All that stock on the shelf isn’t an Asset

The ability to deliver client orders quickly can be the difference between winning or losing an order but how can you ensure that you do that and how quickly do you really need to do it?

Part of the challenge is of course the desire everyone seems to have of wanting stuff now, to have the safety net of knowing it's there just in case you or the client wants it, if you have it on the shelf then you can deliver now irrespective of what issues the plant is having.

So we build warehouses and we fill them with stock, we fill them with stock from our own suppliers so it's there when we need it, if we need it and finished goods stock that we are going to sell to our customers when they need it, if they need it.

So, what happens if you don't need it or the customer doesn't need it? What do you do with all this stock now?​

Your ERP system and probably your finance team will tell you that the stock is work money, it'll either be valued on what you paid for it or what you plan to sell it at or by some form of moving average cost, the problem is that this value is well, make believe. The only value your finished goods stock or your work in progress or that matter, has is what someone is willing to pay for it, that's how the market works. If you feel it's work $50 because you spent $20 on raw materials, put $20 of labour and overheads into making it and want $10 for your profit line that's great, but if the market says well, we don't want to buy it at that we'll pay $35 for it, that's the value of your item, that's what all the stock is work… that's less than it cost you to make it… worst still, if you build all that stock and the market says well actually we don't want it at all than its actually worth zero. (Don't believe me? Ever heard of a Microsoft Zune? or an Apple Newton??)

Think about this if you had to shut the doors tomorrow because your cashflow had disappeared and you could not pay anyone what happens? The liquidators come in and start selling things off, they may sell part of your company to a competitor for a fraction of it's value, they may sell your stock and the equipment for a fraction of the value because that's what it's worth.

If you want a really good way to tie up piles of cash quickly then the very best way a company can do that is build stock and increase Work In Progress, and that's what I see when I walk around companies, I don't see piles on inventory and think great they clearly have a great market (if it was that great it would be flying off the shelves) I see cash. You see a flash electronic device or a metal widget or a pile of hats that someone will buy, and I just see piles of cash. Here's something to ponder, what if it were your own personal cash, what if we said ok that $10,000 in your account we are going to just pop it on the shelf here, when it gets through the rest of the business you can have it back, would you be keen on that idea?

The very best form of raw material that any business can have is cash, without cash you are sunk. The great thing about cash is not only can you pay people with it, but you can convert it into any other type of material on the planet. Now granted you need physical raw materials to build your products, some do have lead times that you can't control, I grew up in the contract electronics world where a basic a surface mount capacity could have a lead time of 26 weeks, 6 months for a part worth $0.001 so yes we head a few of those. What we focused on however was how to convert the raw materials into finished products as quickly as possible at the highest quality level as possible, with quality always taking precedence over speed.

What that meant was we turned the products over quickly and so got cash quickly to allow us to continue to invest in the business.

So how can you speed up the throughput of the business? Well you can go out and invest in a whole bunch of equipment and more people but that just adds to cost and does not really help you.

The key is to look for the waste and remove that from the process. I always start anywhere I see large piles of work in progress and try to understand why it is there. Is there a quality problem, is there a line balance problem or is it something else? In lean we focus very heavily on removing waste because that increases the throughput, if I stop doing something that adds no value to the product then it's time it's not hanging around and it moves faster. It's a never-ending task because you are constantly chasing a bit of an improvement here and there and pretty quick you are looking for seconds over minutes in terms of savings.

We focus on improving the quality so that you do not waste time reworking a product and you don't need to inspect things at the end of the line because you are doing that all the way along the line and stopping the line when it's a problem.

Yes we use Kanban's which are small distributed areas of stock in various levels of assembly but these are designed to turn over quickly and act as a buffer or a way of smoothing the flow of the line, the aim is always to eliminate them over time because they can still hide problems. That is what stock does, it hides problems.

Increasing the finished goods happens because you cannot get things out of your factory quick enough because there is a problem and you are papering over that with cash. If you stopped and fixed that problem, you could reduce the cash tied up in finished goods or Work in Progress and move faster.

The faster you move, the faster you turn the cash over and the less stock you need on the shelf, doing that is actually simple… if you want to deliver faster and reduce your finished goods just eliminate the waste.