What Type of Inventory Problem do You Have?
The Cost of Freedom
The weekend edition of The Australian Financial Review for August 8-9, 2020 contained a very interesting article on Freedom Foods. Regular readers will know I speak often about the importance of sound inventory management practices. It is the, “twice a day teeth cleaning” equivalent for business.
The essence of the article focused on the investigation that was underway by one of the big accounting firms to establish how an ASX listed company could allow $60 million of UHT and cereals to go off and have to be destroyed. The cost to the company has been substantial in a number of forms, such as: reputation due to ASX trading having been suspended; the cost of producing the inventory in the first place; the cost of holding this inventory – which all totalled to the $60 million; and then the additional cost of producing the subsequent replacement stock. Not to mention the additional cost of the large accounting firm that has not been included in the $60 million number. I cannot imagine this will be cheap especially considering the staff from the accounting firm will have to quarantine at the end of the engagement because they are staffing it with people from outside Melbourne.
The company has also lost both their CFO and CEO as a result of the bungle.
According to the article, the chairman has subsequently admitted on an investor call that the management does not have a full understanding of the scale of the problem.
I am actually not surprised by this seeming lack of business 101 fundamental practices. I regularly see how many medium and large businesses still do not have sound inventory management practices in place. This is why I have been harping on about it in my newsletters.
This example shows that having poor business hygiene practices in place can snowball into much larger issues. If the culture is such that hygiene matters are not well practised then this leads to much more serious issues. Freedom Foods for example apparently regularly allowed multiple people to use one executive’s American Express card as a mechanism to avoid the proper governance process of utilising purchase orders. Each company has to be realistic and admit when these practices are occurring otherwise they are at serious risk of the same or similar outcome.
This type of behaviour reinforces the old adage that “people believe what they see in the halls not what they read on the walls”. This saying alludes to the situation where the culture of a business is driven by the example being set by senior management, not by the mission and vision statements published on the walls.
I have outlined 10 of the most important inventory management tools – how many of them are you using?
If you would like to know more about how their use can improve your operation and most importantly, your profitability, reach out for a confidential chat.
Remember, truly independent advice can provide:
- an honest point of view;
- a proven methodology;
- knowledge of what questions to ask and an ability to put the vendor under pressure to prove their statements of capability;
- support to executives so their risk is minimised.