25 ways to lower supply chain inventory costs

8/11/2019 25 Ways to Lower Supply Chain Inventory Costs

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25WaystoLowerSupplyChainInventoryCosts

Theprimeobjectiveforallsupplychainsistoprovideclientswithwhattheywant,whentheywantit.

Inventorymanagementplaysacentralroleineverysupplychainsneedtosatisfyitsclients.ByRalphCox

July28,

2013

Inventorypoliciesdrivetwotypesofcosts:periodoperatingexpensesandworkingcapital

requirements.ThelatestLogisticsCostandServiceReportpublishedbyEstablish

Inc./HerbertW.DavisandCompany,indicatesthat,whiletotallogisticscostsasapercent

ofsalesarefallingandmostindividualcompanieshavesucceededinreducinginventory

levels;totallogisticscostsperhundredweightareincreasing,andinventorycostsasa

percentoftotallogisticscostareincreasing.

Inmanyorganizations,however,theopportunitiestoreduceinventorycostsareoftennot

addressedatallorarenotcompletelyexploited.Ifyourorganizationneedshelptaking

moneyoutofinventorytherearestrategiesyoucanemploytodaythatwillprovide

payoff.

Someofthesestrategiesaddresshavinglessactiveinventory,othershowyouacquire

activeinventory,andstillothersrequiretransferringinventoryorrelyingonvendorsfor

betterinventorymanagement.Regardlessofwhichyouchoosetoexplore,proactive

inventorymanagementpolicieswillmakeadifferenceinyouroperations.Herearesome

ofthemostcommontechniquesforloweringinventorylevels.

1. BaseCycleStockonEconomics:Forpurchasedproducts,gettingahandleonyour

acquisitiontransactioncostswilleitherreduceaverageinventoryorallowfor

reducingpurchasing

and

receiving

labor.

For

manufactured

products,

if

production

equipmentchangeovercostsareinasimilarstate,gettingtheminplacewilleither

reduceaverageinventorythroughshorterrunsorallowforreducingchangeoverand

receivinglaborthroughlongerruns.

2. ReduceOrderTransactionCosts:Intheoffice,usethecomputertogenerate

purchaseorders(POs),EDIforPOtransmission,advanceshippingnotices(ASNs)to

reduceexpediting,andhistoricalvendorperformancetoprioritizeexpeditingto


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lowerpurchasingcosts.Inthemanufacturingplant,preplanning;prestagingof

neededpartsormaterials;useofspecialtoolsorequipment;changeoverinitiation

priortocompletionofthepreviousrun;teamworkandworkdivision;maintaining

equipmenttemperatures;andminimizingQA/QCworkallreducecyclestock

inventory.Inthedistributioncenter(DC),palletmanifestbasedreceivingprocesses,

countingscales,

statistics

based

inspection

and

checking,

bar

code

scanners

for

data

entry,certifyingkeyvendorstoeliminatereceivingfunctions,andstockingforward

storagelocationsfirstandreservelocationssecondcanallreducepurchase

transactioncostsandcyclestockaccordingly.Purchasetransactioncostsarenot

normallySKUspecific.However,reflectinganyextraordinarilylowreceivingcosts

associatedwithspecificSKUswillservetoreduceinventoryforthem.Theopposite,

ofcourse,isalsotrue.

3. LowerInventoryHoldingCosts:Improvespaceutilizationinleased,contract,or

publicwarehouses(ortominimizeordelayexpansionofownedfacilities)through

narrowaislehandlingequipment,mezzanines,layout,ormoreappropriatestorage

modes.

4.

BaseSafetyStockonCustomerService:PrioritizingSKUsconsistentwithcorporate

objectives,usingtheappropriatenumberofproductclasses,establishingclasssizes

thatleveragetheinvestmenttomaximizefillrates,updatingsafetystocklevels

dynamicallyandbasingtheservicelevelsforeachclassonthefinancialgoalsofthe

businessallservetoeitherreducesafetystockinventory,reduceoutofstock

situationsorincreaserevenue.

5. ForecastRoutineDemandForecasting:Usingmanuallyedited,nave,arithmetic/

stochasticforecastingmodelstoreduceforecasterrorwillreduceoverstock,

backorders,andtheneedforlateralorreverselogistics,holdinginventorylevels

closesttoonlythatrequiredtosupportthedesiredcustomerservicelevel.Editing

historyto

eliminate

non

recurring

promotions

and

to

compensate

for

out

of

stock

situationsiskey.

6. ForecastFutureOnetimeEventsBasedonPastEvents:Futurepromotionsand

otheronetimeeventscanbebestforecastfromextensivedataonsimilarevents

fromthepast.Holdingrecordsinacentralizeddatabaseavoidstheissueofthedata

leavingwiththelastsalesrepresentative.Extendingthedataformattoincludenot

justSKU,retailer,dateandlift,butalsorelativedegreeofadvertizing,duration,price

reduction,ifanynumberoflocations,orotherfactors,makestheinformation

infinitelymoreusefulforthefuture.

