7 Signs Your Organization Needs Outside Help with its Supply Chain

At some point or another, every company will struggle to manage its supply chain. As sales volumes grow, companies face delivery issues with suppliers, customer expectations seem to increase almost daily and new, high-volume orders bring in much-welcomed revenue, but often add significantly higher complexity. Unless your company specializes in distribution and logistics, it’s unlikely that inventory management is the reason you went into business.

So, which applies to you?

1.     Supply chain management is the core value proposition of my company.

2.     Supply chain management is something we have to do in order to deliver the core competency the company.

If you answered #2, you may want to consider bringing in outside help to get your supply chain under control. Outside support can help quickly drive financial improvements through taking a “hands on” approach with your team. It’s not unusual for a consulting firm to deliver 10-20% inventory reduction over a 10 week engagement, often delivering a 10x multiple on their professional fees. Additionally, through working with the team, expert support can help create systems and processes that create more repeatable performance over time. Finally, an inventory engagement can deliver ongoing value through developing team capabilities that simply did not exist before the project.

So, do you need outside support managing your supply chain? Below are a few indications that outside help could deliver big benefits for your company:

1. Cash flow is constraining your growth

Growing a business requires a lot of cash. Unfortunately, so does inventory. Any dollar tied up in inventory is a dollar you can’t invest in growth. We often hear COOs admit that their current inventory levels are high, but they expect the value to decline at the end of the month, quarter, fiscal year or once a big order goes out. Regardless of when inventory is expected to decline, this is cash that cannot be used to grow your business. Even if the inventory is financed by a revolving credit facility, this is capital that cannot be reliably accessed to finance the growth of the company. Breaching your loan covenants, even for a day, can place your company into technical default. 

Systematic, analytically-driven inventory management is the key to minimizing cash consumed by the supply chain while remaining confident that you’ll be able to fulfill orders as they come in the door. This approach also ensures that you stay within the terms with your creditors.

While the Board of Directors may only examine the quarterly balance sheet, available cash is an all-day, every-day challenge. It’s truly the “high water mark” that matters. External support can be focused on this critical metric, with less pressure to simply produce results at period-end.

2. Your supply chain team lacks experience

Junior employees are the lifeblood of a growing company. They bring passion, energy and enthusiasm to the company without imparting a major hit to payroll. While motivated to contribute and learn, junior employees often come to the table with a skills gap in supply chain management. If included in the curriculum at all, most undergraduate programs teach their graduates a highly academic approach to inventory management that is difficult to apply to your company’s context. Translating this background to a “real world” application can be disorienting, especially if senior leadership in the organization is focused in other areas (e.g. sales and marketing, business development). The end result: the supply chain is managed with best effort rather than best practices.

In addition to the measurable cash flow impact, external expert support can be viewed as a hands-on, on-the-job education specifically tailored to your supply chain. Experts can help stand up meetings, assist the team in developing tools that work for your company and act as a backstop for decisions being made around re-order timing and quantities. Through building capabilities with the people in your organization, on items your company sells, using tools your company uses, your company will develop deep expertise that is impractical to develop through external education programs. 

3. You don’t have the time to develop the skills in-house

Inventory problems have a way of consuming organizations. Excessive inventory drains cash, leading to distraction as management seeks additional credit facilities or equity raises. Shortfalls in inventory create other problems like stock-outs that can jeopardize customer relationships, forcing management into “fire fighting” mode to re-assure the customer. Regardless of cause, the result is the same: company leadership loses its capacity to develop inventory management skills in-house.

External support can help your organization overcome these challenges in many ways. First, external support adds “arms and legs” to your organization, adding critical thinking and deep experience to an area that the management team has difficulty supporting. This can have the effect of multiplying the skills in your supply chain team. In addition to adding capacity, external support accelerates the skills development of supply chain staff. Personalized, hands-on education ensures that your team is developing the right skills to manage the specific challenges of the company’s supply chain. A dedicated effort with a defined timeline also ensures that your team progresses quickly since it is understood that external support comes with an “end date.” At worst, a good supply chain expert can offer an objective perspective on what gaps must be filled in the organization.

The end result: external support helps get the problem under control and ensures that your team is left with the capabilities it needs in order to sustain working capital improvements. 

4. Progress isn’t happening fast enough

You know inventory management matters. It’s a draw on cash, it’s a source of waste, it masks other issues. You put one of your best people in charge of getting it other control. Yet, the issue persists or, perhaps, is getting worse. The company is growing, and with it, the inventory problem. Maybe your assigned lead is doing their best, but the problem is growing faster than the solutions you’ve been able to develop. 

