How do we reduce inventory levels?
A manufacturer of computer peripheral devices was look-ing to improve its balance sheet and P
& L by reducing inventory and the associated carrying costs, while improving customer service.
The products required to support different customer channels varied from expensive long-lead
time engineered systems to relatively low-value standalone units that supported personal
computers. The company needed to completely revamp its inventory, manufacturing and product
support policies, procedures and practices to reflect the dramatic and fast changes to its product
line.
The two main questions that needed answered were:
- What would the impact be on profit from the disposal of obsolete inventory in order to
improve the balance sheet?
- How do we institute a program to prevent the buildup of obsolete inventories by
disposing of slow movers on a regular basis?
Establish performed a logistics cost/performance bench-mark for all of the divisions showing
that inventory carrying costs were extremely high. The bulk of the problem was in inventory
management, there were problems managing the broad mix of products required as well as large
amounts of obsolete and slow-moving inventory.
A cross functional team was formed that included members from Operations, Marketing, Sales
and Finance to evaluate and dispose of excess and obsolete inventories.
The process of creating inventory was benchmarked to “best-practices” to identify improvement
opportunities in purchasing, materials management, inventory planning and management, and
the manufacturing operations.
In purchasing and materials management it was recommended that the total purchasing power of
the corporation be leveraged to obtain more favorable purchasing and consignment agreements
by centralizing the purchasing function. At the same time, local materials management functions
could be strengthened to improve requisitioning and materials usage and upstream supply chain
partnerships were established to improve material flow and reduce purchased parts inventories.
In inventory planning and management, a centralized logistics function was recommended.
Written policies and procedures were developed for inventory planning, management and
reporting, and a new forecasting and inventory planning business process and information
system was implemented. All inventories are now managed more intensively to avoid excess and
obsolete inventories and active inventories are deployed and re-deployed based on well defined
forecast requirements.
The promotion process was also brought under control to avoid sudden unanticipated demand on
the plants, and manufacturing performance criteria was changed from lowest unit cost and high
absorption to meeting the schedule in time and quantity to improve customer service levels.
http://www.establishinc.com/inventory-management
How to Reduce Inventory Levels: A Comprehensive Approach
Inventory management is a crucial aspect of any business, as it directly impacts the balance sheet, profitability, and customer service. In the case of a manufacturer of computer peripheral devices, reducing inventory levels and associated carrying costs was imperative to improve their financial standing and enhance customer satisfaction. This essay will outline a comprehensive approach to reducing inventory levels, highlighting the steps taken by the manufacturer mentioned above as an example.
1. Evaluate and Dispose of Excess and Obsolete Inventories
The first step in reducing inventory levels is to assess and dispose of excess and obsolete inventories. This requires forming a cross-functional team comprising members from Operations, Marketing, Sales, and Finance. The team’s role is to evaluate the inventory and identify items that are no longer in demand or have become obsolete. By disposing of these items, the company can free up valuable warehouse space and reduce carrying costs.
2. Benchmark Inventory Creation Processes
To identify improvement opportunities, it is essential to benchmark the inventory creation processes against industry best practices. This benchmarking exercise should cover areas such as purchasing, materials management, inventory planning and management, and manufacturing operations. By comparing their processes to best practices, the manufacturer can identify areas where changes can be made to optimize inventory levels.
3. Leverage Purchasing Power and Strengthen Materials Management
A key strategy for reducing inventory levels is leveraging the purchasing power of the corporation. By centralizing the purchasing function, the company can negotiate more favorable purchasing and consignment agreements with suppliers. Additionally, strengthening local materials management functions can improve requisitioning and materials usage. The establishment of upstream supply chain partnerships can also enhance material flow and reduce purchased parts inventories.
4. Implement Centralized Logistics Function
Inventory planning and management play a vital role in reducing inventory levels. Implementing a centralized logistics function can help streamline these processes. This involves developing written policies and procedures for inventory planning, management, and reporting. Furthermore, implementing a new forecasting and inventory planning business process and information system can provide better visibility into inventory levels and demand forecasts. With more intensive management of inventories, excess and obsolete inventories can be avoided, and active inventories can be deployed based on well-defined forecast requirements.
5. Control Promotion Process and Manufacturing Performance Criteria
To prevent sudden unanticipated demand on production plants, it is important to bring the promotion process under control. By aligning promotional activities with production capacity, the company can avoid excessive inventory buildup due to spikes in demand. Additionally, changing manufacturing performance criteria from focusing solely on lowest unit cost and high absorption to meeting schedule deadlines and quantities can improve customer service levels and prevent unnecessary inventory accumulation.
In conclusion,
reducing inventory levels requires a comprehensive approach that involves evaluating and disposing of excess and obsolete inventories, benchmarking inventory creation processes, leveraging purchasing power, implementing centralized logistics functions, controlling the promotion process, and changing manufacturing performance criteria. By following these steps, companies can optimize their balance sheets, reduce carrying costs, improve customer service levels, and ultimately enhance their overall profitability.
Reference: http://www.establishinc.com/inventory-management