SLOB

This week, I'm going to talk about that which is, in my professional life, pretty much my favorite thing: SLOB- or slow-moving and obsolete inventory. In a warehouse, when you eliminate SLOB, you free up capital (which makes shareholders happy) and you free up space (which makes you happy). Remember, last installment we talked about carrying costs. Carrying costs are part of what makes the elimination of SLOB "profitable."

You may be wondering how you can have SLOB in your personal life. The reality is that, for most people, SLOB in the home is far more significant (in terms of SLOB on-hand versus overall inventory on-hand) than SLOB in a warehouse. The reason is simple: corporations are well-aware of the cost of SLOB ownership. They literally hire people (like me) to find ways of utilizing SLOB and optimizing on-hand inventory.

As I said at the beginning, I love SLOB elimination, both personally and professionally. My wife and I are planning to build a home next spring, but one contingency I have is that all of our SLOB be eliminated before we move, so that we're not just hauling garbage to the next house to store. Why? Don't these things have value? Yes, they do. But they also have costs. In this case, the cost to move them (logistics) and the costs to store them (carrying). Hopefully you are beginning to see how these principles are relevant to your life.

This is key; if you write stuff down, this is a good note to take: The principles that make corporations successful are the same principles that can make your home successful.

Despite the cries of Occupy Wall Street and the mainstream media, corporations are not evil. To understand that, it's important to understand what makes them tick; corporations have a legal obligation to maximize shareholder wealth, and that is accomplished (in most cases) by maximizing customer value. Therefore, my professional mantra is, "it is my responsibility to maximize customer value in order to maximize shareholder wealth," and I literally make decisions with that in mind.

How do corporations maximize customer value? They reduce the cost of doing business. Oftentimes, people think of reductions in operating costs solely from the perspective of maximizing profits, and while that is true, it also yields the ability to capitalize on a competitive pricing advantage. If Company X can produce their goods at $0.97 per unit, but Company Y can produce like goods for $0.95, they can sell their product for $0.02 less per unit, and still generate the same amount of profit, but at better margins, which makes shareholders happy. Notice how I keep referring to investors as shareholders? I do this to illustrate the fact that they own these companies. We often think of corporations as faceless, inhuman entities, but they are always driven by the people that own them. Why is that significant? Well, it shows us that our homes are just like small-scale corporations.

Most homes have shareholders and stakeholders. My wife and I are shareholders and stakeholders in our home, while our two kids and my brother-in-law (from whom we rent), are stakeholders. Their success is contingent upon our success. With this in mind, we are able to convert my professional mantra into a personal mantra. And though it was a long and winding journey, we have finally arrived at the thesis of this week's topic. We must maximize stakeholder value in order to maximize shareholder wealth. We can now see that optimizing our personal supply chain is even more significant than it is for corporations to optimize theirs.

So that was a lot of back-story, but it was necessary. A great deal of supply chain optimization is found in the lens through which you view your situation. Perhaps you have an old computer that you never use, but you're having trouble getting rid of it because it was $1,000 when you bought it, even though you've bought three more since. When you consider the cost of keeping it, you're only driving that figure up. If the initial cost ten years ago was $1,000, and you've spent $24 per year giving it a warm place to stay, you've now spent $1,240 dollars over the life of the machine. Now maybe you're thinking, "how did I spend $24 per year just holding onto it?" Well, if you've got a 2,000 sf house for which you pay $2,000 per month (and we must factor in utilities, taxes, insurance, and any other costs of ownership, so this is a pretty conservative estimate), the cost to you is $1 per square foot per month. An average PC takes up roughly two square feet, so $2 per month goes toward that PC's storage. Further, that computer probably could have sold for $600 seven years ago (when you bought the first replacement), whereas today, it is completely worthless. Therefore, you've effectively spent $840 to keep this computer.

This is a very petty example, but the cumulative effect of lots of little things can often be greater than the singular effect of one big thing. But speaking of big things, how much does that rusty old truck in the backyard cost to store each month (mom and dad, please don't haul Rusty off; you've got plenty of space!)? Well let's suppose you own one acre of land for $20,000. An average single cab pickup takes up about 200 sf of space (20'x10'), more if you've got it in some sort of shelter. That 200 sf is 0.46% of an acre. $20,000 x 0.46% = $91.83. Therfore, the initial cost of that space was nearly $92, and beyond that, you are paying monthly (in taxes, interest, and insurance on the land) to store it. And because of this example, you can see that storing a PC for the last ten years was likely more costly than storing the old pickup.

Of course, if you already own the land and the house, this isn't as relevant, because idle space costs the same as utilized space. However, in this great land of ours, there is a common theme: as people increase affluence, they acquire more space and then fill it with more stuff. Consequently, they must increase their space to buy more stuff, and then increase their space again. Maybe you've found yourself desiring more space for a hobby studio, to have a BBQ area out back, or just so that you can park your car in the garage. Consider whether increasing your space is maximizing value for your stakeholders. If it isn't, you are likely diminishing wealth for your shareholders (you!). Perhaps the better solution is to eliminate some SLOB.