Using Big Data to Turn Gordon Graham’s Inventory Principles into a Game-Changing Strategy!
My history with ECS dates back over 25 years, mostly as a customer, but over the last two years as an employee. The owner of ECS, Darran Vayhinger, and I share a vision on what ECS should offer as an ERP partner: delivery of meaningful results through advisory services, business intelligence tools, products for service organizations, and inventory management. And when it comes to inventory management… Darran and I are devoted disciples of Gordon Graham. But I also believe in the quote by Albert Einstein… “Everything should be made as simple as possible, but not simpler”.
Gordon Graham is the Godfather of today’s inventory management systems and a famous author on the same subject. Whether you’ve heard of him or not, we all benefit from his methodologies. And as with any Godfather, you don’t get there without a “few dead bodies”. It’s hard to believe today, but during the 1960s and 1970s, it was controversial to consider moving from a manual inventory system to managing inventory on a computerized platform. Yet his ideas became the gold standard for inventory management, and he became the king maker for inventory systems over the years. Software developers would seek his blessing or perish in the history of software development. Great ideas withstand the test of time, and I’m interested in advancing Gordon Graham’s ideas so that inventory management will become a killer organizational strategy.
If you’re a business owner, C-suite executive or manager, you’re responsible for overseeing and/or executing the organization’s strategic initiatives. Statistically speaking – and studies show – the chances of any strategic initiative becoming “successful” is extremely low. Yeah… a bit too cutesy, but true. Yet if the extent of your planning results in two competing ideas for purchasing: “have enough inventory” and “don’t have too much inventory”, you need to stop and recalibrate. We’re going to Gordon Graham this thing to the next level. Inventory management is going to become your game-changing strategy!
When it comes to inventory management, today’s computing power, big data availability, speed of change, and unprecedented efficiencies couldn’t have been conceived at the time of Gordon Graham’s reign. Gordon Graham stressed simplification for the purchasing agent because the computations of a high math system aren’t understood. Consequently, the purchaser increasingly deviates from the system’s recommendations with progressive overcorrections. I’ve seen where the purchaser gets lost in the details without keeping sight of the bigger picture. Frustrations permeate through the organization with lost opportunities, overstocked products, and exasperated warehouse staff. And why? “Have enough inventory” and “don’t have too much inventory” doesn’t cut it. It’s not the purchasers’ fault. In fact, if they understand the strategy and their role… purchasers are a secret advantage for the organization.
We know the results from our approach are game-changing, but there’s some math involved as well as organizational discipline. That’s why we believe in working with executive teams to turn inventory management into competitive strategy. And in turn work with purchasers to execute that strategy with purchasing tactics. And finally, utilize powerful tools that provide visualizations for measuring real results. You’ll see the results… it’s that simple.
By utilizing big data along with the foundational principles of Gordon Graham, we develop strategic plans targeting the following areas:
Rhythm, Tempo, and Meter
These are musical terms that we see applied in very successful ways… most notably in sports. When we see an athlete who possesses these traits, their activities appear effortless and unstoppable. They maximize the results achieved given the effort exerted. When a team performs this way, everyone knows their positions and executes. We know it when we see it –and we also know there was a lot of preparation and training involved.
When we translate this into inventory management, the whole inventory process can set the rhythm, tempo, and meter for the organization. Providing flow to the inventory cycle leads to significant efficiencies. Therefore, the effort exerted is efficient and leads to dramatic results.
Working Capital
This is the traditional way we think of inventory management. By lowering the inventory levels, the investment in inventory moves to cash in the bank. In fact, when I was running companies, this was the pitch typically heard from software vendors selling their inventory systems. Their sales approach was basically “How about I give you the system and you pay me a percentage of the savings?”.
My philosophy to lowering inventory levels isn’t as an end goal, but more of a funding mechanism. Even if I convinced you to put inventory management as your #1 goal… it certainly isn’t the only one. In fact, we often add inventory management to our engagements as a funding mechanism for other projects. Inventory used in this manner serves as a hedge to risks that other projects are inevitably taking.
Cash Flow
Inventory is costly when it just sits in the warehouse. It takes up valuable space, gains holding costs, increases insured premiums, and is basically tying up capital. The objective is to turn inventory into cash and begin the cycle again.
By utilizing Big Data, we can increase the cash cycle in clever ways. One method is vendor financed inventory: by leveraging the terms of a vendor, the outlay of cash for the inventory can coincide with or even occur after payment is received from the customers. Although getting paid before outlaying the cash is a bit rare, the idea is to get outgoing and incoming payments in a rapid order. In this case, we’re leveraging the GIFT of terms from the vendor. For this concept to work, the vendor must receive payment on time and not a day over.
Partner with Vendors
Very early in my career, I was accountable to a Board of Directors. It was a good relationship providing guidance to a young executive. There were only a couple of times where I realized I really messed up, one being payments to vendors. It isn’t clever or good strategy to drag payments out; we need your vendors because they are the key to making this system work. When vendors get paid reliably and on time, the ability to partner with them to affect working capital, cash flow, and margin become a whole lot easier. Your purchasers need not struggle with minimum or maximum thresholds and safety stock – instead they utilize techniques that leverage the vendor partnership. And we’ve developed a philosophy at ECS that our engagements need to increase EBITDA at least 1%. I’m telling you… the purchaser can do this single-handedly.
I still have lots more to say on this topic, but the blog is too long already. For a title that references Gordon Graham, you may be wondering about mins, maxes and safety stock. We’ll save this for a future blog, but it does get math-heavy. Ultimately, the idea is to configure the inventory system for strategy, which is the front-end work. Once properly configured, the execution is shibumi: a state of effortless perfection. And last but not least, we visualize and refine the results.
In my upcoming PROCECS blog series, I’ll dive deeper into the following topics and more:
- The History of Inventory Management That No One Will Tell You
- Business Intelligence: Leveraging Big Data and Artificial Intelligence (AI)
- The Benefits of Automating Your Inventory Management System
- How Inventory Can Be a Game Changer in a Service Organization
- An Inventory Planning Guide: Next Steps for Your Organization
- A Service Contract Guide: Turn a Loss Leader to a Profitable Strategic Advantage
- What Keeps You Up at Night: Managing Consignment and Loaner Inventory
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David Gurvis
PROCECS Product Manager
