Most companies have two challenges: too much of the wrong stuff and not enough of the right goods. Knowing where to begin making inventory improvements is not easy. Then, sustaining such improvements sometimes seems impossible. Here are 10 steps you can take to get started.
Step 1: Make sure inventory records are right. How recently have you done a full physical inventory? When your employees go to pick stock showing in the system, are they often unable to find it? Businesses have discovered millions of dollars of working capital that turned out to be bogus when a physical-to-system reconciliation was done.Before you can reduce inventory, you have to be sure of exactly what you have.
Step 2: Find the inventory in “black holes.” As a corollary to your inventory-accuracy exercise, be sure all inventory locations are included in your accounting. When inventories get high, odd things happen. 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. Distributed,worldwide warehouses make this more possible, as do consignments without written and carefully monitored procedures for tracking and limiting inventories. To find the hidden inventory, use the collective memory of your colleagues. Once uncovered, make sure the inventory is also part of the official record so it can eventually be eliminated.
Step 3: Identify and dispose of worthless inventory.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: overage, out of spec, etc.If there is no identified demand, bite the bullet and get rid of it.
Step 4: Identify and make plans for nearly worthless inventory. In addition to the obviously worthless inventory described in Step 3, there is usually a large amount of material for which there may be some demand, but not enough to draw the inventory down in a timely manner.Disposing of this material is usually a bit more complicated than for worthless inventory because there is usually more resistance to writing off large volumes.Developing a market for products is the most desirable way of disposing of them. Coordinate with sales to find an outlet—even if it covers only variable cost. It’s better than letting inventory sit idle or having to write off the entire amount.
Developmental products that never quite take off can be the toughest inventory for sales to let go of emotionally.Hope, however, is not a sales plan. The business process should include sales at a set minimal rate within a set maximum time frame. If sales have not developed by the drop-dead date, inventory does no one any good. It should be written off.
Step 5: Consider reasonable rebalancing of geographic regions that can then be analyzed separately. Shifting inventory among over- and under-used warehouses is away to improve inventory turns. Shipping material back from Asia, if it was originally shipped to Asia from the U.S., is probably not going to be feasible in the long run. All warehouses in the eastern U.S., however, might be fair game for evaluating the trade offs of rebalancing inventory.
Step 6: Within a rebalanced region, determine fastest moving SKUs in dollars and days of supply. Since working capital is the bottom line, reducing high levels of a low value item will not be as beneficial as reducing more moderate levels of a high-value item. Hence, identifying the dollar value for each SKU is a necessary first step.Simultaneously, calculate the days’ supply within each rebalanced region based on the average forecast for the next three months.
For the top 20% of your SKUs by dollar value, put together a table of SKU, total dollar value, quantity and days’ supply. Be sure, if there is no demand for the next three months, you enter a large number (e.g., 999) instead of zero as the days’ supply. Sort the table in descending order of days of supply. If the days’ supply for all of these items is higher than, say, twice their production cycle, plus lead-time to the most distant warehouse in the region,continue. If not, reduce the list to just those for which the days’ supply is higher than the value.
Step 7: Evaluate days’ supply by individual warehouse within the rebalancing region. With your remaining list,look now at inventory by individual warehouse. Again,recalculate dollars and days’ supply based just on demand for that SKU at that warehouse. Is there far too much in one warehouse but far too little in another? If so, consider the cost of relocating the inventory versus making more for the under-stocked warehouse. If the costs are right,rebalance the stocks (at least within your working model)before continuing.
Step 8: Take a lesson from the Hippocratic Oath: First,do no harm. The easiest way to reduce excess inventory is to stop making more of it. Let sales bring the inventory down.Check your rebalanced list against production schedules to ensure you’re not making, or planning to make, more of already overstocked material. Alter plans and schedules accordingly. Then, update future inventory projections.
Step 9: Evaluate alternate ways of selling inventory,especially if you’ve rebalanced the inventory within your warehouses and still find excesses that cannot be brought down to reasonable levels within an acceptable time period. For these SKUs, consider other ways to move the material: Can the material be converted to something tha tdoes have demand? Offer a promotion. Turn an inventory problem into a marketing opportunity by offering your best customers a slightly reduced rate if they buy double their normal monthly amount.
It is true that this strategy will merely move demand from one month to another. If, however, the need to bring down working capital is great enough, this can be a viable option. Can an excess SKU be repackaged economically into a needed SKU (say, bags to boxes)? Better yet, can customers be enticed to take their second choice (i.e., the original) package?
All such possibilities must, of course, be measured for cost-benefit trade offs, including the message you inadvertently send to the marketplace. Nonetheless,knowing where your excesses are provides options for what to do about them.
Step 10: Make the ultimate sacrifice. If, after analyzing all the possibilities above, you still have certain inventories vastly in excess, you may have to consider just writing them off. “Vastly in excess” will vary by business and how critical it is that your working capital reach a certain target by a certain time. Inventory cannot be managed in a vacuum.Writing off inventory means a hit on earnings. If it must be done, it is best done at the beginning of a quarter, so earnings impact will be revealed in time for the business to do what it deems appropriate.
No one wants to scrap good inventory, so the most important lesson is not to get into that position in the first place.
Jane Lee, vice president of supply chain solutions, oversees the ongoing development of Supply Chain Consultants’(SCC, Wilmington, Del.) expertise in all aspects of supply chain planning,independent of software. The above 10steps are part of SCC’s Zemeter Inventory Planner, which keeps detailed records of inventory history. It allows customers to see developing trends and control issues before they become problems.Contact www.supplychain.com for more information.