Playing Great Defense

Operational Insights into Defensive Spending Strategies

by
Charlie Smith
Operational Insights Inc.

In the book The Millionaire Next Door, authors Stanley and Danko instruct that in the game of personal wealth accumulation, your offense is the personal income that you bring in, while your defense is how you spend that income. While a high salary is playing great offense, spending that salary frivolously results in a losing score. These concepts are easily translated into what we do in the business world.

Your revenues are your offense, and the way you spend your revenues is your defense.

While having a great offense is obviously important to any company, many overlook the importance of having a great defense. A great defense can significantly increase your bottom line, while a bad defense can consume the revenues and possibly the entire company.

In this article, I list a few key areas where spending can get out of control. I have also included some points to consider as you review your defensive strategy with your team. In future articles in this series, I will give some insights into how to make potential defensive liabilities into areas of great strength.

Managing Inventory

If you have seen the movie Raiders of the Lost Ark, you know that at the very end of the show you are shown a government warehouse that goes on for what seems like forever filled with all sorts of crated goods. While visiting the warehouse of a network marketing company, I felt like I was in the middle of that movie. It seems that the company had problems over the years figuring out their MRP, inventory, and warehouse management software, so they made sure that they bought enough material to keep them from getting the dreaded backorder. In order to do this, they just kept adding on to their warehouse! When I got there, they had over 250,000 square feet for a product line that should have required well under 100,000. This company was generating so much cash and growing so fast, that they threw money at the inventory until they ran out of cash.

Every item in your warehouse should be looked at as a pile of cash that is doing nothing for you unless it is moving. Worse, any stock that is not moving is also potential cash that you can't get at. When inventories increase, generally it is because you are stocking up on the wrong stuff, material and products that you don't need right away due to bad forecasting or too high of minimum order requirements. Inventory Management is much more than cycle counting; it is a delicate balance between purchasing, inventory control, and vendor relations.

Points To Consider - Inventory Management

• How much cash do you have invested in your inventory?
• How often do you turn that inventory over as a whole?
• How often do you turn your inventory over product by product?
• Does your team use your expensive MRP system, or do they use an Excel spreadsheet as a workaround?
• Do you have a plan to reduce the dollar value of your inventory?
• Do you have minimum order requirements that force you to keep several months worth of inventory?
• Have you worked with you vendors to hold some of your inventory for you until it is needed?

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About the Author:

Over the past 15 years Charlie Smith has had the opportunity to work for Fortune 100 and 500 firms, as well as privately held multi million dollar companies. His various positions have included; COO, Vice President of Operations, Vice President of Global Logistics, Director of Manufacturing, Director of Engineering, Director of R&D, Electrical Automation Manager, Maintenance Mechanic, and the guy in the "Rat Suit" at Chuck E. Cheese.

With collegiate degrees in Electrical Automation and Robotics, Technology Management, and an MBA from Brigham Young University, Charlie has a great breadth of secular knowledge to go with his global experience. He has honed his skills in logistics, supply chain, and manufacturing operations working for companies such as Dannon Yogurt, Wyeth Pharmaceuticals, Unicity International, and Young Living.

Charlie's brand of wit and humor, combined with his common sense approach to operations, allow him to communicate with every level of management and line personnel. He has a very positive personality and the ability to inspire others.

An accomplished presenter, Charlie has spoken in front of thousands of people, successfully talking operations without causing a massive outbreak of spontaneous comatose amongst the audience. He has been published in Controls Engineering magazine, and is a regular contributor to the Direct Selling News.

Charlie resides with his wife Christi and their five children in American Fork, Utah.
Website: http://www.operationalinsights.com
E-Mail: csmith@opinsights.com
Phone: 801.443.1084