In this three part blog-post, I want to give some helpful hints to inventory planners in terms of right sizing inventory. Please note that I used the phrase right-size, not reduce. This is because unless you are running a 100% make-to-order business, you will need inventory to meet the customer’s expectations. That is how the business makes money; by meeting customer’s needs in a timely fashion. Inventory allows us to do that.
Inventory can be explained as a by-product of the imbalance between supply and demand. Too much supply not accompanied with appropriate demand will leave you with excess inventory, forcing you to find ways to get rid of it, often at discounted prices and even at a loss. On the other hand, too much demand will make you run into stock-outs, which can result in unhappy customers, resulting in loss of customers and market share over time.
The ideas in this blog post expand on the theme presented by Jane Lee in a white paper. This can be downloaded from the Cutwater website
So, without further ado, here are the first three things you can do about inventory.
Step 1: Make Sure the Inventory Records are Right.
How recently have you done a full physical inventory? When your warehouses go to pick stock that’s showing in the system, are they often unable to find it? Your inventory accuracy needs to be close to 100% to ensure that you are getting the most from the working capital being charged to you. Some businesses have discovered millions of dollars of working capital which turned out to be bogus when a physical – to – system reconciliation was done. So before you can reduce inventory, you have to be sure of exactly what you have!
is a more detailed post on the importance of accurate inventory records by Chuck Intrieri.
Step 2: Find the inventory that’s in “black holes.”
As a corollary to your inventory accuracy exercise, be sure ALL your inventory locations are included in your accounting. When inventories get high, odd things happen that wouldn’t happen in normal circumstances. For example, an additional warehouse or storage facility,
perhaps one not recognized by your order entry or ERP system, may be pressed into temporary service. Too often, this “unrecorded” inventory location is forgotten altogether (out of sight, out of mind). Distributed worldwide warehouses make this all the more possible, as do consignments without written and carefully monitored procedures for tracking and limiting their inventories. Find all these hidden “holes” (use the “institutional memory” in your colleagues’ brains) and make sure they are part of the official record so they too can be eliminated.
Step 3: Identify and dispose of worthless inventory.
I think most of us have gone through the drill of moving things further and further back in the refrigerator (or the basement) before finally throwing it out. Typically, this is done in the hope that someday we will use the stuff we are saving. Well, here is the deal. Worthless inventory does not improve with age. Material can be defined as worthless if it has no identified demand (including consumption). Inventory can fall into this category for a number of reasons:
- Over age
- Excessive rework (e.g., would take 3 years to “rework” – by which time you know you will have created more rework).
- “Heels” (partial boxes left – over at the end of a lot)
- Obsolete Raw or semi-finished material no longer needed because of a bill – of – materials change.
- Earlier “formulas” of a developmental product that now uses a different formulation.
If there is no identified demand for it, bite the bullet – get rid of it
Next week, we will post the next three things you can do to right-size your inventory.
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