inventory costs

Being able to understand the real cost of managing inventory will assist organisations in implementing the right inventory policy supported by effective inventory management disciplines. The following outlines the components of inventory costs.

Inventory carrying costs is the cost of holding inventory

Ordering cost is the cost of administration activities including order placement & reordering

Opportunity cost is the loss of sales due to being out of stock

how to reduce inventory costs (successful inventory reduction strategies)

Depending upon the type of business and the level of desire to make this change, there are several ways businesses can reduce their level of investment in inventory, releasing valuable capital and finally taking control of their cost to serve.

The first step classify inventory into two categories:

Working capital - inventory that adds commercial benefit to your business.
Non working capital - inventory that adds no commercial benefit to your business.

Listed below are successful strategies that we have implemented in businesses as part of their inventory reduction programs:

Store stock in selective warehouses or distribution centres based on demand/sales profile by customer. Stock that is becoming slow moving should be reviewed and a strategy implemented to bleed the inventory down by instigating a return to supplier program (based on initial agreed buying terms) or centralising C and D class items.

Cross docking shipments direct to customers avoids inventory holding costs and eliminates all warehouse processing costs, which would be necessary in a conventional make to stock environment.

Assess the use of storage modules within your warehouse to determine if space is being fully utilised for static storage, namely pallets, pick locations, tote bays and shelving. By changing the type of MH equipment used, aisles can be truncated to allow for greater space utilisation. Ensure that all costs are taken into account prior to changing rack positions or leasing new MHE.

Postponement, where the final selling product which comprises of components or sub-assemblies is not produced to a finished goods state. By working on improving forecast demand, planners can manually release work orders for finished goods periodically and thus reduce overall stock holding.

Evaluate the range of inventory and determine which items are not to be sourced due to poor performance

Lead-time reduction initiatives can be an effective way to slowly reduce inventory as a reduction from 45 days in transit to 35 days for imported products can make a vast improvement to your stock holding position. This lead-time should be reduced gradually and with caution as multiple stakeholders are typically involved throughout the inbound supply chain and reductions in leadt-ime can have an adverse effect on a stakeholder where delays are experience and the planned leadtime savings are consumed by the delay. Establish upper and lower leadtime threshold control limits and work within these parameters

Re-evaluate the planning settings in your ERP system as a number of these have been set up initially to only support the first cut calculations for safety stock and safety time, probably from the first data migration process. Also, cleanse these settings to ensure that only a single trigger point works for your planning process i.e. safety time as days or safety stock, not both.

Stock rationalisation is a method by which the selling SKU, sourced or manufactured, is evaluated against multiple criteria such as gross margin, sales volume, EBIT etc to determine whether it will remain as part of the business product portfolio.

Improve your demand management process by eliminating item volatility where projections are based on historical data sets and identify clients who may be willing to collaborate and share demand data closer to planned delivery windows. This avoids planned order generation based on historic profile and moves to a firm order policy driven by customer delivery windows.

Classifying your stock into high, medium, slow and obsolete then developing a stock minimisation strategy for each class and category by manipulating the safety stock levels more frequently which will reduce inventory levels in a warehouse, store or manufacturing environment. Ensure that the right settings are applied to your MRP or DRP systems. The level of inventory at stocking points or locations

Close satellite warehouses and centralise distribution where possible. The trade-off between inventory level and cost of distribution (Cost to serve) needs to be established prior to any decision to close sites.

Identify those non selling SKU's and develop an exit plan to reduce the inventory. Warehouse sales are an effective way of depleting and removing stock when the establishment costs are lower that the recovery cost from the sale.

Select a Supply Chain and Logistics Assessment that identifies real improvement.

We offer a range of assessments that are tailored to specific functions within your oganisation that require review. Depending on the scope of works or the scale of your organisation, our assessments are typically completed within 2 weeks of commencement for single site entities. Reference sites available on request.