We know it's risky - and potentially boring - to do math in public. But, sometimes it's really important in understanding key concepts in supply chain.
I talk to people all the time that say something like: "Why are you always harping on this accuracy thing? I mean, I understand that it's important - but aren't you being kind of obsessive about this? We've worked really hard with our manual system and we've achieved 95% accuracy - and we're pretty happy about that. What's this 100% Holy Grail stuff?"
So, let's contemplate some round figures for a minute. Let's say you have $1,000,000 (one million dollars) in inventory (and many of you have far more inventory on hand than that - I know we have customers that have over $10 million and some have tens of millions.) Let's assume that you have 95% accuracy. That means that you have $50,000 (0.05 X 1,000,000) of inventory that you can't account for - it's either lost, stolen, damaged, or somewhere in your facility that you don't know where it is - so you can't deliver it to your customer. Sometimes you can find it, but it might cost you more to find it than it costs to buy again when your customer needs it so you can ship it to them.
What typically happens is that $50,000 is eventually charged to your bottom line.
And here's where it gets painful. Let's say that your company produces a bottom line that is 15% of revenue. To make up for $50,000 that hits your bottom line, how much revenue do you need to add? Well, that's 50,000 / .15, or $333,333.33. If you have $10,000,000 in inventory, you can multiply that by ten.
So what's easier - increase inventory accuracy or increase sales by over six times the financial impact of your accuracy percentage?
What do you think about our obsession now?
