I always find this process entertaining.
My mother – God bless her – almost never
threw anything out, even if it had transformed into another state of matter. Fruit
with blue-green fur, soggy vegetables that
you could poke a finger through and meat
that was more frost than flesh were common in our kitchen growing up. Unless
you had to eat the milk with a fork and
spoon, it was still good enough to put on
your cereal in the morning.
Mom wasn’t nuts. She wasn’t cheap. She
wasn’t reckless about our health and well
being. She knew that eventually everything
would either get eaten or thrown out. The
truth is that this stuff just didn’t bother her.
She figured that we had enough sense to
know what was edible, and if so inclined
– which was unlikely – we could run the
rest down the garbage disposal ourselves
with minimal effort. Maybe she subscribed
to the old “If it doesn’t kill you…” adage,
and maybe she wasn’t all wrong. After all,
my brothers and I are still alive and never
had any health issues related to bad food
from home — that I know of.
To be fair to my wife, she’s just watching out for our collective best interest, and
none of us has ever suffered from bad food
at our house either. One thing is certain:
whatever manages to survive the weekly
purge is good quality merchandise!
About once a year (usually during the
Christmas holiday) we also delve into the
depths of the dry goods cabinets, tossing
some of the stuff that hasn’t moved, and
restocking everything else neatly according
to item, shape, size, etc. If we’re lucky, the
fruits of those labors might last until New
So why do I tell you all this, and what
does it have to do with inventory? In case
you haven’t figured it out yet, this is analogous to the way some companies handle
In effect, we have three storerooms. The
refrigerator is our cold storage unit. Our
pantry is the main storeroom for non-per-
ishables. The downstairs closet is our sat-
ellite for overflow. The shelves, racks, and
compartments contain outside purchased
materials (groceries), in-house manufac-
tured items (freshly prepared recipes), and
even some used materials (leftovers).
Like many companies, we don’t have
assigned bin locations, nor do we try to
maintain a perpetual inventory, which
occasionally results in misplaced items and
unplanned runs to the store (emergency
purchases). I’ll readily admit that we also
have quite a bit of non-stock material,
such as seasonal supplies, occasional-use
cooking utensils, and other essentials that
take up quite a bit of room. Unlike many
companies, however, we routinely review
our obsolete stock, and sometimes have to
make tough decisions about what to keep
and what to get rid of, primarily due to
Also, unlike many companies, we have
very low carrying costs. My wife may be
amusingly entertained by my Charles Atlas
impressions, but doesn’t pay me, so my
labor is free. The incremental expense of
maintaining and insuring our “storeroom”
space is almost negligible, and our ener-gy-efficient refrigerator supposedly runs
on $4 worth of electricity per month. Add
in a couple of cheap garbage bags, and our
total annual carrying cost totals about $50
above what we spend at the store. We haven’t completed our yearly reorganization
yet, but all told I would estimate that we
have about $1,000 worth of groceries scattered throughout the house, so our carrying
cost percentage is roughly 5 percent.
But what if we had to report our grocery
inventory as an asset on our tax return and
pay another 10 to 15 percent of that $1,000
to local, state, and federal officials on a
quarterly or annual basis? What if we paid
for our groceries on a credit card with a 20
percent annual interest rate and could only
make minimum payments on our monthly
bill? All of a sudden, our 5 percent car-
rying cost percentage would be more like
35 to 40 percent, and we would be paying
an extra $350 to $400 per year out of our
pockets to keep the same supplies on hand.
In today’s economy, that could be enough
to make some people cut back on their
purchases, and we would probably take a
much more critical look at our inventory.
Even my mother would probably start
throwing stuff out!
Fortunately, this is all hypothetical
for us, so we don’t have to deal with it.
But for many companies, it’s fact. The
annual carrying cost percentages may be
lower – more like 15 to 20 percent – but
the impact is real and tangible. Yet many
materials management and site leadership
personnel are either oblivious to the cost,
or have learned to live with it like my
mother learned to live with freezer burn.
Instead of buying what they need, they
buy what they want. Instead of monitoring
turnover, they simply monitor “service”
(as measured by level of complaints).
Instead of routinely reviewing obsolete,
expired, and damaged inventory, they
lament about lack of space. All the while,
accountants, risk managers, and others
write checks to cover these indiscretions.
Just like the cost of our groceries doesn’t
stop at the checkout line, the cost of your
inventory doesn’t stop at the receiving dock.
So as we head downstairs to rummage
through our stockpiles of broth, tomato
paste, crackers, etc., now might be a good
time for you to head to your raw material
and MRO storerooms, take a good hard
Doug Wallace is a materials management expert at Life Cycle Engineering
( www.LCE.com) with over 25 years of
combined experience as a manager and
management consultant. You can reach
Doug at dwallace@LCE.com
Like many companies, we don’t have assigned bin locations, nor do we try to maintain a perpetual inventory, which occasionally results in misplaced items and unplanned
runs to the store (emergency purchases). Unlike many companies, however, we routinely review our obsolete stock, and sometimes have to make tough decisions about
what to keep and what to get rid of, primarily due to space considerations.