I remember watching the movie City Slickers several years ago. In the movie, Billy Crystal (Mitch) heads out west to a cattle ranch looking for an escape from his ho-hum, stuck-in-a-rut life. There is a scene where Mitch is talking to a cowboy (Curly) about his life and Curly gives him some advice. The exchange goes something like this:
Curly: Do you know what the secret of life is?
[holds up one finger] This.
Mitch: Your finger?
Curly: One thing. Just one thing. You stick to that and the rest don’t mean nothing.
Mitch: But, what is the “one thing?”
Curly: That’s what you have to find out.
Do you ever feel like the key to success in your business is just like this scene? One thing…just one thing. But no one will tell you the answer! If you could figure it out, your life would be so much better! Your business would still have its ups and downs, but at the end of the day you’d know it would be ok because that “one thing” was covered.
What drives executives crazy is that there are so many things to concentrate on (sales, customer service, operations, etc.) that it’s hard to know where to focus your energy. For most businesses, the logical place to look first is sales. If you can just increase your sales, all of your problems will go away, right? Maybe…but maybe not.
Focusing solely on increasing sales would be like the government only raising taxes every time there is a budget shortfall. It would help, but you can’t base your future exclusively on increasing revenue. Besides the normal ebb and flow of customers, it will burn out your sales force in a hurry. Increasing sales can only be part of the solution…it’s definitely not your “one thing”. Yet every year, companies invest millions of dollars to find better ways to boost revenue.
What about cutting cost in your operation? Maybe you could sell some trucks, go to a smaller space, or reduce headcount. The problem with this model is that eventually these cuts will start hurting your company’s performance and its ability to compete.
What if there is another area that has been overlooked? Something that is so critical to your profitability it can single handedly determine the fate of your company. What if this one area of your company could ensure your profitability, even in a slow economy?
Let me introduce you to your purchasing department. That’s right, purchasing. You know, those folks who are normally relegated to the dark cubicles, get the oldest computers, the least comfy chairs and no windows. These are the people that determine whether or not your company will be here in 5 years, 10 years…or even next year.
Don’t believe me? When looking at the most common reasons that companies fail, lack of sales ranks about number 7 on the list. Mismanagement of assets, such as too much inventory in the wrong place, is number 1.
So why is it so few companies invest in the necessary tools to help their purchasing department operate effectively? As with most things, the answer comes down to lack of knowledge and visibility. Most companies don’t understand just how much it costs to carry extra inventory nor do they have the right tools to keep up with the rapidly changing trends in the marketplace. These two factors combine to create a perfect storm.
Consider this, only 65% of companies place a cost on carrying inventory. 65%! Whether we want to admit it or not, there is always a cost associated with the inventory in your warehouse. Although it will vary from one industry to the next, the normal cost of carrying inventory is typically about 24%. The cost of money, opportunity cost, storage, taxes, damage, and obsolescence all contribute to this number. The more inventory you have, the more money you lose every year to this hidden cost.
Am I suggesting that you run your warehouse as lean as possible all the time? Not at all. I am, however, suggesting that any time your purchasing department makes a decision, it needs to take into account the carrying cost of your inventory. There are absolutely times when it makes sense to buy extra inventory to take advantage of a price break, or cash in before a price increase. There are times when you should order from a supplier once a quarter rather than once each week. And there are certainly times when your buyers should have a little more safety stock to account for fluctuations in demand. But in each of these examples, those decisions must be weighed against what it will cost to hold onto that extra inventory.
If they are, purchasing can ensure your success for years to come. In 10 or 20 years, if someone asked you why your company was so successful, wouldn’t it be great if you could hold up your finger and say, “This…One thing. Just one thing.”
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