THE ABCM OF INVENTORY…For God’s Sake, It’s NOT an Asset!

Waste…is the most extravagant and costly of all expenses.

  Theophrastus in the 3^rd century, B.C.

Two thousand years later, our mantra of lean business practices support this Greek philosophers words.  Eliminating waste throughout the workplace, whether it is too much paper, too many processes, too many layers of management, too many locations or too much inventory, results in immediate bottom-line savings.

I worked with a small business hair supply distributor, tire retailer, and secondary school.  The one similarity within each of these industries was excessive inventory and the incurred associated costs.  Small businesses, from kiosks to office and warehouse or retail stores, are in the same dire need to reduce their inventory levels with process improvement as are large corporations.

What Do We Do Now

By its very nature, inventory as an asset is a contradiction with JIT/lean manufacturing philosophies that demands we order only what we need, when we need it.  Moving “inventory” to the liability side of the balance sheet encourages its reduction and/or elimination.  Until this happens, corporations and small businesses will continue to focus on layoffs (people) rather than addressing dramatic process changes and inventory ordering efficiencies that must be resolved (organization).

Prove it to Yourself

ABCM allows us to quantify our costs.  I’ve designed a worksheet to help you validate this point.

actual product cost (from supplier) + transportation (from the supplier to you) + insurance (while moving) + unloading / unpacking + storage costs + warehouse costs      insurance      maintenance + transportation (from you to customer) + security expense	$ ___________________ $ ___________________ $ ___________________ $ ___________________ $ ___________________ $ ___________________ $ ___________________ $ ___________________
Add to the above, the overall costs of
+ physical inventories (and all the errors       that come from this activity) + the annual state, local, or federal taxes     paid on inventory values + administrative paperwork throughout      the entire process + human resource allocation	$ ___________________ $ ___________________ $ ___________________ $ ___________________
REAL inventory dollar outlay	$ ___________________

What Needs to be Done?

The savings of monies on inventory waste can better be invested on capital equipment needs, resource requirements and salary compensation.  Evaluating these expenses and developing diagnostic data for each will highlight the priority of work to be done.  Excel software (for those in global locations that may not have MRP systems) will take your data and translate it into graphs that will point you in the right direction.  This will help in defining action for solutions.

Both the hair salon distributor and the tire retailer gained capacity for current and needed inventory space by throwing out old and obsolete products (some as old as 5 years on products with a 6 month shelf life!) that were taking up space.  Rather than spending money for additional warehouse / shelf space and incurring capital costs, both were able to put more money into buying products they needed and, in one case, to provide raises (albeit small) to their (extremely appreciative) employees.

Once wasted costs are addressed and corrective actions are in place, the move (and the mindset) of inventory from asset to liability will be one that begins to change the business to an efficient, value added growth position.  In the global, and local, competitive marketplace that we live in today, that can only mean success.

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