A Truck Full of Melons -- Dickeson
Accepting the study results is saying, in effect, that if we increased liquidity resources by accelerated inventory and receivable turnovers and reduced transaction time we still could not expect a reasonable risk/return on the funds released. Even as a profit leader it takes more than five years to recover the cost of capital invested. Doesn't this table clearly reflect the imbalance of productive capacity in our industry?
The rate of return on enterprise assets is not acceptable under any rational circumstances for the printing industry. It is particularly unacceptable today when the rate of change is accelerating in our economy.
Statistics Don't Lie
Isn't it remarkable how statistically close together the average assets and sales of both "Leader" and "Other" firms are on those two measures? It's the average income where the disparity is hardly credible. Average income of "Leaders" is 5.5 times better, as both a return on sales and on assets employed, than for the "Other" companies.
If we look just at the "costs" of slow turns we might value the loss of profitability at the current cost of interest on short-term borrowing. For example, if we decreased our average inventories by $100,000 we've saved costs at the rate of, say, 10 percent—$10,000. But we're not bankers; we're entrepreneurs. We must regard that $100,000 released to us at an entrepreneurial rate of return, an opportunity rate. It should not be less than 25 percent. Invest in nothing related to printing that doesn't appear to return the investment in four years or less! And at that it's only 6 percent greater than the present profit leaders.
The $7.9 million the average printer has invested in resources must yield just under $2 million in earnings. The objective of WOW III is a 25 percent return on enterprise resources.
As Captain Picard, of Star Trek, would say: "Make it so." It will require "right sizing" the business for the market to be served—excess capacity is unacceptable. Inventory will turn over twice each month and accounts receivable will not exceed, on average, 15 days. Non-use and misuse of productive capacity will be vigorously attacked with Activity-based Costing. Internet communications will be developed to optimize the supply chain and compress transaction time.