Muda, Cash, Mark Cuban and Your Business

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I recently heard that billionaire Mark Cuban’s answer to the savings problem created by low interest rates is to buy huge quantities of “staples” such as razor blades, soap and toilet paper.  His concept is based on quantity discounts and inflation edging out interest earned on cash.

In case you don’t know, Mark Cuban is a self made online media, billionaire.  According to Forbes magazine he is worth 2.4 billion $ and is number 206 on Forbes top 400 list.  By the way, he owns the Dallas Mavericks NBA basketball franchise.  It is fair to say that Mark probably has a large house (mansion or 2 or 3) and lots of available cash in case of business downturns or personal emergencies.

Mark can spend lots of money on whatever he likes with little real economic risk.  So spending thousands of dollars on razor blades etc. is no threat to him.  Mark Cuban can afford the waste of excess inventory…..

BUT CAN YOUR BUSINESS?

I can remember back two recessions, I was working with a client who was told his primary raw material price was going to go up at least 10% soon.  Based on that information huge quantities were purchased.  The amount far exceeded the normal storage space so they “made it fit”, in other words crowded the plant making everything more difficult to accomplish.  With six months inventory on hand, sales began to drop.  With the lower demand they now had nine months inventory on hand.  With sales down they had a cash shortage……and it became necessary to extend the credit line with the bank (our friendly neighborhood bankers are less and less inclined to do so these days).

In short, the decision to buy large quantities of a critical raw material increased operating costs (motion, transportation and waiting were exacerbated), cash flow was reduced to a trickle causing some layoffs that otherwise may possible have been avoided.  In addition, company morale and the continuous improvement effort took a huge hit which took years to return to it’s previous state.  In short, this simple decision negatively impacted the “favorable environment for continuous improvement” the company had work so diligently to create while costing the company a lot of money.

You are not Mark Cuban, you do not have extra cash laying around to buy extra “just in case inventory to save money in a period where interest rates are not keeping pace with inflation.

The muda of excess inventory is real.  As Henry Ford said back in 1914 “Ordinarily, money put into raw materials or into finished stock is thought of as live money.  It is money in the business, it is true; but having a stock of raw materials or finished goods in excess of requirements is waste — which like every other waste turns up in high prices and low wages.”  Raising prices is not an option for many of us these days so that leaves low wages as the primary outcome of excess inventory

2 Comments

  1. Geoff

    You mention the company had been years into a continuous improvement process prior to making the poor inventory purchase decision. Had inventory management not been a part of their improvement process planning, or did they ignore their planning and analysis in a “knee jerk” reaction to the announced materials price increase?

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