They’d be better off to close or fix these, but they can’t see them. This is because, as you move up through the organisation and consolidate results, transactions from all areas get mixed together, the trackability and potential insights become lost, and the overall business result has been diminished. A certain business unit could be costing you money and you can’t see it.
Again, this occurs when the financial systems aren’t transparent enough all the way down through the organisation to the front line. The more complex the organisation, the bigger this problem can be.
As an example, we worked with an aeronautical company selling products into a specialised market with a wide area of distribution. They had a range of technical products, and, over time, they would upgrade those products to bring better ones to market. What they didn’t have, however, was a migration strategy to take the customers using the older products over to the new products. They just had more products.
To service more products, or sell more products, you need more inventory. This grew and grew over time to the point where they had so much inventory their cash flow started to be threatened. In fact, the whole sustainability of the organisation started to be threatened due to the amount of funds tied up in carrying inventory, work-in-progress (WIP) and finished goods (FG) stock.
They couldn’t see it because, at any one time, they were only measuring a product. We’ve taken a product to market. Is it profitable? Yes, it is. They weren’t measuring the overall inventory as a cost of sales, a total cost of the business and monitoring how that inventory was growing from a base value and cash flow perspective.
When we did an analysis, I found that 50% of the inventory had a very low turnover rate simply because it was only the old customers who were using this inventory. New customers were getting the more recent product. Inventory sat in the shed instead of being free cash in the bank, and this brought a very high cost to the business.
Equally, servicing a growing range of products has a steadily escalating costs cycle. When we worked with this company to optimise their approach to market and also significantly change their inventory methodology. Within 12 months of doing this, the business had turned around to a profitable position. The organisation was now taking a more focused approach to market and managing the total cost and profit of delivering to that market.