Nine Excess Inventory Management Mistakes

There is an article worth reading in the August 2013 issue of CFO. The article by Gary C. Smith is titled: Nine Inventory Management Mistakes — and One Easy Solution. The Nine Mistakes listed by the author are as follows:

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Automotive Slump?

In the past few weeks, we have noticed a trend in automotive advertisements.  It seems in almost every ad we see, and as it is football season we are watching a fair amount of television, the offers are for for zeros:  $0 down, $0 first month payment, $0 security deposit, $0 due at signing.  This is, of course, for leases.  It is not much different than for purchases with $500 - 5,000 rebates and 0% financing up to 60 months.

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ERP and Excel: Part II

In Part I, we discussed the proper use of Excel with ERPs. We advised against using Excel to manage planning and other operational transactions. In Part II, we will backtrack on that advice, a little, and discuss when it is actually appropriate to use Excel spreadsheets for operations planning and other transactions.

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800 Pound Gorilla

What is an 800 Pound Gorilla?  Well as this blog is not about biology or animal species it is safe to assume we are not talking about the Western Lowland Gorilla, the Eastern Lowland Gorilla, the Mountain Gorilla, or any other Ape Family in the Animal Kingdom. We are talking about a small sub-class of Homo sapiens whose natural habitats are corporations and other organizations. 

Yes, we are talking about people. They do not resemble Gorillas in any physical manner.  Nor are these “800 Pound Gorillas” necessarily obese as the weight reference alludes.  No, we are talking about a class of people, men or women, who are adept and skilled at getting their own way in organizations. The name comes because we generally assume that an 800 Pound Gorilla usually gets his weight in the Gorilla world.  It may be a little offensive to gorillas but this is a common name given to corporate bullies.

The 800 Pound Gorilla is often the leader of an organization. It could be the CEO, President, General Manager, VP, Director, Manager, and even Supervisor.  In his realm or span of control, the 800 Pound Gorilla is dynamic and forceful. The 800 Pound Gorilla gets his way through force of personality and often by intimidating those who oppose his point of view.

However, not all 800 Pound Gorillas are leaders. They might be natural leaders in a group or milieu where the actual leader may be the exact opposite of an 800 Pound Gorilla. More often than not, this sub-class of 800 Pound Gorilla is very knowledgeable and uses that knowledge as a club. There are also cases where these 800 Pound Gorillas are right and wrong. 

The term 800 Pound Gorilla is not a positive term. They are, as in the above matrix, senior executives who throw their weight around and are often wrong, the term Gorilla is not often used for leaders that impose their will and are always right.  We tend to call these leaders great and visionary.

At Cadent Resources, we are concerned with Demand Planning and Inventory Optimization. We see 800 Pound Gorillas mostly in the area of Demand Planning. These 800 Pound Gorillas insist on revising forecasts upward into what they “believe” the sales will be. In most cases the Gorilla is wrong. If the 800 Pound Gorilla is the CEO, President, VP of Marketing, or VP of Sales there is not much the demand planning team can do. There is also not much a well crafted S&OP process can do. The 800 Pound Gorilla gets his way and the Demand Plan is compromised.

If the Demand Plan is compromised too often, no one will want to play and the S&OP process will unravel. The entire effort will become ineffective. In fact, the best S&OP programs work when senior executives become Gorillas with the intent on making S&OP work.

We invite you to share with us your experience with 800 pound Gorillas both good and bad. Are you a Gorilla? Be honest.

A Quick Inventory Opportunity Assessment

When we meet with a company for the first time, we like to ask three simple questions to allow us to make a quick assessment of their inventory status.  We ask:

1. What is your revenue and gross margin?


2. What is your inventory level?


3. What is your average lead time?

These are three relatively easy questions but we do not always get three quick and concise answers. As we are often talking to senior executives or owners, we always get an answer to the first question, which makes total sense as these are the most basic of measures of any business. We generally get a high percentage answering the second question correctly as well.  This also makes sense as most people that talk to us, a company specializing in demand planning and inventory management, do so when they suspect they have an inventory problem.

The third question is where we get our first inkling that there may be an issue at the company.  In our experience, we have found that this question is not as easily answered off the top of the head as the first two.  It is simply because this measure unlike the others is not looked on with as much importance and in many cases is not as easy to derive. Additionally, there is often confusion as to what we mean by lead time.  It is often assumed that we are asking about lead time to their customers.  Though we are as interested in that at the preliminary discussion level, we are more interested in the average lead time from their suppliers of raw, pack, and finished goods to them.

So why do we ask about lead time?

Simply stated, with the average lead time we can do a gross “guesstimation” of actual versus potential inventory turns i.e. If the average lead time is two months, there will be, on average, two months of inventory in the system (assuming the company owns the one month worth of inventory in transit) as a lower limit.  This means six turns per year.  We can calculate the Cost of Goods Sold by subtracting the gross margin from the revenue.  With COGS and Inventory we can estimate the companies average turns.  We can then compare that to the lower bound inventory we calculated based on average lead time and voila… we have a gap that provides a gross estimate of the companies improvement opportunity.

If the average lead time is not available, we already know that there is an opportunity.  

On the other hand, we come across the rare instance where these numbers are known and quickly shared. They may answer: “let’s see, 60% of our goods come from Asia.  Half of that is from China with a lead time of two months.  The remainder is from other countries with a lead time of 3 months.  The rest of our goods are imported equally from the US, Mexico, and Germany with lead times of 2 weeks for the US and 1 month for each of Mexico and Germany.”  In this case, we are first impressed, but then quietly run our back of napkin inventory calculations. If our calculation shows that their performance is not optimal we quickly ask “So, tell me, how volatile is your customer demand?” That of course is a topic for another posting!

Do you know internal, external, and cummulative lead times?  If not, familiarize yourself with these numbers and the consequences of the same.  You may be surprised.