Issue link: https://www.e-digitaleditions.com/i/540646
14 FEDA News & Views continued on page 27 I f one of your warehouse employees walks past an item lying in the middle of a warehouse aisle, do they pick it up and put it in its proper location? Do they pretend not to see it? Do they feel they are too busy to deal with it? Do they kick it out of the way? The answer to these questions pro- vide a good indication of what your employees think about your inventory. For any distributor to be successful, its employees have to see the direct rela- tionship between inventory and their paycheck. Well-known industry consul- tant Gordon Graham says that inventory is cash in a different form—and it is. Furthermore, inventory must be trans- formed back into cash (through sales) for the company to have the money to pay its employees. You cannot be suc- cessful (or perhaps even survive) unless all of your employees understand this relationship. You can see if they understand this concept by giving them a little test. Let them consider the following sce- nario: Joe works out in your warehouse. He's never been what you call "neat." His motto is serve the customer quick, and don't let anything get in your way. Joe doesn't think twice about flinging boxes out of the way to get to the item he wants. The path of destruction he leaves in his wake earned him the well- deserved nickname "The Tornado." It's probably not surprising that Joe occasionally (once a week or so) breaks something. And, it probably won't shock you to learn that some of the material that Joe "flings" out of the way is some- times never seen again. In fact, Joe loses (or breaks) $100 dollars worth of mate- rial a month. What does the company have to do to make up for this loss? Many people would respond that the company would have to sell an addition- al $100 worth of material and that the $100 cost may be worth the speedy ser- vice Joe provides the customers. This is incorrect. Material losses, whether from theft, breakage, or misplacing warehouse stock, must be paid for with profit dol- lars. Profits are the company's source of income; the money left over after it pays all of its expenses. If a distribu- tor's net profit before taxes is four per- cent (a respectable number for most distributors), the company has a four- penny profit for every dollar of sales. The replacement material has to be paid for out of this four cents on the dollar. Therefore, to make up for Joe's mis- takes, the company doesn't need $100 in new sales, it needs $2,500! Here's the math to prove it: $2,500 x 4% = $100. Four percent of $2,500 is $100. If we change this equation around slightly, you get a calculation that illustrates the true cost of lost merchandise. Do Your Employees Understand the True Cost of Lost Material? By Jon Schreibfeder jons@effectiveinventory.com Value of Lost/Broken Material Net Profit before Taxes Additional Sales Needed To Make Up for Lost/Broken Material If you divide the value of the lost material by your company's net profit before tax, you get the amount of additional sales you need to generate to make up for the loss. Let's apply this formula to our example: $100 .04 $2,500