Think You’re an Expert? Think Again!
Few companies have a written record of how and why the inventory and purchasing systems settings are set the way they are set.
Last month Rich presented a webinar on optimizing use of your ERP system along with Mark Jensen from Epicor. The point of the presentation is that most companies only use a fraction of the functionality provided by their ERP system (that’s the software they use to run their business). This observation included companies that are using the most current ERPs, as well as those using what are now called legacy systems that might be decades old.
As part of the discussion, he described a common thread that we have observed where some companies have self-proclaimed experts in their area of self-proclaimed expertise who feel no need to venture beyond what they already know. They resist training. They resist changes in procedures and practices. They scoff at others who ask questions or make suggestions. They become the monkey wrench in the works that blocks new ideas and improvements. They can prevent the proper use of their ERP and in the process reduces the competitiveness of their company. This type of progress-blocking “expert” can be quite dangerous when the world and our industry are evolving so quickly.
Some of the other facets of this phenomenon:
While his resume indicated 10 years of experience, he, in fact, had 1 year of experience 10 times: This occurs in all walks of life and our industry is not immune to its effects. It is critical that companies not measure an individual’s “expertise” in years, but instead measure the progress and increased value that an individual brings to the job through his/her work. This is, of course, much harder to assess, so few companies do a good job of gauging an individual’s progress. Our industry also seems to continue to base many of its compensation levels on years served versus increased contribution to the company and its bottom line. Whenever we hear someone say, “Our inventory management procedures are top notch and cannot be improved,” or “Our cost/price management process is wonderful,” or “There is no ROI for better inventory or pricing work,” we ask tough questions, because in our industry few if any companies have, in reality, reached this point.
My numbers are at the top end of companies in our industry: If you hear this, a possible approach might be to compare the company’s performance to industry metrics provided by associations or buying groups. On the surface, this seems like a reasonable approach but, as they say, “the devil is in the details.” For example, one cocky inventory manager “expert” was bragging about his inventory turns number as compared to the company’s industry peers. However, as we started asking questions about the calculation of his numbers we were told, “That’s what the computer reports.” We asked how the numbers were calculated by the computer and received a blank look. Real experts not only understand what the number means, but also how they are calculated. This allows the expert to diagnose problems more knowledgeably.
For the record, turns should be calculated as cost of goods sold (COGS), from stock, for the period divided by the average inventory for the period. The period used is often a year.
Upon further review, we found two significant flaws in his number:
• The cost of goods sold number used in the computation included directs and special orders that significantly inflated the turns. The inclusion of directs and special orders is incorrect since turns is a measure of inventory turnover. Including sales that were not from inventory increases the top number (numerator).
• The average inventory number was calculated for the entire year by taking beginning inventory value on Jan. 1 + the ending inventory value on Dec. 31 and dividing that total by two. The average inventory number was mathematically the average of the two data points. For most companies, those two data points are not remotely representative of the inventory levels the company really had in order to service their customers. For many wholesalers, the yearly beginning and ending inventory values are at their lowest levels on Jan. 1 and Dec. 31, and not even close to where the inventory is in the heart of the season. The result is that the bottom number in the calculation (denominator) is decreased and thusly the inventory turns can be greatly inflated. We feel that a more accurate average inventory would be the average of each of the month’s inventory levels.
Our self-appointed inventory “expert” either didn’t understand his turns number was wrong, or he did know that it was flawed but didn’t correct it because it masked his mediocre actual performance. Neither of these is good. In any case, this inflated number had been used by our “expert” to stiff-arm any suggestions that he utilize the purchasing features in the computer system instead of his manual, seat-of-the-pants approach to purchasing. Further, this flawed metric had given the company owners a false sense of their performance. It became the basis for their continued use and propagation of the “expert’s” faulty “best practices.” “Why would we utilize the features of our ERP when our turns are so much better than the rest of the industry?”
Think systems, not individuals for critical functions within your company: “If our _____ person gets hit by a bus, we are so _____.” You fill in the blanks, but most wholesalers will relate to the resulting statement. Think about, if your pricing person or your inventory person gets hit by a bus or, on a happier note…for them, wins the lottery, followed by a chorus of that great old song by Johnny Paycheck, “You can take this job and shove it.” Would you be able to gather their notes and written procedures together in order to continue to operate that part of the business without a hiccup? Would the replacement be basically starting over or would your “system” be able to continue forward.
Companies need systems for their key functions: By system, we mean a written set of guiding principles and objectives, set of written procedures, the software, if any, to support those procedures, a process for codifying the key information and smart, well-trained, dedicated people to administer the “system.” Few companies, that we have observed, could move on easily without problems. In our experience, many companies struggle to make the transition work when someone in a key role retires having given 5 years notice. Why? Because most of the company’s experience, expertise and process is in the “experts” head. Few companies have a written record of how and why the inventory and purchasing systems settings are set the way they are set. Even fewer companies, have any notes as to how or why prices are set to where they are set. (Sadly, for some companies the reason there are no notes and no written procedures is that there are no processes to write down…or as one wholesale employee put it, “Come to work, urinate on fires all day, go home…repeat tomorrow.” For the record, this is not a “system approach.”
Do you have the right expert?: One additional thought, when you filled in the second missing word in the above phrase, if your word was “lucky,” “happy” or “fortunate” it probably means your “expert” needs to be changed or changed-out.
So your task this month is to really think about the individuals you have in key roles to determine if they really are the experts that you need in those roles. One of the key indicators, in our mind, is whether they are leading the charge to improve and to build proper systems for the company, or are they the ones who are preventing efforts to improve and grow.
As a side note, remember that, in a previous column, we discussed the need for wholesalers who have moved their ERP to the cloud to have a plan B for when there is an outage. On Feb. 28, one of the largest cloud service companies, considered by many as one of the best, Amazon Web Services (AWS) had a regional outage that impacted several of its services and a bunch of its customers for about 2 hours. Its published statement indicated it was due to a human error at AWS and some problems with the AWS’ restart process. Apparently, its servers don’t go down often (a good thing) but that means its restart procedure was not as good as the company wanted it to be. If you are using a cloud-based server for your operation or your backups, be sure you have a procedure for how you will continue to operate in spite of an outage…or maybe you can just send your team home and let your competition take your business until service is restored. Hopefully, your customers will also be restored when the outage is over. We mention this because some wholesalers seem to think that the cloud is invincible. It is not, plus there are hackers who would love to disrupt commerce in the U.S. For those of you who do not use a cloud-based service, hopefully you have a recovery plan for when your local server(s) or your router dies at the worst possible moment and how your team will operate until the replacement is in place.