Just to bring to everyone’s attention the fact that new legislation affecting SME’s takes effect today. If you haven’t already become aware of this, you need to if you sell goods to another business.

While I haven’t read the new legislation in its entirety, it appears to apply to anyone who claims “Retention of Title” of goods on your invoices. “Retention of title refers to the types of clauses that may be included in contracts where a purchaser may take possession of property, but does not acquire title to the property from the seller until the full purchase price is paid”.

It would appear claiming this right on your invoices is no longer sufficient to claim title in the situation where your customer becomes insolvent.  So I have found some details for you in case you are not aware of this change.

A quick summary of the new rules is available at : http://www.ppsr.gov.au/ForBusiness/Newrules/Pages/default.aspx

An explanation of what fees you will be liable for are available at: http://www.ppsr.gov.au/ForBusiness/ForBusinessFees/Pages/default.aspx

Any doubt - seek advice from your legal counsel.

There could be serious consequences for the World’s economies over the next few years if the World Bank’s recent predictions are proven correct. While our esteemed leaders are saying Australia is well placed to ride out the difficulties and they continue to pat themselves on the back for a job well done in 2007, the reality is we aren’t in control. Not over the overall global economic conditions anyway. However, we are in control over how we react to those conditions.

If the predictions do prove to be correct, the consequences on the availability of credit for businesses in Australia will be significant. The results of that could be:

·      One’s ability to access cash will become more important, if not critical.

·      The supply of money will be tighter making harder to get.

·      Money will be more expensive if and when you do get it.

·      Your ability to grow may be constrained because of an inability to access suitably priced finance.

·      Your profit margins may be eroded due to the cost of funding.

·      Executives will be working harder for less return.

My mother always taught me that an ounce of prevention was better than a pound of cure. Sound advice for businesses as it is always better to be prepared for difficult times rather than deal with them if and when they hit. Successful businesses are always prepared and have a “Plan B”, even if they don’t need or used it. I wrote about this in November in a previous blog back where I laid out four steps that could be taken in preparation of what I called “Having an ‘R-Plan’” – plans for a recession, should it occur.

Now is the time to get prepared for the possibility that more difficult times are ahead and take the actions necessary for that preparation. If we take actions that ensure your business is Lean and Agile now, the business will be able to successfully adapt to whatever demand patterns the economy throws at it.

Business today should have:

1.     As much as possible of its capital is in cash.

2.     A low debt level.

Where Is The Cash?

It is not unusual for Inventory and Accounts Receivable to account for the majority of capital employed in a business. I call these areas lazy assets. They are lazy because, money is tied up and not necessarily producing as high a return as is possible – therefore they don’t work hard for you and are inherently lazy. Good inventory management is a sound preventive action and ensures that the capital employed is working as hard as it can to deliver value to the business.

Many consider inventory, specifically the accounting fraternity, as an asset. This is evidenced by the fact it is included in the current assets section of an organisation’s balance sheet. This is rationalized in this manner because supposedly the inventory a company purchases can be quickly sold and converted back to cash either by a discount or, if necessary, a fire sale.

Unfortunately many of us disagree with this assessment and treatment of the investment made. I don’t consider having to conduct a fire sale as an asset albeit it can return some cash quickly. The amount that can be returned under these circumstances will depend on the economic conditions prevailing at the time.

Generally, however, this type of activity is undertaken when times are tough and cash is required. This is usually a time when many other companies are most likely doing the same thing, therefore lowering demand for such product.

Therefore we have formed the view that while in an accounting sense inventory is classified as an asset, I actually consider it a liability until it has been turned into profit. Only then has the investment added value to the organisation. Until then it’s really a liability in sheep’s clothing.

So if times get tough there should be little comfort in having investments in a, so called, asset named inventory. There is little value to be generated by having an investment in a capital item that incurs unnecessary costs while it waits in the hope (just in case) a customer places an order.

One technique that will release a significant amount of cash from a business is disciplined Inventory Management.

