Wednesday, May 2, 2012

Excess Inventory, Prevention and Reduction

“If I do not have the inventory, then I cannot meet my customer’s demands and they will go to some other place”.

What inventory rationale is used by your organization?  Is there a system or does someone glance at a shelf and magically know that a part needs reordering?  Even if the magic person is rarely wrong, what happens if they get hit by a bus one day on the way to work or takes a maternity leave or extended sick time or disability?  Are the purchasing decisions driven by the sales department, operations, or finance team?

Is your inventory process repeatable?  Can the process be duplicated?  Will any of that special discounted order from your long-time supplier end up sitting on the shelf for a long time or will it be resold quickly? 

Reduction of excess inventory is a tedious, but necessary task.  Excess and Obsolete analysis should be done each year around the time of a physical inventory.  Find out what has not moved and find ways to get rid of it.  The overhead and tax implications of holding on to dead inventory can make this a costly decision, if ignored.  That space could be better utilized for faster moving items.  How much space could be saved if you only carried what you actually sold?

Prevention deserves equal, if not more time than reduction.  Do the prevention part right, of not ordering inventory that never gets sold, and the reduction effort goes away over time.  That does not help you today, but you should be keeping your eyes open in this effort.

Your inventory system does not have to be Just-In-Time (JIT).  Organizations pay a premium for this convenience.  In the case of a Tsunami that happened in Japan recently, those that were dependent on JIT inventory probably took a big hit. 

But, but, but it does make sense to order only what you need based on historical demand and reasonable forecast efforts.  Take into account typical supplier lead times, some safety stock level and you can estimate relatively close an amount to order.  Round up or down a little to match any discount levels to keep you competitive.  Of course this can be difficult in some industries like retail where buyers need to forecast demand for new products months before any demand shows up.

One key step is to identify if any inventory is actually a target for reduction.  Most Enterprise Resource Planning (ERP) systems have sales history and analysis functions.  Make sure historical collection is enabled.  In many industries, history is a predictor of future demand.  If there are a large number of items to be reviewed try looking at them as a group first.  Some systems use a division and/or class to group like items.  Sales history also can give you customer demographic and region or territory view of demand. 

I am not trying to give a detailed or complete review of how inventory should be managed.  There is just too much information to cover in one short article. 

Each organization needs to find what works for their needs.

Each business will have its own metrics to apply.  The point is to make sure the right people are looking at the inventory.  Sales departments want to have everything, every time.  It speeds up their commission payments.  Customers also like it.  And, if your customers are buying what is purchased or manufactured, then you do not have a problem.  If your customers are not buying the product and it sits on the shelf for too long, you are not going to make any money on it.  Better to identify and cut the dead stock.

There are hundreds of methods to forecast and order/reorder.  Each has their benefits and deficits.  Some methods are better for some industries and some are better in others.  What is important is having a system that tracks your inventory and increases its accuracy.  The more accurate your inventory, the better and more profitable your organization will function.    Newer systems provide multiple ways to automate a lot of the data collection and record information.  New systems do not necessarily mean more manpower.  It might just include reallocation of existing resources.

Your business has been running for so many years and you know what you need. 

No one is going to be able to come in and cut your inventory level in half or any other double digit amount.  If they promise that or begin to “tell” you how to run your business, find a way to get rid of them (quickly). 

A more accurate inventory allows management to indentify dead stock inventory.  There are many ways to dispose of this excess.  A more accurate inventory allows better purchasing decisions, which help to reduce dead stock, increase inventory turns, and bolster profits.

What you can expect by using a modern ERP system is slight reductions and increased accuracy of inventory in manufacturing, material handling, inventory control, forecasting and purchasing, to name a few places.  Add up the different departmental savings for a one or two percent reduction of inventory levels.  That coupled with increased accuracy and you lay the foundation of a good Return on Investment (ROI).

Dolvin Consulting uses it expertise and industry contacts to work with your team to identify areas that can be improved through the use of automated systems.  You probably already have a feeling that things are not right or could be better.  Maybe you would like an independent source to confirm you are already doing the best you can with the budget and resources available. 

We do not know who you are, so you must take the first step and contact us.  We do not bite.  We consult.  We have a mutually vested interest in your success.  Both of our livelihoods depend on it.  Pick up the phone, email us, or fill out our contact information and see how we can help.  Do it now!

1 comment:

  1. It is a good one to consider in terms of getting what we are eager to learn in terms of proper documentation of stocks and inventory.

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