The Goal

80

"But how do we know the value of our finished goods?" she asks.

"First of all, the market determines the value of the prod- uct," says Lou. "And in order for the corporation to make money, the value of the product-and the price we're charging-has to be greater than the combination of the investment in inventory and the total operational expense per unit of what we sell."

I see by the look on Bob's face that he's very skeptical. I ask him what's bothering him.

"Hey, man, this is crazy," Bob grumbles.

"Why?" asks Lou.

"It won't work!" says Bob. "How can you account for every- thing in the whole damn system with three lousy measurements?"

"Well," says Lou as he ponders the board. "Name something that won't fit in one of those three."

"Tooling, machines..." Bob counts them on with his fin- gers. "This building, the whole plant!"

"Those are in there," says Lou.

"Where?" asks Bob.

Lou turns to him. "Look, those things are part one and part the other. If you've got a machine, the depreciation on that ma- chine is operational expense. Whatever portion of the investment still remains in the machine, which could be sold, is inventory."

"Inventory? I thought inventory was products, and parts and so on," says Bob. "You know, the stuff we're going to sell."

Lou smiles. "Bob, the whole plant is an investment which can be sold-for the right price and under the right circumstances."

And maybe sooner than we'd like, I think.

Stacey says, "So investment is the same thing as inventory."

"What about lubricating oil for the machines?" asks Bob.

"It's operational expense," I tell him. "We're not going to sell that oil to a customer."

"How about scrap?" he asks.

"That's operational expense, too."

"Yeah? What about what we sell to the scrap dealer?"

"Okay, then it's the same as a machine," says Lou. "Any money we've lost is operational expense; any investment that we can sell is inventory."

"The carrying costs have to be operational expense, don't they?" asks Stacey.

Lou and I both nod.