ISHIDO: Answers to the inventory costs mnemonic

 I got a lot of mail from people who said they had no idea what the hidden costs were for having too much inventory. One person wrote, “I’ve always been allergic to cost accounting.” Today I’ll give you the answers, and I hope the next time you call on prospects or clients whose inventory appears to be too high, you can provide some more interesting insights about how this is costing them money.

The mnemonic ISHIDO:

Interest on the investment:  This is the obvious first answer.  Either there is an opportunity cost because the company could be earning interest on the money tied up in inventory, or it is paying interest on a working capital line of credit to finance the inventory.  Less inventory, better interest position.

Storage:  Inventory has to be stored somewhere and that means the expenses associated with warehousing, including heating and cooling the building to protect the product.

Handling:  Those guys who wheel around on forklifts?  They earn salaries and are paid benefits. Less inventory, less handling expense.

Insurance:  The product must be insured against loss by fire, water or other unforeseen event, and insurance is expensive.  Since insurance costs are estimated based on inventory value, less inventory equals lower premiums.

Deterioration:  When I was a manufacturer our inventory was primarily paper and plastic, and it was very susceptible to deterioration from both heat and moisture.  If you aren’t careful about flow, you will end up with slow inventory turns, prolonging storage time and making the product vulnerable to deterioration.  Businesses whose products are very short-lived, are geniuses at inventory storage and yet they still agonize about getting it right.  Think of the produce section of a supermarket.

Obsolescence:  One year I was at a trade show and the guy next to me was the regional sales manager for Success Calendars. I learned a lot from him about seasonal pricing.  There is no greater example of the power of obvious obsolescence as the calendar or date book business. Next year if you need to buy a calendar real cheap, go into Barnes & Noble in late January.

Now that you’ve read the answers and can commit ISHIDO to memory, can you picture yourself saying to a prospect, “We took a look at your inventory turns, which are much higher than your industry average.  As you know, excess inventory is associated with a number of costs that are not at first obvious.  We believe there are six costs to you that you may not have considered and I’d like to review them with you.  They are…”

Then you tell the prospect, “At our company we recommend an annual internal audit of your inventory in order to help you assess your true position, improve your income statement and give you a more reliable balance sheet.  This also helps us gain a truer financial picture of your company so that we can help you in the best way.  What are your thoughts?”

Your intent is to add value as a financial professional and focus on things the customer should be worried about.  Are your competitors having these kinds of discussions with your clients? I hope not.

 Think Like Your Customer

Fable Friday: James Clavell’s “Shogun,” Ishido, Mnemonics and inventory costs!

Here’s a helpful story for all you commercial or corporate bankers out there, plus a little quiz at the end to see if you’re on top of your game.  This is tricky to follow, so bear with me.

Back in the 70’s I read all of James Clavell’s novels, beginning with Shogun in 1975, the first in his Asian series.  They were beautifully written books, filled with intrigue, adventure and passion. I couldn’t put them down.  I especially enjoyed the political tactics and rivalry between two of the shoguns, Toranaga and Ishido, and their efforts to gain advantage from the protagonist Blackthorne.  Ishido was particularly hateful and I never forgot his name.

Now fast-forward to the 80’s and I’m in graduate school taking an accounting course, with several years of commercial banking behind me. I was reading a chapter on the hidden costs of inventory, and I noticed that the book had them listed in bullet points with the first key word in bold type. There were six of them.

Because I like word games such as crossword puzzles, quizzes and acrostics, I couldn’t help but notice that the first letters of each of these key words from top to bottom spelled out the word “ISHIDO,” that memorable shogun from the novel.

“Wow,” I thought.  “This is going to be a great mnemonic to remember this list,” and I went back and reread the cost descriptions.  I assume you know what a mnemonic is, don’t you?  You use them all the time:  “Every good boy deserves fudge,” for example, lists the names of the treble clef notes. I’ll bet you know some others, like “HOMES” for the Great Lakes.

In Morton Thompson’s book “Not as a Stranger,” he recounts how medical students used mnemonics to memorize anatomical terms.  “Never lower Tillie’s pants; mother might come home” was a mnemonic to memorize the eight bones of the wrist:  navicular, lunate, triquetrum, pisiform, multangulum major, multangulum minor, capitate and hamate.  (There, I did that from memory, so they really do work!)

So here’s where you come in, if you are a commercial banker or lender.  You know that it’s critical to differentiate yourself in a positive way with your customer or prospect and one way to do that is to demonstrate how prepared and knowledgeable you are on financial subjects.

Let’s suppose you’re having a conversation about inventory. Maybe your customer has too large an investment, or turns are far slower than industry average.  Wouldn’t it be awesome to say, “Having too much inventory can be dangerous.  Many people think too much inventory means a less liquid asset, but there are actually six costs associated with inventory.  Let’s just review them, so we can see how you can save some money…” and then you tick each one of them off for your customer.

You think customers won’t be impressed?  Let me tell you that they will be, because I’ve done this and it works.

So here is your quiz.  Using the mnemonic “ISHIDO”, reply here or write to me and list the six costs associated with inventory.  I’ll give you the answers in Tuesday’s blog post.

Meanwhile, if you find this little quiz interesting, send the link to your friends and colleagues who are in the commercial area and see how they do with it. At the least it will get you to think about how dangerous it is to have too much inventory, and at the most it will help you to…

 Think Like Your Customer