“You know what I care about Wharton Boy?”
“Turns! They teach you that at Wharton? I turn a store every 25 days and I pay my suppliers in 90 days. I turn a store three and half times before I have to pay for it. That funds all my store openings!”
Years ago my friend Phil Sugar (”Wharton Boy”) served on a board with the leader of all Wal-Mart stores east of the Mississippi and he was getting a lesson in retail during a break in a board meeting.
I love that story because here is someone who manages massive complexity - thousands of Wal-Mart stores - distilling down to a couple of sentences what really matters in his business. It’s incredible clarity.
So why do brand leaders get themselves into inventory trouble? Why do they lose sight of the value of increasing inventory turns or not prioritize it? It’s easy to dismiss the story above, ‘that’s Wal-Mart. They are notorious for beating up suppliers and paying slow.’ And while Wal-Mart’s inventory turns have come down from 14 per year at the telling of that story to 9 today, a lot of great brands are less than 2 per year. So it’s easy to shrug it off as not applicable.
But I think the real reason brand leaders lose sight of the value of inventory turns is cash flows are non intuitive. Our cash flows have a lot of moving pieces; cycles overlap in time and they are presented in summary form.
Thinking about what the Wal-mart exec said made me wonder if I could isolate and illustrate the cycle in a simpler way. Check out the video below and let me know what you think.
Model shown in video
https://docs.google.com/spreadsheets/d/1t9-BfynJqib2EKMD1KlYXI52DUz3wScfBNSe_E-tp64/edit?usp=sharing