A customer with an inventory problem asked me a question yesterday….’I need to reduce inventory fast, what should I do?’ The answer is pretty easy…. ‘Make sure more inventory leaves your warehouses, than arrives into your warehouse…and then make this a major weekly KPI in your business.’
Inventory that leaves your warehouse
Every day we issue inventory from our warehouses to meet customer demands. Hence inventory is always leaving our warehouses. If you want to accelerate this process you can discount, promote or try and find new markets. However, these activities normally focus on the good inventory. It is the bad inventory better known as Excess inventory that is difficult to make it leave your warehouse. But unfortunately by ignoring it, it will just hang around and tie up working capital and use up space. Call the sales guys in, create an Excess Log, assign responsibility and you will be surprised what a little focus can do!
Inventory that arrives into your warehouse
Every day, organisations replenish their inventories. Hence new stock is always arriving into a warehouse. If you want to reduce your inventories, you better make sure you are buying the right amounts of inventory that mirror the drum beat of your sales patterns.
Obviously replenishing new items is very risky as sales patterns are unknown, but for the rest of the more mature items with more predictable sales patterns, it is much easier. In factor to really simplify the problem, there are only 3 major factors to consider…
- What is the expected demand (the forecast)
- What are your cycle stocks (which are largely driven by MOQ (Minimum Order Quantities))
- What are your SS (Safety Stocks) which you hold to protect your availability by buffering yourself against poor forecast accuracy and poor supply reliability?
Predicting demand is extremely important and is the Holy Grail of supply chain planning. The task gets considerably more difficult when you add into the mix promotions, seasonality, customer level forecasts and weather patterns.
Reducing cycle stocks is normally a more medium to long term strategy as this impacts production and is linked to other supply factors outside of your control like long supply lead times and the need to fill container.
However, if you want to reduce inventory fast, the answer lies in focusing on your SS.
Ask yourself this question; ‘How much of your inventory is tied up in safety stocks?’ The answer is normally surprisingly high…50% to 60% depending on the length of lead time. Normally the shorter the lead time the bigger the percentage of you inventory will be in SS?
Then ask yourself these self-check questions to get a sense of how well you are going it….
- How do you set SS?… broad brush; all items get 15 days;
- What factors go into setting SS?… lead time risk, forecast risk, length of lead time, quantity of replenishment, frequency of review;
- Do you use differential Target Service levels?…or do all items just treated the same;
- Do you use different formula for fast and slow moving items?
- When last did you review them?… annually, quarterly?
- Is there a SS KPI in your business that is visible across the global?
Reducing inventory sometimes sounds risky, but if you focus on the basics and build a robust process around it with reliable data, it is not as risky or hard as you might think?