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One of the more common axioms in the manufacturing world is “Inventory is Evil”, because too much inventory can only lead to problems. The most common problems often sited are the cash consumed purchasing the inventory, increased warehouse costs to store excess inventory, higher obsolescence write-offs when a particular part is classified as obsolete or inactive, and extra manpower to count, review and manage the inventory.

So, how does a company, even a well-managed one, get into inventory trouble in the first place? Two obvious reasons include poor forecasting by sales and unexpected inventory obsolescence due to a technology change. However, to list all the potential reasons for high inventory levels is beyond the scope of this narrative as the intent is to help you to discover ways to reduce your inventory levels without making overhauling your current basic processes; in other words quick fixes that can have dramatic results.

One of operations’ key responsibilities is to ensure the appropriate level of inventory is on-hand to support sales. With this in mind there are four important points to consider:

  1. The main tool that operations use to recommend inventory purchases is Material Requirements Planning (MRP).
  2. The basic assumptions that drive purchase recommendations by the MRP are forecasted total sales, sales orders already in backlog, bill-of-materials (BOM), vendor and in-house lead times, and safety stock levels.
  3. The basic stereotypical trait of most manufacturing people is risk avoidance
  4. The general philosophy of most companies, particularly companies experiencing high growth (e.g. start-ups), is to not lose a sale due to lack of inventory. In addition, it is my experience from working for manufacturing companies in fast paced Silicon Valley, a manufacturing manager or purchasing employee is much more likely to get fired for missing a sale than ending up with excess inventory. Playing it safe thereby becomes a basic survival strategy.

Since the BOM, including yield percentages, always needs be accurate as possible and backlog is a known quantity, operations have only a few remaining ways to insert some conservatism (i.e., playing it safe) into the MRP output. They can increase the demand side of the calculation by nudging the Sales forecast up a bit or increase the supply requirements by ratcheting up either the lead times or safety stock levels of all purchased and manufactured inventory.

The analysis and impact of safety stock is pretty straightforward so I won’t spend much time here, but lead time is a bit more challenging and therefore probably warrants a more frequent review than safety stock levels. In fact, Supply Chain Digest published an article on May 4, 2006 titled ‘The Impact of Lead Time Variability’ highlighting “Preliminary Research out of Georgia Tech finds there’s a lot more variability on inbound deliveries than many companies may realize” and as Georgia Tech’s Dr. Donald Ratliff noted that “not only does lead time variability impact a variety of supply chain cost and performance metrics, the impact of variability is actually greater the more efficient a company’s supply chain is.”

That is a rather thought provoking mouthful. In essence, even though lead time variability impact is more prevalent than believed, the impact is greater on well-run supply chains.

Given that a very common way to be conservative in inventory planning is to increase lead times and the implications on lead time variability per the Georgia Tech study, it warrants a more frequent review than it probably is receiving today. To complicate matters just a bit, there are numerous places where lead times can be used or “hidden”. However, a great place to start is the lead time for the receiving department to receive inventory and then place the item into its appropriate stock location in the warehouse. Depending on your particular situation, this particular lead time might even be considered superfluous, because if there is an urgent need for specific material, manufacturing will not only be aware of its arrival at the dock, they will find a way to expedite the material out of receiving and onto the production floor.

Coming from my finance background, conservatism does have its place. However, the impact of being conservative should at the very least be understood by all so that any conservatism becomes a conscious decision by the executive team. For example, let’s assume that the annual COGS for a company is $10,000,000 and the inventory level is $2,500,000. This equates to an inventory turn of 4.0 or having 91.25 days of inventory on hand. If the company has a 1 day lead time for material receipts, then by eliminating this lead time, will by definition, reduce inventory to 90.25 days in inventory. This reduction will result in an inventory being reduced by 1.1% / $110,000 as the company’s MRP will now calculate the inventory purchase requirements based on a shorter lead time.

Bottom line: both lead times and safety stock are typically set and reviewed infrequently. However, as their impact can be a significant drain on cash and a cause of an increase in inventory obsolescence expenses when parts are classified as inactive, they both should be reviewed and analyzed for appropriateness and accuracy at least once a year to ensure that all inventory conservatism is known and understood by all so that appropriate action can be taken.

