How to Effectively Reduce the Inventory in Your Supply Chain
by Joe LaMantia and Ron Quick
When properly managed and kept lean, inventory is a crucial asset for your business. However, excess levels of inventory and poor strategy to manage it results in your inventory quickly becoming a significant – although avoidable – cost.
Tying up working capital in surplus stock is simply not an efficient business practice. Let’s consider some common roadblocks to effectively reducing inventory, methods for working around those obstacles, and the many benefits of a lean approach to inventory.
Reasons why your company may have excess inventory on hand
While every business is different, there are a handful of common reasons why companies tend to keep more inventory on hand than is needed. Identifying them is the first step to a more effective strategy that keeps your stock levels under control.
Some frequent justifications include:
- Concerns about variable customer demand. Setting safety stocks to cover 99.99% of forecasted customer demands without economic analysis will lead to high inventory costs in handling, storage and obsolescence.
- Limitations of existing ordering processes. Manual ordering systems are too cumbersome to link tightly with varying demand, so inventory is added as a buffer to reduce the manual efforts.
- Difficulties linking supply and demand. Poor synchronization between these two key drivers can be addressed with additional inventory, but at a substantial cost.
- Avoiding production disruptions. Maintaining excess raw material to reduce the risk of disruptions in the production process.
- Building in safety lead time. This strategy is a response to issues with supplier on-time and quality performance.
Strategies for taking a more efficient approach to inventory
While there’s logic behind many of the reasons used to maintain a higher than optimal inventory level, the costs of doing so can easily eat into the savings realized in other areas. A thoughtful, well-planned move to a lean inventory strategy can address many of these concerns at their root, offering improved performance and more financial flexibility.
Consider these three valuable concepts that can provide short-term improvements and set the stage for benefits in the long run:
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- Using relevant methodologies to identify high-cost items and focusing on those inventory components specifically, then creating links between supply and demand for them. Analytical tools facilitate ordering from suppliers only when necessary which can lead to near-immediate benefits and significant reductions in high-cost items.
- Utilizing a consignment model to have essential materials available but not impacting working capital until it is needed. Results can start appearing in just days, and a 3-6 month period will offer aggregate results.
- Paying close attention to the demand trends, adjusting for seasonality and sales levels to develop better forecasting of variable demand for inventory. Sales & Operations planning (S&OP) is a proven discipline for improving customer service as well as optimizing inventory.
In all cases, dependable, agile analytical tools and supply chain platforms are vital for making these transitions. These solutions offer the information, analysis and oversight needed to make the necessary shifts and start realizing the benefits.
Taking company culture, suppliers and customers into account
As is the case with any substantial change to operations, a shift in company culture and positive attitudes toward adoption among leaders and staff are critical for beneficial reductions in inventory.
A move to a lean supply chain culture and its associated practices as a whole is critical for realizing the specific benefit of reduced inventory. This foundational cultural change, focused on maximizing value, strongly aligns with reducing unnecessary inventory and maintaining a streamlined approach to it in the long term. It allows your business to essentially trade information for inventory, using increased availability of data and analysis to scale back the need to maintain large stocks of items.
Sales, finance and operations teams must increase collaboration and information sharing, breaking down silos between departments to address all concerns and opportunities related to inventory. Business leaders need to lead the charge and demonstrate the benefits of the change.
To focus on lean practices and supply chain and inventory analytics, businesses should strongly consider educational offerings from APICS and the Association for Supply Chain Management.
Companies must also engage suppliers and customers, sharing forecasting information, educating them about the new processes and taking considerations like supplier managed and consignment inventory into account.
Long-term strategies and benefits for reducing inventory
By putting the necessary tools into place, defining the need for current and future inventory, benchmarking sales to inventory ratios and engaging in meaningful analysis and forecasting around inventory, businesses can continually reduce inventory and make operations more efficient. The drive to zero – carrying as little inventory as possible – requires consistent effort and improvement, but results in increasingly positive results. Management has to take the lead by:
- Embedding this principle into company culture.
- Reviewing metrics on a regular basis.
- Implementing the tools to identify issues and manage them effectively.
By lowering the overall need for inventory, companies can save warehouse space and defray risks related to obsolescence and carrying costs. Plus, they can improve customer responsiveness and reduce confusion in the process. This ultimately boosts customer satisfaction.
Businesses must take their market position and goals into account, setting inventory levels in line with individual objectives like consistently fast response to orders. But the result of an effective lean supply chain and inventory is always:
- A stronger competitive position.
- Better financial outcomes.
- The ability to put more working capital to the best use possible.