Let’s Change How We Think About Inventory

Let’s Change How We Think About Inventory

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“The more inventory a company has, the less likely it is that they have what they need.” – Taiichi Ohno

We look at inventory stacked up and think of it as money in the bank. It’s time to start recognizing it for what it is—frozen cash that is far from an asset. It’s a necessary part of doing business, but we want as little of it as possible. 

 

Inventory as an Asset 

According to your Balance Sheet, inventory is equal to money in the bank. Appearing right next to cash in “Current Assets”, the visual implies that inventory is reliable revenue but it glosses over this tiny detail: inventory needs to be sold before it does you any real good.

As any business person knows, however, selling inventory is no small detail. It goes rotten, becomes obsolete, breaks, gets lost, gets stolen, gets wet, has defects, oversaturates the market, and goes out of style. 

The practice of Balance Sheets is hundreds of years old, and speaks to a time when buying and selling was a simpler game. Now the complexity increases every year.

Inventory is a current asset when it’s sold. Until then, it’s a block of ice with all your cash frozen inside of it. In that sense, it’s not an asset at all, but a potential liability. The difference between those two is a razor’s edge. 

 

Things to Consider 

It’s true that you can’t sell from an empty shelf. We can’t do business without inventory, and the more we have, the more we can make. 

You buy inventory with working capital (ie. cash). Cash is the oil in the engine of your business; without it, the system seizes. 

 

 

The Key to Making Inventory an Asset

Think of it this way; inventory is an asset up to a certain degree, at which point it starts to become a liability. It’s a question of how fast you can sell it.

 

Turning your inventory is what makes it an asset. The faster your turns, the more flexible you are. 

But fast turns take discipline. It’s about keeping your hand on the wheel and your eyes on the road ahead.

Buy less, sell it faster, buy more, and repeat. It’s how to keep inventory as an actual current asset, and not let it turn into boxes of frozen cash getting dusty in the back storeroom. 

It sounds easier than it is, but there’s often low-hanging fruit. Re-evaluate those volume incentives you’re offered, or how long it takes to sell the last 25% of product—and whether you’re getting all your money for it. Numbers don’t lie, so let them talk you through the solution to your inventory problems.

Is Overdelivering Costing You Money?

Is Overdelivering Costing You Money?

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“Don’t talk, act.
Don’t say, show.
Don’t promise, prove.”
– Anonymous 

We read it in every business book; “Under promise, overdeliver.” It sounds like a slam dunk, but there’s another side to consider.

Over-processing is a deadly waste that erodes our bottom line—and it happens because we’re doing too much. Overdelivering, when the customer doesn’t know about it, is a form of waste that’s easy to over-do.

 

A Tale of Two Cookies 

If you know I’m going to give you a cookie, you won’t be surprised when I give you one. If I give you two cookies, you’ll be thrilled. 

It’s about expectations. You won’t expect two cookies again because you know I went above and beyond, but you’re happier than you would have been with one. That’s the essence of under-promise, overdeliver.

Now, the fatal twist. Imagine you don’t actually know how many cookies I’m going to give you. You think it’s one, and I mentioned it informally, but there’s nothing formal. We simply haven’t had that conversation. 

I end up giving you two cookies. You’re happy about it, but not truly surprised. You think, “Cool, I get two. I thought I was going to get one.” 

From that point on, you expect two cookies. I assume you’ll be thrilled with two cookies but that you’d still be happy with one. Here’s the thing—we haven’t had that conversation. If I try to go down to one, it suddenly seems like I’m hiding one behind my back. 

So I keep giving you two cookies, at first to appease you. Then, somehow, it gets built into my business. Now I’m over-processing, and I’m wasting money trying to bake all these extra cookies. 

 

Overcommunicate

Overdelivering without the customer’s awareness is over-processing. 

Your relationship with your customer follows two rules:

 

Following these rules will avoid surprises like, “I forgot to mention that you’re only supposed to get one cookie.” After all, the longer you give them two cookies, the harder it’s going to be to wean them back to one. Not having these frank conversations early only fosters a sense of entitlement for them and frustration for you; it usually ends badly. 

The solution is to define what is and isn’t included in your customers’ services—fully, and in writing. With existing customers, it’s bound to be more complicated. If you have a customer who has come to expect overdelivery on the daily, don’t necessarily blame them. It’s up to you to have those conversations early. The sooner you do, the faster you’ll be able to eliminate frustrating over-processing from your working relationship and your bottom line. 

 

Working Relationships

While many still strive to under-promise and overdeliver, a growing proportion of businesses are choosing to do only what they agreed to do, at the agreed-upon rate, with no surprises. It’s a recipe for stability where no one gets frustrated or surprised, and everyone understands how many cookies are on the table.

 

What are Your Financial Statements Really Telling You?

What are Your Financial Statements Really Telling You?

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“We want to turn our inventory faster than our people.” – James Sinegal

We all get financial statements. Our bank needs them, and we’re used to referring to them as a guide to our financial decisions. 

As important as they are, it’s important to remember that their format isn’t neutral. The structure of those statements, in terms of what is and isn’t prioritized, was built 100 years ago when business owners had different interests. 

The next time you look at your statements, here are a few things to consider about how its priorities may differ from your own. 

 

The Roots of Accounting Statements 

To appreciate how our statements weigh certain aspects of our business against others, we need to understand where they came from. The processes behind Standard Cost Accounting stretch back to the 1910s/20s, when business looked a lot different than it does now.

A century ago, labour consisted of about 60% manufacturing expenses, with the rest accounting for 30% materials and 10% overhead. The focus was on managing labour because it ate the lion’s share. Overhead was an afterthought, and if mistakes were made from a lack of attention, it didn’t matter much.