The three main benefits of lean manufacturing, if implemented correctly, are 1) a reduction in inventory levels 2) it exposes inefficiencies on the production floor and 3) it reduces waste. One of the key elements of lean manufacturing is the deployment of a Kanban system.

While there different types of Kanban systems, a simplistic definition is it represents a Demand-Pull production approach where customer orders dictate what is manufactured as opposed to the more traditional Demand-Push where the manufacturing organization is tasked with producing specific quantities for specific parts to meet an approved sales forecast for a given period. One of the critical keys to success of a Kanban system is to have an efficient/effective Just-in-Time inventory system so that inventory can be delivered to the factory quickly to satisfy inventory requirements for an order received.

Technically, a Kanban inventory system uses a Kanban (a graphic or visual signal; e.g. color coded cards or lights) that indicate to manufacturing to produce another unit or to replenish inventory on-the-manufacturing-line. Its intent is to minimize inventory levels on the manufacturing floor and to control the quantity of production for a particular product.

A simple example is described below in Scenario 1:

Scenario 1

Lean Manufacturing/Kanban 101 Image Scenario 1

The manufacturing process would be:

In comparison, if a Work Order system is used (Scenario 2) then the below manufacturing process would be used. The important element in this scenario is the 10 units for Part A were considered part of the 100 unit forecast that manufacturing used in their production planning.

Scenario 2

Lean Manuacturing/Kanban 101 Image Scenario 2

The two biggest risks that often are associated with Kanban are 1) if a large order quantity is received, the Kanban system may find it difficult to produce the required quantity in time for the requested delivery date to the customer and 2) If the manufacturing production cycles are long the manufacturing floor space required to keep the production flowing might become extensive.

The value of presenting properly cannot be understated. This is your chance to be viewed as a significant value added member of the team and demonstrate your level of expertise.

Over the years, the below practices have worked extremely well for me. In addition, my observations of other presentations where the presenter did not fare very well was due to not following one or more of these practices.

1. Know your audience

As with any presentation, this is extremely important. Your entire presentation material and presentation style depends on your audience. For instance, a presentation to the Board of Directors would be vastly different in terms of slides, detail, preparation and context than a presentation given to a large group of other finance people.

In addition, a smaller group presentation will be subject to more interactions and therefore knowing each individual attendee can be just as critical. Using the Board of Directors presentation example again; knowing each board members tendencies, mannerism (indications of silent clues of agreement or disagreement), and overall knowledge or bias on a particular topic will help make a presentation go smoothly. The key is to avoid being blindsided by an objection, question or being forced to go down an unexpected path which can abruptly turn a smooth meeting into a very contentious meeting.

2. Know the material backwards and forwards

The presenter needs fully understand the material, any numbers and all the key trends, metrics and variances vs the plan or forecast. You do not want to be just reading the information off the slide. The audience wants to know the story behind the material or numbers. You need to provide the proper narrative as to any important events/milestone and the cause of any material issues or variances (both positive and negative). Are the issues or variances one-time events or will they be recurring?

The ramifications of the issues, depending on their importance, might very well be a topic of discussion By highlighting the possible consequences of not addressing the issue, will at a minimum, ensure the issues are discussed, monitored, resolved or optimally mitigated. Given this, you should be prepared to address the issue in some detail.

One last very important point for this section, if you don’t know the answer to a question, it is better to respond ”I don’t know; let me get back to you” or “I don’t know all the nuances to provide a proper answer, so let me get back to you” than it is to respond with an answer that is not correct. An incorrect answer will cause a hit to your credibility and everything you say after that as well as before that will become subject to suspicion with regards to its accuracy. Of course, you don’t want to be using the “I don’t know” response too often as that as its own negative implications as well.

3. Have answers to questions before they are asked

During preparation of the material, you need to be able to review the slides and ask yourself what questions are likely to be asked during the presentation. This is where knowing your audience and understanding the material and numbers come into play.

By reflecting on the slides, knowing the audience and the details well enough you should be in good position to review the slides and determine what questions are obvious and as well as what questions might surface. This will put you in position to present with confidence and to respond quickly. The better you are able to do this, the higher your credibility to the audience will be.

