If you search the internet for the phrase, “smartest person in the room,” you quickly will see this anonymous quote:
“If you are the smartest person in the room, then you are in the wrong room.”
Good advice. But it diminishes the fact that SOMEBODY has to be the smartest person in the room. Here is why that somebody should be the one who is responsible for managing your company’s inventory and purchasing.
For this article, we use the terms “inventory management” and "purchasing" to refer to the process of deciding what sellable items get purchased, in what quantities and when. These terms are not to be confused with “warehouse management,” the processes of receiving, handling and storing inventory in a warehouse and picking/packing/shipping orders.
For the typical industrial wholesaler-distributor, “inventory” competes with “accounts receivable” as its largest asset, as shown on its balance sheet. (People are our greatest asset” is not accounted for on a company’s balance sheet.)
Take, for example, five publicly-traded U.S.-based nationwide industrial distributors. These companies have annual sales of $ billions. The charts below show the value of inventory, as a percent of all assets, for these five companies.
For all five companies, inventory represents between a quarter (24 percent) and one-third (37 percent) of ALL assets. For four of these companies, inventory is their LARGEST asset.
Not only is inventory a wholesaler-distributor's largest or second-largest asset, it is probably its riskiest investment, too. Compare the drivers that can quickly devalue one's inventory investment, vis-à-vis one's accounts receivable (A/R):
|Inventory Devaluation Drivers||A/R Devaluation Drivers|
Who manages your accounts receivable? Your CFO? Credit Manager? Perhaps a highly educated person with an accounting degree or advanced degree, such as an MBA? If you are willing to put such talent and “smartness” in charge of one of your two largest assets, why not put equivalent talent and “smartness” in charge of your other largest asset?
That is, shouldn’t the smartest person in the room be responsible for managing your largest, riskiest-to-own asset — your inventory?
How smart should the person in your company who is responsible for inventory management and purchasing be? Consider these talents/capabilities:
- Understands basic and advanced concepts of generally accepted inventory management and purchasing practices; has had formal training in inventory management and purchasing
- Understands how your company’s ERP system calculates inventory replenishment decisions, and knows every field and control in your ERP system associated with inventory management and purchase order creation
- Is really good with Excel. And is proud of it.
Other traits of an effective inventory/purchasing manager
- Likes to solve puzzles. (After all, inventory management is one BIG puzzle.)
- Is humble. (There is not much glory in inventory management or purchasing.)
- Is self-confident. (Willing to say, “No.” Even to a salesperson. And to his/her boss. And even to the OWNER.)
- Works well independently and can be self-taught. (Not many companies have inventory management or purchasing “mentors”)
- Pays close attention to details.
- Cares about data accuracy.
- Is risk-averse (but willing to take calculated risks, based on data, not emotion or over-optimistic exuberance)
- Is a rule follower (Capable of creating and enforcing rigid operational discipline, but comfortable managing exceptions)
One more thing: Because the person at your company responsible for inventory management and purchasing is responsible for your company's largest or second largest, asset, he/she should be one of the most highly compensated persons at your company too. You’re welcome.
Mark Tomalonis is principal of WarehouseTWO, LLC.
This blog was originally posted on WarehouseTwo here.