Will Bachman: Hello, Mike. Welcome to the show.
Michael Ryan: Thank you, Will. I appreciate the opportunity to be on. S
Will Bachman: Mike, what are some of the most common inventory management challenges that you come across?
Michael Ryan: Great question, Will. It’s typically one of two things. A CEO is getting calls from customers that are spitting mad because they don’t have the right product in stock at the right time or a manufacturing business has so much inventory that it literally creates an iceberg of cash and working capital.
Will Bachman: Interesting. You really built up a name for yourself and a focus on helping clients with inventory management. What type of clients are you mainly serving, manufacturing or distributors or anybody that carries inventory?
Michael Ryan: Typically, it’s manufacturing businesses. I’ve been most successful in the middle market so businesses ranging annual revenue from 25 million up until about 150 million.
Will Bachman: Cool. You get a call, either it’s the iceberg issue of too much inventory or they’re getting out of stocks. What is your approach when you get called in to help out? Do you have a standard diagnostic of things that you look at? Walk me through what you do first when you start talking to a client about inventory management or maybe when you first get on site, what are you looking at?
Michael Ryan: It all begins with a conversation to really get a sense of what the symptoms they are feeling to help really understand in what ways I can potentially be of service. The way I like to describe it is if you imagine an iceberg, the inventory is the portion that’s sticking out above the top of the water that’s above the waterline. That’s what people see and that’s what people feel. Where I work, where my deep dives focus on is everything under the waterline. It’s the people. It’s the process. It’s the systems to identify where things are either disconnected or out of balance. A typical inventory deep dive, it consists of a week of pre-work so that’s data gathering and setting up interviews with the leadership team, a week on site where it’s literally a deep dive.
Michael Ryan: About half my time is spent interviewing people across the business. The other half sometimes it’s spent operationally out on the manufacturing floor or it could be with the people who really understand the nuances of the data. The third week is where I take all the information and synthesize it into the deep dive assessment that says here are your top five opportunities, here’s what they are worth to the business, and here’s the type of resources that you’ll need to execute on those opportunities.
Will Bachman: You shared the two most common big picture classes of challenge, either basically too much inventory or they’re out of stock. As you dive into it, what are some of the root causes of challenges that you encounter?
Michael Ryan: Great question, Will. Ultimately, inventory is an output. Inventory is the result of the balance or imbalance between supply and demand. The two most common challenges I see are, one, where a manufacturer is running for absorption so they’re trying to make as many products as quickly as possible to reduce the per unit cost. On a per unit basis, the item looks profitable. What ends up happening is the manufacturer, I call it, they stuff the pantry so they just load up a ton of inventory. That’s one, overproduction.
Michael Ryan: The second one is where the sales team shall we say over-promises and under-delivers. They say, “Hey, we can sell a thousand of these in the next two months. Build, build, build, build, build.” 60 days go by and they’ve sold 400, and now the business is stuck with 60% of the inventory that was intended to be sold that did not get sold.
Will Bachman: I imagine there’s different aspects to this. One might be that the inventory that’s in their ERP system or enterprise resource planning system may not actually match what’s on the shelves. How do you get involved in doing a check to see if their true inventory that’s on the shelves actually matches what’s in their systems and then doing a diagnostic to figure out if there’s gaps, what’s the cause of those gaps? What are some common causes of those gaps?
Michael Ryan: That is a wonderful question. In one of my first engagements, I sat down with the CEO and he said, “Our inventory is always wrong.” I said, “Okay, well, I need some color. Can you help me understand what that means?” It’s funny. He says, “Okay, I’ll give you some color.” Clickety-clack. He types on his keyboard. He swings his monitor around and he says, “This email is from our biggest customer. Why don’t you read it?” It says, “Peter, you stink. We gave you this PO 60 days ago and you still can’t deliver. We’re going to have to take our business somewhere else.” He explained that he is tired of getting these emails and said, “Hey, can you help us understand why?”