Maybe your industry is migrating toward solutions with higher inventory costs. For one of our clients, increased focus on security is driving a rapid shift in the product portfolio. Magnetic key cards were being replaced by RFID “chip” cards with a cost increase of about 500%. Coupling higher material cost with increasing volumes, inventory values persisted to increase in spite of dedicated organizational effort to confront the problem.

Bringing in a consulting firm can greatly accelerate the rate of progress in addressing inventory issues. The effect is two-fold: external support add focus to the problem while adding additional resources to get the work done. The result is significantly improved inventory performance, typically over an 8-12 week period.

5. You’re running out of space

Inventory consumes cash in many ways: it costs money to acquire, it goes obsolete, it gets damaged, you pay interest on money borrowed to hold it, it requires people and equipment to manage it. Many of these costs are easy to overlook until the day comes:

Warehouse manager: “we’re running out of space”

What was once an easy-to-ignore inventory problem with occasional non-cash write offs has officially become a very real and immediate cash expense. You may need a new warehouse, or to expand your existing warehouse. Is there space for that? Where will warehouse #2 be located? Who will be distracted from their day job to help find it? How will you transport goods between nodes? Do you need a truck? What new IT equipment is needed in the new location? What are the additional staffing needs? How much is it going to cost to insure a second location?

Fixed costs are easy to ignore until they become highly variable costs. Bringing in external support may help defer warehouse expansion, perhaps indefinitely. They can help you draw down current inventory levels quickly to get things under control. In the worst case, they can help you analyze size and location of your new warehouse. Often the cost of an engagement is a fraction of the annual cost of the additional warehouse, helping justify the investment to investors and The Board.

6. You’re preparing to sell your company

If you’re preparing to sell your company, there’s little that can match a tightly managed supply chain in growing valuation and building buyer confidence. A tightly managed supply chain drives value through increasing EBITDA and may potentially expand EBITDA multiple:

EBITDA expansion

A well-managed supply chain drives EBTIDA in countless ways. Lower inventory frees up cash to drive revenue growth, reduces write-offs on aged/obsolete/damaged inventory, decreases need for warehouse headcount. For further details on how improved inventory management drives profitability, read 5 Ways Your Inventory Costs are Hurting your Bottom Line.

Multiple expansion

There’s little that inspires investment in a company like an orderly, lean warehouse. A well-documented, analytically-defined inventory gives the investor confidence that your company’s performance is linked to process and not “key” employees that manage the supply chain by feel. Installed policies give confidence that the investor can make systematic adjustments based on a platform that already exists, increasing their ability to increase profitability of the business after acquisition.

We often support Private Equity firms who have recently purchased a company. It’s too common that we analyze inventory to realize that $1M+ of inventory on the books is aged/obsolete. At best, this turns into a clawback following deal closure (not a fun phone call to get as the seller). At worst, this can turn a deal sour, eliminating a bidder from the field.

How external support supports preparation for sale

External support can help prepare your supply chain for the scrutiny of due diligence. In addition to freeing up one-time cash, increases in EBTIDA will drive increases in valuation consistent with your industry’s multiple. Even modest inventory reductions can drive large swings in exit value. Further, one-time professional fees for external consultants are typically not included in EBITDA calculations, making the consulting engagement a non-factor in valuation.

7. Every day is a fire drill

By far, this is the #1 complaint that we hear about their supply chain function. We talk to many COOs who lose a lot of sleep thinking about inventory:

“We are in firefighting mode every day”

“We’re maxing out our credit lines right now... Hope this is a good holiday season”

“Stock outs are a big problem. We might lose our #1 customer”

“Steve is out sick this week… I hope this doesn’t cause issues in the warehouse”

We like to think that a well-run supply chain is a boring supply chain. Is your supply chain boring? Or, is it an exhilarating thrill ride that wakes you up in the middle of the night? Bringing in external experts can help make your supply chain boring. They can help set up a regular cadence of meetings to manage re-orders, codify operating constraints and policies and develop smart inventory management strategies that shift your supply chain from a “gut feel” driven organization, to a systematically managed asset that drives value for your company. 

Need further support?

Holding incorrect levels of inventory can drive a wide range of negative impacts on your business. Stock-outs erode customer confidence, overstock drives obsolescence, damage and masks broader issues in the supply chain. Companies that don’t use a systematic approach to inventory management expose themselves to significant risk in addition to more obvious impacts to cash flow.

Every company’s supply chain is unique. If you would like to discuss alternative approaches, or simply require help getting your inventory under control, please contact Seay Associates, LLC today for a free phone consultation.

About the author

Andrew Seay is a principal at Seay Associates, LLC, a management consulting firm specializing in inventory reduction, operations transformation and corporate strategy at middle market companies. Prior to starting his own firm, Andrew worked in McKinsey & Company's Operations practice as an engagement manager. He holds a B.S. in engineering from Northwestern University and an M.B.A. from the Kellogg School of Management.