Overview

Inventory is a necessary to maintain fill rates when demand and sometime supply are uncertain.  Not all inventory is equal, though, and some straight-forward steps can help plan it better.

A sequential approach can drive improvement as you go

  1. Purge current holdings
  2. Evaluate Order Controls
  3. Evaluate service levels
  4. Optimize

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  1. Purge current holdings

One of the more difficult things to do is turning old inventory into cash.    The old inventory should be address in sequence of increasing difficulty:

 

  1. Look for Substitutions in other products
  2. Return to supplier
  3. Work with customer to take the inventory
  4. Sell raw online or finished goods through a secondary market

If none of these works, writing off the inventory is best.  Management is likely to resist but compare what would be gained in reduced margin against the tax value of the write off.  You should discuss how dead stock is counter to a culture where “things in the DC move”.

 

  1. Evaluate Order Controls

For the candidates, see if the order controls (lead times, mins, and batches) do not fit with the current demand.  Get a business analyst for the supply chain application to help you

  1. Validate supplier lead times in system
  2. Evaluate order controls, apply even rudimentary statistics, e.g.
    1. Min = worst case demand in lead time,
    2. Batches are 2 months average demand for A’s, 6 for B’s, 12 for C’s.

Note: the 12 months demand for C’s seems counter-intuitive.   These levels are set high because small time frames may be below the MOQ and the frequency of ordering makes for too much administrative work.

  1. Look for use of blanket P.O.s with release an opposed to one-time, large quantity buys.
  2. Identify substitution potentials that help in use-up.

These changes will drop the inventory level of over time.

 

 

 

  1. Evaluate service levels

Not all inventory is created equals.  Lower volume inventory is going to have a smaller sample size, so the Safety Stock required is going to get higher.    A 97.5% fill rate is going to be much higher than a 95% fill.

But what if we go with a lower number on “C items”?  The impact on overall fill rate is going to lower, if the customer bases the measure on line-item fill rate or better still, total quantity fill rate.  In these cases, it might be acceptable to use a lower fill rate target

 

  1. Optimize

Now that the old is swept away and the current inventory is coming down, you can turn to your customers and suppliers to see how to collaborate to further reduce inventory.  These include,

  1. Reducing lead times via schedule sharing, blanket PO’s, etc.
  2. Eliminating redundant safety stock between customer, you, and your suppliers
  3. Standardizing parts in products to pool demand and simplify planning
  4. Establishing VMI or replenishment with suppliers

These 5 steps are often best done by outside parties, consultants.  The people who built the inventory up are likely to be vested in the decisions that led to the current level and resistant to corrections.  3rd parties can also focus on the effort and get it done quickly.

 

Investment in inventory is made by companies to enhance their customer service.  Be sure you are placing you bet in the right place and that the math is right.  After that work with your suppliers to take things to the next level.