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Inventory Procedures Find Capital in Your Business
by: Chris Anderson
The Cash to Cash Cycle: Part One of Series
Part One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Part Four: Accounts Payable
Part Five: Effective Policies and Procedures: The Complete Cash to Cash Cycle
What Would You Do with $1,000,000?
With $1 Million would you:
$1 Million Waiting in Your Wings
What do you and your business need that you have been putting off because you don’t have the money today?
$1,000,000 certainly would fill those needs. But where do you find $1 Million just lying around your business
right now? Well, you probably have $250,000 in each of four areas in your everyday business, and you don’t
even realize it.
Money in Your Business Procedures
So let’s look at four places in your business where we will find $250,000 each and see how we can help you
find it:
Part 1: Inventory - $250,000.00
Part 2: Accounts Receivable - $250,000.00
Part 3: Sales - $250,000.00
Part 4: Accounts Payable - $250,000.00
Part 5: How-to Procedures - $1,000,000.00
Turn Cash into Time with a New Company Policy
But just what exactly is this source for cash? It’s time. If you are looking for $250,000 then it costs you $4,808
every week that you delay. So what you do with your time quite literally amounts to either costs of delaying, or it
can amount to savings when you take action and control of your time. To correct this cost of delay, an increase
in velocity must follow - which will set the difference between ‘good’ and ‘great’. The consequences of this shift
in system velocity increases discipline and competency: the ability to maintain the increased velocity and the
ability to make the adjustments to achieve the ‘great’. So how do you realize the difference?
Eliminate Inventory and Increase Cash
Let’s start with the biggest, most obvious source – your balance sheet, specifically inventory. If you are a
manufacturer with $300,000 or more of inventory (raw materials, work in process or finished goods) then
STOP! We found it. Why? Because inventory is an unproductive asset. Inventory is money, and having it lying
around your factory is not where your money belongs. So if we reduce inventory to Just-In-Time (JIT) levels,
then we can eliminate 85% or more of your inventory, which translates into $250,000 in cash. But that’s not all.
You will also save another $50,000 or more in annual inventory carrying costs. With less inventory, there are
lower costs of holding inventory. Let’s look at an example of what we’re talking about.
Manufacturing Business Procedures Case Study
A manufacturing organization with $2 Million in average inventory balances needed assistance. We examined
their inventory consisting of raw materials, work in process and finished goods to understand and quantify the
workflow, workload, and demand forecasting issues. Then we designed and implemented a process to
improve their inventory cycle and tie it closer to their actual sales.
The metrics we developed reduced their inventories by 85% and increased their manufacturing cycle efficiency
from 60% to 90% within 120 days of implementing the new procedures. With these new processes and
reports, the company now tracks manufacturing cycle efficiency and delivery time variance rather than just
units produced, as the measure of their manufacturing effectiveness. The result: extra capital plus a 50%
increase in process capability (capacity).
Methods to Design the New Process
By becoming more efficient in the process, we can use time not as a detriment but as a significant benefit to
our business. Step by step, let’s take a further look at how time and efficiency plays a great role in your
business.
Procedures Provide Time Savings
So, as we have seen, we should use each element of the process to extract the most benefit from our
business. With time-saving procedures set in place, you will let your efficiency work for you.
Time Savings Provide Cash in the Bank
With well-defined processes and procedures in place, you will increase efficiency by increasing inventory
turns. And of course an increase in inventory turns means an increase in cash on hand. It’s there - all you have
to do is grab it.
Next part of this series, we will look at finding $250,000 in Accounts Receivable - another step as we work
toward our goal of $1 million in cash savings. So not only aim to reap the rewards of extra savings to your
bottom line, but also see more cash in the bank - $1,000,000 to be exact.
About the author:
Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and
procedures manuals, producing the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: Bizmanualz Policies, Procedures & Forms
Next Article
by: Chris Anderson
The Cash to Cash Cycle: Part One of Series
Part One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Part Four: Accounts Payable
Part Five: Effective Policies and Procedures: The Complete Cash to Cash Cycle
What Would You Do with $1,000,000?
With $1 Million would you:
- Pay off debt?
- Purchase new equipment?
- Invest/save for the future?
- Give yourself a bonus?
- Buy a new car, boat or plane?
$1 Million Waiting in Your Wings
What do you and your business need that you have been putting off because you don’t have the money today?
$1,000,000 certainly would fill those needs. But where do you find $1 Million just lying around your business
right now? Well, you probably have $250,000 in each of four areas in your everyday business, and you don’t
even realize it.