Michael Ryan: Typically, one of the first things I do is I’ll sit down either with the CFO or the controller and I’ll ask for a current quantity on hand from their ERP. This is everything. This is raw materials, work in process, finished goods. I’ll simply sort the list, and I start from the largest negative down to the biggest positive because that’s typically where I’ll see the first signs of something amiss. In this case, this particular client had negative $210,000 of bulk inventory, and it’s physically impossible to have negative $210,000 worth of bulk inventory. It would be the same as me saying I’ve got negative four gallons of milk in my refrigerator. What that led me to was the shop floor to say, “Okay, what are you seeing on the shop floor?” It was a person on the shop reaching on the shelf for raw material and it wasn’t there. You’d look in the ERP and it may say there’s 50 kilograms, but in reality there’s zero.
Michael Ryan: The ultimate root cause was that they were not reporting production. Because they weren’t reporting production, materials weren’t consumed from the system, and it was throwing their system out of balance. In this case, it was people not following the proper production processes to report inventory, which then had a ripple effect of if they don’t have the right raw material, they can’t blend their mix. If they can’t blend their mix, then they can’t ship. If they can’t ship, then Peter, the CEO, gets angry emails.
Will Bachman: Sometimes an “inventory problem” might not actually be inventory. It might be some other issue. I served a manufacturing client where one of the issues was that the bill of materials it turned out was wrong on some things. They couldn’t figure out why they kept running out of certain … being out of stock of certain items. We went into the bill of materials and it turned out that the bill of materials would say for this product, you would only use, let’s say one box, but then in reality, they were using 12 boxes, let’s say for the case. The issue was off so that in reality they were taking 12 boxes every time they produced it but then the system was only deducting one and then they think that they’d have stuff on the shelf but they would run out. We had to go and do a real audit of all the bill of materials for every single product to make sure that they were accurate even just to make sure that we wouldn’t start getting all these gaps whenever you did a physical inventory versus the system.
Michael Ryan: It’s amazing, Will. The bill of material is something that if not set up properly can absolutely lead to repetitive inventory issues. They may be the kind of issues where it’s 50 cents per bill, but if they’re making a million of them per year, it adds up. I had one client, automotive aftermarket parts producer, sitting down with them looking at their inventory. One of the things I saw as I looked at that quantity on hand was, let’s say it was $320,000 of brown craft paper. I asked the controller, I said, “Where do you use brown craft paper?” They said, “Oh, it’s packing material. That’s what we pack our parts in when we ship it out.” I said, “Can you walk me over to where this is stored because I had never seen $320,000 of brown craft paper. I’d like to see what it looks like.”
Michael Ryan: Color just drained right out of his face. He said, “That really should be in the bill of materials and treated as something that gets automatically deducted, but because it was never set up, it’s on the balance sheet, but it never gets relieved. It never gets consumed.” He goes on to say that the year prior, they had to take $250,000 plus right down off the balance sheet because it wasn’t accounted for properly, which is one of the reasons why they brought me in.
Will Bachman: Right, because they hadn’t been expensing it over time. I’ve seen the reverse happen where the client would keep running out of labels because the bill of materials just said one label per product, but there was always some wastage when they were setting up the line or when they were changing the line over. They waste 50 labels or something. They weren’t accounting for that and then they would … After you produce a few thousand things and use up the whole roll of labels, you’re actually using 1.05 labels per product because there’s all that waste. You got to account for that.
Michael Ryan: Exactly. It’s interesting. In the case with the aftermarket parts producer, because they had so many different parts and it meant updating so many different bills, the path that I suggested for him was just make it an expense item. Don’t even put it in the bills because you’re going to have to go and monkey around with 5,000 plus bills and you don’t have any systematic way to do it. In this case, the simple solution was actually the most effective.