Inventory management, however, is not a popular discipline and generally is not well handled. It is like the “Ugly Sister” of the business world, everyone knows they are there but they don’t want to go there. Business people all know that managing inventory is necessary but we don’t like doing it and therefore we don’t. Many feel it requires more effort than it is worth. So we simply resort to doing stocktakes once a year so we can comply with our financial reporting and auditing obligations and call that inventory management. As a result businesses workaround the symptoms poor inventory management creates rather than addressing the real problem.

Inventory management can be very productive, worthwhile and not overly demanding on the business if handled correctly. I often talk to clients about inventory management in terms of personal health issues, like oral health. What would your teeth and subsequent overall health be like if you only cleaned them once a year, or once every month, the common frequency for inventory management? Obviously they would not be in good health. Likewise your business requires a disciplined regime to keep it in good health.

If we care to take the effort to work on our inventory health every day then, just like having the right routine for clearing your teeth, daily preventative measures prevent a) A bigger problem developing over time and b) Having to develop workarounds for the resulting issues that arise.

What good inventory management disciplines do provide are: a) Certainty in decision-making. This results from having accurate data. b) Systems that facilitate growth and are agile to changes in demand.

Fundamentally, organisations have inventory so they are able to supply product when a customer places an order or demand for a product or service increases. This means that organisations make sure they have inventories in warehouses and storage areas “Just In Case” a customer places an order. The more outlets and storage areas a company has the higher the risk of not having the stock the customer wants, when they want it or in the location they want it. This results in:

·      An increasing demand for capital to fund the inventory purchases.

·      An increasing cost of holding & managing that inventory.

·      Larger warehouses and storage areas in which to store the inventory.

·      Increasingly poor visibility of where inventory actually is within the company’s system.

·      Inaccurate inventory records; the system will say one quality when the reality is something completely different.

·      A lowering of customer service and possible loss of sales.

The good news is that it is possible to have lower inventory without sacrificing customer service levels. This can be achieved by having a well designed, disciplined and well-executed inventory management system in place, thereby ensuring the right level of product is in the right place at the right time.

Most executives, and very often the accountants within a firm, don’t take acknowledge the cost of having this inventory in stock. They often have, in their minds, more important issues to be concerned about. While they might accept inventory has a cost over and above the purchase price - in general terms because there isn’t a line item on a P&L called cost of holding inventory, it does not get the attention or concern it deserves.

It is however a very real cost despite there being little appreciation of what that cost really is. Various studies into this have shown it varies depending on what industry the company is in. However, the studies all indicate the cost of holding inventory varies somewhere between 25% and 35% of the cost of the inventory holding. So this means, for every $1 million held in inventory your cost structure is between $250,000 and $300,000 worse off than it needs to be.

This lack of appreciation of the importance comes about because; the cost is spread across a variety of P&L line items the cost and, as mentioned before, does not have a single line item on the P&L. An executive can’t go directly to a particular account and examine what the cost is. The hold cost is made up of Rent, Electricity, Stock writeoffs, Damaged stock, Unproductive & wasted effort by staff and a myriad of others components.

There is, therefore, little opportunity to see the direct causal link between holding the level of inventory and the possibility of a reduction in costs.

 

Summary

So we have established that:

·      Capital is going to become more difficult to secure in the future.

·      Financial institutions might as a result review conditions that apply to your current borrowing arrangements.

·      The cost of that capital is going to be more expensive if you do in fact get it.

·      Inventory consumes a large percentage of this capital.

·      Much of this Inventory is kept for “Just In Case” a customer places an order and sits around for an unnecessary period of time.

·      Most organisations don’t have disciplined inventory management systems in place to deal with this.

With this context in mind, I would like to present the 5 steps you can start taking tomorrow, to improve your inventory position and as a result release a significant amount of cash back into the business. All without adversely affecting your customer service levels. In fact in many cases as a result of these five steps, customer service actually improves.

1.    Understand Your Inventory

As noted in the footnote to the title of this article, not all items can or should be managed in the same way. Different management and procurement techniques are required for each different inventory type. The characteristic of each inventory type is determined by the attributes of the demand for that item sold/used by the organization. A full understanding of these demand characteristics can provide profound insight into the requirements of the customers of the business.

