Category Archives: Inventory

Cut Inventory, Not Headcount for Sustainable Cost Reduction

As noted in a recent Industry Week article which made the astute observation that you should “layoff your inventory, not your employees”, inventory carrying costs can easily range from 15% to 25% of total inventory value on an annual basis (and at low performers, it can get as high as 35%). On a million dollars of inventory, that’s a $150,000 to $350,000 expense which could potentially wipe out your entire profit margin. For an average organization, that’s 2 to 6 employees whose jobs could be saved through better supply chain execution.

A great way to achieve this savings is to acquire modern demand planning and inventory optimization software that will help you improve your forecasts, trim your inventory, and your associated costs. The less inventory you have, the less you have to store. The less time it is in a warehouse, the lower your overhead costs. And having it when you need it prevents the extra transportation costs associated with expediting.

But most importantly, you don’t have to be a large organization to take advantage of today’s affordable on-demand inventory management solutions. Chances are a small organization with only a million dollars of inventory will see a decent return on a basic SaaS inventory management solution.

Cutting the Right Costs with Technology

A recent article in Industry Week, which advocated that you “cut the fat, not the limb”, reminded us that there are a number of strategic projects, based on appropriate supply chain technology, that can provide a far greater internal rate of return than merely slashing costs. After all, companies that layoff employees, consolidate suppliers, reduce product offerings, and halt key projects may inadvertently get rid of the very things that made them successful in the first place!

As Jim Thompson pointed out, in his Supply Chain Brain article, cut, cut, cut is NOT a cost reduction strategy. The only real strategy for cost reduction is the strategic reduction of fat in capital and operating costs … which is easily exposed by technology designed to root out inefficient and redundant processes. Now, more than ever, managers need to look at innovative and aggressive technology projects that will provide increases in operational efficiency.

And, as per the Industry Week article, three great places to start are:

  • Excess Inventory
    Synchronizing actual inventory to recorded inventory provides the data necessary for sound purchasing decisions based on good forecasts.
  • Manual Processes
    Unnecessary manual processes lead to errors and wasted time. Error-handling, re-processing, and lost productivity costs add up, especially if these costs can be affordably eliminated.
  • Supply Chain Weak Links
    Vendor Managed Inventory and longer-term collaborations offer opportunities for both parties.

And when you’ve mastered these, you can move on to the ideas chronicled in Dead Company VII: Even More Ways to Avoid the Graveyard.

Dealing with Demand Volatility

Demand Planning is probably at the forefront of your thoughts these days. You don’t want too much inventory, because you can’t afford to tie up working capital, but you don’t want too little inventory either, because, with sales down, you can’t afford to lose even a single sale. You need to operate lean, mean, and ready for anything at a drop of the hat. You do this by harmonizing sales, marketing, and supply management into a cross-functional team that focuses on meeting demand in the most effective and efficient way possible.

This team should start by segmenting demand by volume and variability, as per a TBM Consulting Group Graphic found in an Industry Week article from earlier this year on “demand management”. This allows the company to optimize planning, control, and manufacturing around each product depending on whether it should be pulled, made-to-stock, made-to-order, or rationalized (where it may be replaced with a similar product or discontinued altogether). Furthermore, by analyzing and understanding the demand patterns of different product families, looking at average volumes and variations in demand, managers [may] determine that their own inventory management policies are responsible for creating the sharp spikes in production and shipments that historically caused inventory shortages and liquidations in the past.

It’s important to note that demand planning is not a game of chance, but a strategy, as highlighted in this recent Industry Week article by a principal of Tompkins Associates. Done right it eliminates, or greatly reduces:

  • out-of-stock situations
  • long, unknown, or unreliable lead times
  • inventories with discontinued and obsolete SKUs
  • overstock of slow-moving SKUs
  • non-optimal inventory deployment

But done wrong, each of these problems magnify. That’s why it’s important to have a demand management plan that not only addresses each of your products, but addresses how you will “respond to demand volatility”. The reality is that the plan can never be completely accurate given the certainty of daily changes that will occur inside the planning horizon. You need to be able to rapidly sense and respond to shifts in demand that deviate from your current plan, work with your colleagues and supply chain partners to understand true demand, identify plan updates and alternatives, and use decision support tools that will help you identify profitable responses to demand changes.