Will Bachman: I imagine when you’ve done some physical inventories, you’ve probably found some pretty interesting things on the shelves, things that have been superseded for 15 years or just random pieces of stuff on the warehouse shelves like, oh, we’re saving this because we might need this equipment someday. Tell me some stories of stuff that you’ve found when you’ve been wandering around the warehouse.
Michael Ryan: One of my favorite stories, Will, is what I like to call the blue lagoon. It’s one of those where it was an opportunity that was hidden in plain sight. For me, those are the ones I enjoy the most because it’s things that people walk past every day and they stop seeing. For this client, they had large batches, which were 5,000 liter batches. They also made mini batches in these blue 55-gallon polyethylene drums. They would make a mini batch when something was hot, hot, hot, and we have to get it out the door. They’d make a mini batch. They’d set up the filling equipment to fill up six, eight, 10 one-liter bottles and then they would leave the drum to sit. They would have all these drums. This was a product that had about a six-month shelf life that would basically collect on the floor. They would have, at one point, I think there were up to 44 drums that were partially consumed. What they built into their process is once a quarter, they go out and they’d scrap it. They were literally and figuratively throwing money away.
Michael Ryan: I coined it the blue lagoon to create the visibility to say, hey listen, this one is simple. This is finish what you start. If you make a 55-gallon mini batch, fill it. Fill the whole thing. Whether you put it in gallon jugs, liter bottles or eight-ounce bottles, just fill it. Get it on the shelf. In finishing what they started, we ended up saving the business I’d say on the order of $90,000 to $100,000 a year in scrap. That was an opportunity that was literally hidden in plain sight.
Will Bachman: After you’ve gone through the process of fixing the bill of materials and just figuring out and identifying the root causes for differences between physical inventory versus a system. You cleared that up. One of the common challenges is … To get inventory right, you’re always balancing this, trying to forecast the demand and you don’t want to have … trying to balance it between having stock-outs on the one hand versus having too much inventory on the other. I imagine there’s some real sophisticated math that can help with this, but what’s the 1.0 type calculation that you help clients with to balance that between you don’t want to have too much, but then you also want to avoid stock-outs too often? How do you strike the right balance?
Michael Ryan: That’s a great question, Will. The 1.0 really comes down to process. When I talk about process, process has to have three components. It needs to be definable, predictable and repeatable. Definable in that you can draw a picture of it. Predictable in that you can tell me what’s going to happen next. The third leg of the stool, repeatable, that’s where businesses usually stumble. Repeatable means the same thing happens every single time. When we start talking about process, the 1.0 version is: Sales, tell me what you’re going to sell. Here are the SKUs that make up 80% of the volume. Tell me what you plan to sell over the next 90 days. Literally turning across the table and saying, manufacturing, here’s how much you need to make of what and when over the next 90 days. The 1.0 process is getting sales to commit to what they’re going to sell and then having manufacturing commit to making what sales is going to sell.
Will Bachman: With one client that I served, I’m curious, your perspective on this. They had one raw material or input to their process. It was a particular custom-made plastic bottle that would have a long lead time, four or five weeks lead time to order this special plastic injection molding bottle. They would order a whole truck load at a time. Typically, the demand for the finished product that used this was relatively steady, but occasionally they would get a spike in demand. They’d get two or three times in one month of orders what they would normally get. When that happens, they would run out of all the stock of their bottles and then they’d be stuck because it would take them five to six weeks to get the new bottles in. It would just basically guarantee that the order when they ship it would be late because they couldn’t get the bottles.
Will Bachman: I suggested to them like, look, the holding cost for this, money is so cheap right now. Just go buy a tractor trailer full of these bottles and put them into storage at a warehouse. Just pay to store it for a year. You’re not going to have a lot of in and off the shelf charge. Just store it. You have it locally. When you do get one of these spikes, you can go ahead and take them off the shelf. It costs you 3,000 bucks or something to store it for the year.