We get this insight in the first instance through the use of the Pareto principle, often called the “80/20 Rule”. This is a simple (and often neglected) technique for identifying and understanding what causes are having the biggest impact on events. More on the Pareto principle can be found at: http://en.wikipedia.org/wiki/Pareto_principle

The process of using the Pareto principle is simple when you have your data in an Excel™ Spreadsheet.[1] The process has 5 steps;

                     I.     Decide the basis upon which you wish to conduct your analysis. The two most common are revenue and profit. (My preference is profit for reasons that, hopefully, will become obvious shortly). Then perform the following calculations, depending on which basis you choose:

·      Sales quantity X Price

·      Sales quantity X Gross Profit

                   II.     Rank the results this calculation generates from highest to lowest.

                 III.     Create two columns to the right of the result of the ranking calculation. In the first, perform an accumulation total for your entire list. At the bottom of your list total the entire list. In the second new column, calculate what percentage of the total for the entire list, each line’s accumulated total represents.

                  IV.     Find the spots where the accumulation percentages reach 20%, 60% and 80%. You might be surprised by what a small number of inventory items actually make up 80% of your sales/profit (depending upon which category you chose  to use).

                    V.     Based on your accumulation percentage totals, categorise your inventory into three groups:

                                  i.         A – represents the top 20% of your ranked list. They are “A” items because the represent items that move the most (sales quantity) and they will have the biggest impact on the business should something go wrong (highest sales/profit).

                                ii.         B – represents the next 20%;

                               iii.         C – represents the remaining items in your list

The categorisations will become the foundations for much of the work from this point on.

If you would like a template of this analysis sheet just send me an email at david@scs.com.au and I will forward one to you.

2.    Set Up Metrics Around Inventory

Demming has been incorrectly quoted as saying “You can’t improve what you don’t measure”. While the source of the quote maybe incorrect, it still remains true that the best way to improve a process is to measure the outcomes of that process.

It is not an uncommon experience when I go into companies and ask some simple questions for many staff and executives not to know basic inventory statistics. The cause might be either because the organisation doesn’t measure them or the executives have no interest in keeping abreast of them. Statistics such as:

·      Current Inventory Level (where is our inventory level at today?).

·      What are our current inventory turns and/or more indepth, what are our inventory turns by SKU (Stock Keeping Unit)?

·      What ABC category any inventory item belongs to.

Measuring outcomes like these are important because use of KPI measurements such as these drive behaviour within a business. This is a critical component to the successful use of KPI’s. (A subject I will blog on more later). But in summary: KPI’s are only useful to an organization if they are used to create and maintain desirable corporate behaviours.

In order for KPI’s to successfully change and maintain behaviours and to be valuable to management, the measurements in themselves must be:

1.     Accurate,

2.     Timely and

3.     Actionable

If your organization doesn’t currently have measurements of this nature or they do but they don’t have any impact on behavior – then start setting behavior changing metrics now! Its critical to ensuring capital will be efficiently used.

If you would like to have an obligation free discussion on what those metrics could be, email me and we can start the discussion.

3.    Be Disciplined and Persistent

Most business decisions rely in some way or another on inventory. The ability to make a sale or a promise to a customer relies on accuracy in inventory levels. Purchasing decisions rely on inventory accuracy to ensure out of stocks are minimised. Inaccuracy of inventory data is a major cause of poor customer service. Being disciplined and persistent in sound inventory management processes is a major contributor to ensuring inventory data is accurate.

Unfortunately more organisations than not only conduct yearly inventory counts (stocktakes). As I previously mentioned this is primarily done to satisfy accounting and auditing requirements rather than being an operational practice that creates good customer service and a successful business.

Successfully companies are more proactive than that. They are disciplined in their approach to inventory management and they are persistent in its execution. As I mentioned earlier good oral health requires a thorough daily process of cleaning one’s teeth twice a day. If you don’t have this level of discipline and persistence then the chances are you will be having difficulties with your teeth, either now or in the near future. Likewise successful companies need to undertake a daily regime to ensure best practice inventory management practices are utilized thereby avoiding avoidable issues.

The daily regime I speak of involves implementing a daily cycle counting regime based on the ABC analysis we spoke about earlier. The key is the discipline of doing this frequently, and the most effective frequency is daily.

