Some clarifaction is necessary. Notes from the recent earnings call Q&A:
What’s important is while I don’t think that we’re going to have another grand announcement on cost reductions this year. I think what you will see and what we’ll be able to talk about as the quarters click off is a continual improvement in some of our core processes. One of the things we’ve talked a lot about is reducing cycle times inside our organization.
A really good example is we used to order from most of our large vendors once every 12 weeks, essentially once a quarter. We’ve already compressed that cycle time from 12 weeks to four weeks. Four weeks isn’t the right number, its either two weeks or one week but four weeks is a lot easier and a lot better to deal with than 12.
As we do that the ability to take additional inventory add as we compress safety stock and obviously it’s easier to forecast four weeks out then 12 weeks out. You’ll see some inventory improvements but you’ll also see some operating cost improvements as we’re only handling the product once rather than two or three times.
David Weiner – Deutsche Bank
Obviously you’ve been cutting inventories pretty substantially. Can you talk about what impact that has on your credit line availability, I think your total line is over a billion dollars but as you cut inventories how does this impact the amount that maybe you can actually borrow?
I think the key thing here is we look at the productivity of the inventory. If we’re taking inventory out we’re taking out inventory that quite frankly we own. So it allows us to recapture cash flow and improve our overall liquidity position. What we’re doing with inventory and Ron described it as getting smarter in terms of the replenishment, how frequently we order, how we order our front list.
We’ve sped up our return channel back through the returns process from our stores this year. Quite frankly just getting to a point where you’re improving the overall optimization of that inventory and quite frankly good things come from that in the cash flow and the liquidity standpoint.
The reduction in inventory expense is not just a function of "not carrying books" but one of a more 'just in time' inventory system. It is also clear from the comments that Borders intends to further reduce this time between orders another 50% to 75%.
The inevitable error that occurs when ordering once a quarter is that excess must be requested to avoid shortfalls. There is almost no way to avoid it. By increasing the frequency the cash flow consequences are hugely positive and the inventory levels that must be carried at any given point are dramatically reduced.
Disclosure: Long BGP