Will Bachman: I’m curious if you run into situations like that where demand is generally steady, but occasionally you’ll get a spike, and how companies should think about keeping the raw material inventory on hand for situations like that. How do you balance that trade off?
Michael Ryan: Will, that is a wonderful example. Buying product and storing it is absolutely one solution. If the storage costs are low, that’s probably the shortest putt. Another way to solve that is perhaps my favorite LinkedIn tip of all time that I’m guaranteed to put out at least twice a month, is call your customers in that if it’s steady, steady, steady, blip, steady, steady, blip, and these blips seemingly fall out of the sky. That is a perfect reason to reach out to your customer and say, hey, can you give me some insight on the spikes? Can you help me understand, maybe even help me predict when these spikes are going to come? By opening that dialogue, it’s another feedback loop into the forecasting process.
Will Bachman: You mentioned when we started the show that one of the challenges that you’ll sometimes get called in is when a company has this massive iceberg full of inventory, more than they know what to do with and they’re probably bursting at the seams. What do you do in those kinds of situations?
Michael Ryan: In those situations, most often it’s because a bank has brought me in. The manufacturer, the borrower may have missed a loan payment, may have broken a covenant, and the bank will send me in to say, “Hey, can you please help them look at this a little bit differently?” In those cases, it’s spending time really with the leadership and the supply chain to say help me understand why you have so much inventory. Sometimes it could be, hey, that’s the way we’ve always done it. Other times, it may be because, quite frankly, they don’t know any better. It’s helping them look at it a little bit differently to say, hey, instead of ordering six months of material at a shot, why not order it every 30 days or every 60 days in smaller quantities? Quite often, what I’ll see is a buyer who says, oh, I can get a 3% discount if I buy six months worth of this material, not really understanding that the business’ cost of capital far exceeds that 3%.
Michael Ryan: Sometimes it’s education. Sometimes it’s presenting with solutions to look at it a little bit differently and ultimately saying, hey, if you do X, the value to the business will be Y. Really being very, very clear about the value that they can create, the cash that they can unlock by approaching it a little bit differently.
Will Bachman: Yeah, that’s interesting. The buyer might be getting evaluated based on how much savings they’re getting, but then they’re not taking into consideration not just the financial carrying cost of all that material, but just the physical space. Storing it in the warehouse, there’s a physical cost to just jamming up your factory with all that stuff. That can be a problem of just jamming things up so you don’t have a place to move around.
Michael Ryan: Yeah. That’s one thing. As I’m networking, as I’m meeting new people, “Hey, one of the things to listen for is (a) I’m running out of space.” I need to rent a new warehouse. My first response is, “Whoa, whoa, whoa. Let’s figure out what you have versus what you need to see if you really need to go out and rent another warehouse.”
Will Bachman: I’m curious about the kind of tools that you use to do the analytics and what sorts of systems that you set up for your clients. I can imagine that a very simple system would just be having a straight here is the minimum. When you get below this minimum inventory, I’m talking raw material, go ahead and order this order quantity. There are probably more sophisticated things where you’d be actually looking more dynamically at usage over time. I’m curious. What kind of tools do you use? Is it Excel or do you have something more specialized in that to do all the analytics and then how you hand that over to the client, a tool for them to use going forward?
Michael Ryan: Typically, I try to remain I’ll say system agnostic and leverage whatever system the client has in place. Many times, the client isn’t using the full capabilities of the system. I help them understand in what ways they can use their system more efficiently and more effectively.
Michael Ryan: In terms of the actual analytics, typically I’ll get data extracts from the client’s ERP system and manipulate those in Excel. I’m a process guy so I’ve got a process. I’ve got an approach that I use on all my deep dives with the idea of at some point in the future being able to hand it off to somebody else to do the analytics for me so I can really focus on the customer relationship, the client relationship and maximizing the value for the client.