7. ThinkPostponement:ForparentproductsfromwhichmultipleSKUscanbe

manufactured,

only

partially

completing

manufacturing,

placing

semi

finished

productininventory,andthencompletingmanufacturingofthefinalSKUstoorder

reducestotalinventory.Inasimilarmanner,componentproductsfromwhichfinal

SKUsmaybeassembledcanbepurchasedtoinventoryandthenthefinalSKUs

assembledtoorder,providingthatthetimeforassemblydoesntexceedthe

customerleadtime.


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8. RationalizeSKUs:Removalofinappropriateproductfromtheproductlinecanbea

controversyriddenprocess,butmayreduceinventorysignificantlyifhandledina

constructivemanner,asfollows:

Developconsensusontheobjectiveofmaximizingprofit

DevelopactivitybasedcostsforeachSKUandseparatethemintothree

groups:1.Thosewithsellingpricesthatcreatepositivegrossmargin

2.Thosewithsellingpricesthatcovertheirvariablecostbutdonotcompletely

covertheirfixedcost

3.Thosewithsellingpricesthatdonotcovertheirvariablecost

QuantifythesalesvolumecorrelationsbetweenSKUs,basedontheanalysisof

bothindividualordersandaggregateorderpatternsbycustomer

IdentifythecombinationofSKUswhichmaximizesprofitonafullyabsorbed

basis

9. ReduceAcquisitionLeadTimes:Foreithermanufacturedorpurchasedproduct,any

reductioninleadtime,whethersupplierleadtime,transportationtimeorreceiving

cycletime,providesaonetime,permanentreductionincyclestockinventory

proportionaltothethroughputleveloftheSKUandthedegreeofleadtime

reduction.Inasimilarmanner,reducingleadtimevariabilityandincreasinginbound

unit,SKU,ororderfillratesbothincreasesupplyreliabilityandreducesafetystock

inventoryforagivencustomerservicelevel.

10.ImplementJointProcurementforPurchasedProducts:Jointprocurementof

multipleSKUsfromacommonsupplierservestoeffectivelyreduceunitpurchase

transactioncostsandtherebyreducesbothcyclestockinventoryandannual

purchasetransactionexpenses.Inasimilarmanner,jointprocurementofmultiple

SKUsfromdifferentsupplierslocatedinclosephysicalproximityandconsolidationof

inbound(LTL)

volume

to

form

full

TLs

serves

to

reduce

the

incremental

transportationcostportionofpurchasetransactioncostsandreducecyclestock

inventory.

11.MinimizePurchaseMinimums:Comparingthetotalcostofownership,including

inventoryholdingcosts(i.e.,notjustlandedcosts)forpurchasedproductsquoted

priceswithnoorderquantitylimitationswithreducedpricesrequiringminimum

orderquantities(MOQs)willhelpdetermineifthereducedpricesreallyprovide

savings.Anuninformedpurchasersinteraction:

Purchaser:CanIbuy_____atthesamevolumebutatalowerunitcost?

SalesRepresentative:Sure,wecanreduceyourcostby__%ifyoupurchasein

minimum

order

quantities

of

_______

.

Purchaser:Sure,noproblem!

(Whentheannualholdingcostfortheincreasedinventoryduetotheminimum

orderquantitymorethanoffsetstheannualpurchasecostreduction,thehigherunit

costwithnominimumorderrequirementshasalowercost.)

12.GetDownstreamForecastsandSendForecastUpstream:Hardinformationon

upcomingneedsfromcustomersreducesdemandvariabilityandforecasterror,thus

reducingthesafetystockrequiredforagivencustomerservicelevel.Sharing


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demandforecastswithsuppliersismoreindirect;however,inthelongrunitwill

servetoreducethesuppliersfinishedgoodsinventoryandassociatedcostsand,

witheffectivenegotiation,yieldlowerunitpurchaseprices.

13.DontStockIt,orIfSomeStockingisRequired,AtLeastNotEverywhere:Fora

singlestoragelocation,manufacturingorpurchasingproducttoorderwhenthe

acquisitionand

customer

lead

time

relationships

and

order

quantity

relationships

allowitisaverydirectwaytoreduceinventory,providingthattheacquisition

capacityexceedsthepotentialshorttermdemandrate.Likewise,inanetworkof

storagelocations,notstockingeverySKUineverylocationcanreducebothinventory

andtransportationcosts.

14.CrossdockCustomerShipments:Witheffectiveuseofjointreplenishment,the

potentialincreasesininboundtransportationcostsassociatedwithpurchasingto

ordercanbemitigated.Crossdockingcustomershipmentscanfacilitatepurchasing

toorderevenwhentheorderquantityrelationshipwouldhaveotherwisedictated

purchasingtoinventory.Inasimilarmanner,aggregatingpurchaserequirementsfor

multipleDCsintoasingleorderandcrossdockingtomultipleDCseffectivelyreduces

purchasetransactioncostsandreducescyclestockinventory.

