In my experience the biggest drivers of inventory reduction are executive visibility and clear targets . By identifying, repurposing or removing obsolete inventory the volume of inventory on hand will decrease. With this, both direct and indirect costs of keeping the obsolete inventory will be reduced. This closely links to reducing order sizes as a smaller volume of the inventory will be in stock and as a result fewer inventories will be in stock to become obsolete. With new options in hand, customers tend to order different variety of products through various vendors and organizations to understand their customer support and business model. These varied customer trends are difficult to understand and predict in the long run of supply chain cycle.

In this scenario increases in demand are passed down the supply chain, and the biggest impact is felt by those at the farthest end – suppliers of raw materials. Using this calculation on an ongoing basis to order stock will ensure you can meet demand while also minimising holding costs. So your company is looking to reduce costs, and you’ve been asked to contribute by reducing your inventory cost.

Inventory Reduction Strategies

These systems help planners save time while providing greater agility in updating ever-changing priorities, production schedules, and inventory plans. APS Systems can be quickly integrated with an ERP/MRP software to fill the gaps where these systems lack planning and scheduling flexibility, accuracy, and efficiency. Having a standardized reliable way of forecasting demand will mean that excess stock is not ordered and will reduce the chance of obsolete stock. Utilising all the data available and using up-to-date technology can help with reductions.

• When considering the planning method you are using, you should consider manufacturing lead-time in the total planning lead-time.
• Regular period of inventory auditing and routine checkup of the inventory helps in understanding the requirements of reordering of the products.
• For example, if lead times are long or continually fluctuate, you’ll need to carry more safety stock to cover the risk of run-out while you wait for your delivery.
• Dropshipping is where a business accepts orders but doesn’t hold the stock to satisfy those sales.

Generally, inventory is assigned to a plant and owned by a Supply Chain team with support from finance. Therefore, it is more that each planner and buyer should have their own individual targets for the production cells they are planning https://globalcloudteam.com/ or buyer for raw materials inventory from 1st or 2nd tier supplier. There are many benefits of ABC analysis , but for me the biggest benefits are to identify your Made to Stock , Assemble to Order and Made to Order items.

Reduce Obsolete Stock

Consignment inventory is the process of holding and selling inventory on behalf of another company. For example a business may choose to place its products in a retail store before charging the retailer, and hope the increased visibility of the products will lead to sales. An excess of obsolete stock can be indicative of greater issues such as lack of planning, product quality, and poor forecasting. Identifying useless inventory is one of the best things you can do for your business.

When you strike the perfect balance to this relationship, the benefits you reap will be worth it. Unfortunately, quite a few manufacturers reward activities that lead to excessive inventory. When you don’t schedule your production properly, it can have a cascading effect, like imbalances in product flow, and decreased throughput.

Eliminating those items will reduce your overall inventory levels and reduce your costs. Supplier Relationships – Suppliers are extremely important to ensure the efficiency of manufacturing operations. It is important to choose suppliers that have fast, reliable, and accurate lead times to allows you to order smaller quantities without the risk of stock-outs. Therefore, establishing an excellent relationship with your supplier can optimize production and reduce inventory through an efficient supply chain. Move inventory upstream in supply chain by using Vendor Managed Inventory or Consigned Inventory Program. With Strategic suppliers who supply high value, volume and frequency items can keep a minimum and maximum stocks for you as long as you can cover the liability of that inventory.

It also improves communication and cooperation between those involved in different steps of the supply chain. DXP offers a wide range of supply chain services to assist your business. Our decades of experience in supply chain inventory management, consulting experience, and industry research has allowed us to address any of your unique supply chain challenges.

In the past 18 months, many companies have increased their inventory levels. Among the universal challenges that the COVID-19 pandemic has imposed upon the supply chain management profession is the question of inventory, specifically, “how much is enough? It wasn’t long ago that businesses were asking, “By how much can I reduce my levels of inventory?

Editor’s Choice: It’s time for traditional inventory management to evolve!

Companies that depend on the ‘push’ system of inventory management are more likely to stock high levels of products or materials. For example, long lead times usually necessitate long-range forecasting, which is in itself not accurate; this means actual demand is not what was predicted, meaning unsold inventory, and so on. Stockpiling inventory is not the smart way to do business, as it ties up too much money, increased lead times, and leads to opportunity costs.

