A participant in one of our October workshops was frustrated. “Management wants me to reduce inventory by 25% and I have no idea how to do it.” I asked how they came up with this figure and he responded, “I don’t know.” Without direction or an understanding of management’s goal, the possibility of success in reducing inventory while still having what customers need is remote.
Instead of dictating that inventory must be reduced by a certain amount or percentage, inventory reduction would have a much better chance of success by approaching the task with three focused questions:
- How much of our current inventory is excess stock? Excess inventory is any quantity greater than an “x” months’ supply – that is, more than you will sell or use in the upcoming several months. Many firms consider excess to be any quantity greater than a six- or twelve-month supply. Note that all of your dead or inactive stock is included in your excess stock value. List items with excess inventory in descending order by the value of excess inventory and work to reduce this stock and to set up a plan to reduce this unneeded inventory.
- Do all slower moving products have to remain stock items? When you stock a product you are making a commitment to have that product available, in reasonable quantities, for immediate delivery. Examine each item that has had sales or usage in three or fewer of the past twelve months. If it is not an emergency repair part (or, for some other reason, it must be realistically available for immediate delivery), can its stock be liquidated? Again, list these products in descending order based on the current inventory value so that you first address those items that will have the most dramatic effect on your inventory investment.
- Do we have excessive surplus stock of the items that remain on our approved stock list? After discontinuing slow-moving products that are not necessary to meet customer or user expectations of product availability, examine the available quantity of the items that remain in your warehouse. Where excess inventory is far more than you need in the foreseeable future, surplus stock, while still more than you need of an item, usually can be reduced through normal sales or other usage. Surplus stock is any portion of this quantity greater than what is required to meet customer or user needs in a time period equal to the sum of:
- The anticipated lead time.
- The normal length of time between stock receipts from the normal source of supply (often called the review or order cycle).
- The safety stock quantity – that is, your “insurance” inventory necessary to protect customer service in case of unanticipated customer or user demand during the lead time or delays in receiving a replenishment shipment.
These three steps should guide you to reducing your inventory investment without harming customer service. They are much more effective that a simple management directive to immediately get rid of “x%” of your inventory. Unfortunately we have seen too many instances where mandated inventory reductions did more harm than good. They caused inventory management personnel to get rid of needed as well as unneeded stock. This led to stockouts of items that customers expected to be available for immediate delivery.
But what if the three steps we’ve discussed don’t provide the inventory reduction needed by management? Next month we will discuss some other things you can do to effectively and intelligently decrease your investment in stock inventory.