Question

Ok , lets shift focus hard now and really focus on management of a business. As we consider inventory, it is clearly and area where a enterprise has many levers to manage the level and attendant risk. This is because an inventory heavy enterprise would tend to have many types of inventory possibly at different levels of completion. And keep in mind that inventory risk cuts both ways. Too much you risk the price going down and being stuck with high cost inventory, a killer in the tech field or the risk of it simply becoming obsolete. And perhaps it simply sits too long and gets damaged or expires if it is date sensitive like many consumer products. The alternate risk is that too little and you can have supply shortages impacting your customers, supply line shocks due to world wide political issues or even simply a natural disaster, or what we are going through today. Consider that about 8 years ago when the tsunami hit Japan, in addition to being horribly tragic, it greatly interrupted supply chains. Even though most hard drives are made in southeast Asia, a small number of key parts tend to be made in Japan. A hard drive without all parts is simply not a hard drive. It was one of those very rare instances in time when the cost of technology items actually went up due to shortages. You the CFO a company. You are troubled by a few signs. First you are hearing of late deliveries to customers. You note that the budget line for expedited shipments of parts is running over. Revenue seems to be flat when the sales teams are all calling out growth opportunities. The Procurement and the overall supply chain leader have an inventory turn over target of 10 times per year. Keep in mind that for the supply chain leader, 50% of her compensation is for achieving key metrics, one of which is inventory turnover targets. The metrics at a high level look good, she is running just over a 10 turn. But something seems amiss. You send your best analyst to dig into this. She comes back and reports to you that there is an inventory problem. You suggest how so, since all the metrics are being met. She tells you that trouble is brewing underneath the surface. Last year, the sales organization over estimated demand for a high volume product. Procurement over stocked key inventory items for that product. Now those parts are very slow turning being used pretty much for maintenance parts as ordered, but not in new production. To achieve the turnover target, the supply chain head has been driving currently in demand inventory below policy to make up for the other slow moving parts so the average is working out. But the company is doing poorly. Ok, after you "fire" or replace the head of the supply chain and sales perhaps, now what to do to right the ship. There are many options here. I am going to let your imagination loose on what can be done, how to mitigate the risk, are there accounting issues and is there something wrong in the management system and the way people are paid based on selected management metrics. If so how could that be fixed or at least mitigated to prevent this from happening again. There are no right answers here and the solutions are complex. Do your best to suggest ideas. This is one I will talk about briefly in class. While I made up the scenario, don't be fooled, situations like this are not at all uncommon.

Answer 1

Firstly, firing the supply chain lead doesn't solve any problem because technically her 50% of the performance metric is met. The price is determined by the marketing & salespeople so, there is a dynamic between two departments that need to be debunked. In my personal opinion, firing is not the solution.

First, the business part. One thing is clear, the already ordered product that is taking up space, maintenance, and rent need to move out.

1. Order the sales team to push this product into the market by hook or crook by the end of the quarter.
2. The product has already used up resources and time, so, profit might not be a key driver here. If needed, offer discounts or price-cuts on the product.
3. To motivate the staff, offer some incentives to the sales team on turn-over of X amount of the product.

The other problem is the late deliveries and over-flowing of shipment budgets. While most companies out-source logistics, route planning, follow-up, and negotiation is up to the supply chain department. Few things that can be done as the CFO:

1. No-tolerance policy for the logistics department/ agency for late delivery. The fine is to be borne by the agency or be added to the cost of the logistics as a department at the end of the financial year. That cost to be reflected as the bonus point for the whole department.
2. To factor in the uncertainty, suggest adding a few days buffer. Quote a range of possible delivery dates. That way, when you deliver on time, you are on good books of the customer, and if a little late than the expected date, it won't be unprecedented.
3. Sales team: A sales team if sells any product below the allowed price or beyond approved schemes, should be fired and/or fined the amount accruable to the company due to low price.
4. Supply Chain head: Among the metrics, revise the policy to >80% of the products should have 10 times or higher turnover instead of average turnover.

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