Last blog post, I shared three steps for a business who is right-sizing inventory. You can read that post here. As I mentioned in that blog, these ideas are mostly from my colleague Jane Lee’s write-up. In this post, we will continue the conversation and talk about the next four steps for right-sizing your inventory.
Step 4: Identify and make plans for nearly worthless inventory.
In addition to the obviously worthless inventory in Step 2 in the previous post, there is usually a large amount of material for which there may be some demand, but not nearly enough to draw the inventory down in a timely manner. Examples include:
Disposing of these materials is usually more complex than with disposing of worthless inventory, if only because there is more resistance to writing off their large volumes. In the case of the first two bullets, developing a market for these products is the most desirable way of disposing of them, especially since they will continue to be created.
Coordinate with sales to find an outlet – even if it covers only variable cost, it’s better than leaving the inventory sitting idle or having to write off the entire amount. For products for which the last customer has converted to another product (a situation which proper inventory management would never have allowed to happen), approach the last customer who used the product and offer a special deal if he’ll use up the remaining inventory of the older product.
As for developmental products that never quite took off, this can be the toughest of the nearly worthless inventory for sales to “let go of.” The business process should include sales at a (set) minimal rate within a (set) maximum time frame; if the sales have not developed by the drop-dead date, then the inventory does no good, and should be written off.
Step 5: Determine reasonable “rebalancing regions” to analyze separately.
Moving inventory among over and understocked warehouses can be a fine way to improve your inventory turns, but shipping material back from Asia, if it originally shipped to Asia from the US, is probably not going to be feasible in the long run. All warehouses in the Eastern US, however, might be fair game for at least evaluating the tradeoffs of rebalancing inventory among warehouses. Steps 6 and 7 assume that you are working on total inventory within a “rebalancing region,” unless otherwise noted.
Step 6: Within a “rebalancing region,” determine highest inventory SKUs in dollars and days of supply.
Since working capital is the bottom line, reducing very high levels of a $0.02 per lb. (or per part) item will not be as beneficial as reducing more moderate levels of a $2.00 per lb. (or part) item. Hence, identifying the dollar value of each SKU is a necessary first step. Simultaneously, calculate the days of supply within each rebalancing region based on the average forecast for the next three months. For the top 20% of your SKUs by dollar value, put together a table of SKU, total dollar value, quantity, and days of supply. Be sure that if there is no demand for the next three months, you enter a very large number (e.g., 999) instead of 0 as the days’ supply. Sort the table in descending order of days of supply. If the days of supply for all of these items is higher than, say, twice their production cycle plus lead-time to the most distant warehouse in the region, continue. If not, reduce the list to just those for which the days of supply is higher than that value.
Step 7: Evaluate days’ supply by individual warehouse within the “rebalancing region.”
With your remaining list, look now at inventory by individual warehouse. Again, recalculate dollars and days’ supply based just on demand for that SKU at that warehouse. Is there far too much in one warehouse while there’s far too little in another? If so, consider the cost of relocating the inventory vs. that of making more for the under-stocked warehouse. If the costs are right, rebalance the stocks (at least within your working model) before continuing.
In the next post, we will conclude this series with the next three steps. After that, we will talk about what to do with all the obsolete inventory that has been identified.