event is noticed, like the loss of a customer, max-min levels are corrected.  The adjustment can be effected manually or you can wait for the ERP system’s forecast to drop and do it automatically.  For a long time afterwards (maybe forever), nothing more is purchased.  See the example below where demand dropped off significantly in May.  The blue line represents Elucidate on hand inventory, while the purple is a client’s actual on hand.

 

The problem can be worse for a retailer or a manufacturer.  Retailers are often forced to buy well before they see how a product sells.  Goods sometimes keep on arriving, long after demand for them has tailed off.  Make to stock manufacturers, particularly those who make lots of different variations, set a production schedule based on a forecast.  Periodically, the forecast is reviewed against reality and the production schedule adjusted to keep the finished goods inventories from running out or growing too high.  Customer complaints or internal triggers provide alerts, when a product runs out.  Too often it takes much longer to realize that unnecessary inventory is stagnating.  In the example below, the manufacturer makes too many different products to check on the smaller ones frequently.  It took them 3 months to reassess the situation and shut down production of “Size 1”.

 

Elucidate reduces exposure to obsolescence by dropping the buffer size as consumption begins to slow.  Even if demand simply stops out of the blue, exposure is halved since Elucidate typically holds half as much as conventional methods.  In the example above, $1.6 million investment became worthless.  That is equivalent to the gross profit generated by the sale of almost 2 years’ worth – profits wiped out by the loss of a customer.  Using Elucidate, the losses are about five times less.