4. Issue Handling

Undoubtedly you will be in position to have to be the messenger of bad news. Depending on the situation (e.g., presenting to the Board of Directors), it is usually very wise to provide a heads-up prior to the meeting to the board members individually. This accomplishes two things: a) nobody likes negative surprises. By providing advanced notice, it will help control emotional responses during the meeting and b) It will give each Board Member to reflect on possible solutions or provide guidance during the meeting.

While presenting bad news cannot and should not be avoided, it is far better to present the problem, but then follow-up with action plans or possible solutions to solve the problem. In other words, don’t simply announce and give the problem to the attendees. Instead, demonstrate your leadership by owning the problem, whether as a team or individually, as appropriate.

5. Practice, Practice, Practice

This presentation adage has been around for a long time, because it is so valuable. The more important the presentation, the more practice is recommended. The benefits that practice provides include:

The CFO at any company is challenging in both its depth and breadth of responsibilities. At a start-up company, the most precious resource known is CASH. For technology and many other companies, Cash tends to first be allocated to R&D as they are the creators of the product. Once the product gets ready for production, the Sales and Operations organizations begin to grow to support growth in the ultimate chase for more cash.

Having spent about 30 years in Finance with multiple of those years at start-ups including being a CFO for 5 of those years, I have always understood and agreed (but not liked) that administrative functions, especially those at a technology driven company, are the last to get funded as product development and revenue generating activities will always get the lion’s share of the budget dollars.

Given this, since the CFO is typically responsible for administrative functions, the breadth of their responsibilities is typically quite wide. Expert knowledge in Finance is obviously mandatory, but strong working knowledge in the company’s business, Human Resources and Legal is often required.

The role of the CFO

The two primary roles of any CFO are 1) to control and protect the assets of the company, and 2) accurately and report timely the results and financial position of the company. After those two objectives are satisfied the CFO typically strives to be the key business partner to the CEO by providing insightful analysis and financial perspective to various aspects of the business.

A CFO in a start-up has the added burden of needing to obtain an exceptional solid working knowledge of HR and Legal in order to satisfy the first objective of protecting the assets of the company, because they may be the very person performing the day to day tasks given that many start-up companies cannot afford a lawyer or even a part time HR employee. With the knowledge that one mistake in either the handling (or lack thereof) of a personnel issue or in a contract negotiation with a customer can be so devastating it can break a company, one can quickly understand the importance of knowing when to call “time out” in order to seek expert advice from a professional in the field, before it is too late.

The importance of knowing what you do not know

Often, the most dangerous position that anyone can be in is when they do not know what they do not know. In that state, a person is not even aware of the potential landmines that need to be avoided and therefore will not seek critical advice at the right time. By way of example, a CFO without some strong legal experience, from which to draw upon, would very likely underestimate the significance of seemingly innocuous contract boilerplate items such as “warranties and representations” or the term “best efforts” when negotiating a supply agreement with a customer. However, these two legal definitions can have such significant and expensive obligations to ensure compliance and/or onerous remedies to correct a non-compliance condition that they should be avoided at best or fully understood before proceeding. Seeking the advice of a good lawyer at this point may be warranted, but you have to at least understand the situation to realize the criticality.

Tasks are the industry standard term for activities / follow-up items that are assigned to a CRM user and it is one of the most important features of a CRM system. Tasks are “must haves” for someone using or evaluating a CRM system. If properly used, Tasks will be how salespeople and customer support people manage and complete their daily To-Do list. In addition, it is a great tool for communication between Sales, Customer Support employees and company management.

The main purpose of CRM Tasks is to facilitate and monitor items needing a follow-up at the appropriate time. Proper use of Tasks will greatly improve the value of the CRM as well as productivity of the CRM users. Listed below are some of the best practices of using Tasks.

Task critical Information

All tasks that are created in the CRM should have the following information:

Task Notifications

If a user is assigned a Task, that user should be automatically notified by email to ensure the assignment was communicated in a timely manner. This capability may not be important for active users of CRM as these users should be reviewing the Tasks assigned to them on a regular basis.

Any task not been completed by its schedule completion date should be highlighted (e.g. Red Bold font) in the CRM system in some manner so that the Task assignee and their management quickly can see the situation and decide on the proper course of action. A more comprehensive system would have an Alert/Notification capability that will send an email or report to the appropriate people indicating Tasks:

Using Tasks

The most cost common users of are either the sales team or the customer support team. A sales representative might assign themselves a Task to follow-up with an Account by a certain date per their last communication with the Account. Similarly, a Sales Manager or the Lead Generation team might assign a Task to a sales representative, so that timely action is scheduled.