Exploring new suppliers is often forgotten as a way to save money for your business. It’s easy to select a supplier for key goods, then set and forget as long as the product keeps getting delivered. Here D is demand in units per year, S is order cost per purchase order, and H is the holding cost per unit of the product per year. Dropshipping is where a business accepts orders but doesn’t hold the stock to satisfy those sales. Instead, it sends the order directly to a manufacturer or another type of supplier, who then transports the order directly to the customer.

Reducing your order cycles and order quantities is another popular inventory reduction strategy which also helps improve inventory turnover. Smaller, more frequent ordering gives you more flexibility to meet changes in customer demand while preventing a build-up of stock and keeping carrying costs under control. A reduction in total supply chain lead-time will lead to products / materials not being held in stock for a long time.

Inventory is Everything with Jeff Flowers

With cheaper products available online and foriegn inroads of new product varieties, many manufacturing companies face a huge variation in demand supply chain for usual stocks. In most of the cases, many ordered stocks remain unsold due to other competitive products in the market and lower rates on international websites. In the longer run, these unsold products either remain stocked up in the warehouses or gets sold on promotional rate, which in either case is a loss for the organization capital inflow. Just before we launch into explaining the best inventory reduction strategies for your business, it’s best to understand how these strategies can be used within your business’s supply chain management.

I have found this exercise very useful to present visually to the team involved to show how much inventory we should be carrying at each stage of supply chain. Back then you didn’t need to know about holding costs because Mom and Dad let you store your inventory for free. Holding cost by definition, is the cost of holding inventory in a warehouse until it is sold or removed.

How to optimize Inventory: 11 Proven Inventory Reduction Strategies

This allows the company to only produce what has been ordered and eliminate the need to store excess inventory. Furthermore, the inventory management strategies will augment business operations by the effective and efficient flow of goods and services. It adds to profitability, competitiveness, service optimization and market diversification. If you work in business where standard cost only changes once per year, you have to ensure that the financial controls are on your side to reflect the cost reduction in piece price! I would go as far as saying partnership with financial controllers is a must-have for implementing inventory reduction strategies. This closely links to reducing order sizes as a smaller volume of the inventory will be in stock and as a result, fewer inventories will be in stock to become obsolete.

Two, even if you have to tap into your safety stock, you won’t be missing out on sales in the meantime. Having zero safety stock means you have no products to sell while you’re waiting for emergency orders to be fulfilled, which leads to fewer profits. Inventory reduction will allow you to free up warehouse space, lower overhead expenses, and streamline your fulfillment process.

Stochastic Analysis

Inflation’s effects on inventory management policies are likely far from top of the mind of Logistics Viewpoints readers in today’s challenging times. However, today’s elevated rate of inflation warrants a closer look at optimal inventory policies. The reason I chose to write about this company, is because it was very interesting for me to see how a company of this size can focus and apply cost reduction actions in their supply chain and make them work.

Our Business Model

Also, when this cluttered old stock is cleared up, you can invest and make room for fast-selling products and earn better revenues for the organisation. Improved QualityWith a consistent amount of raw material requirement, quality and maintenance of final products is improved. Excess inventory affects the bottom line in hidden ways that are not readily apparent on Financial Statements, which means that the CFO doesn’t really understand the total costs. If you choose the ‘pull’ system of inventory management, you will be able to divert more working capital towards more essential activities. Every business should aim to transfer inventory to customers as quickly as possible before they get obsolete, spoilt, or stolen.

Forecasting and reordering calculations can be based on point of sale demand data, not demand at each stage of the supply chain. And, with a view of stock levels across all echelons, inventory can be balanced out, so excess stock at one location can be redistributed to other sites, where levels of the same item are lower. Order Size Reduction – Large, infrequent orders for items of varying demand can lead cost reduction strategies to high inventory holding costs. Keeping orders small and frequent benefits the company through inventory reduction and increasing cash flow. The more inventory on hand, the more the holding costs will be, and the higher the risks of product depreciation. Before reducing inventory, it is very important to examine the products which are offered and determine whether few products must be discontinued.

Pop-up stores are a vital strategy for gaining exposure for your business, in a cost effective manner, through customer feedback. These are a wonderful way to clear old inventory because they can be set up anywhere and require very little planning. Definitely, this is a valuable strategy for small business owners who have limited resources for their advertising.

So that you will become a recognized leader in the industry in your region. Inventory reduction is one of the most pressing issues for many manufacturing companies. Holding a lot of inventory in warehouses is the major reason of reduction in working capital for an organization and most of the times the main cause of huge losses for the businesses.