Most distributors strive to achieve the goal of effective inventory management:
“Effective inventory management allows an organization to meet or exceed customers’ expectations of product availability with the amount of each item that will maximize net profitability or minimize their total inventory investment.”
Stock vs. Stuff
But most of these companies have two types of material in their warehouses:
Stock – These are the quantities of specific items necessary to achieve the goal of effective inventory management.
Stuff – Everything else. That is quantities of items that are not necessary to meet your customers’ expectations of product availability.
This Stuff represents a non-productive asset. You have invested money in products that will not provide a return on your investment. And it is taking up valuable space in your warehouse. How can you eliminate this Stuff?
Top 5 Ways to Trim Your Stuff (Excess Inventory)
1) Examine what you have on hand. Examine products in each of your warehouses that have had usage in three or fewer of the past 12 months. Does each of these products need to remain a stocked item?
- Is it a critical part that must be on-hand in case of emergency?
- Could a customer obtain this product immediately from a competitor’s inventory?
- Does the high profit justify the cost of maintaining this product in inventory?
- Is it not practical to stock a slower moving product in a central warehouse or distribution center and transfer stock as necessary to this location?
Unless you can respond “Yes” to at least one of these questions, you probably can remove it from this warehouse’s approved stock list and liquate the remaining stock.
2) Carefully evaluate each request to add a new product to inventory. Many new items are dead on arrival. You never sell the entire initial purchase quantity before investing some of the limited funds available for buying new products ask:
- Who is going to buy this product?
- What affect will sales of this product have on sales of other existing products? Can we discontinue an existing stocked item or reduce its stock level?
- What is your prediction or sales or usage for each of the first six months? Hold the person who answered this question responsible for making sure that the anticipated sales actually occur.
3) Ensure that you accurately forecast future demand of each item. The more accurate your forecast the less you have to stock to meet your customers’ expectations of product availability. You can test the accuracy of your forecast by comparing your forecast to actual sales or usage in the month just completed.
Use the equation:
Absolute Value of (Sales/Usage – Forecast) ÷ Smaller of Sales/Usage or the Forecast
If your average forecast error is greater than 30% chances are that using better forecasting techniques will allow you to lower your inventory while maintaining or improving the availability of products you provide your customers.
4) Control who can buy products and set goals for these individuals. Replenishment orders should be issued by a buyer responsible for specific products throughout your organization. Provide these individuals with goals for inventory turnover and customer service (i.e. the percentage of line items for stock items that can be filled in one shipment by the promised date). These goals, along with responsibility for the replenishment of certain items across all locations, encourage buyers to transfer surplus material that is located in one branch to where it is currently needed.
5) Evaluate your replenishment quantities. Many buyers have a habit of always ordering a certain number of week’s or month’s supply of an item. If you need to trim your inventory, order only enough of fast moving products (especially high cost items that fall into this category) to last between normal receipts from the primary supply source. If your reorder points are appropriately set,to equal the anticipated amount of the product you will sell or use during the lead time plus a little safety stock or reserve inventory, reducing replenishment quantities will trim your inventory without harming customer service.
Trimming the Fat
Reducing your inventory is like trimming your waistline. If you take a planned and intelligent approach to this task you will eliminate the fat, or unneeded material in your warehouse, without affecting the muscle. That is the quantities of specific items necessary to meet or exceed your customers’ expectations of product availability.