ShmoopTube

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principles of finance. a la shmoop. planned obsolescence:the dumbest idea in

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history. all right well for many companies

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inventory is a huge part of their asset base. it comprises a giant share of their [boxes stacked in a warehouse]

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capital or financial resources. it's a mess to manage all that inventory store

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it track it and God forbid return it to its manufacturer if something goes wrong.

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well think about the production nightmare called the car industry in

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1970. back then some geniuses created this thing that would become the death

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of the dominance of the American car in the world. it was called planned

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obsolescence and just like it sounds the manufacturers who actually graduated

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colleges and earned degrees purposely made cars suck. huh? were they spies

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planted to destroy the evil capitalists from the West? no they were homegrown. the

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financial managers at the time had the arrogance that the US auto industry was

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so powerfully dominant that nobody in the world would ever catch up and [men in suits think they have great ideas]

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compete with us. we had so much room ahead of the Japanese Korean and German

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car makers that while we could afford to make our cars worse. the problem with

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American cars at the time? while they were lasting too long. instead of a 10 to

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12 year cycle from birth to death the managers of GM Ford and the others

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thought that if we created cars that died after 6 or 7 years, well then people

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would be forced to buy more of them or rather buy them more often, and you can

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bet that the legions of mechanics Midas muffler shops and other repair

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areas were delighted with this notion and highly supportive of planned

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obsolescence. unfortunately the US managers who made these decisions didn't [auto mechanics rejoice]

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get out much, at least not to Japan or Korea. and you know what happened?

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look out the window over your parking lots. see only American cars out there?

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yeah not so much. well the rest is history because yada yada yada foreign

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competitors smoked us a decade later with cars that were reliable cheaper and

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lived for decades. the Japanese manufacturers were relentless in their

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process of managing inventory, and unlike the environment in the US

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where the supply of parts and services was a free-for-all highly competitive [men in a factory putting parts together]

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market ,in Japan things were much more organized and cooperative. one magic

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bullet invented by the Japanese in this era was this whole notion of

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just-in-time inventory or JIT. the basic idea was that instead of storing 5000

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sets of car tires in an assembly factory that would last three months, get lost

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cost warehousing cost infrastructure space etc, JIT manufacturers would store

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a dozen sets. the tires would sit 20 feet from the car and each day the tire

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distributor would bring a new load. the tires arrived just in time to be

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installed. that way if demand suddenly changed while the factory wasn't left [truck delivers tires as needed]

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with 2000 sets of tires that fit a car nobody wanted to buy anymore. adjustments

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to inventory in JIT manufacturing happened daily if not hourly, so mistakes

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were dramatically minimized. JIT is a lot of things but for our purposes it's just

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that: great inventory management. think about what this adjustment then does to

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the metrics we've laid out so far. if sales are 10 billion dollars a year in

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our inventory costs just went from two and a half billion to 250 million, our

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turnover went from 4 X to 40 X. and more importantly think about the 2.5 billion

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dollars of inventory - the 250 million of inventory equals two point two five

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billion dollars in capital that would have been used to just own that

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inventory. well now it's freed up. suddenly we get a whole lot better

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management as massive excess capital and the ability to build new products and [professionals smile at each other]

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build new features and buy supply chains and buy competitors and market and throw

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a really big Christmas party while the whole nine yards. well the combination of

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planned obsolescence mapped against foreign innovation like just-in-time

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inventory encoder industry in the 80s. you know at least today we have Tesla. [fancy car pulls up]

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[scream]

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