Money in Your Business Procedures
So let’s look at four places in your business where we will find $250,000 each and see how we can help you
find it:
Part 1: Inventory - $250,000.00
Part 2: Accounts Receivable - $250,000.00
Part 3: Sales - $250,000.00
Part 4: Accounts Payable - $250,000.00
Part 5: How-to Procedures - $1,000,000.00
Turn Cash into Time with a New Company Policy
But just what exactly is this source for cash? It’s time. If you are looking for $250,000 then it costs you $4,808
every week that you delay. So what you do with your time quite literally amounts to either costs of delaying, or it
can amount to savings when you take action and control of your time. To correct this cost of delay, an increase
in velocity must follow - which will set the difference between ‘good’ and ‘great’. The consequences of this shift
in system velocity increases discipline and competency: the ability to maintain the increased velocity and the
ability to make the adjustments to achieve the ‘great’. So how do you realize the difference?
Eliminate Inventory and Increase Cash
Let’s start with the biggest, most obvious source – your balance sheet, specifically inventory. If you are a
manufacturer with $300,000 or more of inventory (raw materials, work in process or finished goods) then
STOP! We found it. Why? Because inventory is an unproductive asset. Inventory is money, and having it lying
around your factory is not where your money belongs. So if we reduce inventory to Just-In-Time (JIT) levels,
then we can eliminate 85% or more of your inventory, which translates into $250,000 in cash. But that’s not all.
You will also save another $50,000 or more in annual inventory carrying costs. With less inventory, there are
lower costs of holding inventory. Let’s look at an example of what we’re talking about.
Manufacturing Business Procedures Case Study
A manufacturing organization with $2 Million in average inventory balances needed assistance. We examined
their inventory consisting of raw materials, work in process and finished goods to understand and quantify the
workflow, workload, and demand forecasting issues. Then we designed and implemented a process to
improve their inventory cycle and tie it closer to their actual sales.
The metrics we developed reduced their inventories by 85% and increased their manufacturing cycle efficiency
from 60% to 90% within 120 days of implementing the new procedures. With these new processes and
reports, the company now tracks manufacturing cycle efficiency and delivery time variance rather than just
units produced, as the measure of their manufacturing effectiveness. The result: extra capital plus a 50%
increase in process capability (capacity).
Methods to Design the New Process
By becoming more efficient in the process, we can use time not as a detriment but as a significant benefit to
our business. Step by step, let’s take a further look at how time and efficiency plays a great role in your
business.
- Increase Demand Forecasting Accuracy. We only need enough inventory to satisfy demand, and that
is where part of the problem exists. If demand can not be accurately forecasted, then we end up
compensating for this unknown with inventory.
- Increase Manufacturing Cycle Efficiency. How well manufacturing resources are used to produce a
product determines the cycle efficiency. Defective product, product rework, and long lags between
manufacturing cells cause inefficiency, which can be easily calculated. Raw materials should be
converted into finished goods as quickly as possible. The speed at which this occurs defines your
manufacturing cycle efficiency.
- Increase Supply Chain Turns. Increasing the number of times purchases are made may increase
acquisition costs and unit costs because of smaller order quantities. But you will benefit by increasing
your cash flow and eliminating the carrying cost of the inventory (warehousing, material handling,
taxes, insurance, depreciation, interest and obsolescence totaling 25% to 35%).
- Eliminate safety stock. Safety stock is really just a buffer for forecasting variance and supplier delivery
time. While many levels are set arbitrarily in automated MRP systems, your safety stock levels will need
to be reduced due to improvements in demand forecasting accuracy, manufacturing cycle efficiency
and supply chain turns.
- Reduce purchasing errors. This can reduce overstocking and, more importantly, minimize stock outs
that result in expensive expedited purchases. Sell excess and obsolete inventory or return it to your
vendor.
- Eliminate delivery variance. Do not allow vendors to deliver early or late and make sure the delivered
quantity does not vary from the order quantity. After all, delivery errors cause the need to carry more
inventory. Instead, provide suppliers with forecasts of future needs.
- Train purchasing personnel. Provide your purchasing and material management personnel with
formal training. This will arm them with better negotiating skills that will result in better prices and
terms.
Procedures Provide Time Savings
So, as we have seen, we should use each element of the process to extract the most benefit from our
business. With time-saving procedures set in place, you will let your efficiency work for you.
Time Savings Provide Cash in the Bank
With well-defined processes and procedures in place, you will increase efficiency by increasing inventory
turns. And of course an increase in inventory turns means an increase in cash on hand. It’s there - all you have
to do is grab it.
Next part of this series, we will look at finding $250,000 in Accounts Receivable - another step as we work
toward our goal of $1 million in cash savings. So not only aim to reap the rewards of extra savings to your
bottom line, but also see more cash in the bank - $1,000,000 to be exact.
About the author:
Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and
procedures manuals, producing the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: Bizmanualz Policies, Procedures & Forms
Next Article
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