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