The Cost of Doing Business?

Many times when I have worked with clients they have trouble justifying the cost of improving their data collection systems either through Bar Code or RFID.  They try traditional ROI concepts and many times they are successful in justifying the cost to management using these old school techniques.  However, I would like to suggest another method.  Ask yourself a question: How much is it already costing me to do business the way that I am operating now?

For example, if a customer calls and is in need of one of your products right now, can your sales staff be 100% sure that they can fulfill the customer need from inventory?  What does it cost you if your inventory is wrong and you cannot ship as promised?  Have you lost a customer or at least made him less than satisfied with your company? Usually however this is very hard to measure objectively. My suggestion, ask, simple huh? Ask your sales people for one month to just jot down when this happens and how much the sale that was lost equaled or worse yet how much that customer used to buy from you.

Another common scenario is that the company has already purchased the inventory and it may be sitting on the receiving dock or it may have been received, but the paper work is sitting on someone in the office's desk waiting to be entered into the company ERP system. So, you have the inventory but your sales people do not know you have it. Another possible lost opportunity since the customer will just go elsewhere to get the item. Again, ask your sales people to document these lost opportunities due to real or imagined stock outs. Sales people hate to document anything, but help them to understand the importance and what you are trying to accomplish. Besides you are only asking for one month!

Many companies are sharp enough to know they have these problems so the way they compensate is to build inventory to excess levels. This is called "safety stock" and by doing an analysis of inventory turns, it can be quickly determined that there is too much in stock and what the cost of carrying it is. Remember to include not only the cost of the inventory, but also the cost of the money, square footage, labor etc. that are incurred by the safety stock.

I once worked with a company that did a complete physical inventory every month. They had four "teams" one person to count, one person to verify the count of the other person, one person to write down the item counted and the quantity counted and a fourth person to check the work of the other three! These guys had a perfect physical inventory every month. But, how much did it cost them? Not only the personnel costs but every month they had to shut down for one to two days. Nothing could be received and nothing shipped. After inventory was done, another "team" of data input staff had to type in the counts and the CFO had to analyze the variances and then get the warehouse teams to investigate each variance. When we sat down and calculated all of the costs involved both tangible and intangible, they decided a new system could pay for itself after just two inventories. That means the receiving and shipping features of the new system were virtually free. Further they were treating the symptom of the disease (inaccurate inventory) and not the disease (inaccurate receiving and shipping).

Speaking of shipping, that one has huge potential for unnecessary costs. Let me relate a personal experience and I bet many of you have experienced the same thing in your role as a consumer. I own an RV and a concrete wall came out and hit the front fender (actually it was my poor driving of the huge beast of a vehicle). I took the coach to the RV dealer and he dutifully looked up the part number and ordered a new fender. When the part arrived, I drove the 45 miles to the dealer unhooked the car I was towing and left the coach.

Later that day (after I was back home) the dealer called and informed me that the part shipped was the left fender and not the right one which was damaged. It would take another three weeks to get the correct part. So, now I have already waited three weeks to get the "wrong" part and now my coach will be down another three weeks. I was not a happy camper (literally)!


The dealer called and said the part was in and the coach was ready. I paid the bill and when I entered the coach to drive home, the wrong fender was inside. I walked back into the dealer and told him. He said "the manufacturer said to keep it that it was too expensive to ship it back! So, let's look at the costs. The manufacturer paid expedited shipping to send me the correct part. They absorbed their cost for the wrong part (I often wander who made that decision). Finally, they created an upset customer. Will I think twice before I buy another RV from that manufacturer?


Here again is where your sales people can help. They are probably going to get the call from their customer that the wrong part, the wrong quantity, the wrong address, the wrong shipping method, missing parts on the order, and whatever else can go wrong in the shipping process. Ask them to just jot down these incidents. Then have someone calculate the costs, expedited shipping, shipping back of the wrong parts, time to deal with the inventory and accounting adjustments and labor to ship the correct part and receive the wrong part and put it away. Finally, remember to include the intangible costs such as customer dissatisfaction or loss of a customer. I think you will be amazed at how much all of these things cost and remember this money you are already spending. After one month add up all of these costs and see how much it is really costing you to do nothing.

What are the solutions to these challenges? Stay tuned……..