This for of cycle counting aim to have A items counted at least monthly. By their nature they need the highest level of attention and management because the risk of issues is high and the impact of any issues is high. B’s are counted less frequently, usually once every three months and C’s are to be counted at least once a year. So by counting a quantity from each of the ABC categories everyday, this frequency of counts is achieved.

4.    Review Procurement Practices

Implementing such counting practices will quickly highlight inventory that is either obsolete or is slow moving. Removal of obsolete items and reducing the amount held on the slow moving items to a more demand driven level is how we release the cash back into the business.

The greatest sin of all would be to go through such a reduction process, release capital from the business and then to allow the same old processes that created the problem in the first place to replenish that inventory all over again.

Einstein has been quoted as saying, “In order to fix a problem, a different level of thinking is required to that which created it in the first place”. So in order to avoid repeating the sins of the past, new ways of thinking and new processes are required.

In many organisations inventory reordering levels or other triggers that generate a purchase order have not been objectively reviewed for many years. In many places this is because staff believe they are close to the requirements and understand what is needed. Often saying things like, “I have been doing this job for years, I know what I am doing”. But often a close look at cold hard data tells a different story. Just like retail store owners are often blind to the appearance of their store because they are in it every day, likewise someone performing the same task every day can be blind to how it can be improved.

A review of procurement processes and the fundamental assumptions they are based on should be conduced on a regular basis. If this hasn’t been carried out in your business within the last 18 months – start now!!! Ensure that the different categories of inventory are managed and purchased in different ways using different trigger mechanisms. There is no one way for all things.

Unless these are reviewed the company will be doomed to repeat the behaviour of the past.

5.    Be Brutal With Obsolete Items

As I discussed out the outset, companies have inventory “Just In case” an order arrives. So it becomes very easy to justify the keeping of stock that has been identified as obsolete in the ABC analysis we discussed. It is all too easy to say we will keep it for a rainy day. One must be brutal with obsolete items. They must be disposed of and done so quickly.

This may require selling/disposing of the items for less than the cost to purchase. The amount lost in this transaction is often far outweighed by the on‑going costs of holding that inventory, especially if you include the opportunity cost of not being able to re-deploy that capital elsewhere.

Fundamentally it comes back to really understanding what business you are in and what are the requirements of your customer. Clearly this has been misjudged in the past otherwise the inventory you have wouldn’t have been classified as obsolete.

Often this inventory is there because we strategically tried something new and it didn’t work. One needs to recognize this fact and take steps to release the capital it has employed and get on and deploy it elsewhere on another (hopefully) more successful venture.

Of course demand for products will shift and fads do come and go over time. But often an organisation’s processes don’t change in response. It is critical that this 5 step process I have outlined is repeated on a regular basis to ensure the finger remains firmly on the pulse of the business.

6.    Bonus Point

People often don’t take action until they are at the point of self-destruction. This is true on a personal and professional level. As humans we are wired to react to fast moving threats. It’s our “Fight or Flight” response. However, as a species we do not handle slow moving threats very well. We refuse to take immediate action preferring to hope things might change which will result in us not having to take action at all. Poor economic or business performance is a slow moving threat. It is not something that develops overnight or drops in our lap. It occurs slowly over a long period of time.

The issue of not acting until the point of self-destruction is clearly evidenced by Receivers and Administrators when they are appointed to wind up a company. They often indicate that the winding up action would not have been necessary if corrective action had been taken earlier.

Don’t leave your actions until it is too late. Sound and successful business starts with solid basics. There is nothing more basic than disciplined inventory management.

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[1] The following process assumes you have the ability to export data from your business application into a spreadsheet.

 

The Christmas & New Year silly season has come to an end and it is often a time of reflection. Like many others I have been reflecting and planning for both my personal and business lives.

As part of this reflection I recalled my shopping expedition yesterday. My better half and I spend a lovely day in the city utilizing all the Gift Cards I received as Christmas presents. I was simply amazed by the number of stores offering massive discounts on their products. I know retail has been tough, but the level of discounting on offer is something I don’t recall having seen before. (I humbly admit I am not an avid shopper, so that doesn’t necessarily mean much). Having had a retail arm to a previous business I owned, I was really feeling for them.

