Inventory Turns and Family Missions
“I don’t get it,” said the adult grandson of the founder of a substantial distribution business. Although not active in the business, he regularly attended family meetings. He was talking with a cousin during a break. As a philosophy major in college, he felt that he was headed in professional directions the opposite of business. “Family meetings are supposed to be interesting and fun. A couple of years ago we wrote and adopted a noble- sounding family mission statement. But we’ve spent the last two hours talking about inventory turns and trends in average receivable days outstanding. Boring, boring, boring. What does an inventory turn have to do with our family mission or our family relationships?”
“I think that’s a great question,” responded the cousin. “Why don’t you raise your hand and ask it as soon as we reconvene?” The six family members representing three generations who had executive positions in the company sat before 23 relatives, all owners. They’d discussed the business for two hours, in which they pointed out slightly improved profits achieved on a healthy increase in volume, achieved in part by improving average inventory turns from 6.8 to 7.2, despite a recent slippage in average days outstanding for receivables. “Any questions on the report?” asked the second generation CEO.
His nephew’s hand went up. “What does increasing inventory turns have to do with our family’s mission statement?”
The room was quiet. One person laughed. Then the CEO responded. “I don’t think that Alan was trying to be funny. In fact, I think that’s a great question that we all should discuss. Does anyone have an answer to share with the group?”
Again, there was a period of silence. Then one family member spoke up tentatively: “Well, with more inventory turns we sell more stuff and make more money. And then we can use the money to do good things.”
“Okay, said the facilitator. “Anyone else?”
“Yeah,” chimed in another cousin. “In our mission statement, we promise to be good stewards of resources entrusted to our care. If something is just sitting around instead of being used for good, then maybe we are not being the best stewards. If inventory is turning faster, then things are sitting around less and we are doing a better job of stewardship.”
“Those are both good answers,” said the CEO. “But let me ask another question. How can we improve inventory turns?”
“Smarter buying,” said the Vice President-Purchasing.
“Knowing what our customers want, “said the Vice President-Sales.
“Knowing when and where our customers want their orders and getting it there,” said the Director of Logistics.
“Great systems that facilitate communication, order entry, inventory management, fulfillment and a whole lot more,” said the information technology director.
“The willingness to make smart investments in computer systems, warehouses, trucks and training that permit continuous improvement in many areas including inventory turns,” said the non-family CFO who had been invited to attend the meeting.
“The willingness of shareholders to continuously invest profits back into the business to assure that it can remain competitive,” added the CEO.
So far, the chairman had said nothing. But he was smiling. “In the old days, the challenge was to have what the customer needed. Supply was short. Demand was great and we just got all the inventory we could lay our hands on and at the best price we could get. But things have changed.
“Competition is the toughest its ever been. I never would have believed we could still be in business on the kind of margins we have today. But the customers pressure us every day on prices. Of course, I also never would have believed we’d be this big! Our family mission is to stay in business, and improving inventory turnover is one way to do that!”
“Let me summarize what I’ve heard,” offered the CEO. He flipped on the overhead projector and the family’s mission statement appeared on the screen.
“Our mission statement speaks of family unity and opportunity. It describes the benefits of actively owning and managing a business and the application of three generations of experience in our industry. It pledges that we accept responsibility for stewardship of our resources and wish to be held accountable for leading our industry to find better ways to serve our customers. It says that we take the responsibility for providing stable, meaningful employment to our associates. It says that we expect our enterprises to be managed in a way that produces a better than average return on our investment. And it says we’ll use some of the profits we earn toward the improvement of our community and environment.
“While average inventory turns sounds like an awfully mundane statistic, I think we can see that it ultimately relates to every aspect of our family’s mission,” he explained. “Alan, thank you for your question.”
Alan’s cousin nudged him whispering: “Bet you didn’t expect that much of an answer.”
He hadn’t. And the experience left him with much to ponder. He’d never thought of business as containing so much philosophy. And he’d not considered philosophy to be of much relevance to practical matters like inventory turns. Business, in general, and his family’s business in particular, took on a new light for the 20 year old.
“I think I’m beginning to get it,” he said.