Google's Billion-Dollar Idea

Since its IPO, Google's idea people have rolled out new product ideas at a rapid-fire pace. I'd venture to say that some of the ideas, such as electronically cataloguing reference libraries, will never generate enough cash to justify Google's (Nasdaq: GOOG) current $53 billion market cap. One of the company's more ambitious projects, however, has the potential to one day make its stock look reasonable at $195 per share.

Imagine you're the manager at a local Home Depot (NYSE: HD) with too many lawn mowers in inventory. You're faced with cutting the price, finding another Home Depot with low inventory to take your overstock, or stretching your inventory days until the mowers sell. Regardless of the decision, it costs your store in either lower revenues or higher carrying costs.

Now imagine that solving your inventory problem requires little to no effort on your part. What if your store's computer could instantly notify Google's ad network of an overstock, triggering targeted ads to help quickly reduce your inventory? If successful, this technology would be worth billions to global retailers, who are constantly looking for ways to cut costs and shorten the cash conversion cycle.

According to CFO Magazine's annual working capital survey, released in late 2004, U.S. companies averaged 31.5 days of inventory on their balance sheets in 2003. This means that the average product sits on shelves or in storage for a month before being sold. The gamut ran from industry leader Dell (Nasdaq: DELL), with a three-day inventory cycle, to less efficient companies that ran 60-day or greater cycles. It's the latter group that could truly benefit from Google's new idea.

For example, in 2003, Wal-Mart (NYSE: WMT) averaged roughly 47 inventory days, on $199 billion in cost of goods sold. If the Google inventory service had shaved just two days off inventory carriage, it would have generated more than a billion dollars in additional free cash for the giant retailer. Extrapolate that out to thousands of other retailers and product companies, and the market for this type of efficiency improvement is potentially worth billions.

Corporate America puts a tremendous emphasis on working capital efficiency, with inventory the main focus. Google believes it has the technical expertise to integrate millions of retail products into its vast databases, and promote them effectively around the world. Having seen what the wizards at this tech darling do with search and advertising, I wouldn't doubt them. Nor would I doubt that American companies would pay a pretty penny for this type of service.

For more commentary on working capital, check out the following:

• The $600 Billion Cash Cow
• Dell's Secret Earnings Engine
• Heinz Squeezes Out Results
• Cash Isn't a Cruel Measure

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Fool contributor Chris Mallon owns shares of Home Depot through his private investment partnership.