The customer support team will use a task so a representative can act immediately on a customer support ticket categorized as High Priority.

Salespeople and Customer Support personnel should be using the Task page to plan their activities for the day and the near future. The Task page should be the most viewed page by sales and customer support CRM users as it is their guide for beginning their day and checking for updated priorities during the day. If not checked frequently, a new High Priority item might not completed in a timely manner which could have significant repercussions.

Tasks should be able to be sorted by either due date or priority in order for the user to quickly determine what and when activities need to be accomplished.

Salespeople before visiting or communicating with a customer should always take a quick look at the CRM to see if there are any Customer Support Tickets open, especially Tickets with a high priority status. There are plenty of horror stories about a sales representative arriving at a customer site unaware that a major issue has been brewing. Needless to say, this is not a good situation.

Best practices are for CRM Notes and Tasks to be used in conjunction with each other. For instance, a Task may be triggered from a discussion with a customer or prospect. In this situation, the Task should reference the Note (which should have all important information regarding the discussion) so that proper context can be provided.

If you are new to CRM systems, I highly recommend that you work closely with the implementation company to make sure you understand the pros, cons and consequences of decisions regarding all the processes that need to be considered before you go-live. You can save yourself and the rest of the company at lot of frustration and false starts by leaning on the experience of others so that you can avoid common pitfalls and by reinventing the wheel.

One thing to remember is that while there are definitely wrong ways to use a CRM, there is no single right way to use a CRM. There has to be meeting of the minds where the company and the sales organization agree on the processes so the information in the CRM can be interpreted as accurately as possible. I say as accurately as possible, because unlike accounting, where an entry can be clearly determined just by looking at the debits and credits, information in the CRM will be subject to every user’s interpretation. For instance one salesperson’s view of the status of a particular account could very well be different than the status of a different salesperson’s view if the exact same situation and set of facts existed for that salesperson. To add to the complexity, each reviewer’s interpretation of any notes in the CRM could very well be different than other reviewer’s interpretation.

One of the most important processes that needs be finalized is defining the sales cycle that will be used by every CRM user. The objective of clearly defining the stages is to make sure that all salespeople understand what the various stages mean and how management will interpret each stage. With this knowledge, the salespeople can categorize each account appropriately and therefore communicate the account’s progress in the sales cycle in accordance with the company’s agreed upon definitions.

Sales Cycle Stages

With specific regards to sales cycles, it is important to define the stages in the CRM so that the stages are not too few nor too many as each condition has its own set of problems.

Now to really throw a wrench into the whole discussion, many people use two sales cycles. Depending on your particular situation, this might very well be best practices. To clarify the two stages:

  1. Initial Sales Cycle: This includes the stages required to get the account into a position where it has a reasonable chance to close. An example is:
    1. Lead: Have very little information on account (perhaps purchased a list of companies); Need to do some research.
    2. Qualifying: Have basic information, but lack enough information to determine if the account is worth pursuing; i.e. is it a fit for our product/services, but do they have enough budget?
    3. Development: Solid account to target, but they are not quite ready to make a purchase decision within the next 6 months.
    4. Working: Solid account to target and they are ready to make a purchase decision within the next 6 months
    5. Opportunity: Ready to make a purchase decision with the next 3 months.
  2. Subsequent Sales Cycle: Once the account has become an Opportunity in the first sales cycle, this sales cycle defines the stages to close the deal as a win, a loss or a no decision. An example is:
    1. Discovery: meeting to understand the requirements of the account
    2. First Demo
    3. Second Demo
    4. Checking References
    5. Win, Lose, No Decision

It is best practices to assign all accounts that have reached the second sales cycle to not only assign a stage to the Opportunity, but also to input into the CRM at least the dollar value, the percent probability to win the deal and the time frame for the decision.

Management Review

Closing note; one of the toughest parts, but a critical key in properly interpreting the CRM information is to know the tendencies of each salesperson. For example, one particular salesperson will be very reluctant to put a high win probability on a deal, for fear of disappointing management while another salesperson may always be overly optimistic. In addition, the notes they enter into the CRM may reflect their conservative or optimistic tendencies. In any case, you will most likely need to adjust your analysis of the raw data based on the person who input the information to properly interpret the situation.

