The COO Series - Part 4 - Inventory 2022 style.

Stockpiling anything is so 1940’s.

The trend pre-pandemic was to eliminate as much inventory as possible and move to a Just-in-Time inventory philosophy to reduce the burden of carrying inventory, moving it, insuring it, paying rent on it. Just-in-Time is a Japanese concept of receiving raw materials as they are being consumed. A well-run Japanese manufacturer might not have enough materials on hand for that day or even that shift, but they are scheduling inventory to hit their dock in the hours before those parts will be consumed. With Just-in-Time it is possible to manage your cash flow in a way where your customer pays you, and THEN you pay your vendor. But times have changed and today holding inventory might mean the difference between success and failure.

Container shipping times from mainland China to the West Coast have risen from as little as 15 days in 2019 to over 100 days in 2022. Causing mass pandemonium, sell-outs, rising costs, and rumors that big shippers are paying premiums to take your goods off the boat to put their's on. With Global demand for goods at an all-time high, shipping is only part of the issue, raw materials, labor shortages, and COVID shutdowns just exacerbate the problem.

The world has changed and best practices are changing as well. I was recently on a site tour for a potential client and the overstock of inventory they had would have been a massive red flag just two years ago, today it's a sign of a smart operator who recognizes paying interest (also at record lows) on inventory is better than not having inventory at all.

That said, there is still waste that can be found, sought out, and eliminated.

Spoiled or stale inventory is one area where we can focus. Leaders are notoriously bad at not grasping the sunk cost fallacy. Which says that "Costs previously incurred by past actions cannot be recovered". Leaders find it hard to abandon past investments and will many times follow good money with bad not because they believe it will make a difference but because of how much they have already invested.

Seth Godin has said, "Winners quit fast, quit often, and quit without guilt."

Time and time again I have worked with a client that has stale or spoiled inventory that they just can't part with. For instance ...

• A client had 15,000 square feet of warehouse space devoted to a Christmas product that failed three years earlier, that had now spoiled (boxes deteriorated, dust was an inch thick on the boxes etc.) What the CEO couldn't see was that every month he paid rent, cooling, heating, security, and pest control on those boxes, and as far as I know, he is still paying for it today.
• Another client had a failed product launch because of a changing market condition (pandemic). The company had hundreds of thousands of dollars in borrowed money tied up in that inventory that no longer had a market and instead of liquidating it, they rented an additional warehouse to "get it out of the way" then when they moved 6 months later they brought it all with them and rented a larger square footage space to accommodate "all the inventory" spending days and tens of thousands of dollars on moving costs and racking.
• In 2018 I had a client that was storing pallets of wall calendars from 2016 (as if they would somehow find a use for them)
• Many times a client will have a piece of software they built to solve a specific problem, a new website, or their "own system" they have been investing in for years, all with no planned completion and no reality check that the software or website is no longer relevant.
• Expired lab supplies, legacy products still sitting on your server, parts for machines that the company no longer has, paint that has dried out years before but is still being inventoried monthly because no one has authority to throw it away and no idea how to write it off, I've seen it all.

Everyone has inventory and moving, storing, insuring, heating, cooling, and protecting it is costly. Just because it cost something in the past does not mean it still has value in the future. If you have old outdated items, stale inventory, or old code that will never be used it's time to get rid of it.

The best method for ridding yourself of stale inventory that is cluttering up your process and business is "red-tagging". Allowing employees to put a red label on anything they see that they do not believe is necessary to the work you do. Then after some time (say two weeks) gather all the red tags together in one area and sort through them. Sell what you can, give away, or scrap the rest. Cleaning house feels good, it eliminates clutter, it reduces costs and it will help you break out of the sunk cost denial by allowing you to remove the memories of projects that were not successful.

As for the rest of your business simply limiting the number of products or services available makes it easier for individuals and teams to make decisions on which items to use and sell.

How has inventory changed for your business in the last 18 months? Have you taken a different approach or are you still trying to manage inventory the old fashioned way?

Serial Entrepreneur, connector, and content creator, Derrick Mains has authored three books on Lean Management pitched, produced, and starred in the Crackle Original Docuseries “Riding Phat” and helped build (as President and COO) one of the most notable brands to come out of Arizona in the last decade, Phat Scooters.

Derrick applies his experience and unique perspective in his consulting work with Playbook Systems where he works with companies to improve their operational inefficiencies and improve their bottom line. ?