Full warehouses, rising revenue or the lowest purchase price do not necessarily mean that a company is performing well. Procurement, inventory and supplier management often conceal tens of millions of Czech koruna in untapped value, alongside risks that only become apparent when production stops or cash starts running short. In this next instalment of “You Ask, We Answer”, we have selected three questions we repeatedly encounter in businesses. Drawing on real-world experience, we explain what often lies behind them.
Why are our warehouses full, yet we are still short of materials?
Because the problem usually lies beyond the warehouse. It lies in the way the company manages its entire supply chain and planning processes. We have often heard: “We have enough inventory to last three months.” Yet a week later, production came to a halt because a single item was missing. That is not a warehouse problem. It is a supply chain problem. Companies often make purchasing decisions based on established habits, intuition or pressure from production, without competitive tendering, analysis, negotiation or holding their suppliers to account.
“Our employees are friends with their counterparts at our suppliers, and surely that is how it should be.” What a dispiriting statement. The result is warehouses full of items nobody needs, while the materials essential for fulfilling customer orders are missing.
One client held inventory worth hundreds of millions of Czech koruna. Even so, the production schedule kept breaking down. When we analysed the inventory mix, we found that a substantial share of capital was tied up in slow-moving items, while the company repeatedly resorted to emergency purchasing for critical components. The owner saw full warehouses and felt secure..
In reality, the company had cash locked up in inventory while facing significant operational risk. How much capital did we release? More than CZK 100 million. Annual savings exceed CZK 80 million. And no, we are not friends with our suppliers’ employees. Personal relationships should not be the reason people do business together. Professional, friendly relationships are welcome, but the business interests of the company we work for must always come first.
A full warehouse does not guarantee a secure supply chain. Often, the opposite is true.
How can a company be growing while cash keeps disappearing from its bank account?
Because growth does not automatically mean more cash. Sometimes it means precisely the opposite. Many companies succeed in winning new customers and orders. At the same time, however, they need to buy more materials, increase inventory, fund longer customer payment terms and cover higher operating costs.
Revenue is rising. Production is running at full capacity. Managers are celebrating. Yet the bank balance keeps falling.
One client’s revenue was growing at a double-digit rate, but the owner felt that the company was getting poorer every month. We eventually found that the main issue was not profitability, but working capital. This manufacturing company, with annual revenue of CZK 500 million, was funding its growth from its own cash reserves. Excessive inventory, long customer payment terms and poorly designed planning processes were steadily draining cash.
Within a few months, we released part of the tied-up capital back into the business without adding a single new customer. Had the company continued on the same path for another five months, it would have gone bankrupt. What changed? Simply better management of procurement, inventory and cash flow.
The lowest-cost source of funding is often hidden within the business itself. You just need to know where to look.
When is a low-priced supplier actually the most expensive?
Almost every buyer can compare prices. Far fewer companies can calculate the true cost of a supplier. A low-priced supplier may offer a lower unit price. Yet that same supplier may deliver late, have a higher defect rate, take longer to respond, require faster payment, offer less flexibility or force you to hold more inventory.
That is often where all the initial savings disappear.
We worked with a company that had spent several years buying a key commodity from the supplier with the lowest price on the market. Management was convinced that procurement was doing an excellent job. Only when we added up the costs of expedited freight, production stoppages, inventory and quality claims did we discover that this “cheapest” supplier was actually among the most expensive.
Since then, we have always asked:
What is the total cost of using this supplier?
rather than:
What price does this supplier charge?
What price does this supplier charge?
These are two entirely different questions.
The price is visible immediately. The true cost of a supplier often only becomes apparent months later.