Fatal Error #38: Falling in Love with Your Inventory

Fatal Error #38: Falling in Love with Your Inventory


I think I have bumped into one too many clients with the issue of over-investment of inventory lately, so I am pulling out an excerpt of my book The 51 Fatal Business Errors and How to Avoid Them. You may be saying to yourself, “I don’t have an inventory.”  Yes you do. Service businesses have the worst inventory of all- people. The inventory you keep of people’s time expires every hour.  If unused or unproductive, it is lost. Here’s the excerpt from the book:

Large businesses are terrible about having too little inventory.  They seem to think that people are so hungry to do business with them that they can dictate terms…in particular…….you need to wait.  On the other hand…..Smaller businesses are terrible about “falling in love with the inventory.”  For most businesses, your inventory is worthless to everyone but you.  It is only worth the profits you can generate from it.  Ask your banker how much they liquidated the last foreclosure inventory for??  5 cents on the dollar.

It’s not a baseball card collection.  You don’t get credit for having the complete set.  I have seen many a business borrow hundreds of thousands of dollars to finance slow moving inventory that they HAD to have.  This is where financial metrics like inventory turns can come in handy.  Yes, I do believe that some bankers and pencil pushing accountant types go too far and put financial ratios ahead of business needs.  That said, many business owners completely ignore inventory turns.

I encourage you to take a hard look at your inventory annually and use the philosophy, if in doubt, sell it out.

Now for the REALLY tricky part…..services businesses……think you have it good because you have no inventory……sorry…..you have the worst inventory imaginable……labor.  It is perishable by the hour, the vendor expects to be paid every week in full and you never know how much of it you will have available.

This is theory not fact, but I encourage you to consider this…….you NEVER, never can have the perfect level of staff.  You are either understaffed or overstaffed……at all times.  We want to think there is this perfect equilibrium the scale balances but it simply can’t.

That said, if you have to pick overstaffed or understaffed, which would you do?  If times are tough, you should certainly pick understaffed.  How many companies do you see that are overstaffed even though the economy is tough?  It makes no sense?  Pick your poison….either you paid too much in wages or you have whiny, overworked staff…..seems like an easy choice to me?  Now, if you are growing, you will need to intentionally overstaff to accommodate.  You can’t effectively grow with an understaffed environment, right?

Bottom line: don’t take your inventory of product or people for granted.

 

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