While there are legitimate reasons for discounting in some industries (fashion for example where the current stock is out of fashion), in general terms I abhor discounting. It places substantial pressure on profitability. This is clearly demonstrated by the widely used Profitability discount matrix.  In summary it shows gross profit percentage on one axis and the percentage of your price cut on the other. The intersecting cells indicate the increase in sales volume to make up for the discount. Let me repeat that: The increase in sales required to make exactly the same level of profit.

For example of your have an operating with a 25% Gross Margin and you reduce your sales price by 10%, you will have to increase your sales by 66.7% - to make the same profit. This is also assuming:

a)    You are actually able to achieve a 66.7% increase

b)   You are able to achieve this WITHOUT incurring any increased “cost to serve”; such as additional sales people or delivery costs. (If you don’t know what “cost to serve” is – give me a call, your missing out big time.)

The increase required to cover the reduction escalates rapidly the higher the discount goes. For example: Again your GP is 25% - a discount of 13% requires an increase in sales of more then double (110%).

Hopefully you can quickly see why competing on price is the scourge of business. My philosophy is always to compete on value provided and not on price. When times are competitive, look for ways of adding value. If you don’t have a copy of this discounting matrix – send me an email at david@scs.com.au and I will forward you a copy.

2011 has been a difficult year for many companies and their management teams. The pressure to succeed in 2012 is growing by the day.

Here are four actions you can take over Christmas that will ensure you start 2012 in fantastic shape.

1.     Forget about work completely. Totally relax over the break. Make sure your mind is a work free zone the whole time your away.

2.     Enjoy your family time. There is nothing more important in life. So make sure you are present with them 100% of the time your on your break. No one wishes they had spent more time at work on their death bed. This is their time – make the most of it.

3.     Ensure you recharge. Do things you love doing. Do something you haven’t done for a very long time. Do anything that isn’t work related and will help you recharge. Do it with your family.

4.     Carry a note book. Creativity is stimulated by giving the mind time and space in which to work away in the background. If you are genuinely taking a break, then the chances an idea will come to you at the most unlikely time are high. Carry a note book with you, jot down the idea so you don’t lose it and then forget about it until you go back to work.

Have a happy and safe Christmas everyone.

There are 10 common reasons why the implementation of a new ERP system fails to deliver the benefits promised and in many cases cause a catastrophic failure to the business. One of these reasons is poor leadership. ERP projects run a high risk of being highjacked by personal agendas and egos of project team members. Company leadership must provide clear guidance as to the scope of the project and engender unity of purpose behind this scope. Individual agendas and egos are cancerous. They must be rooted out as quickly as possible.

Ralph Norris commented recently the credit markets are frozen thanks to the goings on in Europe. American Airlines files for bankruptcy, talk of a global recession is growing ….. Again. Time to have a session plan is here. Where we actually have a recession or not isn’t the issue - its how prepared for one are you that really matters. Is your business in a fit shape to respond the the effects of a recession?

Here are some things you can do to add to your “R-Plan” to ensure your in better shape should a recession hit.

• Undertake a waste identification and elimination program. As I have mentioned in earlier posts, all waste is costly - but not all costs are wasted. When time gets tough the traditional response is to reduce costs. Often the wrong costs are cut leaving wasteful activities still occurring in the business process. Because waste isn’t a line time on your P&L many managers and accountants have difficulty identifying them. Elimination of waste WILL lower costs across all P&L line items.
• Get close to your customer - understand what is profitable business and what is not. By establishing what it costs you to serve your customer helps to identify loss making business. Undertake a cost to serve analysis. In tough times when you are going to lose business - isn’t it best you decide which business your happy to lose rather than let the market make those choices for you?
• With Banks likely to re-examine borrowing conditions and their client’s performance it will be important your business isn’t in their firing line. Reduce the risk of them changing your borrowing conditions or asking you to lower your leverage. Do this by lower your exposure to them. Find the hidden cash in your business and use it to reduce your borrowings. Cash hides in your lazy assets, inventory, accounts receivable and under utilised equipment or other assets. Release this cash by: 1) ensuring your have vigilant accounts receivable processes that result in low outstanding amounts out of trading terms. (This may even result in your reviewing your trading terms from 30 days from statement to 30 days form invoice for example). 2) Undertake ABC inventory analysis. Know your REAL inventory position - how much of each do you REALLY need? Look at your inventory turns - if they are lower than 12 then you have some serious work to do.
• Add value to your customer and don’t compete on price. Knowing what is profitable business will help here as will the waste identification exercise mentioned before. An intangible benefit of this exercise is a sound understanding of what constitutes value in the minds of your customers arises in your staff. They GET what value means to your customers. Compete on value not on price.

