First things first, do all of your employees understand the cost of bad inventory management? Do all your employees pick up items lying on the floor and put them in its proper place? Do they pretend not to see it? Do they feel they are too busy to deal with it? Do they kick it out of the way?
The answer to this question provides a good indication of what your employees think about our inventory. For any company to be successful, its employees have to see the direct relationship between inventory and their paycheck. The same “pile” of money that is used to pay employees is used to buy inventory. Furthermore, inventory must be transformed back into cash (through sales) for the company to have the money to pay its employees in the future. You cannot be successful(or perhaps even survive) unless all of your employees understand this relationship.
You can see if they understand this concept by giving them a little test. Let them consider the following scenario:
Jerry is one of your service techs. He’s never been what you would call “neat”. His motto is, “serve the customer quick and don’t let anything get in the way.”
Jerry doesn’t think twice about flinging boxes around to get to the item he wants. The path of destruction he leaves in his wake has earned Jerry the well earned nickname…the “Tornado”.
It’s probably not surprising that Jerry occasionally (once a week or so) breaks something. And, it probably won’t shock you to learn that some of the material that Jerry “flings” out of the way is never seen again.
In fact, Jerry loses or breaks about $100 worth of material each week. What does the company have to do to make up for this loss?
Many people would respond that the company would have to sell an additional $100 worth of material and that the $100 cost may be worth the service Jerry provides the customers. This is incorrect. Like any other expense, material losses, whether from theft, breakage, or misplacing stock, must be paid for with net profit dollars. These profits are the company’s source of income; in other words the money it has left over after it pays all of its expenses. If a company’s net profit before taxes is four percent (a very respectable number), the organization has a four-penny profit for every dollar of sales. The replacement material has to be paid for out of these four cents on the dollar.
Therefore, to make up for Jerry’s mistakes, the company doesn’t need $100 in new sales, it needs $2500! (4% of $2,500 is $100)
This same example applies to missing or stolen material, broken or damaged stock and obsolete products. Any product purchased and not eventually sold to a customer has a huge negative affect on the business.
This example doesn’t even take into account the related costs incurred when inventory is lost such as:
*Additional expenses incurred ordering emergency shipments and “fighting fires”
*Labor wasted searching for missing material in the warehouse AND
*Disappointing customers by promising material that is thought to exist in the bin but can’t be found.
