It's Not Luck - Eliyahu M. Goldratt [83]
Now it’s clear. It is a big problem.
“Because this offer gives the shops an incentive to drop inventories,” I explain. “Susan, how much inventory are the shops holding now, and how much do they need to hold for proper visual display plus reasonable stock? Don’t exaggerate in the amount of backup stock, remember, according to your suggestion we are going to replenish them on a daily basis.”
“This does not mean that they will immediately realize that we can do it, but a fair estimate is that they’ll be able to reduce their inventory by half. Maybe a little more.”
“Which means,” I quickly translate it, “that launching this offer will translate to about two month’s lost sales for us?”
“It will be compensated somewhat by their orders to cover for shortages, and hopefully by shops that we can attract to us, shops that right now we aren’t doing business with. I think that the drop will be closer to one month rather than two. That’s roughly the size of the bullet we’ll have to bite.”
“Can we afford it?” Bob asks innocently. As if he hasn’t been worrying about this problem himself.
“I don’t know,” I hesitate. “We already took one shot this year, the finished goods inventory reduction. It was a big one. Almost ten million dollars. What we are talking about here is even bigger. Almost two months of lost sales will increase this year’s losses to unbelievable numbers. I don’t know how I can pass it by the board.”
“But this will guarantee that next year and the year after, this company will register record profits,” Don tries to argue. “Trumann and Doughty will understand it. They are shrewd businessmen.”
“Yes, they are,” I say. They are shrewd enough to realize that if we go ahead, there is no way we can sell Bob’s company this year. Can I persuade them? Maybe.
“I have a suggestion,” I say. “You all go have lunch. I’m going for a walk. You gave me a lot to think about.”
24
Bob’s headquarters are located in the middle of a nice park. The weather is pleasant, the big trees provide almost a pastoral atmosphere. I don’t notice any of it. I’m pacing the narrow paved trails, fuming.
Once again, this devastating, short-term pressure. “Time is money,” I can almost hear Brandon. “Can you guarantee that we will make more than inflation? The credit rating of UniCo is too low. We cannot afford to continue taking such an exposure.” Yes, I know it all. But it’s absurd to give up on such an apparent opportunity.
Maybe I can persuade Brandon and Jim to postpone the sale? I can guarantee making more than inflation. What will be the return on investment if we implement this solution? The investment is giving up on two months’ sales.
Actually it’s not giving up on anything. If we understand that as long as the shops haven’t sold, we haven’t sold, then all this frantic push on the shops takes an entirely different posture. By forcing the shops to hold more inventory, we have simply removed ourselves further from the market. How much inventory do they carry now? Four months? In an industry that constantly releases new product lines, to be four months removed from the market is devastating.
Forget it. For now I have to consider the impact on our books—and on our books, sales means sales to the shops. We’ll lose two months’ sales. How much are we going to gain? According to Susan, we’re probably going to increase sales by thirty percent. Maybe more. I think I can take her estimate as realistic. She is conservative. She is the one who will have to deliver, and she’s been in this business all her life. She knows it inside-out.
Let me use as a conservative number an increase in sales of only twenty-five percent. That’s beautiful. It means that in the long run each year we’ll get an equivalent of three months’ on the two months lost sales. That’s one hundred and fifty percent annual return. Who is talking about inflation? That’s better than a gold mine.
Wait. How long do we have to wait until we reach the long term? I don’t like pies-in-the-sky. When will net sales increase? When shops finish reducing their