Genius by Osmosis

Sometime ago I was working with an “on-again off-again” client looking at an inventory management system (which I’ll call IMS from here on).  A friend of mine who works in their industry has been working with them for some time as they were fairly new business owners in a volatile service industry where inventory probably only makes up 20% of their total revenue.  They had reached a point where they felt they needed some form of an IMS.  Keep in mind this is a very small business, setting up simple triggers in MS Excel could easily suffice.

I had actually helped my friend with this very issue in the past where we cut their inventory while improving service in a matter of eight months, – so he came back to me and explained what these two partners wanted and to see if I could help.  We all sat down at a Starbucks and starting discussing their issues.  Their presumed solution of leveraging an IMS was derived from volatile spending.  Some months they would spend $1,000 in their inventory and other months they would spend $5,000.  They felt this was due to a lack of inventory management on their part.  They were busy with the service side (more lucrative side) of their business and thought this was an easy solution to a big problem and could build in some consistency to their outgoing cash.

However, after walking through the problem and solution with them, they were operating under a false premise.  They assumed that the volatility was driven from two things:  Their inability to effectively demand plan and that sales were just an “off and on” thing.

While both of these statements were true, these were not why they had a problem.  They had a problem for three different reasons.

• First, they didn’t understand their inventory.  What I mean is they couldn’t tell you which products were their best sellers and which products have sat on the shelf for 3 consecutive months.  This was a significantly larger problem than they anticipated.
• Second, they didn’t have a budget.  They knew how much of their revenue was driven from their front-end sales.  While the numbers were volatile from month to month, they could have easily set a budget based on peak sales or average sales or some other demand based methodology without getting into IMS that would essentially tell them what to buy and when weeks in advance.
• Third, their staff was not effectively selling their merchandise.  They were not trained or motivated to sell.  They told me they tried an incentive program where they were awarded gift cards for reaching some threshold.  Apparently their staff didn’t like the places where the gift cards were purchased.  They didn’t even think to ask their staff (4 employees) what would motivate them to sell.  The reason this contributed to the volatility of their outgoing cash is because during weeks when the owner’s clients would come in they would sell more merchandise than weeks when their staff was more heavily working with clients.

After I walked through this with them I explained that while an IMS could be simultaneously implemented and could solve the second issue I noted above, they needed to make other changes.  Setting triggers so they are flagged can help and was encouraged, but even with triggers, their spend may have been better managed but I guarantee their service level would have decined because the true issues were not addressed around sales training and understanding each product in their mix.

Don’t work under the presumption that a business owner or manager you are working with knows the true problem.  Instead, work with their ideas as hypotheses and do the analysis necessary to either prove or disprove the hypothesis.  While they may not know the real problem that doesn’t mean what they are saying won’t get you there.  Be intuitive, do your due diligence and stay engaged.