I knew companies played games with inventory numbers. Although there’s no rational business reason to do so, a lot of public companies purposefully “drain out” inventory (raw material, WIP, and finished goods) at the end of quarter. The only reason they do this is that Wall Street requires quarterly reports. Companies report at the end of the quarter, so they game the system to look good.
Draining inventory out is an example of “waste of motion.” All of the work required to artificially drain out inventory (and then bring it back in) is clearly “non value added” activity. Companies play games and put raw material on trucks and push it out the dock so it’s not counted by the auditors. They ship crap product knowing they can count the revenue and just fix the stuff later. It’s all a fraud.
No reasonable customer is paying a manufacturer to look good for the Street. This inventory draining adds cost and doesn’t add any value. Anyone with a long-term perspective would realize this waste should be eliminated. I would bet that privately-held companies don’t bother with this waste.
So take two manufacturers:
Company A: Truly lean company, has only 10 days of inventory on hand each and every day of the quarter. They practice level selling and level production, so inventory levels remain the same (if not declining a bit due to kaizen).
Company B: Not a lean company. Normally has 30 days of inventory on hand throughout the quarter. They are experts at squeezing the system dry so they end the quarter with only 10 days of inventory on hand. They also have trouble building anything the first week of the quarter due to lack of inventory, which is “OK” because they make up for it by shiping most everything in the last month of the quarter anyway.
By the inventory metrics, these companies both have about 36 turns. Company A is actually much more lean than company B. Company B normally turns inventory only 12 times a year.
Is Wall Street really fooled by this gaming of the system? Apparently, because it wouldn’t be worth the extra effort to game the system if it didn’t have some positive impact. If you wanted a true metric of company inventory performance, you would try a “random inspection” and take a snapshot at any given point in a quarter.
The WSJ shows us the “secret” that GM plays a similar game with cash. Again, all that Wall Street cares about, it seems, is the EOQ number.
“The company’s cash position is more precarious than some investors and analysts think. It is something of an open industry secret that GM has structured its bill-paying so it ends quarters with close to its peak levels of cash. But at most points during the quarter, it has much less. Toni Simonetti, a GM spokeswoman, said GM pays suppliers on the second day of the second month after delivery, meaning there is a cash outflow early each month. The cash then builds throughout the month, she says. The balance can swing by $5 billion to $7 billion in the quarter. It is a longtime practice and ‘well known certainly among the supplier and investment communities,’ she said.”
Instead of paying bills with a set cycle time (which big companies drag out from 30 days to 60 days to 90 days or longer as they grow more desperate), they batch them and send payments out right at the start of the month. That way, cash is highest at the end of month and EOQ. Does this add cost to GM’s procurement organization? It would be hard to quantify, but I’m sure there are internal costs incurred to make this batching happen.
It’s sad when companies have to game the numbers. That’s not providing value to customers. It’s not lean. Gaming the numbers, the last resort of a scoundrel.
Thanks for reading! I’d love to hear your thoughts. Please scroll down to post a comment. Click here to receive posts via email. Learn more about Mark Graban’s speaking, writing, and consulting.