Issue link: http://read.dmtmag.com/i/107829
Management education sessions to help them understand the need for change. obsolescence and crisis branches that had 10 percent or above were called anomalies (even though most branches went through a cleansing every few years). Insurance and taxes were undeniable at 3 percent. When the process was complete, we rolled it out to the entire firm. Purchasing immediately shut it down because some parts were not being correctly calculated. The fact that they shut it down so fast (in just three hours) and that so few parts were involved (200 out of 50,000) indicated something more sinister. To find so few parts in a few hours indicated that they knew in advance the process would fail and where but chose not to inform our team. The value proposition for changing the purchasing function had not been established. Education and changes in the compensation system were enacted to overcome the problem. n So the firm would only admit to a 20 percent holding cost ($4 million bottom line, 15 percent cost of capital + 2 percent obsolescence + 3 percent insurance and taxes). We tried to get them to use 40 percent since the numbers we wanted to use were much higher (25 percent cost of capital + 20 percent storage + 5 percent obsolescence + 3 percent insurance and taxes equaled 53 percent, but we backed it down). The result was a weaker value proposition, especially when the sales force would inevitably complain about stockouts for slow moving inventory and branch managers would continue to tout the "uniqueness of their market." After the system got rolling, the impact was impressive. At a 40 percent minimum holding cost, the inventory reduction was providing a bottom line impact of over $8 million (40 percent of $20 million). Management was happy but unwilling to give the system that much credit. They argued that ROI on the redeployed inventory dollars should be no more than 15 percent (the company's Weighted Average Cost of Capital). The research team pointed out that the company would never invest in something that had less than a 25 percent ROI to no avail. The company refused to admit that storage costs ran as high as 20 percent and that they would not close warehouses anyway. The research team pointed out that at current growth rates new warehousing would be needed annually anyway without the inventory reduction. They refused to consider it. Real obsolescence was in excess of 5 percent but managers would not write down obsolete product until a crisis, so the financials on the average branch showed a 2 percent n ("Do Your Best Practices Smoke the Competition – or Burn Opportunity?" continued from page 22) n n So branch managers and sales people chipped away at the process, add a little here at a customer's request, overrule the system there, and soon more than half of the inventory reduction was gone. Then management changed. The new management team brought in their consultants who reviewed the system and decided it was not best practice. They started from scratch with their own model but before they could finish management changed again and new consultants came criticizing the new process. The management team turned over three times in five years due to poor performance. After five years, we got a call asking us what we had done and why the system had been shutdown. We explained but another consultant was chosen. After all, our system didn't last, so it must not have been best practice right? Five years later we got the same call – again – with the same result. By that time, we had implemented the same system with more than 40 n companies that had been pioneered at their firm with resulting inventory reductions of well over $100 million. So what? The firm not only missed out on tens of millions in bottom line profitability by shutting down a working system, they spent millions more on consultants trying to implement something else but never succeeding. It is little wonder that the firm has dropped to less than half its market-leading size and has been merged under a sister company. Enough is Enough Ok, I don't know how much of this is bitterness and how much is my desire to prevent such disasters in the future, but here goes. The key issue was the value proposition. It needed to be calculated in advance of the project (preventing resistance from sales and purchasing), used in the education that followed implementation (increasing success and limiting backsliding), communicated to all stakeholders (cementing achievement), validated and continuously enhanced (to prevent new challengers from wasting resources). Equipment distributors think they are different (because they are) and often feel that this sort of advice doesn't apply to them (but it does). The different business models often don't seem to fit well-known best practices. Inventory stratification is considered only relevant to parts, for instance. New equipment sales are considered part of an investment process to capture aftermarket business. Rentals are considered to be a world unto itself. The reality is, however, that different measurement systems have to be used in conjunction with best practices and those measurements have to be tied to ROI. Utilization rates can measure rentals and be converted to an ROI analysis. Better forecasting models (best practices) can be used to increase ROI on rentals. Aftermarket impacts of new equipment over machinery life can 24 | www.cedmag.com | Construction Equipment Distribution | February 2013 22_Comp_Advantage_Feature_KP.indd 24 1/30/13 3:29 PM