One approach that some companies use to help mitigate individual bias or tendencies is to assign a fixed probability to each sales cycle stage. For instance, a prospect that likes the first demo could be assigned a 10% win probability. If they make the shortlist of vendors, then it the probability will be increased to 30% and so on. I personally do not particularly like this approach as there are too many nuances to each deal including how many short listed vendors were selected or does a key decision maker have a pre-disposed bias to your or one of your competitors product.

Recently I was walking through a warehouse with the owner of a small distributor, when one of his employees brought him a widget that had been damaged by a forklift. The owner told him to trash the widget, and tell accounting to write it off; the value of this widget, $170. This got me thinking, “are they aware of the cost to replace this widget?”

Later, I asked the warehouse person how much they would need in sales to replace this widget; he said $170. Well, not exactly, let me explain.

In order to replace the cost of the damaged widget, the money must come from the margin of future sales. This company earns a 2% margin for this widget, so they must sell 50 widgets, just to pay for the widget that was damaged! That is $8,500 in additional sales!

$170/.02 = $8,500 in new sales needed to replace damaged widget

$8,500/$170 = 50 widgets

This example doesn’t take into account carrying costs; if carrying costs were 30%, the replacement cost would be $11,050!

This chart illustrates additional sales required to make up for lost/stolen/damaged inventory:

Gross Margin
Item Value2%3%4%5%6%
$25$1,250$833625$500$417
$50$2,500$1,667$1,250$1,000$833
$100$5,000$3,333$2,500$2,000$1,667
$200$1,0000$6,667$5,000$4,000$3,333
$500$2,5000$1,6667$12,500$10,000$8,333
$1,000$50,000$33,333$25,000$20,0000$16,667

Again, to breakeven on lost, damaged or stolen inventory, the replacement cost comes from future profits! How much harder must your sales team work to make up for damaged, lost or stolen inventory?

These little inventory costs that occur daily and weekly add up over time, and at the end of the year, these “little” costs can have a substantial effect on the bottom line. Therefore, it is important for employees to understand costs associated with inventory, and the impact it has on the company’s financials.

One of the most important benefits of ERP systems vs off-the-shelf accounting packages is that information becomes available and leveraged across the enterprise as opposed to being stored in in stand-alone applications and made available only to a select few employees having access to the silo application. This benefit of shared/leveraged information is realized whether all the information resides in the ERP (e.g., informing the A/R department that a customer can be invoiced, because all product ordered has been shipped by manufacturing) or if the information resides in multiple applications that are effectively and efficiently integrated.

Integrations will be effective and efficient if the integration provides information in a timely manner and allows the user to use the application of their choice. For example, if a sales person uses the CRM system as their key tool, all the information they need to do their job should be viewable in the CRM application. Requiring a salesperson to log into the ERP system to view the information is by definition inefficient, will lead to frustration and will result in additional licensing costs for the ERP system.

The below narrative focuses on the benefits of having the ERP system integrated with the company’s Customer Relationship Management (CRM) system and with the Product Lifecycle Management (PLM) application.

ERP / CRM integration

The benefits of this integration are quite extensive, but a top level summary of the benefits include providing information or process improvements to Sales and Customer Support teams as listed below:

Sales Team

The above benefits can and usually do have a significant positive impact on the company’s Sales, Operations and Finance departments. By way of example:

Customer Support Team

The visibility to the above information will:

ERP / PLM Integration

The engineering department typically controls the Bill of Materials (BOM) for products the company manufactures by recording, tracking and releasing Engineering Change Orders (ECO) to existing BOMS and to enter BOMs for new products. If the engineers use the functionality embedded in the ERP system then this information is available immediately to all users of the ERP system. In addition, the engineers will have access to all the relevant information that is already stored in the ERP system to enable them to complete their tasks efficiently and cost effectively.

However, if an external PLM system is used without solid integration between the ERP and the PLM, this can lead to many inefficiencies and cost issues that could have been avoided had an integration existed.

The key benefits of having bi-directional integration between the ERP and PLM systems include:

These two examples serve to highlight the power and the importance of solid integrations between applications where the information in one of the applications is important to users of another application.