Will Bachman: Fantastic. For consultants out there that are maybe going in and doing a broader diagnostic of a client, what are some of the indications that we should look for with respect to inventory that would alert us to, oh, this inventory, we got to take a deeper dive here that seems like there’s some issues that either there’s too much inventory or too little. What are some things to look for?
Michael Ryan: A couple of things. Number one is what’s the on time delivery of a business? What’s their fail rate? A business may have a 98% fill rate and their customers may be very, very happy while having entirely too much inventory. The flip side could be true where the fill rates are low and the business still has high inventory, so it’s a question of the inventory mix.
Michael Ryan: One of the first things that I recommend for any business to look at is what I call the inventory splits. Sitting down with the CFO, sitting down with the controller and saying, “Hey, let’s look at your balance sheet. What I’m looking for are your dollar balances for raw materials, work in process and finished goods.” We’ll take those three numbers and make a very simple bar chart to see, which one is the tall pole in the tent, so to speak? If we line up these three numbers and raw material is head and shoulders above work in process and finished goods, it’s an indication of, hey, let’s let’s do a deep dive into raw material. If it’s on the other side of the page and finished goods is the tall tent pole, then it’s saying, okay, let’s do a deep dive to understand item by item, SKU by SKU how quickly or slowly each one of those items are turning.
Michael Ryan: If the tall tent pole is work in process, that typically is a signal that we may not have an inventory deep dive. It may actually be an operations deep dive. A manufacturing business has a bubble of inventory work in process that’s stuck in there in their shop. That’s a signal to dig a little deeper and find out why.
Will Bachman: Got it. It probably makes sense if the business is mostly make to order versus make to stock. If they’re make to order, you’d expect that it would be mostly raw material waiting around; and then finished goods, as soon as you make it, you ship it out the door.
Michael Ryan: Correct.
Will Bachman: Let’s talk a little bit about your visibility building methods. I have been super impressed. I think I first got to know you via LinkedIn because you are the most consistent poster I know on LinkedIn. I don’t know anybody who’s doing a better job than you of consistently posting really on topic, on theme. I see you all the time posting about inventory. It’s original content and not just links. You’ve gotten me to think if I had an inventory management question, you’re the guy that I’d call just because you’re so top of mind. I’d love to hear about how you’ve been approaching that and what early results you’ve seen and how you think about using LinkedIn to raise your visibility.
Michael Ryan: Well, first off, thank you for your kind words, Will. I appreciate it. The decision to post daily came from really two guys. One is Jonathan Stark and the other one is Philip Morgan. I’ve been big fans of them for a long time, listened to both their podcasts on a regular basis. Really it was framed to me like this, that less than 20% of the people are on LinkedIn every day. If you were to post once a week, the odds that the people you want to see it seeing it are actually quite low. Where going from once a week to once a day, now you have five times as many opportunities to reach the audience that you’re looking to connect with.
Michael Ryan: For me, I’m an engineer. I’m a process guy. That math was easy. It’s really about putting out information with the goal of educating and hopefully making somebody’s life a little bit easier. If I can save somebody an hour a day, a week, a headache with the content that I put out on LinkedIn, then to me, it’s really served its purpose.
Will Bachman: How do you keep-
Michael Ryan: Come up with the content?
Will Bachman: Yeah, come up with the content, keep track of your posts. Some people use Hootsuite or something to schedule them all in advance. Do you do them at a certain time of day? I’m curious to hear about all the mechanics around how you go about it.
Michael Ryan: The mechanics for me are, I’d say number one is the idea generation. Most often, it comes from a conversation with a client or a colleague. Somebody will say something and during the conversation that literally will jump out at me and I will scribble it frantically in my notebook. One of my favorite ones besides call your customers is the idea of thinking outside the checklist. That came from a conversation with an accountant who’s a dear friend of mine saying, “Hey, people run the numbers, but they don’t always look at them.” It’s picking up tidbits from conversations.
