There’s only one real driver behind inventory costs.
Inventory. No inventory, no inventory costs.
Now you can skip the first ten minutes of the over-promoted webinar coming up three weeks from two days ago. (Deliberately confusing.)
As for proven, practical techniques for controlling inventory, there’s only two of those you really need to know.
- Don’t buy what you don’t need and
You’d be amazed at the cost avoidance you’ll realize.
- Don’t buy more than a moderate buffer beyond what you expect to need by the next replenishment cycle. (Altering the quantity every order if need be.)
Then inventory doesn’t build up beyond an expected level and storage costs don’t escalate out of control.
Ten more minutes saved. As for smart use of technology to manage inventory data — upstream and downstream — and to improve forecasting, there are three key points:
- get sales updates at least as frequently as orders are made,
forecasts will always be more accurate with recent data
- be sure to factor in upcoming marketing or (predictable) market events expected to make an impact,
so you won’t be surprised by a rapid spike or drop in demand and
- put the tool in the hands of an expert.
Forecasting is art and science. You need an artist who knows how to select the right model and use the tool properly or you’ll be repeating the i2/Nike fiasco all over again. (Don’t get the reference, Google It.)
Okay, twenty more minutes saved. Now on to procurement and transportation tactics to reduce inventory build up. This is where it could get interesting, but it could also get quite obvious. If you review the six key points from above, you will reduce inventory build up if you:
- don’t order product you don’t use
no inventory, no build up — the best way to cut inventory costs is to control demand
- don’t order more product than you expect to sell or use within the next two replenishment cycles
as more than a moderate amount of buffer can add exorbitant cost
- re-run the forecasts before each replenishment cycle
as downward projections must result in an inventory reduction and
- don’t forget the expert
as this is one application where the tool alone isn’t enough
You can certainly get much more advanced than this, but is it worth it? The most successful organizations follow the 80/20 rule. They apply 20% of the effort to get 80% of the savings and then move on to the next low-hanging fruit big savings opportunity. Inventory management is as old as the Procurement profession, and best practice inventory management and forecasting hasn’t improved that much over the last decade. Returns are diminishing and at some point you have to wonder if it’s worth it when there are so many other opportunities on the table for cost reduction and avoidance. You can disagree, but the most successful Supply Management organizations use cost reduction waves (and implement multiple cost reduction strategies) and only go after the last 20% if the effort is really worth it. With raw material and fuel costs rising rapidly, unless you’re using a third party storage facility that is significantly over-billing (and this is almost as common as office supply vendors replacing cheap contract SKUs with expensive off-contract SKUs when the products reach end of life) or maintaining a buffer that is much too high, inventory costs are no longer a significant portion of lifecycle costs for many products.
That’s the doctor‘s view. Leave a clearly defined different one if you wish.