15.ExtendPaymentTerms:Whennegotiatinglong termpurchaseagreements,getting

thebestpaymenttermsatagivenunitpriceisthemostdirectwaytoincreasethe

portionofinventoryfundedbythevendor.Ifimprovingpaymenttermscanbe

coupledwithincreasedturnover,thentheimprovementinworkingcapital

effectivenessissignificant.

16.TakeAdvantageofPrice/QuantityBreaks:Takingprice/quantitybreaksintoaccount

whenpurchasingforreplenishmentseemsanobviouswaytoreducetheinventory

investment,butseemstobefrequentlyoverlooked.Oftenthisisaresultofeither

notquantifyingbreaksatthetimeofsourcingornegotiation,nothavinganeffortless

wayto

take

them

into

account,

or

through

lack

of

understanding

of

the

impact

of

purchasinglargerquantitiesatreducedunitcost.

17.TransferInsteadofPurchase:WhenanoverstockSKUinonelocationneedstobe

purchasedtoreplenishinventoryinanotherlocation,transfersareasmartwayto

reduceinventory,providedthattheadditionalwarehousingandtransportation

expensesarenotsohighthatthereductioninholdingcostdoesnotexceedthecost

totransfer.

18.Liquidate:Althoughtherewillalwaysbeashorttermpricetopayontheprofitand

loss(P&L)andthebalancesheet,whenitisabsolutelyclearthatthevaluetobe

gainedthroughliquidationwhetherthroughsaleatreducedprice,saleasdistressed

product,

salvage,

or

charitable

donation

is

greater

than

the

most

optimistic

estimateoffuturegrossmarginfromconventionalproductsales,thenliquidationis

thebestdecision.

19.MergeInTransit:Theconceptofintransitproductmergingwhere,forexample,

twothingsareshippedfromdifferentlocationsandthenmarriedintransitsothat

theyreachthecustomerasasingleshipmentcanbeseenasatechniquefor

reducinginventoryiftheneedforthecustomertosimultaneouslyreceivemultiple

SKUsistakenasarequirement.Iftheneedforsimultaneousreceiptisagiven,then


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theconcepteliminatestheneedforinventoryingtheindividualSKUstogether.To

someextent,mergeintransitrepresentsanextensionofpostponementbeyondthe

distributioncenterwalls.

20.GetHelpFromFriends:CollaborativePlanningandReplenishment(CPFR)isanopen

setofpredefinedbusinessprocessesandIT/communicationsstandardscreatedto

facilitatecollaboration

between

supply

chain

partners.

CPFR

can

reduce

inventories

throughinventorybalance,forecast,demandandotherdatavisibilityandassociated

collaborationintheplanningarea.

21.UseVendorManagedInventory(VMI)andVendorStockingPrograms(VSP):With

theappropriateincentives,allowingVMIsupplierstoassumetheresponsibilityfor

replenishmentofyourinventory,becauseoftheirvisibilityintoboththeirown

inventoryandproductionscheduleandyourdemanddata,canalmostalwaysreduce

yourinventory.Usedprimarilyformaintenanceinventoriesbutapplicabletoall,

VSPsrequireasuppliertocommittoanextremelyhighservicelevelfordeliveryof

specificSKUswithinafixedtimeatapredefinedmarkupovercost.VSPscanreduce

oreliminateinventoriesforslowmovingproducts.

22.

EstimateReservesAccurately:Accurateestimatingofreservesavoidsyearend

surprises.Estimatesshouldbebasedonarealisticviewofbothinventoryaccuracy

andtheviabilityofproductsale.

23.MaintainAccurateInventoryBalances: Inaccurateinventorybalancesundermine

theverybestforecastingandsafetystockmanagementprocesses.Theycanalways

beaddressedwitheffectivecyclecountingandissuerootcauseidentificationefforts.

24.ExploitSalesandOperationsPlanning(S&OP):Attheirverybest,effectiveS&OP

programsfacilitategooddecisionmakingtocompensateforthereallifeissues,

whichwillalwaysoccuraboveandbeyondthebestplanningefforts.Attheleast,

theybegintogeteveryoneonthesamepageregardingthecapacity,timingand

otherissues

between

actual

demand

and

available

supply.

25.MeasurePerformance:Reporting,postinginpubliclocationsinternally,and

reviewingperformanceresultswithnaturalworkteamslaythegroundworkfor

continuousimprovement.Inhighlyseasonalbusinesses,providinglastyearsresults

alongwiththisyearsfacilitatessametimelastyearcomparisons,whichmaybe

muchmoremeaningfulthanthismonthversuslastmonth.

Therearenumerouswaystotakebettercontrolofinventoryanddecreaseitsassociated

costs.Manyofthesestrategiesmayseemchallengingtoimplement;however,theyhave

allbeenusedsuccessfullyforyears.Thekeytomanaginginventorysuccessfullyisto

continuously

measure

your

performance

and

look

for

new

ways

to

improve.

These25strategiesshouldgetyourorganizationthinkingaboutwhatitcandotolower

inventorycosts.

25 ways to lower supply chain inventory costs

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