The best way to insure that you stay on top of demand volatility is to implement a multi-tier, multi-enterprise visibility solution that allows for near real-time demand data to be shared downstream, that can alert suppliers when demand unexpectedly rises and falls, and that can allow partners to collaborate on the best way to respond to unexpected demand spikes and drops. The system should be able to tap into the relevant CRM, ERP, SCM, POS, forecasting, and demand planning tools in place and not require manual re-entry of data and should consolidate the data for easy “what-if” analysis and reporting. As the article notes, good demand planning and response management can represent the largest opportunity for companies to increase customer service, enhance margins and attain more predictable revenue across the entire value chain, and allow supply management to simultaneously increase profit as it avoids unnecessary cost.

Inventory Management Softens Tough Times

With greater supply chain instability, driven mostly by the soaring price of oil, but exacerbated by the rush to outsource manufacturing, comes a growing need for leaner, meaner, inventory management, as pointed out in a recent Supply Chain Brain / Global Logistics & Supply Chain Strategies article that was taking another look at inventory planning and optimization.

The article points out that solid inventory management strategies are an important component of your overall risk mitigation plan, which hopefully you are working on considering a recent Aberdeen survey found that 99% of companies have experienced a supply chain disruption in the last year and that over half of suffered a financial loss because of it. To that end, the article highlighted a number of strategies that you should be exploring.

The first strategy it highlighted was the practice of inventory swaps between nominal competitors who help each other out in regions where supply suddenly becomes low or demand spikes unexpectedly. Most raw materials are used for multiple purposes in multiple industries, and it shouldn’t be too hard to identify companies that are not direct competitors that you can hammer out inventory swap agreements with.

The second strategy it recommends is my personal favorite, inventory optimization. However, it’s important to note that you need to do multi-echelon inventory optimization across your supply chain, as pointed out by this Supply Chain Digest article, because you need to see the big picture. Otherwise, you’ll overstock some locations, understock others, and lose out on real cost savings opportunities.

When you have multiple locations, you have to see the big picture and remember that you do not need as much safety inventory at a set of locations that are all in the same region as you might think you need. It’s often a better decision to risk having to ship inventory between warehouses than to risk an overstock that will result in obsolescence and a material loss in addition to the losses incurred by unnecessarily tying up too much working capital.

The third strategy, brought up in both articles, is better forecasting. The best inventory plan in the world is useless if the forecasts are way off. Be sure to pull in sales data regularly and revise your forecasts at least monthly to account for unexpected demand spikes, demand reductions, competitor new product introductions, seasonal demand shifts, and other unexpected variables that can require a forecast update to prevent unexpected losses from overstocks or understocks.

The fourth strategy is to consider network re-design. If you have too many warehouses, or too few, you could be losing money on the associated warehouse overhead or on extraneous transportation costs.

A fifth strategy, if you have excess inventory, is to donate it. As per this recent S&DC Exec article, “the benefits of donating excess inventory” are fourfold. It helps you reduce taxes (under section 170 (e)(3) of the U.S. Internal Revenue Code), it frees up warehouse space to store more inventory of products that are in higher demand, it avoids liquidation problems (that will appear down the road), and it can fulfill your company’s philanthropic goals while generating goodwill.

Just remember, inventory is cash. Too much, and you’re tying up too much of your precious working capital. Too little, and you’re losing the cash that results from sales. So get your inventory in order, and in addition to reducing your risk, you’ll probably save quite a bit of cash in the process. Like Home Depot, who estimates that better inventory management could save them 1.5 Billion a year. That’s a lot of bling.