We were invited in to assist with the layout for a new plant. It seems that they needed more space to bring in additional products. In seven months we’d freed enough space, in the existing facility, for all additional production, plus 10,000 sq. ft. to spare.
Another client had just acquired a $40,000,000 line of credit. They were looking to acquire some other companies that would complement their business. In six months we’d freed up $52,000,000 in tax free cash via inventory reduction. In eleven months, it totaled $90,000,000. $150,000,000 in two years. This was in addition to cutting lead times by 35% and missed deliveries by 75%. Cost savings exceeded $20,000,000/year. Needless to say, they never used their line of credit!
In our twenty-three years of serving the manufacturing and distribution industries, we’ve had three clients that have generated in excess of $150,000,000 in cash via inventory reduction.
Is this the exception? Of course it is! But 30-40% reduction of inventory, within the 1st year, is commonplace. Two recent clients, one with 27 direct employees, the other with 50 directs, both generated > $1,500,000 in cash from the reduction of active inventory, and >20% of freed up floor space. See Lean Manufacturing Results.
When done correctly, the transition to lean, via permanent inventory reduction, is almost always more than self-funding. In 95% of our clients, the transition to lean funded all consulting fees, tooling and capital costs, in-house costs of training, etc. and was still a significant net cash generator
In Part 2 of this series, we’ll explain how inventory reduction forces us to improve our entire operating process. For now, suffice it to say that every company would rather have their cash and space utilized it a way that generates a return, rather than in inventory which COSTS us money.
One extremely well respected client of ours estimated that their true cost of carrying inventory exceeded 4% per month (almost ½ the value of the inventory itself, every year)!
Even a conservative carrying cost of 1%/month is more than many companies generate as a return on their capital! If your current capital equipment justification process does not provide credit for inventory reduction, you might want to take another look at it. For most manufacturing and distribution companies, inventory reduction is, by far, the fastest, cheapest, least painful way to generate cash!
Side Note: You might also want to take a look at our Cost of Inventory Real-Time Calculator. Plug in your company’s actual numbers and the calculator will graphically illustrate what your inventory is costing you. It can be a real eye opener!
Our article, Inventory Reduction part 2, deals with using inventory reduction to drive continuous improvement.
Good luck on your journey to World Class operating performance. Enjoy the ride!