WHEN I T COMES TO METHODS OF ANALYZING AN ORGAnization’s financial performance, there are several options. One
is the venerable DuPont Model, which though it dates back to the
early 20th century, is still reflective of reality as well as simple to
construct and easy to visualize. At the end of the day, it can display corporate return on assets (ROA) and/or return on equity,
which 1) satisfies shareholders and senior executives, and 2) tells
the story behind how well—or not—assets are being leveraged
and what the impact of debt is on real financial contribution.
Inventory, whether accurate or not, plays a role in several
inputs to the DuPont Model. Total inventories constitute assets,
with obvious ROA ramifications. Therefore,
reductions to inventory levels are not simply
cost-shaving moves, but also potential move-the-needle boosts to enterprise performance.
The other consequences are not necessarily
trivial but are small potatoes in the bigger
picture, affecting capital outlays and their timing, people costs to plan and manage, and the
ratio of value-adding and non–value-adding
activities.
WHAT AND WHERE ARE INVENTORIES?
The issue of “right” inventory levels is a question for another day, and if all business concerns could be erased by reducing inventories, life could be simple. But there are risks and consequences to be weighed, and the
wiggle room we might have enjoyed a decade ago is intolerable
today—and growing more so.
So, we’ll concentrate on inventories and their accuracy for the
moment. At a macro level, inventory rests at many stages, with
varying degrees of exposure to inaccuracy and heartburn for
managers. Try these as a starting point:
; On order: Delivery specified, but subject to weather, port
congestion, labor action, transport availability, and force majeure;
accuracy specified, but unknown until confirmation upon receipt
; In transit: Delivery estimated, subject to the above uncertainties; accuracy stated, but unknown in fact
; Arrived: Delivery confirmed; absolute accuracy unknown
BY ART VAN BODEGRAVEN basictraining
Inventory, accuracy, and
corporate performance
until entered in systems
; In stock: Accuracy confirmed or corrected
upon physical putaway and entry into systems
upon “official” receipt; subject to error with
succeeding picks, returns, etc. Complicated by
the possibility of residence in multiple facilities
and/or multiple locations within a facility
; Returns to DCs: Accuracy confirmed upon
receipt. Subject to deterioration during subsequent activities
; Store stocks: Dependent on quality of processes and systems for receipt,
sale, return at store levels
; In transit returns from
stores: Dependent on quality
of processes and systems at
store and DC levels
; Consigned inventories in:
Accuracy dependent on processes, discipline, systems at
resident location(s)—DCs,
stores, suppliers
; Consigned inventories out:
Accuracy dependent on processes, discipline, systems at
resident locations—customer DCs, customer
stores, our DCs, our suppliers.
Perhaps there are more to consider, but these
should offer some insight into how difficult
it is to establish and maintain total inventory
visibility and accuracy.
RECEIVED WISDOM
Inventory accuracy has been a holy grail for
generations. Academics, consultants, and practitioners have both preached and practiced
cycle counting as a cure. In the abstract, cycle
counting is compelling; in limited and contained applications, it has been—and con-
