- Reid Hanson
Trust, but verify
Over the years tracking inventory for clients, I have seen many companies rise and fall. Some from external issues, some from change management failures, and some from holding on to their problems like they are a company asset. However, the largest example of where companies first show decline is from their inventory. Regardless of the industry, things go south when inventory management gets sloppy. Usually by the time sloppy inventory management practices show up on an accounting ledger, it is no longer a problem; it’s a crisis.
We have worked for Fortune 100 companies who love their inefficiencies and know that, even though they manufacture a product, it's their IT team that drives their overall ability to be efficient. This didn’t become clear to them until COVID disrupted the supply chain last year (the microchip shortage around the globe is an accurate analogy). Imagine if they would have known even 30 days earlier that they were in for a raw material shortage. Now imagine 60-120 days in advance. Invoices and purchase orders can only go so far to tell an organization "how" inventory on hand is used. One company's blind reliance on the IT department to author reports based on financials alone has left them in a place where they are spending more than ever to have employees sit idle waiting for materials. These material shortages come from the supply chain disruptions that created a gap in raw material acquisitions. Based on financial data, the manufacturer said they had enough materials to bridge the supply gap. However, that turned out to not be the case. Why would this happen? It starts small at first. One senior manufacturing floor employee had a bad experience with a product they were proud of not passing the testing conducted by a third party QA process. This widget failed because of a design flaw, but even though the design was updated to fix the shortcoming, that employee felt personally responsible for ensuring that the product never failed a QA test again. As a senior associate, they ran the line and added just 3% more material than what was called for on new builds. Seems benign right? Wrong!
By allowing employees to continually "alter" manufacturing specs without oversight, even if they believe they are providing value to the customer and ensuring the company looks good, these employees' changes can snowball into major issues. This small change was then altered without knowledge of design to all of the other products that were manufactured by that plant. Over time, that senior associate was involved in cross-training other plants. And, as we all learn from Good Manufacturing practices, it is good to share "best practices." However, that increase of 3% has spread to hundreds of products and plants.
This is all without design, purchasing, and the C-level departments knowing the change ever happened. To bring this back full circle, if a product is being made that used to cost a dollar and now costs $1.03 by itself, it is not an alarm. However, this company makes 500+ million units on an annual basis.
Another example is smaller but just as relevant. Say you have a VAR company that purchases products, adds some customizations to that product, then sells an experience (electrician, plumber, security company, AV installer, etc.). When a product is specified and that product is replaced in the field for any reason, are there more costs involved than just the delta of the new item's cost? Sure there are. It is the same issue as above. Even small changes gone unverified or explained foster a business environment of sloppy inventory management. These small changes all add up to take from the bottom line, first in ways that are hard to detect, then they start to build as time goes on and those habits become ingrained and are oh so hard to break.
"I just didn’t want to have to go back to the truck for this specific part. So I used what I had within reach."
- Said by everyone, at least once.
One of the complaints we hear all of the time is "I don't want to micromanage my employees, they are a good group of people." In those instances, the real issue is usually a leadership or cultural issue. Besides, it's not micromanaging if you have a process that is well defined and ensures organization success. Asking employees to be accountable for their material usage is not micromanaging either; it's being smart with your resources regardless of the scale. Inventory management systems don't have to be evasive but they do need to think differently than your accounting platform. Your inventory under the eyes of "best practices" should be tracked to a point where acceptable loss is a known acceptable value.
Moral of the story, if you have high dollar inventory or your revenue per item is high, then a single line on a P&L simply isn't going to explain "how" your business is running. The whole picture of how a business is functioning is simply not viewable from a P&L or a balance sheet. It requires another tool designed to offer incoming and outgoing inventory information from a non-financial point of view. Or in other words - trust but verify.
From process improvement to change management. KPI's are important. Do you have KPI's or access to easy to access data that highlights your progress? If not, Cairnstack Software can help.
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