Renee’s Rule™: What gets measured matters.

June 28, 2009

Every manager knows the axiom “What gets measured is what gets done,” but too often managers overlook key measurements.

An example: When cash is tight, and profits are lagging, managers, boards of directors and lenders often focus on reducing inventories.  Measuring dollar value of inventory and inventory turns can certainly be useful; however, if  there is no report that shows the AGE of the inventory (how old the inventory is and whether or not it is obsolete) and no report that measures stockouts, inventory reductions may produce undesirable, unintended consequences.

When a company holds old or obsolete items and reduces the size of its inventory, the dollars tied up in inventory do decline, but the % of  “bad”  inventory  increases, and the entity may find itself without  materials needed to deliver orders on time and/ or to stock its shelves with the products that customers want.

In addition, if a company does not write down old or write off obsolete inventory (and, yes, this still happens!), the company is inflating its bottom line.  Since financial statements are the scorecard of the business, if financial statements are not accurate, then management’s decisions are based upon misleading information.

Renee’s Rule™: What gets measured matters.