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10 Proven Ways To Lower Inventory Costs

Posted on September 16, 2011

Screen-shot-2011-09-14-at-1.17.03-PM-300x168Getting your clients what they want, when they want – it’s not a new challenge. The key is to continuously measure your inventory performance and look for new ways to improve. MFG Tray shares 10 common practices that have yielded results for other clients:

1. Base Cycle Stock on Economics: For purchased products, getting a handle on your acquisition transaction costs will either reduce average inventory or allow for reducing purchasing and receiving labor. For manufactured products, if production equipment changeover costs are in a similar state, getting them in place will either reduce average inventory through shorter runs or allow for reducing changeover and receiving labor through longer runs.

2. Lower Inventory Holding Costs: Improve space utilization in leased, contract, or public warehouses (or to minimize or delay expansion of owned facilities) through narrow aisle handling equipment, mezzanines, layout, or more appropriate storage modes.

3. Forecast Routine Demand Forecasting: Using manually edited, naïve, arithmetic / stochastic forecasting models to reduce forecast error will reduce overstock, backorders, and the need for lateral or reverse logistics, holding inventory levels closest to only that required to support the desired customer service level. Editing history to eliminate non-recurring promotions and to compensate for out-of-stock situations is key.

4. Forecast Future One-time Events Based on Past Events: Future promotions and other one-time events can be best forecast from extensive data on similar events from the past. Holding records in a centralized database avoids the issue of the data leaving with the last sales representative. Extending the data format to include not just SKU, retailer, date and lift, but also relative degree of advertising, duration, price reduction, if any number of locations, or other factors, makes the information infinitely more useful for the future.

5. Think Postponement: For parent products from which multiple SKUs can be manufactured, only partially completing manufacturing, placing semi-finished product in inventory, and then completing manufacturing of the final SKUs to order reduces total inventory. In a similar manner, component products from which final SKUs may be assembled can be purchased to inventory and then the final SKUs assembled to order, providing that the time for assembly doesn’t exceed the customer lead time.

6. Reduce Acquisition Lead Times: For either manufactured or purchased product, any reduction in lead time, whether supplier lead time, transportation time or receiving cycle time, provides a one-time, permanent reduction in cycle stock inventory proportional to the throughput level of the SKU and the degree of lead time reduction. In a similar manner, reducing lead time variability and increasing inbound unit-, SKU-, or order-fill rates both increase supply reliability and reduce safety stock inventory for a given customer service level.

7. Implement Joint Procurement for Purchased Products: Joint procurement of multiple SKUs from a common supplier serves to effectively reduce unit purchase transaction costs and thereby reduces both cycle stock inventory and annual purchase transaction expenses. In a similar manner, joint procurement of multiple SKUs from different suppliers located in close physical proximity and consolidation of inbound (LTL) volume to form full TLs serves to reduce the incremental transportation cost portion of purchase transaction costs and reduce cycle stock inventory.

8. Minimize Purchase Minimums: Comparing the total cost of ownership, including inventory holding costs (i.e., not just landed costs) for purchased products’ quoted prices with no order quantity limitations with reduced prices requiring minimum order quantities (MOQs) will help determine if the reduced prices really provide savings. An uninformed purchaser’s interaction:Purchaser: Can I buy _____ at the same volume but at a lower unit cost?
Sales Representative: Sure, we can reduce your cost by __% if you purchase in minimum order quantities of _______ .
Purchaser: Sure, no problem!(When the annual holding cost for the increased inventory due to the minimum order quantity more than offsets the annual purchase cost reduction, the higher unit cost with no minimum order requirements has a lower cost.)

9. Get Downstream Forecasts and Send Forecast Upstream: Hard information on upcoming needs from customers reduces demand variability and forecast error, thus reducing the safety stock required for a given customer service level. Sharing demand forecasts with suppliers is more indirect; however, in the long run it will serve to reduce the supplier’s finished goods inventory and associated costs and, with effective negotiation, yield lower unit purchase prices.

10. Don’t Stock It, or If Some Stocking is Required, At Least Not Everywhere: For a single storage location, manufacturing or purchasing product to order when the acquisition and customer lead time relationships and order quantity relationships allow it is a very direct way to reduce inventory, providing that the acquisition capacity exceeds the potential short-term demand rate. Likewise, in a network of storage locations, not stocking every SKU in every location can reduce both inventory and transportation costs.

SOURCE: Supply Chain Management Review, July 2011