Inventory Idiocy


The end of the year draws nigh and ten or eleven months of ignoring supply chains in general, and inventory in particular is coming home to roost in executive offices around the world. Avon Products is out of cash due in large part to out of control inventories - borrowing money to pay dividends, but that's what you get when you appoint a CEO based on where she went to school and who she is connected to, rather than based on what she knows - and is in even deeper trouble due to a thoroughly muddled ERP implementation.

Research In Motion (RIM - the Blackberry guys) is writing off $485 million of excess inventory - the kind of thing that happens when your business model is based on Buck Rogers technology and absurdly long lead times - bet wrong on the technology and lose big - real big. Stein Mart screwed up its inventory system and, as a result, reported that - oops - we didn't lose $.3 million - we lost $1.8 million.

Of course there are the GM's of the world who screw up the supply chain on purpose. The aforementioned got in trouble as a result of ignorance but GM trashes their supply chain routinely to scam their investors. They are up to inventory levels last seen in the days immediately before its IPO. With 105 days of truck inventory shoved down their dealers throats, look for glowing headlines after the first of the year crowing of banner sales. (Other tell-tale clues: they are in a below the radar layoff of engineers - value adding folks - and pouring money into advertising) Whenever they have the need for better numbers the Wall Street manipulators and financial wizards running GM use the supply chain as their magic button to goose the top and bottom lines. That is ignorance of a different sort - or perhaps apathy. They either don't know or don't care what inventory bloat does to their cost structure and ability to control quality.

Most companies do not foul up inventory on such a grand scale as these - but foul it up many do. I once had a CEO tell me he didn't have time to take a deep dive into the details of how his company's supply chain processes worked. He seemed to have plenty of time to dive very deeply into the accounting system in mind-numbing detail, however. Apparently counting the excess inventory accurately struck him as a more important use of his time than learning how to prevent it.

It seems to happen every year and this one is no exception. Execs who have little concern for much other than sales and finance ten months out of the year go into the panic mode at year end when cash flow is foundering, line of credit payments loom, excess and obsolete inventories must be accounted for and the day of reckoning with Wall Street, the bank and the board approaches.

They know complex financial formulas by heart, but not the basics of the relationships between lot sizes, lead times and variation in demand on inventory levels. They know how to manipulate short term profits by maniputating inventory, but not how to improve long term profits by compressing cycle times. They can parrot Harvard/McKinsey philosophies about global supply chain strategy, but cannot tell you a single thing a buyer or planner actually does in the course of the work day.

After almost twenty years in this business I have come to accept that supply chain is only a major concern near the end of the year when too many managers call in help to lock the barn door in a rush months after the horse is gone. After the first of the year they will manage the supply chain by edict - issuing mandates for inventory reductions with neither thought nor knowledge of the conflict inherent in those mandates with their policies of getting 'China prices' and achieving purchase price reduction goals. If they have a supply chain strategy at all it will largely consist of a software investment. Outside expert help will be needed for lean accounting, lean sales and marketing and lean manufacturing but leaning up the supply chain will be of little importance until this time next year ... and so it goes.

Article posted December 8, 2011
Evolving Excellence