25 ways to lower inventory costs

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In 3 pages double spaced, summarize the key differences between the two articles and the perspectives they provide. Then take a stand. If you were required to lower inventory costs while still maintaining customer satisfaction, what would you do?

Inventory Optimization: Evolving from Fad to Necessity

There is broad agreement that inventory should be optimized to properly match demand. Yet achieving this continues to prove difficult for many companies. The insight and best practices offered here will help you understand the importance of sound inventory practices and put your inventory optimization initiative on a success track.

The Case for Managing MRO Inventory

Taking a Broader View of Supply Chain Resilience

How to Communicate with Your Board of Directors

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7 Steps to Better Inventory Management

Effectively managing your inventory —

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25 Ways to Lower Inventory Costs The prime objective for all supply chains is to provide clients with what they want, when they want it. Inventory management plays a central role in every supply chain’s need to satisfy its clients.

By Ralph Cox, Principal, Tompkins

Associates

July 20, 2011

Inventory policies drive two types of costs:

period operating expenses and working

capital requirements. The latest “Logistics

Cost and Service Report” published by

Establish Inc./Herbert W. Davis and

Company, indicates that, while total

logistics costs as a percent of sales are

falling and most individual companies

have succeeded in reducing inventory

levels; total logistics costs per

hundredweight are increasing, and

inventory costs as a percent of total logistics cost are increasing.

In many organizations, however, the opportunities to reduce inventory costs are often

not addressed at all or are not completely exploited. If your organization needs help

taking money out of inventory there are strategies you can employ today that will

provide payoff.

WEBCAST: 10 Proven Ways to Cut Your Inventory Costs

Wednesday August 31, 2011 at 2:00 PM EDT For supply chain professionals looking for practical tips to lower their inventory costs, this is a "must-attend"

event. Ralph Cox from Tompkins Associates will discuss proven procedures, policies, strategies and

technology enablers for cutting inventory costs - and improving the bottom line. Click Here for more Information

Some of these strategies address having less active inventory, others how you acquire

active inventory, and still others require transferring inventory or relying on vendors for

better inventory management. Regardless of which you choose to explore, proactive

inventory management policies will make a difference in your operations. Here are

some of the most common techniques for lowering inventory levels.

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. Reduce 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

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whether it’s at rest in a warehouse or in the supply chain pipeline — is a critical factor in business success today. Join us for this special webcast as inventory

expert, Paul Huppertz, Partner at The Progress Group, highlights steps companies can take to improve their inventory performance and reap the benefits.

View more webcasts

From the Institute for Supply Management

ISM’s December 2012 Semiannual Economic Forecast Posts Positive Numbers

While there were few surprises contained in ISM’s December 2012 Semiannual Economic Forecast, the overall findings suggest growth in the United States will continue in 2013

ISM semiannual report expects more continued economic growth for rest of 2012

Institute for Supply Management’s NMI hits highest level since January 2011

ISM November non-manufacturing report shows growth for 24th straight month

ISM October non-manufacturing report is nearly identical to September, still growing

View more from ISM

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. Purchase transaction costs are not 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.

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: Prioritizing SKUs consistent with

corporate objectives, using the appropriate number of product classes,

establishing class sizes that leverage the investment to maximize fill rates,

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, reduce out-of-stock situations or increase revenue.

5. Forecast Routine Demand Forecasting: Using manually edited, naïve,

arithmetic / stochastic forecasting models to reduce forecast error will reduce

overstock, backorders, and the need for lateral or reverse logistics, holding

inventory levels closest to only that required to support the desired customer

service level. Editing history to eliminate non-recurring promotions and to

compensate for out-of-stock situations is key.

6. Forecast Future One-time Events Based on Past Events: Future

promotions and other one-time events can be best forecast from extensive data

on similar events from the past. Holding records in a centralized database avoids

the issue of the data leaving with the last sales representative. Extending the

data format to include not just SKU, retailer, date and lift, but also relative degree

of advertizing, duration, price reduction, if any number of locations, or other

factors, makes the information infinitely more useful for the future.

