ERP & Inventory Catch 22
About 12 months ago I wrote about the need for tighter inventory and capital control. I’d like to revisit this topic in light of recent economic changes. Specifically:
- The RBA has dropped rates and is tipped to do so again.
- Bond yields, which reflect future growth and inflation expectations, are hitting all time lows.
- There has been an actual inversion of the US Treasury yield curve. (An inverted yield curve is normally a reliable predictor of a recession, having predicted the last three in the US).
- The current trade war tensions between China and the US.
All this puts business owners in a quandary. There is substantial negativity around in the press recently and, locally, this is evidenced by the number of For Lease signs in retail shops and offices. Almost all of this bad press is focused on matters that an individual business owner has absolutely no control.
My dear departed Dad taught me many years ago, when I was working in our family business, that we should worry about and take action on the things we can control. If it was out of our control then we should stop worrying about it and do the best we could with what we had and knew. So what is it we know?
- Lower rates on the surface make holding inventory more attractive because it notionally appears to be cheaper and subsequently no issue if you are holding too much inventory.
- Lower rates are deployed as a policy measure to stimulate the economy, as such we are operating in an economy that could be doing better.
- Higher inventory levels in a slowing economy is not a good thing. Like blood in the human body, inventory best serves the business when it moves. A slower economy means it is moving at a slower pace with a greater percentage of the overall holding potentially not moving at all.
So what do companies have control over? Executives can control:
- How much capital they have deployed in their business.
- How efficiently their business is operating.
- Efforts that identify and eliminate waste in their business processes.
- How effectively they use their investments in technology, particularly how they use their ERP system.
I was speaking to a US colleague of mine last night and she was telling me her clients are focusing on cash flow initiatives. Everyone is looking for where they can find cash. This reinforces my view of what tactics executives should be employing to best position themselves for the near and medium term challenges ahead.
So, what to do about all of this? As I mentioned twelve months ago I was advising companies to undertake inventory reduction projects in preparation for the inevitable downturn. I suspect many have not. This remains my view. By focusing on how capital is deployed in your business you will be ensuring the blood pumping through your company will be fresh and moving fast and often, a key tactic for dealing with both downturns and periods of growth. How you use your ERP system is a central tool to successfully employing this tactic.
For those companies thinking of following this advice and improve the use of their systems I believe you should undertake the following tasks first:
- Undertake a strategic review of your digital positioning including the role ERP plays in managing capital and cash.
- Have a robust discussion around how ERP supports the broader company strategy.
- How used functionality in your system may provide that next level of competitive advantage.
True independent advice can assist here by providing:
- An honest and independent point of view, free of corporate political pressure.
- Proven capability of facilitating the conversations needed to achieve the right result.
- A proven methodology for success with ERP.
- Support to executives so their risk is minimised.
The biggest challenge I have working as that independent advisor is getting involved in the conversation early enough. My experience is many of the biggest and most impactful mistakes are actually made in this early phase. As such, remediating these situations and resetting expectations amongst the key executive team is more painful than it needs to be. The earlier the right conversations are held, the better.
This is something I can help with, so if you or anyone you know is looking:
- To improve the way their business operates and make better use of their capital;
- To improve the way they leverage their current system;
- To replace their current system;
give me a call for a confidential discussion on the best way to achieve this.
Until next month …