Happy to help with explaining how these tools will ensure your business is in a fit condition to weather any recession storm that may come our way. However, the key is to DO IT NOW. Not when the recession hits - too late then. Be prepared and if you haven’t already START NOW!

I have been participating in a conference in Sydney this week and one discussion really brought a key point home to me. The conference was for a group of diverse consultants from many points around the world. During this discussion one Accountant in the room started to discuss how he was providing advise on retrenchment of staff. All because, “Times are now tough and they had to start to cut costs”.

I almost screamed at him to stop. (I did contain myself). His reaction to tough times is so stereotypical of traditional management thinking, where one of the first things to be examined for cost cutting is the staffing level. When in reality I believe this should be one of the last things to be cut.

Staff redundancies:

·      Immediately lower morale.

·      Can often be carried out indiscriminately.

·      Significantly weakens the corporate knowledge. It walks out the door with those made redundant.

·      Provide a quick reduction in costs.

·      Cause a significant increase in hiring and development costs when times improve.

·      Signal to the market your weakness.

·      Provide the catalyst for your good people to go looking elsewhere.

This chap wasn’t aware of what I have coined David Ogilvie’s Cost Equation^™.  Where: Cost ≠ Waste but Waste = Cost^©.

Not all costs are unnecessary to operate the business. Therefore not all costs are wasteful. However all waste is costly.

Clearly I obviously don’t know the organisation this chap was consulting to, however I would be willing to suggest that they have not undertaken any thorough waste identification and elimination projects prior to undertaking this discussion on redundancy. I would suggest there are significantly better ways to reduce cost and far more dollars to be saved, by identifying what waste in occurring within the business than by simply making some people redundant.

Waste identification and elimination projects allow the company to:

·      Find the cost saving they seek while keeping their most valuable resource – their people.

·      Free up staff from performing wasteful activities thereby allowing them to perform value generating activities that the company can use as a competitive advantage. That is; provide more value for the same price to customers thereby strengthening loyalty at a very critical time.

·      Be more efficient and productive at a very critical time.

·      Be stronger and more agile when the good times return. While those who made people redundant struggle to find and train staff and get back up to speed, your organisation is lean and primed to perform.

·      Maintain their corporate knowledge.

·      Develop loyalty from staff for maintaining their role when times were tough.

Redundancies are not cheap to perform, particularly if they are long-term employees. My contention is that if those costs were actually used to fund waste identification and elimination projects instead; then the company would achieve the cost reduction it was seeking and be in a stronger position in the longer term.

Is this a guarantee to prevent redundancies from occurring in the future – of course not! But it is a giant step towards having to do them at all and come out of tough time much stronger as a result.

Those who have followed my entries for some time will remember I predicted a looming increase in industrial problems a number of years back. I went on to say that if this was to come to pass then the cost structure and ultimately profitability for organisations will dramatically change. The week end’s events have been a sad coming true of the types of issues I was frightened would eventuate. 

Now firstly let me set the record straight, I am not anti union. I believe that workers have the right, if they so choose, to have someone represent them in discussions with their employer. Not everyone in this world is skilled at representing themselves in these types of situations. I myself was a member of a union at one time in my life - albeit an employers union when I owned Hotels back in my distant past. So its not the concept of unions that concerns me. Its the philosophy behind what some represent that does.

I flippantly said to a young colleague of mine recently, he needed to be careful of the REDS under the beds. He thought I meant the Qld Rugby team. There are a number of generations now who haven’t managed through very bad times and haven’t seen the effects of dramatically socialists policies. The Labor Party has drifted to the right over time in order to gain an increase in appeal to voters. But there is an underlying leftist agenda smouldering under the surface. Many young managers haven’t been exposed to these situations before.