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 Acquisition Lead Times: 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 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.

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11. Minimize Purchase Minimums: Comparing the total cost of ownership,

including inventory holding costs (i.e., not just landed costs) for purchased

products’ quoted prices with no order quantity limitations with reduced prices

requiring minimum order quantities (MOQs) will help determine if the reduced

prices really provide savings. An uninformed purchaser’s interaction:

Purchaser: Can I buy _____ at the same volume but at a lower unit cost?

Sales Representative: Sure, we can reduce your cost by __% if you purchase in

minimum order quantities of _______ .

Purchaser: Sure, no problem!

(When the annual holding cost for the increased inventory due to the minimum

order quantity more than offsets the annual purchase cost reduction, the higher

unit cost with no minimum order requirements has a lower cost.)

12. Get Downstream Forecasts and Send Forecast Upstream: Hard information

on upcoming needs from customers reduces demand variability and forecast

error, thus reducing the safety stock required for a given customer service level.

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, yield lower unit purchase prices.

13. Don’t Stock It, or If Some Stocking is Required, At Least Not Everywhere:

For a single storage location, manufacturing or purchasing product 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. Likewise, in a

network of storage locations, not stocking every SKU in every location can

reduce both inventory and transportation costs.

14. 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.

15. 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.

16. 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.

17. Transfer Instead of Purchase: When an overstock SKU in one location needs

to be purchased to replenish inventory in another location, transfers are a smart

way to reduce inventory, provided that the additional warehousing and

transportation expenses are not so high that the reduction in holding cost does

not exceed the cost to transfer.

18. Liquidate: Although there will always be a short-term price to pay on the profit

and loss (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.

19. 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.

20. 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.

4/10/13 25 Ways to Lower Inventory Costs - Article from Supply Chain Management Review

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21. Use Vendor-Managed Inventory (VMI) and Vendor Stocking Programs

(VSP): With the appropriate incentives, allowing VMI 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. 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.

22. Estimate Reserves Accurately: Accurate estimating of reserves avoids year-

end surprises. Estimates should be based on a realistic view of both inventory

accuracy and the viability of product sale.

23. Maintain Accurate Inventory Balances: Inaccurate inventory balances

undermine the very best forecasting and safety stock management processes.

They can always be addressed with effective cycle counting and issue root

cause identification efforts.

24. Exploit Sales and Operations Planning (S&OP): At their very best, effective

S&OP programs facilitate good decision-making to compensate for the real life

issues, which will always occur above and beyond the best planning efforts. At

the least, they begin to get everyone on the same page regarding the capacity,

timing and other issues between actual demand and available supply.

25. Measure Performance: Reporting, posting in public locations internally, and

reviewing performance results with natural work teams lay the groundwork for

continuous improvement. In highly seasonal businesses, providing last year’s

results along with this year’s facilitates same time last year comparisons, which

may be much more meaningful than this month versus last month.

There are numerous ways to take better control of inventory and decrease its

associated costs. Many of these strategies may seem challenging to implement;

however, they have all been used successfully for years. The key to managing inventory

successfully is to continuously measure your performance and look for new ways to

improve. These 25 strategies should get your organization thinking about what it can do

to lower inventory costs.

Ralph Cox, is a director at Tompkins Associates and a recognized authority on

improving performance in logistics, warehousing and inventory management.

© Tompkins Associates, Inc., All rights reserved.

WEBCAST: 10 Proven Ways to Cut Your Inventory Costs

Wednesday August 31, 2011 at 2:00 PM EDT For supply chain professionals looking for practical tips to lower their inventory costs, this is a "must-attend"

event. Ralph Cox from Tompkins Associates will discuss proven procedures, policies, strategies and technology enablers for cutting inventory costs - and improving the bottom line.

Click Here for more Information

More "Must Read" related articles on "Inventory Management"

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Article Topics

Feature · Procurement · Supply Chain · Warehousing · Inventory Management ·

Purchasing · Inventory Optimization · All topics

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