Banks unknowingly encourage COPQ in client organizations

Inventory COPQ - Qimpro

Educational institutions teach us that inventory is required to run an organization. This inventory is broadly classified into three categories:

  • Raw material
  • Work-in-process
  • Finished goods.

As we all know, inventory management requires space, systems and man-power.

We also know that banks are pleased to accept inventory as a collateral for issuing a short-term loan to an organization. They probably believe: More the inventory, safer is the bank.

As a Qualitist, I question this risk taken by any bank. I believe, inventory is a manifestation of ‘poor quality processes’. Processes have failures. These failures create waste. The waste, as well as man-hours to correct a failure, is referred to as the Cost Of Poor Quality (COPQ). In order to guard against process inefficiency, we build inventory.

Example 1: We protect ourselves against poor quality delivered by our suppliers, by creating an incoming inventory department.

Example 2: We protect ourselves in operations by building work-in-process inventory because we are not sure of the quality of our internal suppliers.

Example 3: We stock up finished goods inventory because we do not know the needs of our external customers.

All this spells process inefficiency. Inefficiency creates chronic waste. Chronic waste and correction has a cost. COPQ.

Conclusion: Banks unknowingly encourage COPQ in the processes of client organizations.

Remedy:

  1. Banks should abolish the practice of accepting inventory as collateral for short-term loans.
  2. Organizations aiming to manufacture Quality goods need to benchmark The Toyota Way.
  3. The critical skill that every employee in an organization must learn is Structured Problem Solving.

Do you agree?

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26 thoughts on “Banks unknowingly encourage COPQ in client organizations”

  • What a brilliant idea Mr Lulla. Inventory as collateral for short-term loans definitely encourages COPQ. Banks certainly need to look at this from a new perspective.

  • Interesting perspective. Of course it would depend on the value chain and kind of category. But very interesting concept

    • Marzin,
      May I suggest you map the value creation processes (AS IS) from the Supplier Wing to the Distribution Wing.. The COPQ will stare at you. The decision diamonds are your Cuality Control points, and the rework loops your Opportunities for Quality Improvement.
      What if banks audited your value creation processes?
      Suresh

  • This is really an eye opener!!! If it’s brought into practice we can have a super efficient system that would even make people restructure their financial arrangements.

  • Agree with your position. Although an inventory of cash in your pocket gives you a more secure feeling vs. having none.

  • Warehouses also help store inventory and are the best place to measure COPQ. Warehouses also have their own inventory i.e. unsold spaces. 20-30 percent space in US Warehouses is vacant.

    • I had not thought of this before, Sachin.

      In my view:

      I can see an Amazon using a warehouse as an operational requirement.

      Also I can see a mining organization keeping spare parts stored at site to address MTTR

      Hospitals will also need critical life saving drugs

      Etc Etc Etc

      The basic argument is to kill avoidable inventory

  • I do agree that the Toyota systems of efficient functioning are the standard companies must work towards achieving for themselves . Managements of companies should be advised and reminded in the matter by quality experts . However legislation that Banks should not lend against inventories may hurt industry and is therefore not recommended . Banks could consider drafting suitable credit guidelines that would nudge the companies in this direction .

    • Nalini: I recommend that banks audit the value creation processes of potential borrowers, and personally estimate their respective COPQ. An autopsy of sorts.

      Once banks function as Quality Facilitators they will:

      1. Contain their own Risk; as well as
      2. Improve the efficiency of processes for the borrower, thereby reducing COPQ and improving the bottom-line.

      Suresh

  • Very well explained. Sir…
    Does any bank capture and implement learnings to improve and eliminate such ‘root causes’ identified?
    Do they fail to realize that similar actions will deliver same results?
    Inactions will cause chaos…

  • Well said sir. We may also look at the portion of fund deployed by banks in providing working capital loans. In my view, there should also be strict control of Central Bank in monitoring NPAs and bring more disciplined deployment of funds by banks to avoid surprise similar to Jet Airways and like.

  • Dear Suresh,

    Pleasing to hear from you.

    My thoughts are 👇

    Very true and rightly explained about the reasons of building up inventory.

    However is it all due to “poor quality” of business practices or management decisions ?
    Isn’t it prudent to be on guard against possible fluctuations in incoming supplies – due to any eventuality viz delivery time, quality of product & even changing nature of modern day customers although everyone (probably) understand turn-around time from order to delivery in every action ?
    Keeping it optimum or bloated can be attributed to efficient & effective management practices AND that indeed differentiates the companies from being among the Top performing or poorer performing companies.

    Kishansingh Ramsinghaney

    • Ramsinghaney,

      So good to hear from you.

      The reality is that organizations do not perform as an effective orchestra.

      Interdependent processes are out of sync with one another, resulting in the temptation to squirrel away inventory – incoming, operational and finished goods.

  • Excellent point Sir. Banks do see inventory as an asset. They also see cash receivable as a positive to assess loans. This also is a mistake because unpaid amounts for a long time usually turn to write offs.
    Again, thanks for this excellent observation.

  • Yes, I agree. Getting it right the first time does not seem to be on the agenda for many organisations. Though learning and skill development happens partly due to successes and partly due to failures, a casual approach can be very dangerous for growth.

    • Manjula, As you are aware Structured Problem Solving is a critical skill required organization – wide. Employees must be empowered to define and solve problems. .

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