Should these pressures gain traction again, this will have significant impact on business continuity and profitability. Add to this the fact we have a significant number of managers who are of an age who have experienced the disruptions such philosophies can cause and we have the recipe for serious impacts on business operations and profitability if we are not careful.

What to do about all this. What steps can a manager take to ensure they are prepared for further turmoil.

Well individually no one business has the power or influence to make an independent difference to the industrial stage in their own right. (At least my clients don’t). We are essentially in the hands of our political masters and lobbyists there. From a business operations perspective there are three keys things to be doing at the moment.

1. Understand your inventory ABC’s. The impact of disruptions might mean you have to carry increased inventory in order to cover and maintain customer service levels for any shortfall due to disruptions. The last thing any business needs is to commit more capital to inventory just in case a disruption occurs, particularly in today’s JIT environment. So if this becomes necessary, clearly it new to be funded. So where does the money come from? It is best to fund this by reducing your current investment in C items and use those funds to invest in A’s & B’s. A sound understanding of your ABC’s is critical here. By definition your C items are those that won’t have a major impact on your customers or your customer service levels. If your not sure of the details of your ABC’s, if you can’t articulate them directly now without checking with someone - then take steps NOW!, because you don’t know it well enough.
2. Keep a tight reign on Accounts Receivable. Make sure you are disciplined in your management of A/R. This will help to keep the cash moving and available if you need to invest in A & B inventory items. This is critical. There would be nothing worse if your competitors handled this really well and you didn’t. If they had product available and you didn’t.
3. Identify and cut waste - don’t start on a traditional cost cutting exercise. Ensure you have a sound definition of value established and measure process steps within your business against this measure of value. Are they adding value or not? If not - deal with them by either reducing the cost/complexity of them, automating them or cutting them out all together. Remember my formula; © Cost <> Waste but Waste = Cost. Essentially not all costs are wasteful but all waste is costly. 

If you are not sure how to deliver these for your organisation - give me a call.

Thanks to Alan Kohler from the Eureka Report for this:

If America was a family…

“If the US government was a family, they would be making $58,000 a year, spending $75,000 a year, and have $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.”

(Sent in by Wesley LeGrand by Grand Private Equities)

Well over the past couple of days, today in particular, we have seen another major correction on share markets. I have had a number of calls this morning asking what this means. The following are my thoughts on what executives need to do in these turbulent times.

Some context to begin with;

·      Australia is clearly being driven by China,

·      The Government’s new industrial laws are favoring the union movement and industrial action is slowly increasing,

·      Our productivity has been slowly deteriorating for quiet some time now, largely due to (as Saul Eslake says) fading effects from previous reforms, “production-stifling regulation” and capacity constraints.

·      High Australia dollar – which is back hovering around parity with the US dollar as I write this, after being at record highs causing exporters significant difficulties to overcome

·      The wealth effect has taken a massive hit in the last day or two. People will be bunkering down to weather the storm.

Solution discussions:

What will stand companies in good stead in the current conditions will be the ability to be agile and adjust to the conditions as they fluctuate. I can hear a cry of readers saying that’s fine in theory but that’s not possible in reality. The simple fact is; by developing an agile infrastructure in your business, by adopting lean and agile philosophies, companies can be flexible to the prevailing conditions.

I can’t help thinking that fundamental business transformation principals continue to apply, no matter what the economic conditions are being experienced. By that I mean companies need to either start or continue their transformation activities. The best of these transformation activities is to become or improve your ability to:

1.     Create value 

2.     Identify and eliminate waste

3.     Take action – do something different. Remember Einstein’s definition of insanity; “Continue to do the same thing over and over again – each time expecting a different result”.

By truly understanding what the customer considers to be value and by identifying any and all steps within your value stream that don’t contribute to creating this value within that stream and eliminating them, is the key to success. All these activities will free up lazy capital within your business reducing the need for capital, and more specifically cash – the lifeblood of every organization. Every ounce of waste you identify is actually costing you or is consuming your cash. By identifying and taking steps to eliminate such waste releases this cash back into the business – and who doesn’t want more cash, especially in the current conditions?

If you want to know more about what might be possible for your company, give me a call.