The Real Cost of Delayed Action

What would you do if you had the chance to save $2M per year with no capital expense and a payback period measured in weeks? Nothing?

Have you ever noticed how much time we all spend considering the costs of taking action and how little time we spend considering the cost of inaction? That is, the cost of delayed action.

Recently I helped a company identify an $11.4M improvement opportunity. This involved reducing their inventory holdings across a number of sites, without negatively impacting their operational performance. If the cost of holding inventory is 20% of the inventory value per year, in this case, the annual savings in holdings costs would be $2.2M, each and every year!

So, what is the impact if you then do nothing and delay the execution of such a project?

Many people seem to think that nothing happens. Their logic is that the opportunity hasn’t gone away and is still there to be achieved – just as soon as they get started. I’ve even heard people say that it is a bit like cash in the bank that you can realize it when you get around to it. Or that it is a ‘sunk cost’ that has already been spent. In each case, maintaining the status quo seems OK. But that is just not true.

A project that saves $2.2M per year equates to a savings of $190k per month. Logically then, every month of delay in executing this project costs the company $190k in unnecessary and avoidable costs. This is not an accounting ‘opportunity cost’, it is a genuine cost to the company. In this case, inventory is not like cash in the bank it is more like a loan from the bank, involving interest and other payments each and every month until it is paid off.

If this company spent time considering the costs of taking action, the costs of inaction would mount up at the rate of nearly $200k per month. At that rate, they asked the right question: how do we get going sooner rather than later?

Of course many people argue that inventory savings aren’t real, that they are a function of accounting wizardry, or that the savings usually relate to obsolete items and so there is no real cash benefit. Again this is just not true. To demonstrate this here are some examples from other recent projects that I have been involved with:
* $2.0M in savings from completing a consignment deal – a genuine cash saving with ongoing benefits.
* $1.4M in items (in one storeroom) were duplicated and overstocked and were then preferentially used before other items – a cash saving from not re-purchasing the other items until these were used.
* $638k reduction achieved through improved maintenance planning and scheduling – saving wasted expenditure on items that they said would be used ‘one day’ (whatever that means).

These are each examples of real cash savings. In each case delaying action not only delays the benefit but also involves continued, unnecessary, expenditure of cash.

Obviously I don’t know the details of your specific situation and you may not have benefits of the size mentioned above but my question to you is: Have you considered the real cost of delaying materials management action at your company?

Don’t be the company that wastes money by not taking action.

The Truth About Inventory Management Theory

This 2 Minute Tutorial uses both theoretical and real life examples to expose the truth about inventory management theory. Can you handle the truth? Watch the 2 Minute Tutorial video at http://www.youtube.com/watch?v=yV265x1gqyo

Eliminating spare parts stock outs

One of the main fears of most reliability and maintenance engineers is that, at the time of actual need, the required spare part will not be available. This is commonly referred to as a stock out. Thus the goal of many reliability and maintenance engineers is to eliminate spare parts stock outs and remove this influence on total downtime. So how do you eliminate all stock outs?

The short answer is that you can’t do this without tying up massive amounts of money that would be better used elsewhere. Even then, I am not sure that you could guarantee eliminating all stock outs. This would possibly require holding multiple units of every part in your plant. That’s not viable. That’s the truth.

What you can do is accept stock outs in areas where they have little or no impact or where a viable supply alternative exists. Then work to eliminate stock outs for items that really matter. To achieve this you need a considered evaluation and analysis of the likely demand, the data on hand, and the factors that influence these two. Of course we cannot predict all failures, so there is no certainty. However, by being disciplined in your review of the items that matter, and accepting stock outs for those that don’t, you will achieve far better service levels from your spare parts inventories.