Today, overheard is a much larger piece of the fiscal puzzle. Despite that, Standard Cost Accounting relegates it to the last consideration. When it’s deprioritized visually on the statements, we don’t think of it with a deserved sense of urgency. 

 

Inventory: Asset or Frozen Cash? 

The pace of change has accelerated exponentially in 100 years. In the 1920s, when you invested in materials or inventory, you could rely on turning them into cash at some point. 

Fast forward a century later and it’s more complicated. Manufacturing or purchasing a product now doesn’t mean it’s going to make you any money. Products are going obsolete or out of trend so quickly that it’s a race against time.

What to Remember 

Knowing how to read your statements matters because the Deadly Wastes creep up on us as soon as we drop our guard. Here’s what to watch for:

Your financial statements are some of the best tools you have available—if you use them wisely. Look at the numbers with a critical eye, and you may see new opportunities for maximizing your profits.

Find Better People with Process Improvement

Find Better People with Process Improvement

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“You can only become truly accomplished at something you love. Don’t make money your goal. Instead pursue the things you love doing and then do them so well that people can’t take their eyes off of you.”

– Maya Angelou

 

Efficiency (and saving money) is the direct impact of Process Improvement. But in our current job market, we can’t underestimate the indirect impact of Process Improvement; attracting career-minded potential employees to your business. 

The next time you start hunting for that elusive employee to help build your business, put your commitment to Process Improvement front and centre.

 

Differentiate Yourself

Valuable employees know who they are, and they’re shopping you as much as you’re shopping them. 

If you publish general ads with no distinguishing features to your business, you’ll attract people looking for a paycheck. If you make your business stand out from the pack, you’ll attract people wanting a career. 

Career-minded employees think differently. They want to engage with their employer and derive purpose through making a difference. While others sprint for the door at 5pm, they get the job done. But they won’t waste their energy and talents on a business that can’t fulfill them.

Promoting your team’s engagement in Process Improvement (or Lean) will:

Offer a sense of purpose to candidates, and you’ll be heads up over your competition.  Then they can have the candidates who are only after a paycheck. 

 

Make it about more than Money

Your candidates are akin to your customers: they’re evaluating whether or not to invest in you. Ultimately, money plays a big role; you’ll always have a bigger competitor who can offer more.

Change the paradigm. Big paychecks attracts candidates looking for precisely that. Tell candidates that you’ll listen to them, challenge them, and give them opportunities to be part of something larger than their own workstation, and you’ll be offering something that money can’t match.

That being said, there are limits. Valuable employees aren’t greedy, but they want a good standard of living for their families. 

 

Build Word of Mouth

If you’ve been hiring for a while, you know that good people know good people. 

Process Improvement only works when you walk the walk—day in and day out. Ask, listen, implement and repeat. 

Each small change saves money, but equally important is that each employee-sourced small change makes a big difference in morale. To people who care enough to speak up, seeing their ideas taken seriously and implemented is the greatest reward.

Empower your good people, and they’ll tell other good people. And when hiring time rolls around, you’ve been building a reputation to leverage your way towards an engaged, career-minded team. 

 

The people you want on your side are people who want the same things you do; they want to work smarter, and feel that their work has value. By embracing Process Improvement, you’re sending attractive signals about the work culture you’ve built. Build it into your business, and watch your business build momentum.

Balancing Efficiency & Quality for Your Customers

Balancing Efficiency & Quality for Your Customers

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how to ensure quality in professional services

It’s easy to fall in love with efficiency. It promises big savings to those with the fortitude to see efficiency-saving measures through. Process Improvement is built on small, compounding efficiencies.

As easy as it is to get carried away, we must always balance efficiency with quality. The former is your perspective, the latter is your customer’s perspective. And the customer pays your mortgage. 

Cut processes too deeply, and you’re asking for trouble. It takes too long to process files, customer service suffers, and mistakes happen. 

The solution: build quality into the front end. It’s an integral part of Process Improvement, and it helps us negotiate the balance between cutting for efficiency and maintaining a top-notch product.

 

A Culture of Quality

You can improve your processes from the corner office, but it won’t last. To create sustainable change (and save some real money) you need buy-in from every desk and cubicle. Focusing on quality is low-hanging fruit for cultural change.

Focus on “efficiencies” in meetings, and people get scared. “Efficiencies” tend to mean job cuts. Tilt the conversation toward quality, and ears perk up because:

pros of quality professional services

A culture of quality will deputize every employee to ensure that everything they do represents the best of the company. Once they’re empowered to be stewards of quality, they’ll probably be more receptive to hearing about building efficiencies into daily processes. 

Remember that your workforce cares about the services they provide.The pride is already there, all you have to do is encourage them to actualize it. 

 

Mistake-Proofing Your Processes

Once a document or email with a missed detail or mistaken number goes out to a client, the damage is done. The science is in balancing efficiency with a culture of quality to get the best of both worlds. 

Mistake-proofing (poka-yoke in Japanese) is about catching mistakes early and empowering your employees to prevent them. It builds on the culture of quality that you remind people about every morning at your stand-up meeting.

It’s tempting to give employees instructions so clear that they can shut off their minds. Empowering them, and building that culture, is about asking them to check the numbers twice and use their intuition if something doesn’t add up. 

Everytime a file passes from one worker to the next, it freezes more of your cash into it. Catching mistakes earlier will help you retrieve that cash (by getting a sale instead of a bad review) at the other end. 

mistake proofing professional services

Every employee who touches a company file should be their own quality control. Don’t wait until the end; empower your team to spot mistakes or anything missed and fix them before they cost you another dime. 

 

“Quality is not an act, it is a habit.”

– Aristotle