Michael Ryan: I’ve got a on my phone a little bit list of ideas for future posts. The mechanics are I’ve got a running Google Doc that I keep my posts in, and I will write them out sometimes a day in advance, sometimes a couple of days in advance. Typically, I try to post every morning on LinkedIn and I post it manually. I don’t have anything that’s automated that does the post for me.
Will Bachman: Do you find that the fact that you’re posting daily actually makes you more aware and curious? Does it make you come up with more ideas?
Michael Ryan: Will, by very nature, that’s a great question. By the very nature of me being on LinkedIn daily, it’s helping me see what other content is out there. Sometimes somebody else’s content may trigger an idea. It may be I posted something yesterday, got some really great engagements in the comments and that then spurs a follow on post or a follow on post to that. To me, it’s about finding that balance between, hey, I want to post on LinkedIn. I want to engage with the people who comment as well as commenting and engaging with other people’s posts. LinkedIn ultimately is about contributing. The more I can contribute to other people’s posts, the more I found it’s helped pull visibility into my posts.
Will Bachman: You’ve told me before that you think of LinkedIn as it’s a long game, this visibility building, and you shouldn’t expect just immediate return on investment on your time. What have you seen so far? You’re doing it about six months. When you chat with people, do they bring up, oh yeah, I’ve been seeing your LinkedIn posts recently or have you gotten actually any new projects from it? I’m curious what you’ve seen so far from this experiment.
Michael Ryan: A couple of things. One is I get a lot of feedback. I spent a lot of time in … I’m Cleveland based in the Northeast Ohio community with the middle market. I’ll go to an event. Somebody said, “Oh, I saw your post.” Typically, I’ll smile and I’ll say, “Well, thank you. I would appreciate it next time if you could drop a comment, even if it’s, hey, Mike, thumbs up, looks great.” That engagement really helps spur other people in. I found that there are a of people who look at content, but not everybody is always willing to engage for some fear that they’ll say something wrong or for whatever reason. For every, let’s say 10 comments I get on a post, I’ll run into 30 or 40 people who say, “Oh, I saw that post. I remember that post.” For me, it’s about putting it out there and being very giving and sharing. If people engage, it’s great. If they don’t, they don’t.
Michael Ryan: In terms of finding clients and creating engagement with the posts, what I found is that the daily posting helps me stay top of mind. One example is a couple of months back, a guy I used to work with at Goodyear, who I haven’t spoken with in probably six or seven years, reached out to me because he had an inventory challenge and he saw a post on LinkedIn. That to me is proof positive that posting regularly on LinkedIn is a fantastic way to stay top of mind.
Will Bachman: Yeah, that’s an awesome story. What else do you do with the content? Are you reusing it anywhere else?
Michael Ryan: Each time I post on LinkedIn, it also posts to my Twitter feed, and that’s something where I found it’s a twofer where I can use that same content and have it automatically feed out to Twitter. All the videos that I create, I will also host them on my website. My website, there’s a link at the top that says “Meet Michael” and it’s an opportunity for people to see what I look like, hear what I sound like and get a sense for who I am and what ways I can create value.
Will Bachman: Let’s mention that here on the air. What are the best places for people to find you? Let’s talk about your website, your Twitter. I’ll include your LinkedIn profile URL in the show notes.
Michael Ryan: LinkedIn, I’d say first and foremost, you can find me there daily. My LinkedIn handle is I solve problems, linkedin.com/in/isolveproblems. My website is mryangroup.com. In anticipation of our conversation today, Will, I’ve created a special landing page for Unleashed listeners at mryangroup.com/unleashed.
Will Bachman: That is awesome. We’ll definitely include that link in the show notes. Michael, it’s been a lot of fun having you on the show talking about inventory. Any listener that has a client dealing with inventory challenges, it might make sense to reach out to Mike. He clearly is totally focused on this and has a lotto share on the topic. Mike, thank you so much for joining.
Michael Ryan: Thank you, Will, for the opportunity. I appreciate it.