The cost of inaction

When money is tight, people save. This is an intuitive reaction shared by many companies and private individuals. But saving alone does not guarantee success. You can also save in the wrong way and make your financial situation even worse. Much like a car driver who ignores maintenance to save money and later has to pay high repair costs, companies are faced with the challenge of weighing up between action and inaction. Given the current challenging times, it is often overlooked that inaction is often far more expensive; this is especially true for inventory management.

In difficult economic times, many companies are under great pressure to reduce their costs. This pressure means that project or investment decisions are often postponed. The focus is placed heavily on the direct and immediately visible costs of action. The introduction of new technologies, staff training or the modernization of processes first cost money before they bring in money and are then often postponed to the future.

For example, IT investments are postponed in order to save on license costs for new software, and consulting projects are not tackled in order to save on consulting fees. On the one hand, this saves money, but in the medium term, high maintenance and compatibility problems arise or business objectives such as customer satisfaction or a reduction in capital commitment are not achieved.

Some of the costs of inaction are realized later, when the consequences – such as high repair costs or customer losses – have already occurred. For another part, the costs of inaction are not recognized, even though they are reflected in the annual financial statements in the form of increased costs, lower income and tight liquidity, because the poor figures in the annual financial statements do not allow conclusions to be drawn about the actual causes.

Especially in the supply chain environment, we repeatedly encounter this second effect. For years, hundreds of thousands of euros in costs have been dragged along that were not necessary or millions in potential liquidity sunk. But nobody at management level pays much attention to this because they have been carrying around this rucksack of costs and tied-up capital for a long time.

The cost of this inaction in the medium term is increasingly eroding earnings, which are sometimes masked by sales successes. But increasing sales quickly becomes difficult, especially in difficult economic times.

I worked in corporate restructuring for many years and found myself in the same situation time and time again:
Out of fear of the costs of taking action, people chose not to act or tried to solve an identified problem internally until the situation was so bad that they could no longer afford to act. In practice, it is much less often sales problems that drive a company into insolvency than the erosion of earnings due to cost increases.

My experience from restructuring projects has taught me that you have to prepare for the bad times in the good times and should therefore never allow “maintenance backlogs” to build up in your own operational infrastructure, operational organization and operational efficiency. When the going gets tough, there is neither money nor time to solve the problems.

In Germany, companies in many sectors are now doing badly and many, not just some, will not be able to make up the maintenance backlog as quickly as would be necessary given the situation.

What needs to be done now is to first invest where the greatest returns can be generated in the short term and where the greatest liquidity can be gained. And that brings us to a core area of supply chain management: