Why Is My Inventory Still Bloated? Part I
By Jon and Matt Schreibfeder
We work with many clients setting the replenishment parameters for stocked items to achieve the goal of effective inventory management. That is, to meet or exceed their customers’ expectations of product availability with the amount of each item that will maximize net profits. But occasionally, even after we set optimum replenishment parameters, a client will still find themselves with a bloated inventory. There are two common reasons why this frustrating situation occurs: large quantities of committed inventory and large quantities of uncommitted non-stock products.
This article will examine large quantities of Committed Inventory
Most ERP computer systems will “commit” or “reserve” quantities of products once they have been ordered by customers. This reduces the “Available” quantity (On-Hand – Committed) of each of these items and prevents this stock from being sold to another customer. In most cases the order will soon be shipped or delivered, and the customer billed for the material. When this occurs, both the On-Hand and Committed quantities of each shipped/delivered item is reduced.
But what if the order is not immediately shipped or delivered?
• The committed material will remain in the warehouse gathering dust. It cannot be sold to another customer or used for another purpose.
• Buyers may order more of each of the products because its Net Available Quantity (On-Hand – Committed + On Replenishment Order) has fallen below the Reorder Point or Minimum Stock Level
To prevent this from happening, best practice is:
1. to review all orders with committed stock each week.
2. If an order cannot be immediately shipped or delivered, the responsible salesperson or customer must specify a shipment date. Your management must agree to hold the committed material until that date.
3. A report of committed inventory beyond the anticipated shipment/delivery date should be presented to management each week. Information for each item should include:
• Cost per Piece
• Extended Cost
• Due Date
This report should be able to be sorted in two ways:
• Ascending order by due date. That is, the item with the oldest due date listed first.
• Descending order by extended cost. The overdue item in which you have the most money invested is listed first.
Again, management should assert pressure to get the committed material moved…. that is, delivered or shipped to the customer.
Next month, we will examine quantities of uncommitted non-stock inventory