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.
Control Order Transaction Costs: In the office, use
the computer to generate purchase orders (POs), EDI for
PO transmission, advance shipping notices (ASNs) to reduce
expediting, and historical vendor performance to prioritize
expediting to lower purchasing costs. In the manufacturing
plant, pre-planning; pre-staging of needed parts or materials;
use of special tools or equipment; changeover initiation
prior to completion of the previous run; teamwork and work-division;
maintaining equipment temperatures; and minimizing QA /
QC work all reduce cycle stock inventory. In the distribution
center (DC), pallet manifest-based receiving processes,
counting scales, statistics-based inspection and checking,
bar code scanners for data entry, certifying key vendors
to eliminate receiving functions, and stocking forward storage
locations first and reserve locations second can all reduce
purchase transaction costs and cycle stock accordingly.
3.
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.
4.
Base Safety Stock on Customer Service: Using the appropriate
number of product classes, setting the dividing lines between
each class in the best manner, updating safety stock levels
dynamically, and basing the service levels for each class
on the financial goals of the business all serve to either
reduce safety stock inventory or reduce out-of-stock situations
and increase revenue.
5.
Use Routine Demand Forecasting: Using manually edited
arithmetic forecasting models to reduce forecast error will
reduce overstocking, backorders, and DC returns from stores,
holding inventory levels closer to only that required to
support the desired customer service level.
6.
Forecast Events: If one-time demand clutters the sales
history, or if one-time demand events are part of the future,
then they need to be taken into account in any forecasting
done-both in terms of editing them from history and in terms
of incorporating future events into the routine demand forecast.
7.
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.
8.
Rationalize SKUs: Removal of inappropriate product from
the product line can be a controversy-ridden process, but
may reduce inventory significantly if handled in a constructive
manner, as follows:
-
Develop consensus on the objective of maximizing profit
-
Develop activity-based costs for each SKU and separate
them into three groups:
- Those
with selling prices that create positive gross margin
- Those
with selling prices that cover their variable cost
but do not completely cover their fixed cost
- Those
with selling prices that do not cover their variable
cost
-
Quantify the sales volume correlations between SKUs, based
on the analysis of both individual orders and aggregate
order patterns by customer
-
Identify the combination of SKUs which maximizes profit
on a fully-absorbed basis
9.
Reduce Lead Times for Product Acquisition: 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.
10.
Implement Common Supplier 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.
11.
Purchase Minimums: Compare the total cost of ownership
for purchased products as quoted prices with no minimums
to reduced prices with minimums to determine if the reduced
prices really provide savings.
12.
Implement SKU-specific Purchase Transaction Costs: Purchase
transaction costs aren't normally SKU-specific. However,
reflecting any extraordinarily low receiving costs associated
with specific SKUs will serve to reduce inventory for them.
The opposite, of course, is also true.
13.
Get Demand Plans from Downstream: Hard information on
upcoming needs from customers reduces demand variability,
thus reducing the safety stock required for a given customer
service level.
14.
Send Demand Plans Upstream: 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, perhaps
yield lower prices.
15.
Don't Stock It: Manufacturing or purchasing 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.
16.
Cross-dock Customer Shipments: With effective use of
joint replenishment, the potential increases in inbound
transportation costs associated with purchasing to order
can be mitigated. Cross-docking customer shipments can facilitate
purchasing to order even when the order quantity relationship
would have otherwise dictated purchasing to inventory. In
a similar manner, aggregating purchase requirements for
multiple DCs into a single order and cross-docking to multiple
DCs effectively reduces purchase transaction costs and reduces
cycle stock inventory.
17.
Keep In Stock, But Not Everywhere: In multiple DC tier
environments, stocking certain SKUs in fewer/upstream facilities
as opposed to more/downstream facilities yields obvious
benefits. Likewise, within a single tier of DCs, not every
SKU deserves to be stocked in every DC.
18.
Extend Payment Terms: When negotiating long- term purchase
agreements, getting the best payment terms at a given unit
price is the most direct way to increase the portion of
inventory funded by the vendor. If improving payment terms
can be coupled with increased turnover, then the improvement
in working capital effectiveness is significant.
19.
Take Advantage of Price/Quantity Breaks: Taking price/quantity
breaks into account when purchasing for replenishment seems
an obvious way to reduce the inventory investment, but seems
to be frequently overlooked. Often this is a result of either
not quantifying breaks at the time of sourcing or negotiation,
not having an effortless way to take them into account,
or through lack of understanding of the impact of purchasing
larger quantities at reduced unit cost.
20.
Transfer Instead of Purchase: When inventory of an overstock
SKU in one location needs to be purchased to replenish inventory
in another location, transfers are a smart way to reduce
inventory. Be careful that additional warehousing and transportation
expenses aren't unnecessarily incurred so the reduction
in holding cost does not exceed the cost to transfer.
21.
Consider Liquidation: Although there will always be
a short-term price to pay on the P&L and the balance
sheet, when it is absolutely clear that the value to be
gained through liquidation-whether through sale at reduced
price, sale as distressed product, salvage, or charitable
donation-is greater than the most optimistic estimate of
future gross margin from conventional product sales, then
liquidation is the best decision.
22.
Try Merge-In-Transit: The concept of in-transit product
merging-where, for example, two things are shipped from
different locations and then married in transit so that
they reach the customer as a single shipment-can be seen
as a technique for reducing inventory if the need for the
customer to simultaneously receive multiple SKUs is taken
as a requirement. If the need for simultaneous receipt is
a given, then the concept eliminates the need for inventorying
the individual SKUs together. To some extent, merge-in-transit
represents an extension of postponement beyond the distribution
center walls.
23.
Get Help From Friends: Collaborative Planning and Replenishment
(CPFR) is an open set of pre-defined business processes
and IT/communications standards created to facilitate collaboration
between supply chain partners. CPFR can reduce inventories
through inventory balance, forecast, demand and other data
visibility and associated collaboration in the planning
area.
24.
Use Vendor-managed Inventory (VMI): With the appropriate
incentives, allowing suppliers to assume the responsibility
for replenishment of your inventory, because of their visibility
into both their own inventory and production schedule and
your demand data, can almost always reduce your inventory.
25.
Implement Vendor Stocking Programs (VSP): Used primarily
for maintenance inventories but applicable to all, VSPs
require a supplier to commit to an extremely high service
level for delivery of specific SKUs within a fixed time
at a pre-defined mark-up over cost. VSPs can reduce or eliminate
inventories for slow-moving products.
