Catch Phrases Every Small Company CFO Has Heard (and Uttered)

Catch Phrase #3:  You can’t sell out of an empty basket!

 CFO’s Response: We have too much inventory!

 While catch phrases always contain an element of truth; using them as a justification for a business decision can sink a company. Catch Phrases and the CFO’s Responses are usually based on the different motives and personalities of the players involved. Avoiding the “sound bites”, understanding the underlying motivations and fears of each member of the team always leads to better outcomes.

Having too much, not enough at the right time, or the wrong inventory can wreak havoc on an organization financially and the morale of its people. The answer to how much inventory an organization needs to keep on hand will almost always differ between sales, finance and operations personnel.

As much as owners may work to build collaborative teams, the fundamental job responsibilities of each team member, and in many cases their individual personalities, usually put the members in opposing camps when it comes to inventory levels.

  • The salesperson’s job is to sell and without product they can’t.  They are motivated financially and emotionally when they can deliver exactly everything the customer wants, when they want it and without drama. The costs of excess inventory have little impact on them.
  • Operations and production personnel are tasked to build and produce the orders coming in from sales. Any raw material outages will disrupt their efficiencies and any missed deliveries will cause them to incur the wrath of the sales department. Like sales, excess inventory is their “buffer” from a disappointing outcome.
  • The job description of every small company CFO includes the words “control”, “budget” and “assess and reduce risk”.  Too much inventory could become obsolete or stolen, ties up the cash the CFO requires for other uses, and has to be kept track of and stored.  Having any stock-out or lost sales due to not having the inventory will certainly be “evidence” that the CFO is being a “control freak”. It is the CFO that fears having to resolve “the inventory problem”.

The team members need to stop trying to sway the other members to join their side and see their logic 100%.  Their individual logic is usually based on seeing (or caring) about half of the whole picture. Their motivations and usually their personality types are diametrically opposed.

Instead, the players need to develop a simple, workable agreement, at a high level, as to what is an appropriate inventory level and a simple set of guidelines and rules for the purchasing department to follow without being overridden by the other departments.

In developing the agreement and guidelines things to consider and agree upon:

  • Company niche (all things to all people anytime, or commodity low-cost provider, trendy or classic, etc.).
  • Job shop verses wholesale/retail.
  • Business/product seasonality.
  • Product margins in relation to speed of obsolescence and customer customization requests.
  • Product and raw material lead times as well as job run and set up times.
  • Cash needs for other company projects.
  • Overall economy and company projections.
  • Financial endurance of company to hold inventory along with opportunities to “offload” inventory quickly through non-traditional channels.
  • How “truckload” discounts and volume rebates can be used to enhance profit margin or drive customer volume through better pricing competitiveness.

I’ll Leave You With This….

  • Small, ongoing perpetual inventory taking is almost always better than the once a year exercise many companies perform as it challenges the constant sales assumptions on a SKU level and small doses of dead inventory can be dealt with easier than a massive clean-up.
  • Where the purchasing department resides organizationally and who they report to in the organization can be the key to having a well-managed inventory. 

If your team could use some assistance with setting or right-sizing inventory levels please feel free to contact us at IFI.